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 28, 1997 COMMISSION FILE NUMBER 1-4304 --------------------- COMMERCIAL METALS COMPANY (Exact name of registrant as specified in its charter) --------------------- <TABLE> <S> <C> DELAWARE 75-0725338 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) </TABLE> 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 28, 1997 there were 15,293,330 shares of the Company's common stock issued and outstanding excluding 839,253 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 28, 1997 and August 31, 1996........................................ 2-3 Consolidated Statements of Earnings -- Six months and three months ended February 28, 1997 and February 29, 1996................................................... 4 Consolidated Statements of Cash Flows -- Six months ended February 28, 1997 and February 29, 1996................ 5 Consolidated Statement of Stockholders' Equity -- February 28, 1997............................................... 6 Notes to Consolidated Financial Statements................ 7 Management's Discussion and Analysis of the Consolidated Financial Statements................................... 8-11 PART II -- Other Information and Signatures................. 12 Exhibit 11 (a) -- Calculation of Primary and Fully Diluted Earnings per Share..................................... 12 Exhibit 27 -- Financial Data Schedule..................... 12 </TABLE> 1
3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> FEBRUARY 28, AUGUST 31, 1997 1996 ------------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) <S> <C> <C> CURRENT ASSETS: Cash...................................................... $ 15,331 $ 24,260 Accounts receivable (less allowance for collection losses of $5,786 and $5,501).................................. 308,045 294,611 Inventories............................................... 205,229 186,201 Other..................................................... 43,271 34,411 --------- --------- TOTAL CURRENT ASSETS.............................. 571,876 539,483 OTHER ASSETS................................................ 6,856 4,563 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land...................................................... 17,150 17,272 Buildings................................................. 50,619 45,902 Equipment................................................. 423,185 407,286 Leasehold improvements.................................... 20,176 19,761 Construction in process................................... 29,741 16,748 --------- --------- 540,871 506,969 Less accumulated depreciation and amortization............ (304,830) (284,259) --------- --------- 236,041 222,710 --------- --------- $ 814,773 $ 766,756 ========= ========= </TABLE> See notes to consolidated financial statements. 2
4 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> FEBRUARY 28, AUGUST 31, 1997 1996 ------------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) <S> <C> <C> CURRENT LIABILITIES: Commercial paper.......................................... $ 30,000 $ -- Notes payable............................................. 35,110 Accounts payable.......................................... 116,280 116,971 Other payables and accrued expenses....................... 110,070 128,879 Income taxes payable...................................... 1,422 6,729 Current maturities of long-term debt...................... 11,504 11,494 -------- --------- TOTAL CURRENT LIABILITIES......................... 304,386 264,073 DEFERRED INCOME TAXES....................................... 21,044 21,044 LONG-TERM DEBT.............................................. 137,389 146,506 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 15,293,330 and 15,095,964 shares.......... 80,663 80,663 Additional paid-in capital................................ 13,554 13,193 Retained earnings......................................... 275,218 262,772 -------- --------- 369,435 356,628 Less treasury stock, 839,253 and 1,036,619 shares at cost................................................... (17,481) (21,495) -------- --------- 351,954 335,133 -------- --------- $814,773 $ 766,756 ======== ========= </TABLE> See notes to consolidated financial statements 3
5 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) <S> <C> <C> <C> <C> REVENUES: Net sales.............................. $ 523,463 $ 514,855 $ 1,050,322 $ 1,103,093 Other revenue.......................... 2,292 3,326 6,394 5,307 ----------- ----------- ----------- ----------- 525,755 518,181 1,056,716 1,108,400 COSTS AND EXPENSES: Cost of goods sold..................... 467,344 457,227 936,651 987,509 Selling, general and administrative expenses............................ 40,555 37,700 80,555 73,412 Interest expense....................... 3,686 4,160 7,157 7,857 Employees' pension and profit sharing plans............................... 2,724 3,269 6,398 6,671 ----------- ----------- ----------- ----------- 514,309 502,356 1,030,761 1,075,449 EARNINGS BEFORE INCOME TAXES............. 11,446 15,825 25,955 32,951 INCOME TAXES............................. 4,245 5,815 9,577 12,109 ----------- ----------- ----------- ----------- NET EARNINGS............................. $ 7,201 $ 10,010 $ 16,378 $ 20,842 =========== =========== =========== =========== Net earnings per share................... $ 0.47 $ 0.67 $ 1.06 $ 1.36 Cash dividends per share................. $ 0.13 $ 0.12 $ 0.26 $ 0.24 Average shares outstanding............... 15,413,273 15,025,543 15,400,735 15,298,581 </TABLE> See notes to consolidated financial statements. 4
