-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kz0fyTNQOlQASrvzk8Cq7oqnLqqmZBmrjSMgfNKZCvCIUoOJeMSyCzrACm4dim3e N/U3qlZ/E/SLn0+1RYCOmw== 0000950134-97-008875.txt : 19971126 0000950134-97-008875.hdr.sgml : 19971126 ACCESSION NUMBER: 0000950134-97-008875 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971125 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL METALS CO CENTRAL INDEX KEY: 0000022444 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 750725338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04304 FILM NUMBER: 97728251 BUSINESS ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: P O BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 BUSINESS PHONE: 2146894300 MAIL ADDRESS: STREET 1: 7800 STEMMONS FRWY STREET 2: PO BOX 1046 CITY: DALLAS STATE: TX ZIP: 75221 10-K 1 FORM 10-K FOR YEAR ENDED AUGUST 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF ---- THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------- ---------------- COMMISSION FILE NO. 1-4304 COMMERCIAL METALS COMPANY (Exact name of registrant as specified in its Charter) DELAWARE 75-0725338 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7800 STEMMONS FREEWAY, DALLAS, TEXAS 75247 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (214) 689-4300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $5 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE 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 ___ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE COMMON STOCK ON NOVEMBER 24, 1997, HELD BY NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE OF $33.0625 PER SHARE ON NOVEMBER 24, 1997, ON THE NEW YORK STOCK EXCHANGE WAS APPROXIMATELY $449,000,000. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF NOVEMBER 24, 1997: COMMON STOCK, $5.00 PAR -- 14,826,324. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE FOLLOWING DOCUMENT ARE INCORPORATED BY REFERENCE INTO THE LISTED PART OF FORM 10-K: REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 22, 1998 -- PART III. ================================================================================ 2 PART I ITEM 1. BUSINESS Commercial Metals Company was incorporated in 1946 in Delaware as a successor to a secondary metals recycling business in existence since approximately 1915. The Company maintains executive offices at 7800 Stemmons Freeway, Dallas, Texas 75247 (telephone 214/689-4300). The terms "Company" or "registrant" as used herein include Commercial Metals Company and its consolidated subsidiaries. The Company's fiscal year ends August 31 and all references to years refer to the fiscal year ended August 31 of that year unless otherwise noted. The Company considers its businesses to be organized into three segments - (i) Manufacturing, (ii) Recycling and (iii) Marketing and Trading. The Company's activities are primarily concerned with metals related activities. Financial information for the last three fiscal years concerning the segments is incorporated herein by reference from "Note 12 Business Segments," of the Notes to Consolidated Financial Statements at Part II, Item 8. In November, 1994, the Company acquired Owen Steel Company, Inc. and affiliated companies (collectively "Owen") headquartered in Columbia, South Carolina. The Company paid approximately $50 million, one-half in cash and the balance by issuance of 932,301 shares of the Company's Common Stock to certain selling shareholders. The Company also provided funds for the retirement of approximately $32 million of Owen debt at the Closing. The purchase price was increased by approximately $3.2 million, paid one-half in cash and one-half with 59,410 shares of the Company's Common Stock in October, 1995, as a result of a post closing net worth adjustment and may be subject to further post-closing adjustments (See Item 3. Legal Proceedings). Owen's successor company, SMI-Owen Steel Company, Inc. and the former Owen affiliates operate as a part of the Manufacturing Segment's CMC Steel Group. THE MANUFACTURING SEGMENT The Manufacturing segment is the registrant's dominant and most rapidly expanding segment in terms of assets employed, capital expenditures, operating profit and number of employees. It consists of two entities, the CMC Steel Group and the Howell Metal Company subsidiary, a manufacturer of copper tubing. The Steel Group is by far the more significant entity in this segment with subsidiaries operating four steel minimills, twenty steel fabrication plants, four steel joist manufacturing facilities, four steel fence post manufacturing plants, six metals recycling plants, two railcar rebuilding facilities and thirteen warehouse stores which sell supplies and equipment to the concrete installation and construction trade. At year end the operations of Commercial Metals Railroad Salvage Company, a purchaser and dismantler of abandoned rail lines were transferred from the Recycling segment to the Steel Group to improve coordination with the Steel Group's smallest mill which utilizes salvaged rail for rerolling. The Company endeavors to operate all four minimills at full capacity in order to minimize product costs. Increases in capacity and productivity are continuously emphasized through both operating and capital improvements. The steel minimill business is capital intensive with substantial capital expenditures required on a regular basis to remain competitive as a low cost producer. Over the past three fiscal years, approximately $108 million or 68% of the Company's total capital expenditures have been for minimill projects, not including the Owen acquisition cost. This emphasis on productivity improvements is 1 3 reflected in a generally increased number of tons of steel melted, rolled and shipped from the minimills during each of the last three years as follows:
1995 (1) 1996 1997 --------- -------- -------- Tons melted 1,532,000 1,561,000 1,755,000 Tons Rolled 1,487,000 1,477,000 1,581,000 Tons Shipped 1,531,000 1,730,000 1,926,000
(1) 1995 includes 283,000 tons melted, 213,000 tons rolled and 225,000 tons shipped following the Owen minimill acquisition in November, 1994. The Company's largest steel minimill, operated by Structural Metals, Inc. ("SMI Texas") is located at Seguin, Texas, near San Antonio. SMI Steel, Inc. ("SMI Alabama"), a steel minimill in Birmingham, Alabama, was acquired in 1983. The steel minimill acquired in the Owen acquisition is located at Cayce, South Carolina. This mill is now known as SMI Steel South Carolina ("SMI South Carolina"). A fourth, much smaller mill, has been in operation since 1987 and is located near Magnolia, Arkansas ("SMI Arkansas"). The SMI Texas, Alabama, and South Carolina mills consist of melt shops with electric arc furnaces that melt the steel scrap, continuous casting facilities to shape the molten metal into billets, reheating furnaces, rolling mills, mechanical cooling beds, finishing facilities and supporting facilities. The mills utilize both a Company-owned fleet of trucks and private haulers to transport finished products to customers and Company-owned fabricating shops. Mill capacity at SMI Texas is approximately 800,000 tons per year melted and 750,000 rolled. SMI Alabama's annual capacity is approximately 550,000 tons melted and 450,000 rolled and SMI South Carolina's annual capacity is approximately 425,000 tons melted and 325,000 tons rolled. SMI Texas manufactures steel reinforcing bars, angles, rounds, channels, flats, and special sections used primarily in highways, reinforced