Commercial Metals Company (CMC) purchases and processes scrap metals for use as raw materials by manufacturers of new metal products. CMC produces finished long steel products, including rebar and merchant bar, as well as semi-finished billets and wire rod.
1 FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 2O549 ------------------------------------------- QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------------- For quarter ended February 29, 1996 Commission File Number 1-4304 COMMERCIAL METALS COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-0725338 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7800 Stemmons Freeway P. O. Box 1046 Dallas, Texas 75221 ------------------------------------------------------ ( Address of principal executive offices ) ( Zip Code ) (214) 689-4300 ------------------------------------------------------ ( Registrant's telephone number, including area code ) ------------------------------------------------------ Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of February 29, 1996 there were 15,023,111 shares of the Company's common stock issued and outstanding excluding 1,109,472 shares held in the Company's treasury.
2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I - Financial Statements: Consolidated Balance Sheets - February 29, 1996 and August 31, 1995 2 - 3 Consolidated Statements of Earnings - Three months and six months ended February 29, 1996 and February 28, 1995 4 Consolidated Statements of Cash Flows - Six months ended February 29, 1996 and February 28, 1995 5 Consolidated Statement of Stockholders' Equity - February 29, 1996 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of the Consolidated Financial Statements 8 - 12 PART II - Other Information and Signatures 13- 15 Exhibit 11 (a) - Calculation of Primary and Fully Diluted Earnings per Share 16 </TABLE> Page 1
3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS ( In thousands except share data ) <TABLE> <CAPTION> February 29, August 31, 1996 1995 ------------ ---------- <S> <C> <C> CURRENT ASSETS: Cash $10,978 $21,018 Accounts receivable (less allowance for collection losses of $5,221 and $4,743) 294,108 268,657 Inventories 215,539 208,114 Other 31,866 36,316 -------- -------- TOTAL CURRENT ASSETS 552,491 534,105 OTHER ASSETS 4,878 4,259 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 16,637 16,629 Buildings 42,206 40,178 Equipment 389,993 372,644 Leasehold improvements 17,821 16,972 Construction in process 17,334 10,282 -------- -------- 483,991 456,705 Less accumulated depreciation and amortization (265,974) (246,966) -------- -------- 218,017 209,739 -------- -------- $775,386 $748,103 </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> February 29, August 31, 1996 1995 ------------ ---------- <S> <C> <C> CURRENT LIABILITIES: Commercial paper $30,000 $ -- Notes payable 30,142 5,189 Accounts payable 105,166 107,906 Other payables and accrued expenses 110,403 137,933 Income taxes payable 6,176 3,246 Current maturities of long-term debt 11,557 14,108 -------- -------- TOTAL CURRENT LIABILITIES 293,444 268,382 DEFERRED INCOME TAXES 21,393 18,553 LONG-TERM DEBT 148,676 158,004 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital stock: Preferred stock -- -- Common stock, par value $5.00 a share; authorized 40,000,000 shares; issued 16,132,583 shares, outstanding 15,023,111 and 15,369,592 shares 80,663 80,663 Additional paid-in capital 12,959 11,946 Retained earnings 241,205 223,994 -------- -------- 334,827 316,603 Less treasury stock, 1,109,472 and 762,991 shares at cost (22,954) (13,439) -------- -------- 311,873 303,164 -------- -------- $775,386 $748,103 ======== ======== </TABLE> See notes to consolidated financial statements. Page 3
5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS ( In thousands except share data ) <TABLE> <CAPTION> Three months ended Six months ended February February February February 29, 28, 29, 28, --------------------- ---------------------- 1996 1995 1996 1995 -------- -------- -------- --------- <S> <C> <C> <C> <C> REVENUES: Net sales $514,855 $530,907 $1,103,093 $942,341 Other revenue 3,326 2,060 5,307 4,364 ---------- ---------- ---------- ---------- 518,181 532,967 1,108,400 946,705 COSTS AND EXPENSES: Cost of goods sold 457,227 472,703 987,509 838,386 Selling, general and administrative expenses 37,700 37,280 73,412 64,604 Interest expense 4,160 4,168 7,857 7,197 Employees' pension and profit sharing plans 3,269 2,698 6,671 5,052 Litigation accrual -- -- -- 6,650 ---------- ---------- ---------- ---------- 502,356 516,849 1,075,449 921,889 EARNINGS BEFORE INCOME TAX 15,825 16,118 32,951 24,816 INCOME TAXES 5,815 5,841 12,109 8,167 ---------- ---------- ---------- ---------- NET EARNINGS $10,010 $10,277 $20,842 $16,649 ========== ========== ========== ========== Net earnings per share $0.67 $0.67 $1.36 $1.11 Cash dividends per share $0.12 $0.12 $0.24 $0.24 Average shares outstanding 15,025,543 15,451,182 15,298,581 14,994,449 </TABLE> See notes to consolidated financial statements. Page 4