6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> SIX MONTHS ENDED FEBRUARY 28, -------------------- 1997 1996 -------- -------- (IN THOUSANDS) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 16,378 $ 20,842 Adjustments to earnings not requiring cash: Depreciation and amortization.......................... 21,556 21,056 Provision for losses on receivables.................... 616 882 Other.................................................. (26) (156) -------- -------- Cash flows from operations before changes in operating assets and liabilities................................. 38,524 42,624 Changes in operating assets and liabilities Decrease (increase) in receivables..................... (14,050) (26,915) Decrease (increase) in inventories..................... (19,028) (7,425) Decrease (increase) in other assets.................... (11,153) 3,831 Increase (decrease) in accounts payable, accrued expenses and income taxes......................................... (24,807) (28,580) -------- -------- Net Cash Used by Operating Activities..................... (30,514) (16,465) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Owen Steel................................. -- (2,799) Purchase of property, plant and equipment................. (34,887) (20,849) Sales of property, plant and equipment.................... 26 156 -------- -------- Net Cash Used by Investing Activities..................... (34,861) (23,492) CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper -- net change............................ 30,000 30,000 Notes payable -- net change............................... 35,110 24,953 Payments on long-term debt................................ (9,107) (11,879) Stock issued under stock option/bonus plans............... 4,375 3,939 Treasury stock acquired................................... (13,465) Dividends paid............................................ (3,932) (3,631) -------- -------- Net Cash Provided by Financing Activities................. 56,446 29,917 Decrease in Cash and Cash Equivalents....................... (8,929) (10,040) Cash and Cash Equivalents at Beginning of Year.............. 24,260 21,018 -------- -------- Cash and Cash Equivalents at End of Period.................. $ 15,331 $ 10,978 ======== ======== </TABLE> See notes to consolidated financial statements. 5
7 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> COMMON STOCK TREASURY STOCK -------------------- ADD'L --------------------- NUMBER PAID-IN RETAINED NUMBER OF SHARES AMOUNT CAPITAL EARNINGS OF SHARES AMOUNT ---------- ------- ------- -------- ---------- -------- (IN THOUSANDS EXCEPT SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Balance September 1, 1996...... 16,132,583 $80,663 $13,193 $262,772 (1,036,619) $(21,495) Net earnings for six months ended February 28, 1997... 16,378 Cash dividends -- $.26 a share..................... (3,932) Stock issued under stock option, purchase and bonus plans..................... 361 197,366 4,014 ---------- ------- ------- -------- ---------- -------- Balance, February 28, 1997..... 16,132,583 $80,663 $13,554 $275,218 (839,253) $(17,481) ========== ======= ======= ======== ========== ======== </TABLE> See notes to consolidated financial statements. 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........................................ 28,571 7,143 35,714 8.75% note due 1999......................................... 8,570 4,286 12,856 Other....................................................... 248 75 323 -------- ------- -------- $137,389 $11,504 $148,893 ======== ======= ======== </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 28, 1997, 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. 7
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED RESULTS OF OPERATIONS <TABLE> <CAPTION> 2ND QTR 2ND QTR FY 1997 FY 1996 ------------- ---------- (IN MILLIONS) <S> <C> <C> Revenues.................................................... $ 526 $ 518 Net earnings................................................ 7.2 10.0 Cash flow................................................... 18.5 21.1 LIFO reserve................................................ 30.1 32.9 </TABLE> <TABLE> <CAPTION> SIX MONTHS SIX MONTHS FY 1997 FY 1996 ------------- ---------- <S> <C> <C> Revenues.................................................... $1,057 $1,108 Net earnings................................................ 