EX-99.1 2 d15920exv99w1.txt FINANCIAL STATEMENTS . . . EXHIBIT 99.1 Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS
Year ended August 31, ------------------------------------ (in thousands, except share data) 2003 2002 2001 --------------------------------- -------- -------- ---------- Net sales $2,875,885 $2,479,941 $2,470,133 Costs and expenses: Cost of goods sold 2,586,845 2,162,527 2,172,813 Selling, general and administrative expenses 231,037 220,883 212,428 Employees' retirement plans 12,271 14,685 10,611 Interest expense 15,338 18,708 27,608 Litigation accrual -- -- 8,258 ---------- ---------- ---------- 2,845,491 2,416,803 2,431,718 ---------- ---------- ---------- Earnings before income taxes 30,394 63,138 38,415 Income taxes 11,490 22,613 14,643 ---------- ---------- ---------- Net earnings $ 18,904 $ 40,525 $ 23,772 ========== ========== ========== Basic earnings per share $ 0.67 $ 1.48 $ 0.91 ========== ========== ========== Diluted earnings per share $ 0.66 $ 1.43 $ 0.90 ========== ========== ==========
See notes to consolidated financial statements. Commercial Metals Company and Subsidiaries CONSOLIDATED BALANCE SHEETS
August 31, -------------------------- (in thousands, except share data) 2003 2002 ------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 75,058 $ 124,397 Accounts receivable (less allowance for collection losses of $9,275 and $8,877) 397,490 350,885 Inventories 310,816 268,040 Other 61,053 50,930 ------------------------------------------------------------------------------------ Total current assets 844,417 794,252 Property, plant and equipment: Land 34,617 29,099 Buildings 127,780 119,592 Equipment 747,207 727,650 Leasehold improvements 38,117 34,637 Construction in process 15,503 10,801 ------------------------------------------------------------------------------------ 963,224 921,779 Less accumulated depreciation and amortization (588,842) (543,624) ------------------------------------------------------------------------------------ 374,382 378,155 Other assets 56,607 57,669 ------------------------------------------------------------------------------------ $ 1,275,406 $ 1,230,076 ==========================
See notes to consolidated financial statements.
August 31, --------------------------- (in thousands, except share data) 2003 2002 --------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term trade financing arrangement $ 15,000 $ -- Accounts payable 300,662 275,232 Accrued expenses and other payables 126,971 133,608 Income taxes payable 1,718 5,676 Current maturities of long-term debt 640 631 --------------------------------------------------------------------------------------------- Total current liabilities 444,991 415,147 Deferred income taxes 44,419 32,813 Other long-term liabilities 24,066 24,841 Long-term debt 254,997 255,969 Commitments and contingencies Stockholders' equity: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share: authorized 40,000,000 shares; issued 32,265,166 shares; outstanding 27,994,690 and 28,518,453 shares 161,326 161,326 Additional paid-in capital 863 170 Accumulated other comprehensive income (loss) 2,368 (1,458) Retained earnings 401,869 392,004 --------------------------------------------------------------------------------------------- 566,426 552,042 Less treasury stock 4,270,476 and 3,746,713 shares at cost (59,493) (50,736) --------------------------------------------------------------------------------------------- 506,933 501,306 --------------------------- $ 1,275,406 $ 1,230,076 ===========================
See notes to consolidated financial statements. Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
August 31, -------------------------------------- (in thousands) 2003 2002 2001 -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES: Net earnings $ 18,904 $ 40,525 $ 23,772 Adjustments to earnings not requiring cash: Depreciation and amortization 61,203 61,579 67,272 Provision for losses on receivables 5,162 3,985 4,371 Deferred income taxes 11,605 2,408 (726) Tax benefits from stock plans 330 4,467 404 Gain on sale of SMI-Owen -- (5,234) -- Other (256) (307) (148) Changes in operating assets and liabilities, net of effect of acquisitions and sale of SMI-Owen: Decrease (increase) in accounts receivable (71,938) (48,690) (8,276) Funding from accounts receivable sold 18,662 -- 58,498 Decrease (increase) in inventories (40,676) (37,206) 46,508 Decrease (increase) in other assets (1,028) 912 5,837 Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes 14,594 66,927 (2,389) Increase (decrease) in other long-term liabilities (1,275) 7,231 (2,431) -------------------------------------------------------------------------------------------------------- Net Cash Flows From Operating Activities 15,287 96,597 192,692 CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES: Purchases of property, plant and equipment (49,792) (47,223) (53,022) Acquisition of Coil Steels Group, net of cash received -- (6,834) -- Acquisition of fabrication businesses (13,416) -- -- Sale of assets of SMI-Owen -- 19,705 -- Sales of property, plant and equipment 1,388 3,496 2,866 -------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (61,820) (30,856) (50,156) CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES: Short-term trade financing arrangement 15,000 -- -- Short-term borrowings, net change -- (9,981) (88,673) Payments on long-term debt (373) (10,101) (8,786) Stock issued under incentive and purchase plans 6,216 30,238 4,383 Treasury stock acquired (14,610) -- (6,716) Dividends paid (9,039) (7,521) (6,780) -------------------------------------------------------------------------------------------------------- Net Cash From (Used By) Financing Activities (2,806) 2,635 (106,572) -------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (49,339) 68,376 35,964 Cash and Cash Equivalents at Beginning of Year 124,397 56,021 20,057 -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 75,058 $ 124,397 $ 56,021 ========================================================================================================
See notes to consolidated financial statements. Commercial Metals Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Accumulated Additional Other Number of Paid-In Comprehensive Retained (in thousands, except share data) Shares Amount Capital Income (Loss) Earnings ----------------------------------------------------------------------------------------------------------- Balance, September 1, 2000 16,132,583 $ 80,663 $ 14,231 $ (1,591) $405,317 Comprehensive income: Net earnings 23,772 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment (356) Comprehensive income Cash dividends (6,780) Treasury stock acquired Stock issued under incentive and purchase plans (301) ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2001 16,132,583 80,663 13,930 (1,961) 422,309 =========================================================================================================== Comprehensive income: Net earnings 40,525 Other comprehensive income (loss)- Foreign currency translation adjustment 513 Unrealized loss on derivatives, net of taxes of $(5) (10) Comprehensive income Cash dividends (7,521) 2-for-1 stock split 16,132,583 80,663 (17,354) (63,309) Stock issued under incentive and purchase plans (873) Tax benefits from stock plans 4,467 ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2002 32,265,166 161,326 170 (1,458) 392,004 =========================================================================================================== Comprehensive income: Net earnings 18,904 Other comprehensive income (loss)- Foreign currency translation adjustment 3,855 Unrealized loss on derivatives, net of taxes of $(16) (29) Comprehensive income Cash dividends (9,039) Treasury stock acquired Stock issued under incentive and purchase plans 363 Tax benefits from stock plans 330 ----------------------------------------------------------------------------------------------------------- Balance, August 31, 2003 32,265,166 $ 161,326 $ 863 $ 2,368 $401,869 ===========================================================================================================