6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (In thousands) Six months ended Feb. 29, Feb. 28, ------------------------ 1996 1995 - ---------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $20,842 $16,649 Adjustments to earnings not requiring cash: Depreciation and amortization 21,056 19,045 Provision for losses on receivables 882 1,149 Other (156) (220) ------- ------- Cash flows from operations before changes in operating assets and liabilities 42,624 36,623 Changes in operating assets and liabilities (net of effect of Owen acquisition): Decrease (increase) in receivables (27,482) (11,991) Decrease (increase) in inventories (7,425) (23,024) Decrease (increase) in other assets 3,831 (1,498) Increase (decrease) in accounts payable, accrued expenses and income taxes (28,580) (8,500) ------- ------- Net Cash Used by Operating Activities (17,032) (8,390) - ---------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Owen Steel, net of cash acquired (2,232) (24,994) Temporary investments -- 19,174 Purchase of property, plant and equipment (20,849) (11,759) Sales of property, plant and equipment 156 220 ------- ------- Net Cash Used by Investing Activities (22,925) (17,359) - ---------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper - net change 30,000 (10,000) Notes payable - net change 24,953 5,364 New long-term debt -- 60,000 Refinance long-term debt of acquisition -- (32,000) Payments on long-term debt (11,879) (2,352) Stock issued under stock option/bonus plans 3,939 1,580 Treasury stock acquired (13,465) -- Tax benefits related to stock option plan -- 1,451 Dividends paid (3,631) (3,536) ------- ------- Net Cash Provided by Financing Activities 29,917 20,507 - ---------------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (10,040) (5,242) Cash and Cash Equivalents at Beginning of Year 21,018 19,095 ------- ------- Cash and Cash Equivalents at End of Period $10,978 $13,853 ======= ======= </TABLE> See notes to consolidated financial statements. Page 5
7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ( In thousands except share data ) <TABLE> <CAPTION> Common Stock Treasury Stock ----------------------- Add'l --------------------- Number of Paid-In Retained Number of Shares Amount Capital Earnings Shares Amount ----------- --------- -------- ---------- --------- -------- <S> <C> <C> <C> <C> <C> <C> Balance September 1, 1995 16,132,583 $80,663 $11,946 $223,994 (762,991) ($13,439) Net earnings for six months ended February 29, 1996 20,842 Cash dividends - $.24 a share (3,631) Treasury stock acquired (557,600) (13,465) Additonal treasury stock issued for Owen acquisition 552 37,196 472 Stock issued under stock option, purchase and bonus plans 461 173,923 3,478 ---------- ------- ------- -------- --------- ------- Balance, February 29, 1996 16,132,583 $80,663 $12,959 $241,205 (1,109,472) ($22,954) ========== ======= ======= ======== ========= ======= </TABLE> See notes to consolidated financial statements. Page 6
8 COMMERCIAL METALS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - LONG-TERM DEBT AND EQUITY (in thousands): <TABLE> <CAPTION> Long-Term Current Amount Debt Maturities Outstanding --------- ---------- ----------- <S> <C> <C> <C> 7.20% notes due 2005 $100,000 $ -- $100,000 8.49% notes due 2001 35,715 7,143 42,858 8.75% note due 1999 12,856 4,286 17,142 Other 105 128 233 -------- -------- -------- $148,676 $11,557 $160,233 ======== ======== ======== </TABLE> NOTE B - TAXES ON INCOME: Provision for taxes on income includes estimated United States taxes on undistributed earnings of subsidiaries outside the United States. NOTE C - QUARTERLY FINANCIAL DATA: In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of February 29, 1996, the results of operations for the six months then ended and cash flows for the same periods. The results of operations for the six month periods are not necessarily indicative of the results to be expected for a full year. Page 7
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED RESULTS OF OPERATIONS <TABLE> <CAPTION> (in millions) 2ND QTR 2nd Qtr FY 1996 FY 1995 ------- ------- <S> <C> <C> Revenues $ 518 $ 533 Net earnings 10.0 10.3 Cash flow 21.1 21.9 LIFO reserve 32.9 23.5 </TABLE> <TABLE> <CAPTION> SIX MONTHS Six Months FY 1996 FY 1995 ---------- ---------- <S> <C> <C> Revenues $ 1,108 $ 947 Net earnings 20.8 16.6 Cash flow 42.6 36.6 </TABLE> SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - - Earnings per share matched the prior year record second quarter resulting in record first half net earnings - - Steel Group attained record second quarter sales and profits despite weaker markets and poor weather - - Recycling segment had a respectable but lower quarter than the prior year - - Marketing and trading operating profit up despite intense competition and global oversupply The LIFO method of inventory valuation increased net earnings for the quarter $722 thousand (5 cents per share) compared to a decrease of $1.3 million (9 cents per share) last year. Page 8