concrete structures and manufacturing. SMI Texas sells primarily to the construction, service center, energy, petrochemical, and original equipment manufacturing industries. Its primary markets are located in Texas, Louisiana, Arkansas and Oklahoma although products are shipped to approximately 30 states and Mexico. An October, 1995, fire at SMI Texas destroyed key electrical equipment used in melt shop operations. Interim measures have enabled melting operations to continue with some restraints pending full replacement of the equipment in early fiscal 1998. Despite this condition, 802,000 tons were melted during 1997 compared to 764,000 the prior year. A record 707,000 tons were rolled, up 7,000 from 1996. A substantial program to modernize and improve productivity at SMI Alabama after its 1983 acquisition has resulted in approximately $113 million of capital expenditures through 1997. During 1997 the melt shop recorded record production of 532,000 tons. SMI Alabama manufactures primarily larger size products than SMI Texas such as mid-size structural including angles, channels, up to eight inch wide flange beams and special bar quality rounds and flats and rolled 418,000 tons in 1997. Customers include primarily service centers as well as the construction, manufacturing, and fabricating industries in the primary market areas of Alabama, Georgia, Tennessee, North and South Carolina, and Mississippi. Facilities at SMI South Carolina are similar but on a generally smaller capacity scale than the SMI Texas and SMI Alabama mills. SMI South Carolina manufactures primarily steel reinforcing bars with limited but increasing production of angles, rounds and squares. Its primary market area includes the Southeast and mid-Atlantic area south through Florida and north into New England. During 1997 SMI South Carolina melted 420,000 tons and rolled 316,000 tons. In July, 1997, the company announced a $70 million capital expenditure, the largest single project in the Company's history, to replace SMI South Carolina's existing rolling mill with a new state-of-the-art rolling mill. Construction began in July and is anticipated to be finished in February, 1999. The new rolling mill will have a capacity of approximately 700,000 tons with a substantially broader product line. 2 4 The primary raw material for SMI Texas, Alabama and South Carolina is secondary (scrap) ferrous metal purchased primarily from suppliers generally within a 300 mile radius of each mill. A portion of the ferrous raw material, generally less than half, is supplied from Company owned recycling plants. The supply of scrap is believed to be adequate to meet future needs but has historically been subject to significant price fluctuations. All three minimills also consume large amounts of electricity and natural gas, both of which are believed to be readily available at competitive prices. No melting facilities are located at SMI Arkansas since this mill utilizes as its raw material rail salvaged from abandoned railroads for rerolling and, on occasion, billets from Company minimills or other suppliers. The rail or billets are heated in a reheat furnace and processed on a rolling mill and finished at facilities similar to, but on a smaller scale, the other mills. SMI Arkansas' finished product is primarily metal fence post stock, small diameter reinforcing bar and sign posts with some high quality round and flat products being rolled. Fence post stock is fabricated into metal fence posts at Company owned facilities at the Magnolia mill site, San Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina, which started production during 1996. Because of this mill's lack of melting capacity, it is dependent on an adequate supply of competitively priced billets or used rail, the availability of which fluctuates with the pace of railroad abandonments, rate of rail replacement by railroads and demand for used rail from domestic and foreign rail rerolling mills. Capacity at SMI Arkansas is approximately 150,000 tons rolled per year. The Steel Group's processing facilities are engaged in the fabrication of reinforcing and structural steel, steel warehousing, joist manufacturing, fence post manufacturing and railcar repair and rebuilding. Steel fabrication capacity now exceeds 700,000 tons. Steel for fabrication may be obtained from unrelated vendors as well as Company owned mills. Fabrication activities are conducted at various locations in Texas in the cities of Beaumont, Buda (near Austin), Corpus Christi, Dallas, Houston, San Marcos, Seguin, Victoria, and Waco, as well as Baton Rouge; Slidell, Louisiana; Magnolia and Hope, Arkansas; Brigham City, Utah; Starke, Florida and Fallon, Nevada. The Owen acquisition added fabrication facilities in Cayce, Columbia, and Taylors, South Carolina; Whitehouse, Florida; Lawrenceville, Georgia; Gastonia, North Carolina and Fredericksburg, Virginia. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, industrial plants, power plants, highways, arenas, stadiums, and dams. Sales of fabricated steel are generally made in response to bid solicitation from construction contractors or owners on a competitive bid basis and less frequently on a negotiated basis. The SMI Owen structural steel operations have historically been active in large projects such as high rise office towers, stadiums, convention centers and hospitals. Safety Railway Service, with locations in Victoria, Texas, and Tulsa, Oklahoma, repairs, rebuilds and provides custom maintenance with some manufacturing of railroad freight cars owned by railroad companies and private industry. That work is obtained primarily on a bid and contract basis and may include maintenance of the cars. Secondary metals recycling plants in Austin, Texas, and Cayce, South Carolina, each with two smaller feeder facilities nearby operate as part of the Steel Group due to the predominance of secondary ferrous metals sales to the nearby SMI minimills. The Cayce recycling plant installed and began operating a new automobile shredder during 1997 at a cost of approximately $5 3 5 million. These recycling plants have an aggregate annual capacity of approximately 350,000 tons. The joist manufacturing facility, SMI Joist Company, headquartered in Hope, Arkansas, manufactures steel joists and decking for roof supports using steel obtained primarily from the Steel Group's minimills. SMI Joist expanded operations with the Owen acquisition, obtaining smaller joist plants in Starke, Florida and Cayce, South Carolina. During 1997 SMI Joist Nevada located in Fallon, Nevada, started production of joists to supply western markets. Joist consumers are typically construction contractors or large chain store owners. Joists are generally made to order and sales, which may include custom design and fabrication, are primarily obtained on a competitive bid basis. The Company sells concrete related supplies including the sale or rental of equipment to the concrete installation trade at eleven warehouse locations in Texas. This business operates under the Shepler's name. The Owen acquisition added a similar but smaller operation which emphasizes a broader industrial product supply in Columbia, South Carolina and a second location opened in Cayce, South Carolina during 1996. In January, 1997, the operating assets of Allegheny Heat Treating, Inc., of Chicora, Pennsylvania, were purchased. AHT, Inc. is the Steel Group's entry into the steel heat treating business. AHT works closely with SMI Alabama and other mills