Commercial Metals Company (CMC) purchases and processes scrap metals for use as raw materials by manufacturers of new metal products. CMC produces finished long steel products, including rebar and merchant bar, as well as semi-finished billets and wire rod.
1 FORM 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 quarter ended May 31, 2000 Commission File Number 1-4304 COMMERCIAL METALS COMPANY ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-0725338 ------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7800 Stemmons Freeway Dallas, Texas 75247 -------------------------------------- (Address of principal executive offices) ( Zip Code ) (214) 689-4300 -------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 31, 2000 there were 13,638,504 shares of the Company's common stock issued and outstanding excluding 2,494,079 shares held in the Company's treasury.
2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. --------- <S> <C> PART I - Financial Statements: Consolidated Balance Sheets - May 31, 2000 and August 31, 1999 2 - 3 Consolidated Statements of Earnings - Nine months ended May 31, 2000 and May 31, 1999 4 Consolidated Statements of Cash Flows - Nine months ended May 31, 2000 and May 31, 1999 5 Consolidated Statement of Stockholders' Equity- Nine months ended May 31, 2000 6 Notes to Consolidated Financial Statements 7 - 8 Management's Discussion and Analysis of the Consolidated Financial Statements 9 - 16 PART II - Other Information and Signatures 17 - 18 </TABLE> Page 1
3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands except share data) <TABLE> <CAPTION> May 31, August 31, 2000 1999 ----------- ----------- <S> <C> <C> CURRENT ASSETS: Cash $ 17,656 $ 44,665 Accounts receivable (less allowance for collection losses of $8,200 and $7,714) 367,538 304,318 Inventories 282,829 249,688 Other 74,757 63,666 ----------- ----------- TOTAL CURRENT ASSETS 742,780 662,337 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 27,716 25,927 Buildings 97,611 87,796 Equipment 670,783 635,054 Leasehold improvements 31,100 30,119 Construction in process 15,063 25,351 ----------- ----------- 842,273 804,247 Less accumulated depreciation and amortization (438,391) (401,975) ----------- ----------- 403,882 402,272 OTHER ASSETS 20,926 14,379 ----------- ----------- $ 1,167,588 $ 1,078,988 =========== =========== </TABLE> See notes to consolidated financial statements. Page 2
4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands except share data) <TABLE> <CAPTION> May 31, August 31, 2000 1999 ----------- ----------- <S> <C> <C> CURRENT LIABILITIES: Commercial paper $ 70,000 $ 10,000 Notes payable 44,692 4,382 Accounts payable 180,492 191,508 Other payables and accrued expenses 152,983 153,889 Income taxes payable 3,221 2,025 Current maturities of long-term debt 8,773 9,873 ----------- ----------- TOTAL CURRENT LIABILITIES 460,161 371,677 DEFERRED INCOME TAXES 23,263 23,263 LONG-TERM DEBT 261,925 265,590 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital stock: Preferred stock -- -- Common stock, par value $5.00 per share; authorized 40,000,000 shares; issued 16,132,583 shares; outstanding 13,638,504 and 14,406,260 shares 80,663 80,663 Additional paid-in capital 14,103 14,131 Accumulated other comprehensive loss (1,713) (774) Retained earnings 396,168 368,177 ----------- ----------- 489,221 462,197 Less treasury stock, 2,494,079 and 1,726,323 shares at cost (66,982) (43,739) ----------- ----------- 422,239 418,458 ----------- ----------- $ 1,167,588 $ 1,078,988 =========== =========== </TABLE> See notes to consolidated financial statements. Page 3
5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except share data) <TABLE> <CAPTION> Three months ended Nine months ended May 31, May 31, May 31, May 31, ----------- ----------- ----------- ----------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> NET SALES $ 701,209 $ 583,171 $ 1,951,260 $ 1,682,067 COSTS AND EXPENSES: Cost of goods sold 614,133 506,323 1,707,618 1,461,645 Selling, general and administrative expenses 54,758 51,310 157,069 145,567 Interest expense 7,265 4,088 19,937 13,632 Employees' retirement plans 4,398 3,917 13,166 12,778 ----------- ----------- ----------- ----------- 680,554 565,638 1,897,790 1,633,622 ----------- ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 20,655 17,533 53,470 48,445 INCOME TAXES 7,694 6,531 19,918 18,046 ----------- ----------- ----------- ----------- NET EARNINGS $ 12,961 $ 11,002 $ 33,552 $ 30,399 =========== =========== =========== =========== Basic earnings per share $ 0.93 $ 0.76 $ 2.36 $ 2.09 Diluted earnings per share $ 0.92 $ 0.76 $ 2.31 $ 2.07 Cash dividends per share $ 0.13 $ 0.13 $ 0.39 $ 0.39 Average basic shares outstanding 13,986,418 14,493,180 14,241,221 14,559,437 Average diluted shares outstanding 14,120,823 14,562,281 14,513,233 14,663,998 </TABLE> See notes to consolidated financial statements. Page 4