Treasury Stock --------------------------------- Number of (in thousands, except share data) Shares Amount Total ----------------------------------------------------------------------------- Balance, September 1, 2000 (2,959,908) $(79,815) $418,805 Comprehensive income: Net earnings 23,772 Other comprehensive loss- Unrealized loss on derivatives, net of taxes of $7 (14) Foreign currency translation adjustment (356) -------- Comprehensive income 23,402 Cash dividends (6,780) Treasury stock acquired (271,500) (6,716) (6,716) Stock issued under incentive and purchase plans 177,419 4,684 4,383 ----------------------------------------------------------------------------- Balance, August 31, 2001 (3,053,989) (81,847) 433,094 ============================================================================= Comprehensive income: Net earnings 40,525 Other comprehensive income (loss)- Foreign currency translation adjustment 513 Unrealized loss on derivatives, net of taxes of $(5) (10) -------- Comprehensive income 41,028 Cash dividends (7,521) 2-for-1 stock split (3,053,989) Stock issued under incentive and purchase plans 2,361,265 31,111 30,238 Tax benefits from stock plans 4,467 ----------------------------------------------------------------------------- Balance, August 31, 2002 (3,746,713) (50,736) 501,306 ============================================================================= Comprehensive income: Net earnings 18,904 Other comprehensive income (loss)- Foreign currency translation adjustment 3,855 Unrealized loss on derivatives, net of taxes of $(16) (29) -------- Comprehensive income 22,730 Cash dividends (9,039) Treasury stock acquired (951,410) (14,610) (14,610) Stock issued under incentive and purchase plans 427,647 5,853 6,216 Tax benefits from stock plans 330 ----------------------------------------------------------------------------- Balance, August 31, 2003 (4,270,476) $(59,493) $506,933 =============================================================================
See notes to consolidated financial statements. Commercial Metals Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company manufactures, recycles and markets steel and metal products and related materials. Its manufacturing and recycling facilities and primary markets are located in the Sunbelt from the mid-Atlantic area through the West. Through its global marketing offices, the Company markets and distributes steel and nonferrous metal products and other industrial products worldwide. As more fully discussed in Note 13, the manufacturing segment is the most dominant in terms of capital assets and adjusted operating profit. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. Investments in 20% to 50% owned affiliates are accounted for on the equity method. All investments under 20% are accounted for under the cost method. REVENUE RECOGNITION Generally, sales are recognized when title passes to the customer. Some of the revenues related to the steel fabrication operations are recognized on the percentage of completion method. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that completion costs for certain projects will be further revised in the near-term. CASH AND CASH EQUIVALENTS The Company considers temporary investments that are short term (generally with original maturities of three months or less) and highly liquid to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in, first-out (LIFO) method; cost of international and remaining inventories is determined by the first-in, first-out (FIFO) method. Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance and production wages. Also, the costs of departments that support production including materials management and quality control, are allocated to inventory. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. Provision for amortization of leasehold improvements is made at annual rates based upon the estimated useful lives of the assets or terms of the leases, whichever is shorter. At August 31, 2003, the useful lives used for depreciation and amortization were as follows: Buildings 7 to 40 years Equipment 3 to 15 years Leasehold improvements 3 to 10 years We evaluate the carrying value of property, plant and equipment whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If we determine that impairment exists, we reduce the net book values to fair values as warranted. Major maintenance is expensed as incurred. START-UP COSTS Start-up costs associated with the acquisition and expansion of manufacturing and recycling facilities are expensed as incurred. ENVIRONMENTAL COSTS The Company accrues liabilities for environmental investigation and remediation costs based upon estimates regarding the number of sites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where amounts and timing can be reliably estimated, amounts are discounted. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is recognized on an undiscounted basis. STOCK-BASED COMPENSATION The Company accounts for stock options granted to employees and directors using the intrinsic value based method of accounting. Under this method, the Company does not recognize compensation expense for the stock options because the exercise price is equal to the market price of the underlying stock on the date of the grant. The Black-Scholes option pricing model was used to calculate the pro forma stock-based compensation costs. The following assumptions were required as of August 31:
----------------------------------------------------------------------------- 2003 2002 2001 ----------------------------------------------------------------------------- Risk-free interest rate 3.05% 4.42% 4.84% Expected life 5.44 years 5.44 years 4.60 years Expected volatility .257 .250 .232 Expected dividend yield 1.8% 1.7% 1.7%
If the Company had used the Black-Scholes fair-value based method of accounting, net earnings and earnings per share would have been reduced to the pro forma amounts listed in the table below. For purposes of pro forma earnings disclosures, the assumed compensation expense is amortized over the options' vesting periods. The pro forma information includes options granted in preceding years.