that sell specialized heat treated steel for customer specific use, primarily in original or special equipment manufacturing. The copper tube minimill operated by Howell Metal Company is located in New Market, Virginia. It manufactures copper water, air conditioning and refrigeration tubing in straight lengths and coils for use in commercial, industrial and residential construction. Its customers, largely equipment manufacturers and wholesale plumbing supply firms, are located primarily east of the Mississippi river. High quality copper scrap supplemented occasionally by virgin copper ingot, is the raw material used in the melting and casting of billets. The scrap is readily available subject to rapid price fluctuations generally related to the price or supply of virgin copper. A small portion of the scrap is supplied by the Company's metal recycling yards. Howell's facilities include melting, casting, piercing, extruding, drawing, finishing and other departments. Capacity is approximately 50,000,000 pounds per year. Demand for copper tube is dependent mainly on the level of new residential construction and renovation. No single customer purchases ten percent or more of the manufacturing segment's production. The nature of certain stock products sold in the manufacturing segment are, with the exception of the steel fabrication and joist jobs, not characteristic of a long lead time order cycle. Orders for other stock products are generally filled promptly from inventory or near term production. As a result the Company does not believe backlog levels are a significant factor in evaluating most operations. Backlog in the CMC Steel Group at 1997 year-end was approximately $261,506,000. Backlog at 1996 year-end was approximately $195,779,000. THE RECYCLING SEGMENT The Recycling segment is engaged in processing secondary (scrap) metals for further recycling into new metal products. This segment consists of the Company's 33 secondary metals processing divisions's recycling plants (excluding six such facilities operated by the CMC Steel Group as a part of the Manufacturing segment). During the past year the secondary metals division purchased operating assets of a facility in Odessa, Texas, and two small feeder yards in Edinburg, Texas, and Palm Bay, Florida. The Company's metal recycling plants purchase ferrous and nonferrous secondary or scrap metals, 4 6 processed and unprocessed, in a variety of forms. Sources of metals for recycling include manufacturing and industrial plants, metal fabrication plants, electric utilities, machine shops, factories, railroads, refineries, shipyards, ordinance depots, demolition businesses, automobile salvage and wrecking firms. Numerous small secondary metals collection firms are also, in the aggregate, major suppliers. These plants processed and shipped approximately 1,367,000 tons of scrap metal during 1997, down slightly from 1,397,000 the prior year. Ferrous metals comprised the largest tonnage of metals recycled at approximately 1,155,000 tons approximately 41,000 tons less than the prior year, followed by approximately 212,000 tons compared to 199,000 in 1996, of non-ferrous metals, primarily aluminum, copper and stainless steel. The Company also purchased and sold an additional 213,000 tons of metals processed by other metal recycling facilities. With the exception of precious metals, practically all metals capable of being recycled are processed by these plants. The CMC Steel Group's six metals recycling facilities processed and shipped an additional 344,000 tons of primarily ferrous scrap metal during 1997. The metal recycling plants generally consist of an office and warehouse building equipped with specialized equipment for processing both ferrous and nonferrous metal. Most of the larger plants are equipped with scales, shears, baling presses, briquetting machines, conveyors and magnetic separators. Two locations have extensive equipment for mechanically processing large quantities of insulated wire to segregate metallic content. All ferrous processing centers are equipped with either presses, shredders or hydraulic shears, locomotive and crawler cranes and railway tracks to facilitate shipping and receiving. The segment operates five large shredding machines capable of pulverizing obsolete automobiles or other ferrous metal scrap and has commenced installation of a sixth shredder expected to be operational in 1998 in Jacksonville, Florida. Two additional shredders are operated by the Manufacturing segment's recycling facilities. A typical recycling plant includes several acres of land used for receiving, sorting, processing and storage of metals. Several recycling plants devote a small portion of their site or a nearby location for display and sales of metal products considered reusable for their original purpose. Recycled metals are sold to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers and other consumers. Sales of material processed through the Company's recycling plants are coordinated through the recycling segment's office in Dallas. Export sales are negotiated through the Company's network of foreign offices as well as the Dallas office. No single source of material or customer of the Recycling segment represents a material part of purchases or revenues. The Recycling segment competes with other secondary processors and primary nonferrous metals producers, both domestic and foreign, for sales of nonferrous materials. Consumers of nonferrous scrap metals often have the capability to utilize primary or "virgin" ingot processed by mining companies interchangeably with secondary metals. The prices for nonferrous scrap metals are normally closely related to but generally less than, the prices of the primary or "virgin" metal producers. Ferrous scrap is the primary raw material for electric arc furnaces such as those operated by the Company's steel minimills. Relatively high prices and the need for low residual elements in the melting process have recently caused some minimills to supplement purchases of scrap metal with direct reduced iron and pig iron for certain product lines. THE MARKETING AND TRADING SEGMENT The Marketing and Trading segment buys and sells primary and secondary metals and other 5 7 industrial products through a network of trading offices located around the globe. Steel, nonferrous metals, specialty metals, chemicals, industrial minerals, ores, concentrates, ferroalloys, and other basic industrial materials are purchased primarily from producers in domestic and foreign markets. On occasion these materials are purchased from trading companies or industrial consumers with surplus supplies. Long-term contracts, spot market purchases and trading or barter transactions are all utilized to obtain materials. A large portion of these transactions involve fabricated semi-finished or finished product. Customers for these materials include industrial concerns such as the steel, nonferrous metals, metal fabrication, chemical, refractory and transportation sectors. Sales are generally made directly to consumers through and with coordination of offices in Dallas; New York City; Englewood Cliffs, New Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug, Switzerland; Hong Kong, and Surrey, United Kingdom. During 1997 the Company closed the Tokyo office, now utilizing an exclusive agent, and opened offices in Sandbach, United Kingdom and Bergisch Gladbach, Germany. The Company also maintains representative offices in Bangkok, Sao Paulo, Seoul, and