16.4 20.8 Cash flow................................................... 38.5 42.6 </TABLE> SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - Solid shipments but a continuing weak pricing environment resulted in earnings lower than last year's very strong second quarter. - Steel Group achieved record tons melted and shipped for a second quarter but lower operating profit. - Copper tube division's performance remained strong. - Aluminum and copper scrap prices showed some recovery, steel scrap still below last year. - Steel Group computer technology migration expense continues. CONSOLIDATED DATA The LIFO method of inventory valuation decreased net earnings for the quarter $497 thousand (3 cents per share) compared to an increase of $722 thousand (5 cents per share) last year. For the six months net earnings were $149 thousand lower (1 cent per share) compared to an increase of $868 thousand (6 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 28 FEB 29 FEB 28 FEB 29 1997 1996 1997 1996 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> REVENUES: Manufacturing................................. $245,090 $239,803 $ 503,049 $ 484,543 Recycling..................................... 115,207 109,774 211,281 232,402 Marketing and Trading......................... 179,712 177,648 374,269 413,755 Corporate and Eliminations.................... (14,254) (9,044) (31,883) (22,300) -------- -------- ---------- ---------- $525,755 $518,181 $1,056,716 $1,108,400 ======== ======== ========== ========== </TABLE> 8
10 <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ----------------------- FEB 28 FEB 29 FEB 28 FEB 29 1997 1996 1997 1996 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> OPERATING PROFIT: Manufacturing................................. $ 10,707 $ 13,603 $ 24,704 $ 28,791 Recycling..................................... 2,117 2,644 2,307 4,158 Marketing and Trading......................... 3,653 4,211 9,009 8,711 Corporate and Eliminations.................... (1,345) (473) (2,908) (852) -------- -------- ---------- ---------- $ 15,132 $ 19,985 $ 33,112 $ 40,808 ======== ======== ========== ========== </TABLE> MANUFACTURING - Operating profit for the segment was 21% below last year's comparable quarter. Record second quarter sales and shipments were offset by continued weak pricing and computer migration costs. The Copper Tube Division had continued strong performance. The Steel Group East companies were about breakeven. The Steel Group operating profit was down 32% from the prior year quarter. Second quarter records were achieved for steel mill tons melted and shipped, although billets accounted for most of the increase in shipments. Shipments by the mills totaled 443,000 tons or 15% higher than last year's comparable quarter, but the average selling price was $9/ton lower -- mainly due to product mix -- while average scrap costs were only slightly lower. Mill operating profits were higher led by SMI-Birmingham where sales were 24% higher and shipments were 36% higher than last year. Operating profits in the Company's steel fabrication businesses were down significantly compared with last year's very strong quarter. Despite consistent shipments of 152,000 tons, results were off in most product lines compared to last year's second quarter due to generally lower selling prices, product mix, and weather delays. Computer migration costs during the quarter were $1.4 million. On January 2, 1997 the Company acquired the assets of a heat treating plant in Pennsylvania. The purchase price was not significant to the Company and the purchase method of accounting was used. The operation has been profitable since the acquisition. The Copper Tube Division operating profit was sharply higher compared with last year; interest rates remained favorable for an expanding housing market. Spreads were favorable for most of the period with shipments 10% ahead of the second quarter last year. RECYCLING - Second quarter operating profit in the Recycling segment recovered from the modest results of the first quarter. Results were below last year's relatively strong second quarter, primarily because of a LIFO credit last year. Scrap prices generally were down compared with last year although nonferrous prices improved during the quarter. Average steel scrap prices were about $7 per ton below last year, as weak export markets continued to impact domestic pricing. The volume of ferrous scrap shipped decreased 2% to 289,000 tons while nonferrous shipments increased 15% to 53,000 tons. MARKETING AND TRADING - Operating income for the segment was 13% below last year. Steel marketing and distribution in Australia and the United Kingdom increased sales, margins, tonnage and strengthened their trading teams. Although steel trading tonnage increased, operating profits were down as severe competition squeezed margins. Results for nonferrous semis were solid with only marginal operating profit declines. Operating profits for primary metals, ores, minerals and industrial raw materials were mixed. For the second quarter, the segment had pretax Lifo income of $656,000 compared to $9,000 of expense in the previous year's quarter. 9
