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 November 30, 1997 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 November 30, 1997 there were 14,826,324 shares of the Company's common stock issued and outstanding excluding 1,306,259 shares held in the Company's treasury.
2 COMMERCIAL METALS COMPANY AND SUBSIDIARIES ------------------------------------------ INDEX ----- Page No. --------- PART I - Financial Statements: Consolidated Balance Sheets - November 30, 1997 and August 31, 1997 2 - 3 Consolidated Statements of Earnings - Three months ended November 30, 1997 and 4 November 30, 1996 Consolidated Statements of Cash Flows - Three months ended November 30, 1997 and 1996 5 Consolidated Statement of Stockholders' Equity - November 30, 1997 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of the Consolidated Financial Statements 8 - 13 PART II - Other Information and Signatures 14 - 15 Exhibit 11 (a) - Calculation of Primary and Fully Diluted Earnings per Share 16 Page 1
3 COMMERCIAL METALS COMPANY AND SUBSIDIARIES ------------------------------------------ CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (In thousands except share data) <TABLE> <CAPTION> Nov. 30, August 31, 1997 1997 --------- --------- <S> <C> <C> CURRENT ASSETS: Cash $ 19,603 $ 32,998 Accounts receivable (less allowance for collection losses of $6,534 and $6,116) 277,700 289,735 Inventories 208,383 220,644 Other 41,817 41,899 --------- --------- TOTAL CURRENT ASSETS 547,503 585,276 OTHER ASSETS 6,535 6,524 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 18,317 17,844 Buildings 61,120 55,700 Equipment 451,504 447,553 Leasehold improvements 21,405 19,666 Construction in process 39,890 29,841 --------- --------- 592,236 570,604 Less accumulated depreciation and amortization (334,045) (323,343) --------- --------- 258,191 247,261 --------- --------- $ 812,229 $ 839,061 ========= ========= </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> Nov. 30, August 31, 1997 1997 --------- --------- <S> <C> <C> CURRENT LIABILITIES: Commercial paper $ -- $ -- Notes payable 28,320 -- Accounts payable 103,006 136,988 Other payables and accrued expenses 99,776 129,036 Income taxes payable 3,772 618 Current maturities of long-term debt 11,500 11,502 --------- --------- TOTAL CURRENT LIABILITIES 246,374 278,144 DEFERRED INCOME TAXES 20,834 20,834 LONG-TERM DEBT 183,123 185,211 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 14,826,324 and 14,760,390 shares 80,663 80,663 Additional paid-in capital 12,970 13,627 Retained earnings 299,730 293,600 --------- --------- 393,363 387,890 Less treasury stock, 1,306,259 and 1,371,653 shares at cost (31,465) (33,018) --------- --------- 361,898 354,872 --------- --------- $ 812,229 $ 839,061 ========= ========= </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 November 30, --------------------------- 1997 1996 ------------ ------------ <S> <C> <C> REVENUES: Net sales $ 547,099 $ 526,859 Other revenues 3,402 4,102 ------------ ------------ 550,501 530,961 COSTS AND EXPENSES: Cost of goods sold 486,700 469,307 Selling, general and administrative expenses 42,157 40,000 Interest expense 4,179 3,471 Employees' pension and profit sharing plans 4,743 3,674 ------------ ------------ 537,779 516,452 EARNINGS BEFORE INCOME TAXES 12,722 14,509 INCOME TAXES 4,669 5,332 ------------ ------------ NET EARNINGS $ 8,053 $ 9,177 ============ ============ Net earnings per share $ 0.54 $ 0.60 Cash dividends per share $ 0.13 $ 0.13 Average shares outstanding 15,006,095 15,388,196 </TABLE> See notes to consolidated financial statements. Page 4
6 COMMERCIAL METALS COMPANY AND SUBSIDIARIES ------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In thousands) <TABLE> <CAPTION> Three months ended November 30, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 8,053 $ 9,177 Adjustments to earnings not requiring cash: Depreciation and amortization 11,278 10,658 Provision for losses on receivables 507 268 Deferred income taxes Other 25 (67) ---------- ---------- Cash flows from operations before changes in operating assets and liabilities 19,863 20,036 Changes in operating assets and liabilities: Decrease (increase) in receivables 11,528 (8,110) Decrease (increase) in inventories 12,261 (4,993) Decrease (increase) in other assets 71 (2,477) Increase (decrease) in accounts payable, accrued expenses and income taxes (60,088) (31,126) ---------- ---------- Net Cash Used by Operating Activities (16,365) (26,670) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (22,208) (16,948) Sales of property, plant and equipment (25) 67 ---------- ---------- Net Cash Used by Investing Activities (22,233) (16,881) CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper - net change -- -- Notes payable - net change 28,320 35,000 Payments on long-term debt (2,090) (2,087) Stock issued under stock option/bonus plans 895 328 Dividends paid (1,922) (1,964) ---------- ---------- Net Cash Provided by Financing Activities 25,203 31,277 Decrease in Cash and Cash Equivalents (13,395) (12,274) Cash and Cash Equivalents