Beijing, as well as agents in other significant international markets. These offices form a network for the exchange of information on the materials marketed by the Company as well as servicing sources of supply and purchasers. In most transactions the Company acts as principal and often as a marketing representative. The Company utilizes agents when appropriate and occasionally acts as broker. The Company participates in transactions in practically all major markets of the world where trade by American-owned companies is permitted. This segment focuses on the marketing of physical products as contrasted to traders of commodity futures contracts who frequently do not take delivery of the commodity. Sophisticated global communications and the development of easily accessible, although not always accurate, quoted market prices for many products has resulted in the Company emphasizing creative service functions for both sellers and buyers. Actual physical market pricing and trend information, as contrasted with sometimes more speculative metal exchange market information, technical information and assistance, financing, transportation and shipping (including chartering of vessels), storage, warehousing, just in time delivery, insurance, hedging and the ability to consolidate smaller purchases and sales into larger, more cost efficient transactions are examples of the services offered. The Company attempts to limit its exposure to price fluctuations by offsetting purchases with concurrent sales and entering into foreign exchange contracts as hedges of trade receivables and payables denominated in foreign currencies. The Company does not, as a matter of policy, speculate on changes in the markets and hedges only firm commitments not anticipated transactions. During the past year over 1.4 million tons of steel products were sold by the Marketing and Trading segment. The Zug office of CMC Trading AG consummated a trade financing steel supply contract with Essar Steel Ltd. of Hazira, India, to market over $100 million of steel products. The Australian operations maintain warehousing facilities for just in time delivery of steel and industrial products and expanded into heat treating services for certain steel products during 1997. COMPETITION The Company's steel manufacturing, steel fabricating, and copper tube manufacturing businesses compete with regional, national and foreign manufacturers and fabricators of steel and copper. Price, quality and service are the primary methods of competition. The Company does not produce a significant percentage of the total national output of these products compared with its competitors but is considered a substantial supplier in the markets near its facilities. The large job structural steel capacity and expertise 6 8 of SMI Owen enables the Company to compete throughout the United States for large structural steel projects. SMI Joist is believed to be the second largest manufacturer of joist in the United States although significantly smaller than the largest joist supplier. The Company believes the Recycling segment is among the larger entities recycling nonferrous secondary metals and is also a major regional processor of ferrous scrap. The past year brought active consolidation in the scrap processing industry with aggressively priced acquisitions of significant operations by several relatively new industry members. The secondary metals business is subject to cyclical fluctuations depending upon the availability and price of unprocessed scrap metal and the demand in steel and nonferrous metals consuming industries. The Company will continue with selective acquisitions at prices consistent with the cyclical nature of the metals recycling industry. All phases of the Company's marketing and trading business are highly competitive. Many of the marketing and trading segment's products are standard commodity items. The principal elements of competition are price, quality, reliability, financing options, and additional services. This segment competes with other domestic and foreign trading companies, some of which are larger and may have access to greater financial resources or be able to pursue business without regard for the laws and regulations governing the conduct of corporations subject to the jurisdiction of the United States. The Company also competes with industrial consumers who purchase directly from suppliers and importers and manufacturers of semi-finished ferrous and nonferrous products. ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations is a significant factor in the Company's business. The Company is subject to local, state, federal and supranational environmental laws and regulations concerning, among other matters, solid waste disposal, air emissions, waste and stormwater effluent and disposal and employee health. The Company's manufacturing and recycling operations produce significant amounts of by-products, some of which are handled as industrial waste or hazardous waste. For example, the electric arc furnace ("EAF") dust generated by the Company's minimills is classified as a hazardous waste by the Environmental Protection Agency (EPA) because of lead, cadmium and chromium content and requires special handling and recycling for recovery of zinc or disposal. Additionally the Company's scrap metal recycling facilities operate seven shredders for which the primary feed materials are automobile hulks and obsolete household appliances. Approximately twenty percent (20%) of the weight of an automobile hulk consists of material (shredder fluff) which remains after the segregation of ferrous and saleable non-ferrous metals. Federal environmental regulations require shredder fluff to pass a toxic leaching test to avoid classification as a hazardous waste. The Company endeavors to have hazardous contaminants removed from the feed material prior to shredding and as a result the Company believes the shredder fluff generated is properly not considered a hazardous waste. Should the laws, regulations or testing methods change with regard to EAF dust processing or shredder fluff disposal, the Company may incur additional significant expenditures. To date, the Company has not experienced difficulty in contracting for recycling of EAF dust or disposing of shredder fluff in municipal or private landfills. The Company may also be required from time to time to clean up or take certain remediation action with regard to sites formerly used in connection with its operations. Furthermore, the Company may be required to pay for a portion of the costs of clean up or remediation at sites the Company never owned or on which it never operated if it is found to have arranged for treatment or disposal of hazardous 7 9 substances on the sites. (See Item 3. Legal Proceedings). The Company has been named a potentially responsible party (PRP) at several Superfund sites because the EPA contends that the Company and other PRP scrap dealers are liable for the cleanup of those sites solely as a result of having sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacture of new products. The Company's position is that an arms length sale of valuable scrap metal for use as a raw material in a manufacturing process over which the Company exercises no control should not, contrary to EPA's assertion, constitute "an arrangement for disposal or treatment of hazardous substances" within the meaning of federal law. If the EPA's position is consistently upheld by the courts and no