(in thousands, except per share data) 2003 2002 2001 ----------------------------------------------------------------------------- Net earnings, as reported $ 18,904 $ 40,525 $ 23,772 Pro forma stock-based compensation cost 1,875 1,637 1,195 ------------------------------------ Net earnings, pro forma $ 17,029 $ 38,888 $ 22,577 Net earnings per share, as reported Basic $ 0.67 $ 1.48 $ 0.91 Diluted $ 0.66 $ 1.43 $ 0.90 Net earnings per share, pro forma Basic $ 0.60 $ 1.42 $ 0.86 Diluted $ 0.60 $ 1.37 $ 0.86
The Black-Scholes weighted-average per share fair value of the options granted in 2003, 2002 and 2001 was $3.47, $4.52 and $2.77, respectively. INCOME TAXES The Company and its U.S. subsidiaries file a consolidated federal income tax return, and federal income taxes are allocated to subsidiaries based upon their respective taxable income or loss. Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in Note 6, Income Taxes. Benefits from tax credits are reflected currently in earnings. The Company provides for taxes on unremitted earnings of foreign subsidiaries. FOREIGN CURRENCY The functional currency of the Company's international subsidiaries in Australia, the United Kingdom, and Germany is the local currency. Effective September 1, 2002, most of the Company's subsidiaries in Europe changed their functional currency to the Euro. This change did not materially impact the financial condition or results of operations of the Company. The remaining international subsidiaries' functional currency is the United States dollar. Translation adjustments are reported as a component of accumulated other comprehensive loss. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates regarding assets and liabilities and associated revenues and expenses. Management believes these estimates to be reasonable; however, actual results may vary. DERIVATIVES The Company records derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses from the changes in the values of the derivatives are recorded in the statement of earnings, or are deferred if they are highly effective in achieving offsetting changes in fair values or cash flows of the hedged items during the term of the hedge. RECLASSIFICATIONS Certain reclassifications have been made in the 2002 and 2001 financial statements to conform to the classifications used in the current year. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective September 1, 2002. Goodwill was no longer amortized after that date. Goodwill was $6.8 million at August 31, 2003 and 2002. The comparison of 2003 to the prior year period was as follows:
Year ended August 31, ------------------------------------------ (in thousands) 2003 2002 2001 ----------------------------------------------------------------------- Reported net earnings $ 18,904 $ 40,525 $ 23,772 Add: goodwill amortization -- 684 682 ----------------------------------------------------------------------- Adjusted net earnings $ 18,904 $ 41,209 $ 24,454 -----------------------------------------------------------------------
The goodwill amortization was $0.02 per basic and diluted share for the year ended August 31, 2002, and $0.03 per basic and diluted share for the year ended August 31, 2001. Effective September 1, 2002, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred by increasing the carrying amount of the related longlived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful lives of the assets. The Company has asset retirement obligations relating to landfills which were no longer in use at the date of adoption of SFAS No. 143. The Company had previously recorded environmental liabilities related to the capping, closure and monitoring costs required for these landfills. Therefore, the transition to SFAS No. 143 did not have a significant impact on the Company's net earnings and related per share amounts. At August 31, 2003 and 2002, the Company had recorded $1.5 million and $1.7 million, respectively, relating to the landfill obligations. In September 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 did not significantly affect the Company's financial position, results of operations, or cash flows. The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," for all such activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a significant impact on the results of operations or financial position or cash flows of the Company. In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees on Indebtedness of Others," which applies to all guarantees issued or modified after December 31, 2002. The Company has not entered into or modified any significant guarantees since December 31, 2002, and therefore, no liability was recorded at August 31, 2003. The Company's existing guarantees at December 31, 2002 had been given at the request of a customer and its surety bond issuer. The Company has agreed to indemnify the surety against all costs that the surety may incur should the customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. As of August 31, 2003, the surety had issued bonds in the total amount (without reduction for the work performed to date) of $11.9 million, which are subject to the Company's guarantee obligation under the indemnity agreement. The fair value of these guarantees was not significant. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." The consolidation requirement applies to entities established on or prior to January 31, 2003, in the first fiscal year or interim period ending after December 15, 2003. The Company does not expect FIN No. 46 to have an impact on its financial reporting. NOTE 2. SALES OF ACCOUNTS RECEIVABLE The Company has an accounts receivable securitization program (Securitization Program) which it utilizes as a cost-effective, short-term financing alternative. Under the Securitization Program, the Company and several of its subsidiaries (the Originators) periodically sell accounts receivable to the Company's wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided percentage ownership interest (Participation Interest) in the pool of receivables to an affiliate of a third party financial institution (Buyer). CMCR may sell undivided interests of up to $130 million, depending on the Company's level of financing needs. This Securitization Program is designed to enable receivables sold by the Company to CMCR to constitute true sales under U.S. Bankruptcy Laws, and the Company has received an opinion from counsel relating to the "true sale" nature of the program. As a result, these receivables are available to satisfy CMCR's own obligations to its third party creditors. The Company accounts for the Securitization Program in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The transfers meet all of the criteria for a sale under SFAS No. 140. At the time a Participation Interest in the pool of receivables is sold, the amount is removed from the consolidated balance sheet and the proceeds from the sale are reflected as cash provided by operating activities. At August 31, 2003 and 2002, uncollected accounts receivable of $152 million and $146 million, respectively, had been sold to CMCR, and the Company's undivided interest in these receivables was subordinate to any interest owned by the Buyer. At August 31, 2003 and 2002, no Participation Interests in CMCR's accounts receivable pool were owned by the Buyer and, therefore, none were reflected as a reduction in accounts receivable on the Company's consolidated balance sheets. Discounts (losses) on the sales of accounts receivable to the Buyer under this Program were $584 thousand, $793 thousand and $976 thousand for the years ended August 31, 2003, 2002 and 2001, respectively. These losses represented primarily the costs of funds and were included in selling, general and administrative expenses. The carrying amount of the Company's retained interest in the receivables approximated fair value due to the short-term nature of the collection period. The retained interest is determined reflecting 100% of any allowance for collection losses on the entire receivables pool. No other material assumptions are made in determining the fair value of the retained interest. The Company is responsible for servicing the entire pool of receivables. At August 31, 2003, the carrying amount of the Company's retained interest (representing the Company's interest in the receivable pool) was $152 million (100%) in the revolving pool of receivables of $152 million. The carrying amount of the Company's retained interest was $146 million (100%) in the revolving pool of receivables