6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Nine months ended May 31, May 31, ----------- ----------- 2000 1999 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 33,552 $ 30,399 Adjustments to earnings not requiring cash: Depreciation and amortization 49,579 36,621 Provision for losses on receivables 820 1,789 Gain on sale of property and other (5,847) (125) --------- --------- Cash flows from operations before changes in current assets and liabilities 78,104 68,684 Changes in current assets and liabilities: Decrease (increase) in receivables (64,040) (1,283) Decrease (increase) in inventories (33,141) 23,428 Decrease (increase) in other assets (21,684) 10,410 Increase (decrease) in accounts payable, accrued expenses and income taxes (10,726) 6,401 --------- --------- Net Cash (Used) Provided by Operating Activities (51,487) 107,640 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment, net (48,885) (118,637) Sales of property, plant and equipment 7,866 125 Investment in joint venture (1,216) --------- --------- Net Cash Used by Investing Activities (42,235) (118,512) CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper - net change 60,000 (15,000) Notes payable - net change 40,310 (51,165) New long-term notes -- 100,000 Payments on long-term debt (4,765) (10,705) Stock issued under stock option and purchase plans 5,545 1,614 Treasury stock acquired (28,816) (6,661) Dividends paid (5,561) (5,676) --------- --------- Net Cash Provided by Financing Activities 66,713 12,407 Increase (decrease) in Cash and Cash Equivalents (27,009) 1,535 Cash and Cash Equivalents at Beginning of Year 44,665 30,985 --------- --------- Cash and Cash Equivalents at End of Period $ 17,656 $ 32,520 ========= ========= </TABLE> See notes to consolidated financial statements. Page 5
7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands except share data) <TABLE> <CAPTION> Common Stock Accumulated ----------------------- Other Add'l Number of Comprehensive Paid-In Retained Shares Amount Loss Capital Earnings ---------- ---------- ------------- ---------- ---------- <S> <C> <C> <C> <C> <C> Balance September 1, 1999 16,132,583 $ 80,663 $ (774) $ 14,131 $ 368,177 Comprehensive Income: Net earnings for nine months ended May 31, 2000 33,552 Other comprehensive loss- Foreign currency translation adjustment net of taxes of $506 (939) Comprehensive income Cash dividends - $.39 a share (5,561) Treasury stock acquired Stock issued under stock option, purchase and bonus plans (28) ---------- ---------- --------- --------- --------- Balance May 31, 2000 16,132,583 $ 80,663 $ (1,713) $ 14,103 $ 396,168 ========== ========== ========= ========= ========= <CAPTION> Treasury Stock ------------------------ Number of Shares Amount Total ---------- ----------- ---------- <S> <C> <C> <C> Balance September 1, 1999 (1,726,323) $ (43,739) $ 418,458 Comprehensive Income: Net earnings for nine months ended May 31, 2000 33,552 Other comprehensive loss- Foreign currency translation adjustment net of taxes of $506 (939) --------- Comprehensive income 32,613 Cash dividends - $.39 a share (5,561) Treasury stock acquired (988,500) (28,816) (28,816) Stock issued under stock option, purchase and bonus plans 220,744 5,573 5,545 ---------- ---------- --------- Balance May 31, 2000 (2,494,079) $ (66,982) $ 422,239 ========== ========== ========= </TABLE> See notes to consolidated financial statements. Page 6
8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - LONG-TERM DEBT AND EQUITY (in thousands): <TABLE> <CAPTION> Total Long-Term Current Amount Debt Maturities Outstanding --------- ---------- ----------- <S> <C> <C> <C> 6.75% notes due 2009 $100,000 $ -- $100,000 7.20% notes due 2005 100,000 -- 100,000 6.80% notes due 2007 50,000 -- 50,000 8.49% notes due 2001 7,142 7,143 14,285 Other 4,783 1,630 6,413 -------- -------- -------- $261,925 $ 8,773 $270,698 ======== ======== ======== </TABLE> NOTE B - QUARTERLY FINANCIAL DATA: In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of May 31, 2000, the results of operations for the nine months then ended and the cash flows for the nine months. The results of operations for the nine month periods are not necessarily indicative of the results to be expected for a full year. NOTE C - Reclassifications: Certain reclassifications have been made in the 1999 financial statements to conform to the classifications used in the current year. NOTE D - EARNINGS PER SHARE: There were no adjustments to net earnings to arrive at net income for either the nine months ended May 31, 2000 or 1999. The reconciliation of the denominators of the earnings per share calculations are as follows: <TABLE> <CAPTION> Three months ended Nine months ended May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Shares outstanding for basic earnings per share 13,986,418 14,493,180 14,241,221 14,559,437 Effect of dilutive securities-stock options/purchase plans 134,405 69,101 272,012 104,561 Shares outstanding for dilutive earnings per share 14,120,823 14,562,281 14,513,233 14,663,998 </TABLE> Stock options with total share committments of 1,073,253 at May 31, 2000 were anti-dilutive based on the average share price for the quarter of $27.73 per share, and exercise prices of $28.00 - 31.94 per share. The options expire in 2007. During the third quarter, the Board of Directors of the Company authorized the purchase of up to 500,000 additional shares of the Company's common stock. Page 7