clarification or amendment of the law is provided by legislative bodies, the Company believes the possible liability arising from the sale of secondary metals may reduce recycling rates for metals and other recyclable materials in general. In particular, the Company believes that sellers of secondary or recycled metals could be at material disadvantage compared to sellers of "virgin" ingot from mining operations because the EPA's position apparently excludes suppliers of virgin metals with the same levels of hazardous substances from liability for sales of those materials to the same manufacturers for use, often interchangeably with secondary metals, in the same manufacturing process. The Company believes this result is contrary to public policy objectives and federal and state legislation encouraging recycling and promoting the use of recycled materials. New federal, state and local laws, regulations and changing interpretations, together with uncertainty regarding adequate control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors which impact the Company's future expenditures to comply with environmental requirements. It is not possible to predict the total amount of capital expenditures or increases in operating costs or other expenses or whether such costs can be passed on to customers through product price increases. During 1997, the Company incurred environmental costs including disposal, permit, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $10.1 million. In addition the Company estimates that approximately $4.6 million of 1997 capital expenditures were for environmental projects. The Company believes that it is in material compliance with currently applicable environmental laws and regulations and does not presently anticipate material capital expenditures for new environmental control facilities during 1998 other than the addition of a new baghouse at SMI Texas at an estimated cost of approximately $6 million. EMPLOYEES As of October, 1997, the Company had approximately 7,150 employees. Approximately 5,753 were employed by the manufacturing segment, 1,075 by the recycling segment, 259 by the marketing and trading segment, 37 in general corporate management and administration with 26 employees providing service functions for divisions and subsidiaries. Production employees at one metals recycling plant are represented by a union for collective bargaining. The Company believes that its labor relations are generally good to excellent and its work force highly motivated. ITEM 2. PROPERTIES The SMI Texas steel minimill is located on approximately 600 acres of land owned by the Company. Facilities including buildings occupying approximately 745,000 square feet, are used for 8 10 manufacturing, storage, office and related uses. SMI Alabama's steel mill in Birmingham is located on approximately 35 acres with buildings occupying approximately 435,000 square feet used for manufacturing, storage, office and related use. The SMI South Carolina mill in Cayce, South Carolina is located on approximately 62 acres, all owned, with buildings occupying approximately 360,000 square feet. The SMI Arkansas facility at Magnolia is located on approximately 113 acres with buildings occupying approximately 187,000 square feet. Approximately 30 acres of the Alabama mill property and all Arkansas mill property is leased in conjunction with revenue bond financing and may be purchased by the Company at the termination of the leases for a nominal sum. The steel fabricating operations including the fabrication plants, fence post and joist operations own approximately 800 acres of land and lease approximately 50 acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North Carolina and Nevada. Howell Metal owns approximately 21 acres of land with buildings occupying about 228,000 square feet in New Market, Virginia. The Company's recycling plants occupy in the aggregate approximately 400 acres owned by the Company located at Austin, Beaumont, Dallas, Galveston, Houston, Lubbock, Midland, Odessa, Victoria and Vinton, all in Texas; as well as the Jacksonville, Lake City, Orlando, and Tampa, Florida; and Shreveport, Louisiana; Chattanooga, Tennessee; Springfield, Missouri; and Burlington, North Carolina plants. It leases the real estate at Clute, Edinburg, and Laredo,Texas; Ocala, Port Sutton (Tampa) and Casselberry, Florida; East Ridge, Tennessee. The smaller of two locations at Beaumont and Victoria, Texas, and Shreveport, Louisiana, are leased. The Fort Worth and Corpus Christi recycling plants are partially owned and partially leased. Most small feeder yard locations are leased. The corporate headquarters, all domestic marketing and trading offices and all foreign offices occupy leased premises. The leases on the leased properties described above will expire on various dates within the next ten years. Several of the leases have renewal options and the Company has had little difficulty in renewing such leases as they expire. The minimum annual rental obligation of the Company for real estate operating leases in effect at August 31, 1997, to be paid during fiscal 1998 is approximately $3,836,000. The Company also leases a portion of the equipment used in its plants. The minimum annual rental obligation of the Company for equipment operating leases in effect at August 31, 1997, to be paid during fiscal 1998, is approximately $3,225,000. ITEM 3. LEGAL PROCEEDINGS As of August 31, 1997, the Company or its affiliates has received notices from the United States Environmental Protection Agency (EPA) or state agency with similar responsibility that the Company and numerous other parties are considered potentially responsible parties (a PRP) and may be obligated under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or similar state statute to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at thirteen locations. The Company is contesting or intends to contest its designation as a PRP with regard to several sites, while at other sites the Company is participating with other named PRPs in agreements or negotiations expected to result in agreements to remediate the sites. The locations, none of which involve real estate ever owned or on which operations were conducted by the Company, are commonly referred to by the EPA or state agency as the Peak Oil Site (Tampa, FL), the Metcoa Site (Pulaski, PA), the NL Industries/Taracorp Site (Granite City, IL), the Sapp Battery Site (Cottondale, Florida), the Interstate Lead Company ("ILCO") Site (Leeds, Alabama), the Poly-Cycle Industries Site (Techula, Texas), the Taylor Road Site (Tampa, Florida), the 9 11 Jensen Drive Site (Houston, TX), the Houston Lead Site (Houston, TX), the SoGreen/Parramore Site (Tifton, GA), the Stoller Site (Jericho, SC), the RSR Corporation Site (Dallas, TX), and the Sandoval Zinc Company Site (Marion County, IL). The Company has periodically received information requests with regard to other sites which are apparently under consideration by the EPA as existing or potential CERCLA clean-up sites. It is not known if any demand will ultimately be made against the Company as a result of those inquiries. The EPA has notified the Company and other alleged PRPs that under Sec. 106 of CERCLA it could be subject to a maximum penalty fine of $25,000 per day and the imposition of treble damages if they refused to clean up the Peak Oil, Sapp Battery, NL/Taracorp, SoGreen/Parramore and Stoller sites as ordered by the EPA. The Company is presently participating