of $146 million at August 31, 2002. In addition to the Securitization Program described above, the Company's international subsidiaries periodically sell accounts receivable. These arrangements also constitute true sales and, once the accounts are sold, they are no longer available to satisfy the Company's creditors in the event of bankruptcy. Uncollected accounts receivable that had been sold under these arrangements and removed from the consolidated balance sheets were $20.8 million and $2.1 million at August 31, 2003 and 2002, respectively. NOTE 3. INVENTORIES Before deduction of LIFO reserves of $17,403,000 and $8,074,000 at August 31, 2003 and 2002, respectively, inventories valued under the first-in, first-out method approximated replacement cost. At August 31, 2003 and 2002, 64% and 72%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to the marketing and distribution business. The majority of the Company's inventories are in the form of finished goods, with minimal work in process. Approximately $20.5 million and $16.5 million were in raw materials at August 31, 2003 and 2002, respectively. NOTE 4. CREDIT ARRANGEMENTS In August 2003, the Company increased its commercial paper program to permit maximum borrowings of up to $275 million, an increase from the prior year $174.5 million level. The Company's commercial paper capacity is reduced by outstanding standby letters of credit under the 2003 program which totalled $20.6 million at August 31, 2003. It is the Company's policy to maintain contractual bank credit lines equal to 100% of the amount of all commercial paper outstanding. On August 8, 2003, the Company arranged an unsecured revolving credit agreement with a group of sixteen banks consisting of a three-year, $275 million facility. These agreements provide for borrowing in United States dollars indexed to LIBOR. Facility fees of 22.5 basis points per annum are payable on the multi-year credit lines. The revolving credit agreement includes various covenants. The most restrictive of these requires maintenance of an interest coverage ratio of greater than three times and a debt/capitalization ratio of 55% (as defined). No compensating balances are required. The Company was in compliance with these requirements at August 31, 2003. At August 31, 2003 and 2002, no borrowings were outstanding under the commercial paper program or the related revolving credit agreements. The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at bankers' acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. Amounts outstanding on these facilities relate to trade payables settled under Bankers Acceptances. During August 2003, an international subsidiary of the Company entered into a $15 million short-term trade financing arrangement with a financial institution as a risk management technique relating to the subsidiary's purchase agreement with a Chinese supplier. Under the agreements, the Company advanced the $15 million to the supplier and will repay the bank only after the product is shipped in conformance with the specifications in the supply agreement. In the event of a default by the supplier, the Company's obligation to the bank would not exceed $1.5 million. The advance to the supplier was recorded in other current assets on the consolidated balance sheet. Long-term debt and amounts due within one year are as follows, as of August 31:
(in thousands) 2003 2002 ------------------------------------------------------ 7.20% notes due July 2005 $ 104,185 $ 104,775 6.75% notes due February 2009 100,000 100,000 6.80% notes due August 2007 50,000 50,000 Other 1,452 1,825 ------------------------------------------------------ 255,637 256,600 Less current maturities 640 631 ------------------------------------------------------ $ 254,997 $ 255,969 ======================================================
Interest on these notes is payable semiannually. On April 9, 2002, the Company entered into two interest rate swaps to convert a portion of its fixed interest rate long-term debt commitment to a floating interest commitment. These arrangements adjust the Company's fixed to floating interest rate exposure 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 2.02%. The floating rate was 3.13% at July 15, 2003, the most recent reset date. The total fair value of both swaps, including accrued interest, was $4.6 million and $5.2 million at August 31, 2003 and 2002, respectively, 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, net of accrued interest. These hedges were highly effective for the years ended August 31, 2003 and 2002. The aggregate amounts of all long-term debt maturities for the five years following August 31, 2003 are (in thousands): 2004-$640; 2005-$104,819; 2006-$65; 2007-$50,028; 2008 and thereafter-$100,085. Interest expense is comprised of the following:
Year ended August 31, -------------------------------- (in thousands) 2003 2002 2001 ------------------------------------------------------- Long-term debt $ 13,835 $ 16,499 $ 17,532 Commercial paper 189 145 7,076 Notes payable 1,314 2,064 3,000 ------------------------------------------------------- $ 15,338 $ 18,708 $ 27,608 =======================================================
Interest of $254,000, $447,000, and $1,111,000 was capitalized in the cost of property, plant and equipment constructed in 2003, 2002, and 2001, respectively. Interest of $14,393,000, $18,879,000, and $28,704,000 was paid in 2003, 2002, and 2001, respectively. NOTE 5. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK Generally accepted accounting principles require disclosure of an estimate of the fair value of the Company's financial instruments as of year end. These estimated fair values disregard management intentions concerning these instruments and do not represent liquidation proceeds or settlement amounts currently available to the Company. Differences between historical presentation and estimated fair values can occur for many reasons including taxes, commissions, prepayment penalties, make-whole provisions and other restrictions as well as the inherent limitations in any estimation technique. Due to near-term maturities, allowances for collection losses, investment grade ratings and security provided, the following financial instruments' carrying amounts are considered equivalent to fair value: - Cash and cash equivalents - Accounts receivable/payable - Short-term trade financing arrangement The Company's long-term debt is predominantly publicly held. Fair value was determined by indicated market values.
August 31, -------------------- (in thousands) 2003 2002 ----------------------------------------------------- Long-Term Debt: Carrying amount $ 255,637 $ 256,600 Estimated fair value 278,497 259,656 =====================================================
The Company maintains both corporate and divisional credit departments. Credit limits are set for customers. Credit insurance is used for some of the Company's divisions. Letters of credit issued or confirmed by sound financial institutions are obtained to further ensure prompt payment in accordance with terms of sale; generally, collateral is not required. In the normal course of its marketing activities, the Company transacts business with substantially all sectors of the metals industry. Customers are internationally dispersed, cover the spectrum of manufacturing and distribution, deal with various types and grades of metal and have a variety of end markets in which they sell. The Company's historical experience in collection of accounts receivable falls within the recorded allowances. Due to these factors, no additional credit risk, beyond amounts provided for collection losses, is believed inherent in the Company's accounts receivable. During the year ended August 31, 2003, the Company acquired $1.5 million in property, plant and equipment in a noncash transaction after foreclosing on a delinquent note receivable from a customer. The Company'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 as hedges for accounting purposes only those contracts which closely match the terms of the under lying transaction. These hedges resulted in substantially no ineffectiveness in the statements of earnings for the years ended August 31, 2003, 2002 and 2001. Certain of the foreign currency and all of the commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges. The changes in fair value of these instruments resulted in a $328 thousand decrease, a $208 thousand decrease and a $452 thousand increase in cost of goods sold for the years ended August 31, 2003, 2002 and 2001, respectively. All of the instruments are highly liquid and none are entered into for speculative purposes. At August 31, 2003 and 2002, derivative assets recorded in other current assets were $1.8 million and $1.6 million, respectively, and derivative liabilities of $1.7 million and $1.4 million, respectively, were recorded in other current liabilities. See Note 4, Credit Arrangements, regarding the Company's interest rate hedges. NOTE 6. INCOME TAXES The provisions for income taxes include the following:
Year ended August 31, -------------------------------- (in thousands) 2003 2002 2001 ---------------------------------------------------------- Current: United States $ (2,220) $ 18,173 $ 13,498 Foreign 1,848 1,532 8 State and local 257 500 1,863 ---------------------------------------------------------- (115) 20,205 15,369 Deferred 11,605 2,408 (726) ---------------------------------------------------------- $ 11,490 $ 22,613 $ 14,643 ==========================================================
During 2002, the Company favorably resolved all issues for its federal income tax returns through 1999. Management reevaluated the tax accruals resulting in a net decrease of approximately $1,000,000 in 2002. Taxes of $3,930,000, $11,016,000 and $8,691,000 were paid in 2003, 2002 and 2001, respectively. Deferred taxes arise from temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. The sources and deferred long-term tax liabilities (assets) associated with these differences are:
August 31, ---------------------- (in thousands) 2003 2002 ---------------------------------------------------------------------- Tax on difference between tax and book depreciation $ 41,657 $ 38,457 U.S. taxes provided on foreign income and foreign taxes 15,585 11,857 Net operating losses (less allowances of $1,703 and $780) (837) (561) Alternative minimum tax credit (1,713) (1,713) Other accruals (3,662) (9,183) Other (6,611) (6,044) ---------------------------------------------------------------------- Total $ 44,419 $ 32,813 ======================================================================
Current deferred tax assets of $4.4 million and $12.3 million at August 31, 2003 and 2002, respectively, were included in other assets on the consolidated balance sheets. These deferred taxes were largely due to different book and tax treatments of various allowances and accruals. No valuation allowances were required at August 31, 2003 or 2002 for the current deferred tax assets. The Company uses substantially the same depreciable lives for tax and book purposes. Changes in deferred taxes relating to depreciation are mainly attributable to differences in the basis of underlying assets recorded under the purchase method of accounting. As noted above, the Company provides United States taxes on unremitted foreign earnings. Net operating losses consist of $150 million of state net operating losses that expire during the tax years ending from 2006 to 2023. These assets will be reduced as tax expense is recognized in future periods. The $1.7 million alternative minimum tax credit is available indefinitely. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 replaced the Foreign Sales Corporation (FSC) tax benefits with the "extraterritorial income" exemption (ETI) for fiscal year 2002 and the years thereafter. The ETI exclusion maintains the same level of tax benefit for current FSC users. The Company's effective tax rates were 37.8% for 2003, 35.8% for 2002, and 38.1% for 2001. Reconciliations of the United States statutory rates to the effective rates are as follows:
Year ended August 31, ----------------------- 2003 2002 2001 ------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% State and local taxes .6 1.0 3.1 ETI (.9) (1.2) (1.1) Other 3.1 1.0 1.1 ------------------------------------------------- Effective tax rate 37.8% 35.8% 38.1% =================================================
NOTE 7. CAPITAL STOCK 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. This stock split was effective June 28, 2002, to shareholders of record on June 7, 2002. On June 28, 2002 the Company issued 16,132,583 additional shares of common stock and transferred $17,354,000 from paid-in capital and $63,309,000 from retained earnings to common stock. All applicable share and per share amounts in the accompanying consolidated financial statements have been restated to reflect this stock split. Following the stock split, the Company also instituted a quarterly cash dividend of eight cents per share on the increased number of shares. STOCK PURCHASE PLAN Almost all U.S. resident employees with a year of service at the beginning of each calendar year may participate in the Company's employee stock purchase plan. The Directors annually establish the purchase discount from the market price. The discount was 25% for each of the three years ended August 31, 2003, 2002 and 2001. In January 2003, the Company's stockholders approved an amendment to the plan that increased by 1,000,000 the maximum number of shares that may be eligible for issuance and increased the maximum number of shares that an eligible employee may purchase annually from 200 to 400 shares. Yearly activity of the stock purchase plan was as follows:
2003 2002 2001 ----------------------------------------------------------- Shares subscribed 289,210 282,780 347,640 Price per share $ 12.35 $ 12.48 $ 9.48 Shares purchased 223,880 257,860 74,480 Price per share $ 12.48 $ 9.48 $ 11.74 Shares available 1,141,946
The Company recorded compensation expense for this plan of $932,000, $815,000 and $291,000 in 2003, 2002 and 2001, respectively. STOCK OPTION PLANS The 1986 Stock Incentive Plan (1986 Plan) ended November 23, 1996, except for awards outstanding. Under the 1986 Plan, stock options were awarded to full-time salaried employees. The option price was the fair market value of the Company's stock at the date of grant, and the options are exercisable two years from date of grant. The outstanding awards under this Plan are 100% vested and expire through 2006. The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996. Under the 1996 Plan, stock options, stock appreciation rights, and restricted stock may be awarded to employees. The option price for both the stock options and the stock rights will not be less than the fair market value of the Company's stock at the date of grant. The outstanding awards under the 1996 Plan vest 50% after one year and 50% after two years from date of grant and will expire seven years after grant. The terms of the 1996 Plan resulted in additional authorized shares of 62,806 in 2003, 1,073,782 in 2002, and 67,270 in 2001. In addition, the Company's shareholders authorized an additional 1,000,000 shares during 2002. In January 2000, the Company's stockholders approved the 1999 Non-Employee Director Stock Option Plan and authorized 400,000 shares to be made available for grant. Under this Plan, each outside director of the Company will receive annually an option to purchase 3,000 shares of the Company's stock. In addition, any outside director may elect to receive all or part of fees otherwise payable in the form of a stock option. The price of these options is the fair market value of the Company's stock at the date of the grant. The options granted automatically vest 50% after one year and 50% after two years from the grant date. Options granted in lieu of fees are immediately vested. All options expire seven years from the date of grant. Combined information for shares subject to options for the three plans is as follows:
Weighted Average Price Exercise Range Number Price Per Share -------------------------------------------------------------------- September 1, 2000 Outstanding 4,350,860 $13.47 $ 6.31-15.97 Exercisable 3,559,810 13.06 6.31-15.44 Granted 803,672 11.71 10.95-13.23 Exercised (320,422) 10.70 6.31-15.44 Forfeited (99,932) 13.82 10.99-15.97 Increase authorized 67,270 -------------------------------------------------------------------- August 31, 2001 Outstanding 4,734,178 $13.36 $ 9.21-15.97 Exercisable 3,608,052 13.47 9.21-15.97 Granted 805,380 17.28 17.17-21.42 Exercised (2,212,903) 13.13 9.21-15.97 Forfeited (80,920) 14.00 11.76-17.17 Increase authorized 2,073,782 -------------------------------------------------------------------- August 31, 2002 Outstanding 3,245,735 $14.46 $10.10-21.42 Exercisable 2,111,744 13.94 10.10-18.05 Granted 847,430 14.56 14.54-15.10 Exercised (211,618) 12.39 13.32-19.24 Forfeited (36,629) 14.66 10.10-17.17 Increase authorized 62,806 -------------------------------------------------------------------- August 31, 2003 Outstanding 3,844,918 $14.60 $10.97-21.42 Exercisable 2,655,803 14.24 10.97-21.42 Available for grant 1,189,924 --------------------------------------------------------------------