9 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - BUSINESS SEGMENTS (in thousands): The following is a summary of certain financial information by reportable segment: <TABLE> <CAPTION> Three months ended May 31, 2000 ---------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> Net sales-unaffiliated customers $ 343,850 $ 114,837 $ 242,700 $ (178) $ 701,209 Intersegment sales 1,439 6,320 7,957 (15,716) 0 --------- --------- --------- --------- --------- 345,289 121,157 250,657 (15,894) 701,209 Earnings (Loss) before income taxes 20,014 1,569 4,704 (5,632) 20,655 </TABLE> <TABLE> <CAPTION> Three months ended May 31, 1999 ---------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED --------- --------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> Net sales-unaffiliated customers $ 306,437 $ 78,476 $ 198,238 $ 20 $ 583,171 Intersegment sales 896 3,115 4,248 (8,259) 0 --------- --------- --------- --------- --------- 307,333 81,591 202,486 (8,239) 583,171 Earnings (Loss) before income taxes 19,596 (270) 4,331 (6,124) 17,533 </TABLE> <TABLE> <CAPTION> Nine months ended May 31, 2000 --------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED ----------- ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Net sales-unaffiliated customers $ 977,437 $ 323,052 $ 651,034 $ (263) $ 1,951,260 Intersegment sales 4,291 17,444 21,530 (43,265) 0 ----------- ----------- ----------- ----------- ----------- 981,728 340,496 672,564 (43,528) 1,951,260 Earnings (Loss) before income taxes 53,311 4,424 13,264 (17,529) 53,470 Total assets 771,888 117,198 248,157 30,345 1,167,588 </TABLE> <TABLE> <CAPTION> Nine months ended May 31, 1999 ---------------------------------------- MANU- MARKETING CORP CONSOL- FACTURING RECYCLING & TRADING & ELIM IDATED ----------- ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Net sales-unaffiliated customers $ 896,762 $ 222,662 $ 562,566 $ 77 $ 1,682,067 Intersegment sales 2,805 14,065 26,908 (43,778) 0 ----------- ----------- ----------- ----------- ----------- 899,567 236,727 589,474 (43,701) 1,682,067 Earnings (Loss) before income taxes 59,899 (6,144) 12,221 (17,531) 48,445 Total assets 693,483 109,346 226,956 22,985 1,052,770 </TABLE> Page 8
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED RESULTS OF OPERATIONS (in millions) <TABLE> <CAPTION> Nine months ended Third quarter May 31, ------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 701 $ 583 $ 1,951 $ 1,682 Net earnings 13.0 11.0 33.6 30.4 Cash flows 24.6 24.8 78.1 68.7 EBITDA 44.7 34.8 123.0 98.7 LIFO reserve 6.4 12.2 </TABLE> SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - - Net earnings increased 18% compared to the prior year period. - - Higher steel shipments, outstanding copper tube profitability and a property sale net gain ($3.5 million after-tax) sustained the Manufacturing Segment, in spite of higher depreciation and interest expenses and accruals ($3.3 million after-tax) for estimated settlements on large structural steel fabrication jobs. - - $1.5 million (after-tax) was recovered from graphite electrode anti-trust litigation. - - Steel minimill operating profits improved from the prior year period, in spite of a $500,000 (after-tax) write-down of retired mill equipment held for sale. - - The Company acquired the assets of two profitable southern California rebar fabricators and a concrete related products business in Houston, Texas. - - The Recycling segment was profitable, as compared with the prior year's loss. - - The Marketing and Trading segment continued its profitability and expansion into new markets and products. Page 9
11 CONSOLIDATED DATA The LIFO method of inventory valuation decreased net earnings for the quarter $626,000 (4 cents per diluted share) compared to an increase of $3.5 million (24 cents per diluted share) last year. For the nine months, net earnings were $2.2 million lower (15 cents per diluted share) compared to an increase of $6.7 million (45 cents per diluted share) last year. SEGMENT OPERATING DATA (in thousands) Net sales and operating profit (loss) by business segment are shown in the following table: <TABLE> <CAPTION> Three months ended Nine months ended May 31, May 31, --------------------- ----------------------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> NET SALES: Manufacturing $ 345,289 $ 307,333 $ 981,728 $ 899,567 Recycling 121,157 81,591 340,496 236,727 Marketing & Trading 250,657 202,486 672,564 589,474 Corporate & Eliminations (15,894) (8,239) (43,528) (43,701) --------- --------- ---------- ---------- $ 701,209 $ 583,171 $1,951,260 $1,682,067 ========= ========= ========== ========== OPERATING PROFIT (LOSS): Manufacturing $ 20,085 $ 19,608 $ 53,421 $ 59,917 Recycling 1,578 (255) 4,450 (6,109) Marketing & Trading 5,327 4,825 14,961 14,167 Corporate & Eliminations 930 (2,557) 575 (5,898) --------- --------- ---------- ---------- $ 27,920 $ 21,621 $ 73,407 $ 62,077 ========= ========= ========== ========== </TABLE> MANUFACTURING - The Company's Manufacturing segment consists of the Steel Group and the Copper Tube Division. Operating profit for the segment increased 2% from last year's third quarter while net sales increased 12%. The Steel Group's operating profit was 5% below last year's third quarter. Underlying demand for steel long products was good, and steel shipments increased. However, an historically high level of low-priced steel imports continued to pressure steel mill prices. Also, margins were pressured by lower profits in steel fabrication because of losses on structural steel projects. Significantly better operating profit for the Copper Tube Division more than offset the Steel Group's decline in operating profit. Page 10
12 Steel and scrap prices are as reflected in the table below: <TABLE> <CAPTION> Third Quarter ------------- 2000 1999 ---- ---- <S> <C> <C> Average mill selling price $312 $290 Average fabrication selling price 616 667 Average scrap purchase price 96 73 </TABLE> Operating profit for the Company's four steel minimills was 9% above the prior year. Mill shipments increased 9% to 491,000 from 449,000 tons, and tons rolled were up 41% from last year primarily because of higher production from the new rolling mill at SMI South Carolina and stronger demand. Tons melted also significantly increased. The prior year's production was down due to construction interference associated with major capital projects at SMI Alabama and SMI South Carolina. Margins in fiscal 2000 were slightly lower due to higher scrap prices. While the average mill selling price was $22 per ton above last year, average scrap purchase costs were higher by $23 per ton. Although production at the new SMI South Carolina rolling mill was at record levels, profits were lower than anticipated because of lower selling prices and a product mix not yet balanced with higher value added products. The 2000 quarterly results included a $1.5 million (after-tax) graphite electrode anti-trust recovery and a $500,000 (after- tax) write-down of the old mill equipment held for sale at SMI South Carolina. During the prior year quarter, the mills absorbed an after-tax charge of $1.8 million for start up costs associated with the construction projects. Net sales in the fabrication businesses increased 4% from the prior year's third quarter. Accruals of $3.3 million (after-tax) for estimated settlements on large steel structural jobs were more than offset by a property sale gain. The sale of land and improvements grossed $8.4 million which after costs related to the sale and escrows resulted in a net gain of $5.5 million ($3.5 million after-tax). Fabricated steel shipments totaled 238,000 tons, a 7% increase from the prior year period. The average fab selling price decreased 8% ($51) per ton. In May 2000 the Company acquired substantially all of the assets of two profitable rebar fabrication companies in southern California: Fontana Steel, Inc. with operations in Rancho Cucamonga and San Marcos, and C & M Steel, Inc. in Fontana. These acquisitions expanded the Company's market penetration to the largest rebar market in the United States. Also, in March 2000 the Company purchased substantially all of the operating assets of Bell - Barcelona Concrete Accessories, further expanding its concrete related products business in the Houston, Texas area. The Company continued to progress with its new castellated beam facility and product line as an adjunct to its steel joist business. Page 11
13 Depreciation and amortization expense for the Steel Group increased by $3.6 million pretax from the prior year third quarter due to the new rolling mill in South Carolina and new finishing line at SMI Alabama. The Company's interest expense increased by $3.2 million from the prior year because the completion of these two projects by fiscal year end 1999 substantially ended capitalization of interest expense, short term rates have edged up and overall borrowings have increased primarily due to working capital needs. The Copper Tube Division's operating profit increased 48% from the same period last year due to better material spreads on net sales that were 30% higher. Demand for plumbing and refrigeration tube continued to be buoyed by the strong residential construction sector in the third quarter 2000. Copper tube shipments increased 11% versus the third quarter last year, and production was 8% higher. RECYCLING - The Recycling segment reported an operating profit of $1.6 million for the third quarter 2000, compared with the prior year period loss of $255,000. Prices were significantly better than the corresponding period last year, although they were lower than in the second quarter of the current fiscal year for both ferrous and nonferrous scrap. The supply of scrap was plentiful and more than kept up with demand, including continued imports of ferrous raw materials. Net sales increased 48% to $121 million. Ferrous scrap tonnage processed and