in a PRP organization at the Peak Oil, Sapp Battery, SoGreen/Parramore and Stoller sites, although reserving the right to contest its PRP status, and does not believe that the EPA will pursue any fine against it so long as it continues to participate in the PRP groups. The Company is evaluating a de minimis settlement offer at the NL/Taracorp Site and believes it has adequate defenses to any attempt by the EPA to impose fines in that matter. CMC Oil Company (CMC Oil), a wholly-owned subsidiary which has been inactive since 1985, is subject to a final judgment resulting from an order entered in 1993 by the Federal Energy Regulatory Commission (the "FERC Order"). Judgment upholding the FERC Order was entered by Federal District Court in November, 1994 and affirmed by the Court of Appeals in November, 1995. The FERC Order found CMC Oil liable for overcharges constituting violations of crude oil reseller regulations from December, 1977 to January, 1979, in joint venture transactions with RFB Petroleum, Inc. The overcharges total approximately $1,330,000 plus interest from the transaction dates calculated under the Department of Energy's interest rate policy to the date of the District Court judgment with interest thereafter at 6.48% per annum. Although CMC Oil accrued a liability on its books during 1995 it does not have sufficient assets to satisfy the judgment, estimated, including interest, at approximately $6.4 million as of August 31, 1997. No claim has ever been asserted against Commercial Metals Company arising out of the CMC Oil litigation. Commercial Metals Company will vigorously contest liability should any such claim be asserted. On April 30, 1996, the Company and its subsidiary SMI - Owen Steel Company, Inc. (SMI-Owen) filed a lawsuit seeking to recover approximately $2.4 million from an escrow fund created with a portion of the purchase price in connection with the Company's November, 1994, acquisition of Owen Steel Company, Inc. and affiliates (Owen Steel). The lawsuit seeks recovery of part of a payment made by SMI-Owen to settle a claim in connection with a steel supply and erection contract entered into prior to the acquisition by the predecessor of SMI-Owen. The Company contends the claim was based on events which occurred prior to the acquisition, and the Company is entitled to reimbursement from the former Owen Steel stockholders for the claim settlement under the terms of the escrow agreement. The Complaint alleges breach of contract, breach of the covenant of good faith and fair dealing and seeks a declaratory judgment and damages. Dorothy G. Owen, a director of the Company and former stockholder of Owen Steel is one of four designated representatives of former Owen Steel stockholders. The four representatives have filed an Answer and Counterclaim denying the material allegations of the Company, alleging various defenses and setting forth counterclaims for specific performance, breach of contract, breach of fiduciary duty, breach of the covenant of good faith and fair dealing and seeking a declaratory judgment and unspecified actual and punitive damages. The Company has notified the representatives of the former Owen Steel stockholders and the escrow agent of additional claims against the escrow fund totaling approximately $3 million. Based on responses received to date, the Company believes the representatives of the former Owen Steel stockholders dispute liability as to all of these claims which the Company will pursue in the lawsuit. 10 12 While the Company is unable to estimate the ultimate dollar amount of exposure to loss in connection with the above-described environmental matters, government proceedings, and disputes that could result in additional litigation, some of which may have a material impact on earnings and cash flows for a particular quarter, it is the opinion of the Company's management that the outcome of the suits and proceedings mentioned, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on the business or the consolidated financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The table below summarizes the high and low sales prices reported on the New York Stock Exchange for the Company's common stock and cash dividends paid for the past two fiscal years.
Price Range 1997 of Common Stock Fiscal --------------- Cash Quarter High Low Dividends - ------------------------------------------------------------------------------------- 1ST $33 1/2 $29 5/8 13c. 2ND 30 28 13c. 3RD 30 3/8 27 1/8 13c. 4TH 32 1/2 28 3/4 13c.
Price Range 1996 of Common Stock Fiscal --------------- Cash Quarter High Low Dividends - --------------------------------------------------------------------------------------- 1ST $ 28 5/8 $ 23 1/2 12c. 2ND 27 1/4 23 12c. 3RD 32 3/8 26 1/2 12c. 4TH 33 1/4 29 7/8 12c.
11 13 Since August 3, 1982, the Company's common stock has been listed and traded on the New York Stock Exchange. Prior to that date and since 1959 the Company's common stock was traded on the American Stock Exchange. The number of shareholders of record of the registrant's common stock at November 14, 1997, was approximately 2,591. ITEM 6. SELECTED FINANCIAL DATA The table below sets forth a summary of selected consolidated financial information of the Company for the periods indicated:
FOR THE YEARS ENDED AUGUST 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net Sales 2,248,267 2,310,213 2,107,426 1,657,810 1,558,349 Net Earnings 38,605 46,024 38,208 26,170 21,661 Net Income Per Share 2.53 3.01 2.52 1.75 1.46 Total Assets 839,061 766,756 748,103 604,877 541,961 Stockholders' Equity 354,872 335,133 303,164 242,773 235,421 Long-term Debt 185,211 146,506 158,004 72,061 76,737 Cash Dividend Per Share .52 .48 .48 .46 .39
12 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. CONSOLIDATED RESULTS (in millions except share data)
Year ended August 31, - ------------------------------------------------------------- 1997 1996 1995 --------------------------------- Revenues $2,258 $2,322 $2,117 Net earnings 38.6 46.0 38.2 Cash flow 83.2 89.9 76.6 International sales 737 892 746 As % of total 33% 39% 35% LIFO effect on net earnings (.2) 2.9 (8.4) Per share (.01) .19 (.56) LIFO reserve 30.1 29.8 34.3 % of inventory on LIFO 72% 79% 86%
Significant events affecting the Company this year: o Second best net earnings year ever; fourth quarter was the second best net earnings in history. o Manufacturing segment achieved record shipments and sales, but operating profits were below last year's record, primarily because of higher nonoperating expenses. o Recycling segment had another good year, completing a record four year period of operating profits. o Marketing and Trading maintained operating profits despite weak markets and growing competition. SEGMENTS Revenues and operating profit by business segment are shown in the following table:
(in millions) Year ended August 31, - ------------------------------------------------------------- 1997 1996 1995 --------------------------------- Revenues: Manufacturing $1,083 $1,018 $913 Recycling 485 464 511 Marketing and Trading 758 890 749 Operating profit: Manufacturing 54.8 61.8 54.4 Recycling 7.6 12.1 11.3 Marketing and Trading 17.6 17.7 17.6