11 OTHER Subsequent to quarter end, the Steel Group moved to terminate the Company's only remaining defined benefit plan effective May 31, 1997. Payout of benefits to participants is expected to occur by May 31, 1998. An estimated curtailment loss of $540,000 will be accrued in the third quarter of fiscal 1997. The current annual financial statement pension expense of $1.2 million and cash contribution of $1.5 million will be reduced to an immaterial amount in fiscal 1998 and eliminated altogether thereafter. This expense reduction will be offset against a onetime settlement liability at time of payout presently estimated to be no greater than $2 million. This amount is subject to changes in benchmark interest rates before May 31, 1997. 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 Financial performance should strengthen during the balance of the year although comparisons will be against record quarters. Mill shipments ought to accelerate in the second half with a moderate increase in steel prices. The company anticipates improved profits in steel fabrication. Demand for copper tube should remain good although margins are likely to be lower. Steel scrap markets are in an erratic phase while nonferrous markets are relatively strong. The underlying end use markets for metals are sound, especially in the United States. Conditions in the construction sector are mostly positive; private nonresidential construction and housing sales are strong while highway and public building construction is firm. Industrial output is healthy in the U.S. and demand overseas has shown a modest pickup. The Southwest and Southeast U.S.A. should continue to outperform the nation. In addition, demand in Mexico and South America is stronger. This report contains forward-looking statements regarding the outlook for the Company's short-term financial results including shipments, pricing, demand 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, currency fluctuations and decisions by governments impacting the pace of overall economic growth. LIQUIDITY Cash flow from operations before changes in operating assets and liabilities for the six months was $39 million compared to $42 million last year. Lower net earnings were partially offset by an increase in depreciation expense. Accounts receivable increased $14 million due to strong quarterly sales by the Recycling segment and domestic sales of ores, minerals, and industrial materials. Steel mill inventories increased leading to higher overall inventories. Other assets increased due to funding of a non-qualified employee benefit plan, non-competition agreement, and an in transit sale. Accounts payable and accrued expenses have decreased $25 million with the payment of incentive compensation and funding of employee benefit plans. The Company financed these 10
12 working capital needs as well as $9 million of payments on long-term debt through internal cash flow and an increase in short term borrowings of $65 million. The Company invested $35 million in capital expenditures as part of its anticipated $70 million annual capital program. Net working capital was $268 million at February 28, 1997 compared to $275 million at August 31, 1996. The current ratio was 1.9 compared to 2.0 at August 31, 1996. The Company's effective tax rate for the six months was 36.9%; the rate for the comparable period last year was 36.7%. Stockholders' equity was $352 million or $23.01 per share. Long-term debt as a percent of total capitalization was 26.9% at February 28, 1997 compared to 29.1% at August 31, 1996. The ratio of total debt to total capitalization plus short-term debt stood at 36.5%. 11
13 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, 1996 filed November 27, 1996, 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 At the registrant's annual meeting of stockholders held January 23, 1997, a total of 13,282,894 shares of common stock or approximately 87% 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> Albert A. Eisenstat............................... 13,226,536 56,358 Walter F. Kammann................................. 13,225,206 57,688 Charles B. Peterson............................... 13,198,562 84,332 </TABLE> Stockholders approved the adoption of the Company's 1996 Long-Term Incentive Plan by the following vote: <TABLE> <CAPTION> PRESENT BUT FOR AGAINST ABSTAIN NOT VOTING - ---------- --------- ------- ----------- <C> <C> <C> <C> 10,643,573 1,081,964 70,475 1,486,882 </TABLE> Stockholders also approved the ratification of the appointment of Deloitte & Touche as auditors of the registrant for the fiscal year ending August 31, 1997, by the following vote: <TABLE> <CAPTION> FOR AGAINST ABSTAIN - ---------- ------- ------- <C> <C> <C> 13,218,927 38,369 25,598 </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. <TABLE> <CAPTION> EXHIBIT NO. ----------- <C> <S> 11. -- Computation of Per Share Earnings (a) Calculation of Primary and Fully Diluted Earnings Per Share 27. -- Financial Data Schedule </TABLE> 12
14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ LAWRENCE A. ENGELS ------------------------------------ Lawrence A. Engels Vice President, Treasurer & Chief Financial Officer April 10, 1997 /s/ WILLIAM B. LARSON ------------------------------------ William B. Larson Controller April 10, 1997 13
15 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. - ----------- <C> <S> <C> 11. -- Computation of Per Share Earnings (a) Calculation of Primary and Fully Diluted Earnings Per Share 27. -- Financial Data Schedule </TABLE>