at Beginning of Year 32,998 24,260 ---------- ---------- Cash and Cash Equivalents at End of Period $ 19,603 $ 11,986 ========== ========== </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, 1997 16,132,583 $ 80,663 $ 13,627 $ 293,599 (1,371,653) ($ 33,018) Net earnings for three months ended November 30, 1997 8,053 Cash dividends - $.13 a share (1,922) Treasury stock acquired Stock issued under stock option, purchase and bonus plans (657) 65,394 1,553 Tax benefits related to stock option plans ----------- ----------- ----------- ----------- ----------- ----------- Balance, November 30, 1997 16,132,583 $ 80,663 $ 12,970 $ 299,730 (1,306,259) ($ 31,465) =========== =========== =========== =========== =========== =========== </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> 6.80% notes due 2007 $ 50,000 $ -- $ 50,000 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 4,284 4,286 8,570 Other 268 71 339 -------------- -------------- -------------- $ 183,123 $ 11,500 $ 194,623 ============== ============== ============== </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 November 30, 1997, the results of operations for the three months then ended and cash flows for the same periods. The results of operations for the three 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) 1st Qtr 1st Qtr FY 1998 FY 1997 ---------- ---------- <S> <C> <C> Revenues $ 551 $ 531 Net earnings 8.1 9.2 Cash flow 19.9 20.0 LIFO reserve 29.3 29.3 </TABLE> SIGNIFICANT EVENTS AFFECTING THE COMPANY THIS QUARTER: - - Excluding a prior year nonrecurring insurance recovery, results were comparable to last year, but below expectations. - - Steel Group achieved record tons melted, rolled and shipped for a first quarter. - - Record capital expenditure budget underway. - - Recycling reported a disappointing loss. - - Intense competition and poor international markets lowered Marketing and Trading results. CONSOLIDATED DATA The Lifo method of inventory valuation increased net earnings for the quarter $521 thousand (3 cents per share) compared to an increase of $348 thousand (2 cents per share) last year. Page 8
10 SEGMENT OPERATING DATA Revenues and operating profit by business segment are shown in the following table: <TABLE> <CAPTION> Three months ended November 30, ------------------------------- 1997 1996 ------------- -------------- <S> <C> <C> REVENUES: Manufacturing $ 290,918 $ 257,959 Recycling 104,126 96,074 Marketing and Trading 172,776 194,557 Corporate and Eliminations (17,319) (17,629) ---------- ---------- $ 550,501 $ 530,961 ========== ========== OPERATING PROFIT: Manufacturing $ 14,670 $ 13,997 Recycling (490) 190 Marketing and Trading 3,388 5,356 Corporate and Eliminations (667) (1,563) ---------- ---------- $ 16,901 $ 17,980 ========== ========== </TABLE> MANUFACTURING - Operating profit for the segment was 5% above the prior year quarter on 13% higher revenues. Shipments were strong but weaker prices in both steel as noted in the table below and copper tube markets moderated profits. <TABLE> <CAPTION> 1st Qtr 1998 1st Qtr 1997 ------------ ------------ <S> <C> <C> Average mill selling price $315 $319 Average fab selling price 657 686 Average scrap purchase price 112 114 </TABLE> Nevertheless, the Steel Group's operating profit was 19% higher compared to last year's first quarter. First quarter records were set for steel mill tons melted, rolled and shipped. Shipments by the four mills totaled 527,000 tons or 23% higher than last year. The increase in profits was led by SMI Alabama which beat its previous earnings record by 30%. SMI Arkansas and SMI South Carolina were also substantially ahead of last year. SMI Texas exceeded last Page 9
11 year's tons shipped; however, profitability was lower because of the $1.7 million nonrecurring insurance recovery in the prior year. Operating profit in the Company's steel fabrication businesses was slightly below last year's strong first quarter. Shipments were a record 196,000 tons but the average selling price declined. The Company has a record $125 million capital plan for fiscal 1998, primarily at the steel mills. Construction of the new rolling mill at SMI South Carolina is underway and preparations have begun for SMI Alabama's new finishing line including a cooling bed, straighteners and stackers. Copper tube production and shipments exceeded last year's first quarter but weak prices resulted in lower operating profits. Demand for plumbing tube was solid as mortgage interest rates remained favorable. RECYCLING- The Recycling segment reported a disappointing loss. The volume of ferrous scrap shipped increased 11% to 299,000 while nonferrous shipments were unchanged at 46,000 tons. Steel scrap prices were higher than last year and margin percentages held level. Aluminum scrap countered lower margins with higher volume and profits remained steady. Copper and brass markets were weak with declining volumes and margins. Increases in processing costs associated with new capacity failed to bring in sufficient margin increases. The segment was also negatively impacted by rail service problems in the Southwest. Subsequent to quarter end the Company acquired two secondary processing facilities in Florida and one in Houston. The operations are neither individually nor combined significant to the financial position of the Company, however the Florida acquisition marks the Company's entry into the auto salvage business to enhance sourcing of scrap. MARKETING AND TRADING- Revenues and operating income of the Marketing and Trading segment were significantly below last year's first quarter. Whereas our North American business remained good, Page 10