Manufacturing The Manufacturing segment includes the CMC Steel Group and Howell Metal Company. The Steel Group achieved record sales and tons melted, rolled and shipped; however, operating profits were held back by computer migration costs, termination of a defined benefit plan, and the startup costs of a new joist facility. Shipments by the four minimills increased 11% to 1.93 million tons while fabricated shipments increased 6% to 690 thousand tons. A decrease of $4/ton to $321 for average mill prices combined with slightly higher fabrication prices of $656 per ton resulted in a 7% increase in revenues to over $1 billion. Steel Group revenues were $1.0 billion compared with $949 million in the prior year. Operating profit for the Steel Group was $48.6 million or 15% lower. Computer migration costs totalled $6 million and pension expense included a $541,000 curtailment loss for termination of the Company's last defined benefit plan. The Company's fourth joist plant which opened in Nevada in June 1997 had startup costs of $2.8 million all of which were expensed as incurred. SMI-Texas set new records for shipments and production and SMI Alabama had record profits. Most notable was SMI South Carolina's turnaround from a very weak performance last year to break even this year. Steel fabrication profits were only half of last year's strong results due to delays on larger structural jobs, generally lower margins, and the joist plant startup. In January 1997 the Company acquired the assets of a heat treating plant in Pennsylvania. The purchase price was not significant to the Company. The operation has been profitable since the acquisition. The Copper Tube Division operating profit was up 40% from last year based on 6% higher shipments and increased productivity. Late in the year margins came under pressure due to imports from Mexico and reduced housing starts. Recycling Although revenues increased 4%, the Recycling segment reported a 37% decrease in operating profit compared to last year. The largest single factor was a LIFO charge this year versus a credit the prior year resulting in a change in LIFO expense of $4.7 million. Gross margins on nonferrous scrap improved, but ferrous margins were less because of lower volume. Shipments amounted to 1.15 million tons of ferrous scrap and 212 thousand tons of nonferrous scrap, down 2% in total from last year (excludes scrap tons processed by the six Steel Group processing plants). Rail service disruption, especially in the Southwest, was a problem. Domestic demand for scrap was good, while exports were slack except for Mexico. Average steel scrap prices were down slightly from last year. Aluminum prices were a bit higher while copper prices were 9% lower. The consolidation within the scrap industry accelerated during the past year with major acquisitions pursued at what the Company believes are overvaluations. The Company made an acquisition in 1997 of a complementary processing facility in Midland/Odessa, Texas which was not significant to its overall operations. The synergism of the combined operations fueled a turnaround in profitability for the location. Marketing and Trading Operating income for the Marketing and Trading segment was consistent with last year although revenues were down 15%. For the year, the segment had pretax LIFO income of $2,006,000 compared to an expense of $324,000 last year. Steel trading margins were pressured by intensely competitive global markets, diminished buying by China and continuing exports from the CIS. The Southeast Asian markets, wracked in the latter stages of the year with severe financial downturns, were particularly weak. The steel and nonferrous marketing and distribution businesses achieved good results with just-in-time delivery and other warehousing programs especially in Australia. Similar programs in the 13 15 United Kingdom reversed the poor results of the prior year. Trading operations located in the U.S. which import substantial quantities into North America had excellent results. Semi-fabricated metals and minerals and chemicals had equivalent results to the prior year. New steel products surpassed last year. In the second half of the year a steel supply contract was consummated with Essar Steel in India, and CMC Trading AG will market over $100 million of steel products for Essar during the next three years. At year end, a similar but smaller arrangement was concluded with a mill in China for performance over the next year. The Tokyo office was converted to an exclusive representative agency arrangement, and a small office was opened in Germany to facilitate steel imports. OUTLOOK The outlook generally remains favorable although global markets remain mixed. Most importantly, during the fourth quarter the Company began to implement modest price increases in the United States on reinforcing bar and merchant shapes. Some improvement is being seen in overall pricing of fabricated steel. Construction markets in the U.S. are strong, margins on copper plumbing tube should improve and ferrous scrap markets are steady. The trends in nonferrous metal prices are diverse, but demand should remain active. Europe is improving, but most Asian economies have slowed because of the currency turmoil. The continued economic pickup in Latin America, especially Mexico, should be beneficial. The outlook for public construction remains positive and, longer term, infrastructure spending should increase. Expenses related to the Steel Group computer migration in fiscal 1998 should continue in the $6 million dollar range. In connection with the aforementioned termination of its last defined benefit plan, the Company estimates that total pension expense for 1998 will be $2.5 million which includes both normal pension costs and a one time settlement liability. Thereafter, pension expense will be eliminated altogether. The opening two paragraphs of this section contain forward-looking statements regarding the outlook for the Company's short-term financial results including estimated expenses, 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. 1996 COMPARED TO 1995 SEGMENTS Manufacturing Despite generally weaker pricing, record tonnage levels propelled the Manufacturing segment to record revenues and operating profit. Steel Group revenues were $949 million, an increase of 13% over last year. Operating profit rose 15% to $57.4 million on the strength of an 11% increase in tonnage shipped. Mill prices declined 3% while average prices for fabricated material increased modestly. Steel mill tonnage shipped was 13% higher at a record 1.73 million tons. Record steel mill tons were melted while rolled tons were comparable to last year. Despite a fire at SMI-Texas and a weak performance at SMI-South Carolina, Mill operating profits were in line with last year. In October 1995 a fire put SMI-Texas' Melt Shop offline for 166 hours. Notwithstanding operating under less efficient conditions for the remainder of the year, the Mill had its second best year ever. Included in other revenues is $1.8 million from an insurance recovery for property damage. Settlement of business interruption claims did not occur until after fiscal year end. SMI-Alabama shipped record tonnage and produced record profits. SMI-Arkansas also achieved a new higher profitability level. SMI-South Carolina cut inventories in half and restructured its management team, but suffered an operating loss while our capital investment and employee efficiency programs were being implemented. Steel fabrication profits increased 40% as tonnage was up 15% to 650 thousand tons. Both the Steel Group East and West fabrication branches were profitable. Operating profit in the Copper Tube Division was down only slightly from last year. Attractive interest rates continue to drive a strong housing market. Pricing was unstable as the market was still trying to shake the effect of the Sumitomo copper scandal. Recycling With a continuing strong ferrous market and receding LIFO reserves due to falling prices and inventory levels, the Recycling segment completed a good year. Shipments amounted to 1.2 million tons of ferrous scrap and 208 thousand tons of nonferrous scrap, both comparable with the prior year. Ferrous scrap has had stable pricing for the last two fiscal years. Nonferrous scrap prices, particularly copper, have been more volatile. The Sumitomo copper scandal resulted in a dramatic decline in the price of copper. Aluminum declined on account of a global buildup in inventories. Rapid inventory turnover protected the Secondary Metals Recycling Division from the full effect of falling prices. 