Share information for options at August 31, 2003:
Outstanding Exercisable -------------------------------------------------------------------------------- Weighted Average Remain- Weighted Weighted Range of ing Con- Average Average Exercise Number tractual Exercise Number Exercise Price Outstanding Life (Yrs) Price Outstanding Price -------------------------------------------------------------------------------- $10.97-12.25 692,746 3.7 $ 11.81 692,746 $ 11.81 13.13-15.10 1,954,972 3.7 14.32 1,134,222 14.16 15.44-21.42 1,197,200 4.6 16.65 828,835 16.39 ================================================================================ $10.97-21.42 3,844,918 4.0 $ 14.60 2,655,803 $ 14.24
PREFERRED STOCK Preferred stock has a par value of $1.00 a share, with 2,000,000 shares authorized. It may be issued in series, and the shares of each series shall have such rights and preferences as fixed by the Board of Directors when authorizing the issuance of that particular series. There are no shares of preferred stock outstanding. STOCKHOLDER RIGHTS PLAN On July 28, 1999, the Company's Board of Directors adopted a stockholder rights plan pursuant to which stockholders were granted preferred stock rights (Rights) to purchase one one-thousandth of a share of the Company's Series A Preferred Stock for each share of common stock held. In connection with the adoption of such plan, the Company designated and reserved 100,000 shares of preferred stock as Series A Preferred Stock and declared a dividend of one Right on each outstanding share of the Company's common stock. Rights were distributed to stockholders of record as of August 9, 1999. The Rights are represented by and traded with the Company's common stock. The Rights do not become exercisable or trade separately from the common stock unless at least one of the following conditions are met: a public announcement that a person has acquired 15% or more of the common stock of the Company or a tender or exchange offer is made for 15% or more of the common stock of the Company. Should either of these conditions be met and the Rights become exercisable, each Right will entitle the holder (other than the acquiring person or group) to buy one one-thousandth of a share of the Series A Preferred Stock at an exercise price of $150.00. Each fractional share of the Series A Preferred Stock will essentially be the economic equivalent of one share of common stock. Under certain circumstances, each Right would entitle its holder to purchase the Company's stock or shares of the acquirer's stock at a 50% discount. The Company's Board of Directors may choose to redeem the Rights (before they become exercisable) at $0.001 per Right. The Rights expire July 28, 2009. NOTE 8. EMPLOYEES' RETIREMENT PLANS Substantially all employees in the U.S. are covered by defined contribution profit sharing and savings plans. These tax qualified plans are maintained and contributions made in accordance with ERISA. The Company also provides certain eligible executives benefits pursuant to a non-qualified benefit restoration plan (BRP Plan) equal to amounts that would have been available under the tax qualified ERISA plans, but are not available due to limitations of ERISA, tax laws and regulations. Company contributions, which are discretionary, to all plans were $12,271,000, $14,685,000, and $10,611,000, for 2003, 2002 and 2001, respectively. The deferred compensation liability under the BRP Plan was $18.6 million and $14.4 million at August 31, 2003 and 2002, respectively, and recorded in other long-term liabilities. Though under no obligation to fund the plan, the Company has segregated mutual fund assets in a trust whose current value at August 31, 2003 and 2002 was $14.6 million and $13.2 million, respectively, and recorded in other long-term assets. The Company has no significant postretirement obligations. The Company's historical costs for postemployment benefits have not been significant and are not expected to be in the future. NOTE 9. COMMITMENTS AND CONTINGENCIES Minimum lease commitments payable by the Company and its consolidated subsidiaries for non-cancelable operating leases in effect at August 31, 2003, are as follows for the fiscal periods specified:
Real (in thousands) Equipment Estate ------------------------------------------------------ 2004 $ 4,000 $ 5,318 2005 3,188 4,689 2006 2,290 3,901 2007 1,737 3,328 2008 and thereafter 2,483 9,736 ------------------------------------------------------ $ 13,698 $ 26,972 ======================================================
Total rental expense was $13,428,000, $11,774,000 and $11,483,000 in 2003, 2002 and 2001, respectively. CONSTRUCTION CONTRACT DISPUTES During 2001, the Company increased its litigation accrual (included in accrued expenses and other payables) by $8.3 million due to an adverse judgment from a trial. At August 31, 2002, $9.6 million was accrued (including interest). The judgment was upheld on appeal and paid in 2003. In another matter, a subsidiary of the Company, SMI-Owen Steel Company, Inc. (SMI-Owen) entered into a fixed price contract with the design/builder general contractor (D/B) to furnish, erect and install structural steel and certain other materials along with related design and engineering work for the construction of a large hotel and casino complex. In connection with the contract, the D/B secured insurance under a subcontractor/vendor default protection policy which named the Company as an insured in lieu of performance and payment bonds. The Company made a claim against the insurance company for expenses incurred from the default of a large subcontractor. During 2002, the Company and the insurance company settled related litigation filed by the Company, and the Company recovered $15 million which included recovery of a $6.6 million claim receivable, receipt of an additional amount ($7.4 million), the release of the balance of $1 million of previously escrowed funds and, subject to certain contingencies, reimbursement of an additional amount (up to $3 million). The $7.4 million in excess of the claim receivable and escrow amount released was recorded as deferred insurance proceeds (in other long-term liabilities at August 31, 2002) pending final resolution of the Company's disputes with the D/B. At August 31, 2002 and 2001, the Company maintained contract receivables of $7.2 million from the D/B. Such amounts are included within other assets on the accompanying balance sheets. During 2003, SMI-Owen settled, contingent upon completion and approval by the Bankruptcy Court which has jurisdiction over one of the parties, all disputes between SMI-Owen, the D/B and the owner of the Project. SMI-Owen will pay $1.25 million of the $3.5 million settlement payment with $2.25 million to be paid by the insurance company. Final resolution of this dispute will resolve all material claims asserted against SMI-Owen arising from the Project. The Company reduced its accrual for the deferred insurance proceeds by $937,000 at August 31, 2003 to reflect this settlement. The settlement agreement provides that SMI-Owen reserves all rights with regards to pending litigation against an insurance broker for insurance benefits not received by SMI-Owen due to the broker's acts, errors, omissions and other conduct related to the insurance program for the Project. The Company is involved in various other claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the results of operations or the financial position of the Company. ENVIRONMENTAL AND OTHER MATTERS In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes that adequate provision has been made in the financial statements for the potential impact of these issues, and that the outcomes will not significantly impact the results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular quarter. The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at fourteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the results of operations or the financial position of the Company. NOTE 10. EARNINGS PER SHARE In calculating earnings per share, there were no adjustments to net earnings to arrive at income for any years presented. The stock options granted June 7, 2002, with total outstanding share commitments of 10,000 at year end, are antidilutive.