shipped increased 19%, and ferrous sales prices were an average $100 per ton or 25% higher than a year ago. Nonferrous shipments increased 20%, and the average nonferrous scrap price was 22% higher than the prior year period. Total volume of scrap processed, including the Steel Group processing plants, was 629,000 tons, an increase of 19% from the 528,000 tons processed during the prior year period. MARKETING AND TRADING - Operating profit for the Marketing and Trading segment was 10% higher than the prior year's third quarter, while net sales increased 24% to $251 million. The recovery in global steel prices generally reached a plateau during the quarter and decreased in some cases. Margins in steel marketing and distribution held up better than those in steel trading. Tonnage was steady. The strong United States dollar had a significant influence on regional supply flows. The segment's operating results improved because of product diversification, stronger regional business and solid execution. Markets in nonferrous metal products remained highly competitive, but profitability was improved due to increased sales from the Company's diverse product lines, further market penetration and progress in extending the range of products. Sales of industrial raw materials and products including ores, minerals, ferrous raw materials and primary metals increased and remained profitable despite continued margin pressures. Page 12
14 CONTINGENCIES In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings, governmental investigations, including environmental matters, and contractual 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. During fiscal year 2000, the Company incurred substantial costs primarily as a result of a subcontractor default on a large structural steel fabrication contract. The Company has subcontractor default protection insurance for this work. Although, the upper limit of the expense to the Company as a result of the subcontractor default has not yet been calculated, the Company had recorded amounts due of approximately $3.5 million pretax as of May 31, 2000 as a portion of the claim against the insurance company. The Company has initiated legal action under the insurance policy to collect this amount as well as other damages the Company has, or may in the future incur. The insurance carrier apparently disputes coverage and liability. Management believes that the Company has a valid claim under the policy and that the recorded amounts, at a minimum, will ultimately be collected. The Company is subject to federal, state and local pollution control laws and regulations in all locations where it has operating facilities. It anticipates that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. OUTLOOK - Management continues to believe that the fourth quarter of fiscal year 2000 will be stronger than the third quarter, due to both internal and external factors. The Company's biggest challenge remains to continue improving profit performance at the South Carolina mill and stabilize the large structural fabrication business. Markets, generally should be relatively steady. Although the United States economy is decelerating, demand from the construction, manufacturing and distribution sectors remains healthy, and markets in Europe and Asia (other than Japan) have been Page 13
15 gaining momentum. Earnings per share will be further enhanced by the Company's accelerated share repurchases. Because of the global market improvement, potential anti-dumping action on some of the Company's steel mill products, the seasonal increase in construction, and the recent softening of the United States dollar, management expects that steel mill production and shipments will increase. The mills' operating profits will also benefit from the recent decline in raw material costs. Conversely, customers continue to reduce inventories. The outlook for the Company's downstream steel fabrication and related operations remains favorable, and its strong presence in fabrication continues to provide profit stability. Residential construction is down from its peak, but remains relatively brisk; consequently, demand for copper tube is expected to continue to be good. The planned expansion of the copper tube facility is underway with completion anticipated in fiscal year 2001. As the fourth quarter began, ferrous and nonferrous scrap prices had declined significantly from recent highs, but appear to have stabilized. However, management does not anticipate much recovery of near-term prices for the main product lines in the Recycling segment. Demand for ferrous scrap remains good but is weaker than expected considering relatively high steel mill operating rates. Management anticipates some decline in ferrous scrap imports which would strengthen prices. Nonferrous markets are relatively stronger. In Marketing and Trading, the overall global steel outlook is mixed. Demand for nonferrous semi-finished and industrial products should remain solid. Management does not expect firmer prices, however, and volume could decline