12 intense competition and poor international markets exacerbated by Asian currency crises caused lower margins elsewhere. Most of the Asian markets did a complete reversal and induced a shift in trade flows. Many customers sharply curtailed their purchases; conversely, suppliers sought to increase exports. Steel trading was particularly negatively impacted. Steel marketing and distribution and nonferrous metal products remained steady. Results from ores, minerals and industrial materials were down. OTHER Since August 1996 various divisions of the Company have been upgrading both hardware and software to meet commercial requirements. As part of these enterprise wide solutions, year 2000 considerations are being addressed. The Company has not separately considered the cost of the millennium solution as it is only a byproduct of the larger project. The Steel Group computer migration effort incurred expenses of $1.65 million during the first quarter. The Marketing and Trading segment in conjunction with the Corporate office has been involved with implementation of new financial and management information systems. Estimates of costs are still soft but total capital expenditures for computer hardware and period expenses for software are not anticipated to exceed $2 million incurred over three fiscal years. 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 Page 11
13 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 The Company's domestic steel markets are firm and margins should widen during the balance of the year despite the Asian situation and its effect on all markets. The underlying construction, manufacturing and distributor markets in North America are strong. Some improvement in copper tube and recycling profits is expected, although scrap markets remain uncertain. Global demand and prices for steel and nonferrous metals are likely to be weaker near term. Management continues to focus on internal improvements and remains cautiously optimistic about this fiscal year and very positive for the future on account of the Company's inherent strengths and strategic plan. 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 three months was approximately $20 million, comparable to the prior year period. Increased depreciation offset lower net earnings. Accounts receivable decreased $12 million principally in the Recycling segment and domestic trading units. Inventories decreased $12 million partially offset by an increase in the new SMI Rail division of $8 million with declines at several international trading divisions. Accounts payable, accrued expenses and income taxes decreased $60 million spread across all the Company's Page 12
14 segments. Part of the decrease is due to timing of vendor payments in the Marketing and Trading segment and to the payment of incentive compensation and funding of employee benefit plans. The Company invested $22 million in capital projects as part of its anticipated $125 million annual capital program. Notes payable increased $28 million to supplement current cash flow to fund working capital and capital expenditures. At November 30,1997 there were 14,826,324 common shares issued and outstanding with 1,306,259 held in the Company's treasury. Stockholders' equity was $362 million or $24.41 per share. Long-term debt as a percent of total capitalization was 32.4% at November 30,1997 compared to 33% at August 31,1997.The ratio of total debt to total capitalization plus short-term debt stood at 36.8%, an increase from year end due to seasonal borrowing requirements. Net working capital was $301 million at November 30,1997 compared to $307 million at August 31,1997. The current ratio was 2.2 compared to 2.1 at August 31,1997. The Company's effective tax rate for the three months was 36.7%, comparable to the prior period. Page 13
15 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, 1997 filed November 25, 1997, 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 Page 14
16 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 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 January 13, 1998 /s/ Lawrence A. Engels ------------------------------ Vice President, Treasurer & Chief Financial Officer January 13, 1998 William B. Larson Controller Page 15
17 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - ------- ----------- <S> <C> 11. Computation of Per Share Earnings (a) Calculation of Primary and Fully Diluted Earnings Per Share 27. Financial Data Schedule </TABLE> Page 16