August 31, ------------------------------------ 2003 2002 2001 -------------------------------------------------------------------------- Shares outstanding for basic earnings per share 28,202,979 27,377,083 26,059,122 Effect of dilutive securities: Stock options/ purchase plans 402,616 898,208 261,866 -------------------------------------------------------------------------- Shares outstanding for diluted earnings per share 28,605,595 28,275,291 26,320,988 ==========================================================================
At August 31, 2003, the Company had authorization to purchase 1,116,152 of its common shares. NOTE 11. ACCRUED EXPENSES AND OTHER PAYABLES
August 31, ----------------------- (in thousands) 2003 2002 ------------------------------------------------------------- Salaries, wages and commissions $ 37,698 $ 31,544 Insurance 13,562 12,987 Employees' retirement plans 11,325 15,086 Advance billings on contracts 10,787 7,855 Taxes other than income taxes 8,699 9,470 Freight 8,228 5,980 Litigation accruals 6,650 16,416 Interest 1,833 1,901 Other 28,189 32,369 ------------------------------------------------------------- $ 126,971 $ 133,608 =============================================================
NOTE 12. ACQUISITIONS In January 2003, the Company acquired substantially all of the operating assets of E.L. Wills, Inc., a rebar fabrication company located in Fresno, California, specializing in commercial and industrial construction throughout the states of California and Nevada for $4.2 million cash. In May, 2003, the Company acquired substantially all of the operating assets of the Denver, Colorado location of Symons Corporation for $5.6 million cash. This acquisition expands the Company's concrete form and construction-related product sales in the western part of the United States. Effective August 31, 2003, the Company acquired substantially all of the operating assets of Dunn Del Re Steel, Inc., a rebar fabrication company located in Chandler, Arizona for $3.6 million cash and the assumption of a $625 thousand note payable. Its primary market is Arizona, extending also to Utah, New Mexico, California and Nevada. The purchase price allocation for Dun Del Re Steel has been prepared on a preliminary basis, and reasonable changes may be made following valuation by business appraisers of the intangible assets. Operations of the acquired entities are reflected in the consolidated statement of earnings from the date of their respective acquisitions. The pro forma impact on operations, as of the beginning of 2003, of these acquisitions would not have been materially different from the actual results. The following is a summary of the allocation of purchase price for these acquisitions as of the date the assets were acquired (in thousands):
E.L. Dunn Wills Symons Del Re Total --------------------------------------------------------------------------------------- Inventory $ 1,227 $ 173 $ 575 $ 1,975 Property, plant and equipment 2,215 55 2,435 4,705 Rental equipment -- 4,400 -- 4,400 Identifiable intangible assets 705 1,000 1,220 2,925 Note payable -- -- (625) (625) Other 52 -- (16) 36 --------------------------------------------------------------------------------------- Total $ 4,199 $ 5,628 $ 3,589 $ 13,416 =======================================================================================
Rental equipment and intangible assets are included in long-term other assets on the August 31, 2003 consolidated balance sheet. The intangible assets acquired include trade names, customer lists and backlogs, all of which have finite lives and are being amortized. The estimated annual amortization of intangibles is not expected to be material. In July 2003, the Company's subsidiary, Commercial Metals (International) AG, entered into a purchase agreement to buy 71.1% of the outstanding shares of Huta Zawiercie, S.A. in Zawiercie, Poland for approximately $50 million in cash and $32 million assumed long-term debt. Huta Zawiercie operates a steel minimill similar to those operated by the Company's steel group. Its annual capacity is about 1 million tons consisting mainly of rebar and wire rod products. This transaction is expected to be completed by December 15, 2003. NOTE 13. Business Segments The Company's reportable segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise. Following the acquisitions of Huta Zawiercie, S.A. (CMCZ) and The Lofland Company and subsidiaries (Lofland) in December 2003, the Company has five reportable segments: domestic mills, CMCZ, fabrication, recycling and marketing and distribution. Prior year results have been revised to be consistent with the new segment presentation. The domestic mills segment includes the Company's domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The newly-acquired CMCZ minimill and subsidiaries in Poland will be presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are not similar to that of the Company's domestic minimills. The fabrication segment consists of the steel group's other steel and joist fabrication operations (including Lofland), fence post manufacturing plants, construction-related and other products. Following the acquisition of Lofland, the Company's chief operating decision maker began reviewing the results of fabrication operations separately, thus necessitating the reporting of these operations as a separate segment. The domestic mills and fabrication segments' businesses operate primarily in the southern and western United States. Recycling consists of the Secondary Metals Processing Division's scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales, distribution and processing of both ferrous and nonferrous metals and other industrial products. The segment's activities consist only of physical transactions and not speculation. Corporate and Eliminations contains eliminations of intersegment transactions, expenses of the Company's corporate headquarters and interest expense relating to our long-term public debt and commercial paper program. The Company uses adjusted operating profit to measure segment performance. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following presents information regarding the Company's domestic operations and operations outside of the United States:
External Net Sales for the Year ended August 31, ---------------------------------------- (in thousands) 2003 2002 2001 ---- ---- ---- United States $1,689,645 $1,708,863 $1,714,898 Non United States 1,186,240 771,078 755,235 ---------------------------------------- Total $2,875,885 $2,479,941 $2,470,133
Long-Lived Assets Year ended August 31, ---------------------------------- (in thousands) 2003 2002 2001 ---- ---- ---- United States $409,298 $421,332 $449,121 Non United States 21,691 14,492 9,812 ---------------------------------- Total $430,989 $435,824 $458,933
Summarized data for the Company's international operations located outside of the United States (principally in Europe, Australia and the Far East) are as follows:
Year ended August 31, --------------------- (in thousands) 2003 2002 2001 ---- ---- ---- Net sales - unaffiliated customers $626,257 $378,745 $266,609 Total assets 186,322 124,870 83,743
The following is a summary of certain financial information by reportable segment:
Adjustments Domestic Marketing and 2003 (dollars in thousands) Mills Fabrication Recycling and Distribution Corporate Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Net sales- unaffiliated customers $ 596,418 $ 739,677 $ 409,554 $1,129,777 $ 459 $ -- $2,875,885 Intersegment sales 173,635 2,961 31,890 19,920 -- (228,406) -- ----------------------------------------------------------------------------------------------------- Net sales 770,053 742,638 441,444 1,149,697 459 (228,406) 2,875,885 Adjusted operating profit (loss) 19,664 701 15,206 21,784 (11,039) -- 46,316 Interest expense (income)* (273) 3,649 844 1,214 10,158 (254) 15,338 Capital expenditures 25,979 17,473 5,765 3,560 2,428 -- 55,205 Deprec. and amort. 37,908 12,319 7,936 2,134 906 -- 61,203 Total assets 412,403 326,541 106,749 342,752 86,961 -- 1,275,406