temporarily. The recently weaker United States currency will alter material flow. The Company will continue its expansion into new product and geographic areas. Longer term, the Company expects good markets to continue for construction related products and services. Added spending for the nation's infrastructure (including highways, bridges and airports, as well as schools) has begun to materialize, albeit unevenly. The Company anticipates relatively high consumption of steel bar and structural steel in the public sector during the next few years. The outlook for private construction also is favorable. Global prospects for metal consumption in the engineering and manufacturing sectors are similarly encouraging as the world focuses on productivity and technological improvements. The Company's historically high capital investments in fiscal years 1999 and 1998 should result in a meaningful increase in revenue growth and earnings power, with the major benefit beginning in fiscal year 2001. The Company will continue to profit from its vertical integration and unique business mix, and should be in a more favorable pricing environment. Page 14
16 This outlook section contains forward-looking statements regarding the outlook for the Company's financial results including shipments, pricing, demand, production rates, and general market conditions. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include interest rate changes, construction activity, metals pricing over which the Company exerts little influence, new capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, global factors including credit availability, currency fluctuations, and decisions by governments impacting the level and pace of overall economic growth. LIQUIDITY Cash flows from operations before changes in current assets and liabilities for the nine months ended May 31, 2000 were $78.1 million compared to $68.7 million last year. Net cash flows used by operating activities was $51.5 million compared with $107.6 million provided by operating activities in the prior year period. Depreciation and amortization increased during fiscal year 2000 primarily due to the capital projects at South Carolina and Alabama which were commissioned during the second half of the prior year. Accounts receivable increased partially due to higher sales in fiscal year 2000 than in the last part of fiscal 1999. The remainder of the increase was primarily due to slower collection of retention and billings for large steel structural jobs. The Company has increased its inventories since August 31, 1999 because of higher prices and increased volume. The Company's other assets increased from the fiscal 1999 year end primarily due to more dealer advances, prepaid expenses, and goodwill. Accounts payable decreased $11.0 million because of timing differences in international sales. Notes payable and commercial paper increased $100.3 million to supplement current cash flows for funding working capital, capital expenditures and treasury stock repurchases. The Company invested $48.9 million in property, plant and equipment primarily in the Steel Group at the steel minimills, and in its fabrication operations including acquisitions. The company also invested in the expansion of its copper tube facility. These capital expenditures were substantially less than the $118.6 million spent during the prior year period. At May 31, 2000, there were 13,638,504 common shares issued and outstanding with 2,494,079 held in the Company's treasury. Stockholders' equity was $422 million or $30.96 per share. During fiscal 2000, the Company repurchased 988,500 shares of common stock at an average price of $29.15. Page 15
17 Net working capital was $283 million at May 31, 2000 compared to $291 million at August 31,1999. The current ratio was 1.6, slightly below August 31,1999. The Company's effective tax rate for the nine months was 37.3%, the same as the prior year period. Long-term debt as a percent of total capitalization was 37.0% at May 31, 2000 compared to 37.5% at August 31, 1999. The ratio of total debt to total capitalization plus short-term debt stood at 46.4%, higher than the 39.6% at fiscal 1999 year end due to working capital requirements, capital expenditures and treasury share repurchases. Page 16
18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the information incorporated by reference from Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the year ending August 31, 1999, filed November 24, 1999, with the Securities and Exchange Commission. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits required by Item 601 of Regulation S-K. 27. Financial Data Schedule for the period ended May 31, 2000. B. No reports on Form 8-K have been filed during the quarter for which this report is filed. Page 17
19 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 June 22, 2000 /s/ William B. Larson Vice President & Chief Financial Officer June 22, 2000 /s/ Malinda G. Passmore Controller Page 18
20 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 27 Financial Data Schedule </TABLE>