10 For the six months net earnings were $868 thousand higher (6 cents per share) compared to a decrease of $1.4 million (9 cents per share) last year. SEGMENT OPERATING DATA Revenues and operating profit by business segment are shown in the following table: <TABLE> <CAPTION> Three months ended Six months ended Feb 29 Feb 28 Feb 29 Feb 28 1996 1995 1996 1995 -------- -------- ---------- -------- <S> <C> <C> <C> <C> REVENUES: Manufacturing $239,803 $243,396 $484,543 $405,134 Recycling 109,774 133,785 232,402 234,606 Marketing and Trading 177,648 168,251 413,755 330,714 Corporate and Eliminations (9,044) (12,465) (22,300) (23,749) -------- -------- ---------- -------- $518,181 $532,967 $1,108,400 $946,705 OPERATING PROFIT: Manufacturing $ 13,603 $ 11,247 $ 28,791 $ 25,069 Recycling 2,644 6,351 4,158 8,620 Marketing and Trading 4,211 3,752 8,711 7,466 Corporate and Eliminations (473) (1,064) (852) (9,142) -------- -------- ---------- -------- $ 19,985 $ 20,286 $ 40,808 $ 32,013 </TABLE> MANUFACTURING - Led by record Steel Group sales and profits, the segment achieved a 21% increase in operating profit above last year's comparable quarter. Tons melted and rolled were down 8% and 13%, respectively, versus the second quarter last year as three of the four mills were affected by adverse weather and steel markets were seasonally weaker. Shipments by the four minimills totaled 386,000 tons or 4% higher, whereas average selling prices decreased 3%. SMI-Texas, SMI-Birmingham, and SMI-Arkansas all had increased operating profits compared to the prior year Page 9
11 quarter. SMI-Texas shipments were 4% above last year. Insurance claims for the first quarter electrical fire are still pending. SMI-Birmingham tonnages were consistent with last year despite losing almost a week of production due to adverse weather. SMI-Arkansas shipments were lower. SMI- South Carolina operated at a lower level of production; coupled with higher shipments than the prior year, it was able to reduce inventories. The steel fabrication businesses recorded significantly higher profits on improved selling prices and shipments increased 6% to 154,000 tons for the quarter. The SMI Owen companies are profitable for the year to date. Copper Tube operating profits remained down compared with last year. Shipments were flat but prices remained under pressure causing margins to shrink. RECYCLING - Demand for scrap remains steady but with weaker prices, operating profits for the segment were well below last year's outstanding second quarter. The volume of scrap processed and shipped within the segment decreased 4% to 341,000 tons. Revenues were down 18% with average steel scrap prices historically high but about $9 per ton below last year's very strong second quarter. Margins were lower than last year, with virtually all product lines showing declines especially aluminum. MARKETING AND TRADING - Operating income for the segment was 12% higher than last year on a revenue increase of 6%. Demand for nonferrous semis, primary metals, secondary metals and industrial raw materials remained good although excessive customer inventories impacted sales and margins. Global steel sales were modestly higher but margins were significantly lower because of intense competition and the global oversupply. Regional trade picked up and marketing and distribution is increasing. The Company is expanding its distribution capacity in Australia which should come on line by fiscal year end. Page 10
12 OTHER REVENUES - Other revenues increased primarily due to interest recovered on a loss in a prior year. ENVIRONMENTAL ACTIVITIES The Company is subject to federal, state and local pollution control laws and regulations in all locations where it has operating facilities. It anticipates that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. In the ordinary course of conducting its business, the Company becomes involved in environmental litigation, administrative proceedings, and governmental investigations. Certain of these environmental matters or other proceedings may result in fines, penalties or judgments against the Company which may have a material impact on earnings for a particular quarter. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to losses in connection with such matters, it makes timely accruals as warranted. It is the opinion of the Company's management that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on the business or consolidated financial position of the Company. OUTLOOK Shipments should accelerate in the second half with an increase in steel prices. The direction of nonferrous markets is uncertain. The inventory correction is running its course and the underlying end use markets are sound. Conditions in the construction sector are mostly positive; private nonresidential construction and housing sales are stronger while highway and public building construction is firm. The Southwest and Southeast should continue to outperform the nation. The manufacturing sector is sluggish both here and abroad but industrial activity appears to be increasing again. The steel market in Mexico is showing some recovery. Europe remains weak, but there are signs of a modest improvement in Japan and activity in the Pacific Rim is at a decent level. Page 11
13 LIQUIDITY Cash flow from operations before changes in operating assets and liabilities for the six months was $43 million compared to $37 million last year. Depreciation expense increased from $19 million to $21 million due to the SMI Owen acquisition and increases in capital assets in the Recycling segment. Accounts receivable increased $27.5 million since August 31 due to increased business activity. Accounts payable and accrued expenses have decreased $28.6 million with a consequent increase in short term borrowings. The Company invested $20.8 million in capital expenditures as part of its anticipated $61 million annual capital program. During the quarter the Company repurchased 30,000 shares of common stock at an average cost of $23.52. This brought year to date repurchases to 557,600 shares at an average cost of $24.15. At February 29,1996 there were 15,023,111 shares issued and outstanding with 1,109,472 shares held in the Company's treasury. Stockholders' equity was $312 million or $20.76 per share. Net working capital was $259 million at February 29,1996 compared to $266 million at August 31,1995. The current ratio was 1.9 compared to 2.0 at August 31,1995. The Company's effective tax rate for the six months was 36.7%; the rate for the comparable period last year was 32.9% due to a credit of $1 million to income tax expense from the favorable resolution of tax issues with the Internal Revenue Service. Long-term debt as a percent of total capitalization was 30.8% at February 29,1996 compared to 32.9% at August 31,1995. The ratio of total debt to total capitalization plus short-term debt stood at 39.8%. Page 12
14 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, 1995 filed November 27, 1995, with the Securities and Exchange Commission. With regard to the litigation described in that Form 10-K involving CMC Oil Company, a wholly-owned subsidiary of the Company, the November 3, 1995, Judgment of the United States Court of Appeals for the Federal Circuit is a final, non-appealable order. CMC Oil Company did not appeal the Judgment. CMC Oil does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company in connection with this litigation. Commercial Metals Company will vigorously contest liability should any such claim be asserted. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the registrant's annual meeting of stockholders held January 25, 1996, a total of 13,599,057 shares of common stock or approximately 88% percent of those outstanding and entitled to vote were present in person or by proxy. There was no solicitation in opposition to management's nominees and all such nominees were elected as set forth in the following tabulation: <TABLE> <CAPTION> Nominee Votes For Votes Withheld - ------- --------- -------------- <S> <C> <C> Laurence E. Hirsch 13,517,580 81,477 A. Leo Howell 13,438,290 160,767 Dorothy G. Owen 13,445,670 153,387 </TABLE> Page 13
15 The stockholders approved the ratification of the appointment of Deloitte & Touche as auditors of the registrant for the fiscal year ending August 31, 1996, by the following vote: <TABLE> <CAPTION> For Against Abstentions and Broker Non-Votes --- ------- -------------------------------- <S> <C> <C> 13,558,915 20,974 19,168 </TABLE> ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits required by Item 601 of Regulation S-K. Exhibit No. 11. Computation of Per Share Earnings (a) Calculation of Primary and Fully Diluted Earnings Per Share 27. Financial Data Schedule 27.1 Restated Financial Data Page 14
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCIAL METALS COMPANY April 12, 1996 /s/ LAWRENCE A. ENGELS ---------------------- Lawrence A. Engels Vice President, Treasurer & Chief Financial Officer April 12, 1996 /s/ WILLIAM B. LARSON --------------------- William B. Larson Controller Page 15
17 INDEX TO EXHIBITS ----------------- EXHIBIT NO. DESCRIPTION - ------- ----------- 11 Computation of Per Share Earnings (a) Calculation of Primary and Fully Diluted Earnings Per Share 27 Financial Data Schedule 27.1 Restated Financial Data