Adjustments Domestic Marketing and 2002 (dollars in thousands) Mills Fabrication Recycling and Distribution Corporate Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Net sales- unaffiliated customers $ 559,420 $ 802,888 $ 354,387 $ 762,584 $ 662 $ -- $2,479,941 Intersegment sales 161,901 2,288 23,667 14,428 -- (202,284) -- ----------------------------------------------------------------------------------------------------- Net sales 721,321 805,176 378,054 777,012 662 (202,284) 2,479,941 Adjusted operating profit (loss) 41,006 30,441 5,098 14,196 (8,102) -- 82,639 Interest expense (income)* (583) 4,532 1,011 1,050 13,145 (447) 18,708 Capital expenditures 20,364 18,682 4,723 9,323 965 -- 54,057 Deprec. and amort. 37,206 12,332 9,650 1,609 782 -- 61,579 Total assets 421,706 298,744 98,847 262,111 148,668 -- 1,230,076
Adjustments Domestic Marketing and 2001 (dollars in thousands) Mills Fabrication Recycling and Distribution Corporate Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------------ Net sales- unaffiliated customers $ 529,202 $ 815,281 $ 371,298 $ 752,723 $ 1,629 $ -- $2,470,133 Intersegment sales 142,890 4,186 22,539 18,433 -- (188,048) -- ----------------------------------------------------------------------------------------------------- Net sales 672,092 819,467 393,837 771,156 1,629 (188,048) 2,470,133 Adjusted operating profit (loss) 42,615 14,085 (2,324) 7,833 4,790 -- 66,999 Interest expense (income)* 532 10,053 2,165 1,332 14,637 (1,111) 27,608 Capital expenditures 23,405 22,574 5,587 1,208 248 -- 53,022 Deprec. and amort. 42,239 12,163 11,005 1,124 741 -- 67,272 Total assets 405,431 334,194 93,268 188,405 60,648 -- 1,081,946
*Includes intercompany interest in the segments. The following table provides a reconciliation of adjusted operating profit (loss) to net earnings (loss): ADJUSTED OPERATING PROFIT RECONCILIATION
Corporate Domestic Marketing and (in thousands) Mills Fabrication Recycling and Distribution Eliminations Total ------------------------------------------------------------------------------------------------------------------------------------ Year ended August 31, 2003: Net earnings (loss) $ 13,188 $ 369 $ 10,006 $ 15,529 $(20,188) $ 18,904 Income taxes 6,288 189 5,104 4,753 (4,844) 11,490 Interest expense 10 120 5 1,313 13,890 15,338 Discounts on sales of accounts receivable 178 23 91 189 103 584 ------------------------------------------------------------------------------------------------ Adjusted operating profit (loss) $ 19,664 $ 701 $ 15,206 $ 21,784 $(11,039) $ 46,316
Corporate Domestic Marketing and (in thousands) Mills Fabrication Recycling and Distribution Eliminations Total ------------------------------------------------------------------------------------------------------------------------------------ Year ended August 31, 2002: Net earnings (loss) $ 26,327 $ 18,699 $ 3,741 $ 8,085 $(16,327) $ 40,525 Income taxes 14,277 11,462 1,187 3,769 (8,082) 22,613 Interest expense 73 218 4 2,039 16,374 18,708 Discounts on sales of accounts receivable 329 62 166 303 (67) 793 -------------------------------------------------------------------------------------------- Adjusted operating profit (loss) $ 41,006 $ 30,441 $ 5,098 $ 14,196 $ (8,102) $ 82,639
Corporate Domestic Marketing and (in thousands) Mills Fabrication Recycling and Distribution Eliminations Total ----------------------------------------------------------------------------------------------------------------------------------- Year ended August 31, 2001: Net earnings (loss) $ 25,706 $ 9,120 $ (1,579) $ 3,612 $(13,087) $ 23,772 Income taxes 16,587 4,563 (903) 2,139 (7,743) 14,643 Interest expense 19 338 12 1,798 25,441 27,608 Discounts on sales of accounts receivable 303 64 146 284 179 976 ------------------------------------------------------------------------------------------ Adjusted operating profit (loss) $ 42,615 $ 14,085 $ (2,324) $ 7,833 $ 4,790 $ 66,999
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 2003, 2002 and 2001 are as follows (in thousands except per share data):
Three Months Ended 2003 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 -------------------------------------------------------------------- Net sales $ 636,179 $ 660,816 $ 774,151 $ 804,739 Gross profit 61,060 67,919 74,419 85,641 Net earnings 2,205 2,933 3,022 10,744 Basic EPS 0.08 0.10 0.11 0.38 Diluted EPS 0.08 0.10 0.11 0.38
Three Months Ended 2002 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 -------------------------------------------------------------------- Net sales $ 572,168 $ 574,325 $ 651,604 $ 681,844 Gross profit 78,095 74,880 92,120 72,319 Net earnings 8,482 6,572 16,433 9,038 Basic EPS 0.32 0.24 0.59 0.32 Diluted EPS 0.32 0.24 0.56 0.31
Three Months Ended 2001 --------------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 -------------------------------------------------------------------- Net sales $ 601,926 $ 584,188 $ 629,435 $ 654,584 Gross profit 70,844 58,253 82,893 85,330 Net earnings (loss) (2,421) 1,590 10,569 14,034 Basic EPS (loss) (0.09) 0.06 0.41 0.54 Diluted EPS (loss) (0.09) 0.06 0.40 0.53
The quantities and costs used in calculating cost of goods sold on a quarterly basis include estimates of the annual LIFO effect. The actual effect cannot be known until the year end physical inventory is completed and quantity and price indices are developed. The quarterly cost of goods sold above includes such estimates. The final determination of inventory quantities and prices resulted in $857 thousand after-tax expense in the fourth quarter 2003. Fourth quarter 2002 net earnings decreased $1.1 million after the final determination of quantities and prices was made. Fourth quarter 2001 net earnings were not significantly impacted. In recording accruals for workers' compensation expense, management relies on prior years' experience and information from third party administrators in making estimates. Results at the end of fiscal year 2002 and 2001 indicated a decline in the number of claims resulting in a $1.0 million and $2.1 million reduction, respectively, in the accrual during the fourth quarters. During the third quarter of fiscal 2003, a subsidiary of the Company was notified that a customer, now in bankruptcy proceedings, alleged the subsidiary received payments from the customer within 90 days of bankruptcy filing which are voidable and should be returned to the bankruptcy estate. The payments were for materials and services sold by the subsidiary to the customer. The company had accrued $1 million as of May 31, 2003 relating to this matter. During the three months ended August 31, 2003, this dispute was settled subject to Bankruptcy Court approval for $118 thousand. Following a revised Court ruling, the Company reduced its litigation accrual by $2.5 million during the fourth quarter 2001. NOTE 15. SUBSEQUENT EVENTS In November 2003, the Company repurchased $89 million of its 7.20% notes due in 2005. As a result of this debt repurchase, the Company will record a pre-tax charge of approximately $2.8 million. Also, in November 2003, the Company issued $200 million of fixed rate notes due in November 2013. The interest rate is 5.625%. Interest is payable semiannually. The Company had entered into an interest rate lock, resulting in an effective rate of 5.644%. EXHIBIT 99.1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Commercial Metals Company Dallas, Texas We have audited the consolidated balance sheets of Commercial Metals Company and subsidiaries as of August 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Commercial Metals Company and subsidiaries at August 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE, LLP Dallas, Texas November 5, 2003 (November 13, 2003 as to Note 15, and June 2, 2004 as to Note 13)