14 16 1996 COMPARED TO 1995 (CONTINUED): Marketing and Trading Facing difficult global markets, the Marketing and Trading segment still increased revenues 19% and reported operating profits slightly above last year. The markets for steel, aluminum and nonferrous products turned down sharply during the first two quarters. Customers were left with high inventories and many countries in which the Company operates experienced slower growth. The highlights for the segment were trading in the Americas and marketing and distribution in Australia. Imports of semi-fabricated metals, minerals, chemicals and new steel products sustained earnings. Just-in-Time delivery and other warehousing programs in Australia provided solid results. The segment was adversely impacted in the United Kingdom where a sharp market downturn caused renegotiated or canceled contracts. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations (before changes in operating assets and liabilities) for fiscal 1997 was the second highest in the Company's history. Strong Company earnings and record depreciation expense generated the cash flow. Cash flow from operating activities was used to fund increases in inventories across all divisions, but particularly for large fabrication jobs, the new joist plant, and back-to-back marketing activities. Other assets increased due to rail salvage jobs in process and funding of the Company's nonqualified benefit plan. Accounts payable increased due to normal commercial activity. Strong cash flow enabled the Company to retire all short-term borrowings at year end. Net working capital was $307 million as of August 31, 1997, compared to $275 million last year. The current ratio was slightly higher at 2.1. The Company's sources of short-term funds include a commercial paper program of $40 million. The Company's commercial paper is rated in the second highest category by both Standard & Poor's Corporation (A-2) and Fitch Investors Service, Inc. (F-2). Formal bank credit lines equal to 100% of the amount of all commercial paper outstanding are maintained. The Company's $150 million long-term notes issued in July 1997 ($50 million) and July 1995 ($100 million) are rated investment grade by Standard & Poor's Corporation and Fitch Investors Service, Inc. (BBB+) and by Moody's Investors Service (Baa1 - upgraded from Baa2). The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at banker's acceptance rates or on a cost of funds basis. Management believes it has adequate capital resources available from internally generated funds and from short-term and long-term capital markets to meet anticipated working capital needs, planned capital expenditures, dividend payments to shareholders, stock repurchases and to take advantage of new opportunities requiring capital. Capital investments in property, plant and equipment were a record $71 million in 1997 compared to $48 million the prior year. The capital plan for fiscal 1998 will be the largest plan in Company history at $125 million. The single most important project to be undertaken is a new $70 million rolling mill at SMI South Carolina. These expenditures are expected to be funded from internally generated funds and existing credit facilities. Total capitalization was $561 million at the end of fiscal 1997. The ratio of long-term debt to capitalization was 33%, up from 29% last year. Stockholders' equity was $355 million or $24.04 per share. In 1997 the Board of Directors authorized an additional 500,000 shares for repurchase of the Company's common stock and at August 31, 1997, 581,081 shares remain authorized. During the fiscal year, the Company repurchased 628,993 shares of Company stock at an average cost of $28.18 per share. On August 31, 1997, 1,371,653 treasury shares were held by the Company. There were 14.8 million shares outstanding at year end. 15 17 CONTINGENCIES In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. The Company's origin and one of its core businesses for over three quarters of a century has been metals recycling. In the present era of conservation of natural resources and ecological concerns, the Company has a continuing commitment to sound ecological and business conduct. Certain regulations regarding environmental concerns, however well intentioned, are presently at odds with goals of greater recycling and expose the Company and the industry to potentially significant risks. Such exposures are causing the industry to shrink, leaving fewer but more well financed operators as survivors to face the challenge. The Company believes that materials that are recycled are commodities that are neither discarded nor disposed. They are diverted by recyclers from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications. Environmental agencies at various federal and state levels would classify certain recycled materials as hazardous substances and subject recyclers to material remediation costs, fines and penalties. Taken to extremes, such actions could cripple the recycling industry and undermine any national goal of material conservation. Enforcement, interpretation, and litigation involving these regulations are not well developed. The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at thirteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its PRP designation. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, may have a material impact on earnings and cash flows for a particular quarter. 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. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the business or consolidated financial position of the Company. In fiscal 1997, the Company incurred environmental expense of $10.1 million. This included the cost to staff environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessment, and remediation, consultant fees, baghouse dust removal and various other expenses. The Company estimates that approximately $4.6 million of its capital expenditures for fiscal 1997 related to costs associated with environmental compliance. The nature and timing of these environmental costs is such that it is not practical for the Company to estimate their magnitude in future periods. At August 31, 1997 $4.5 million remained in accrued expenses for environmental liabilities. The November 22, 1994 Final Order of the United States District Court for the Southern District of Texas against CMC Oil Company, a subsidiary of the Company, is now a final, non-appealable order. This liability has been accrued in the financial statements of CMC Oil Company. 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. Under the terms of the acquisition agreement of Owen Steel Company, Inc. and affiliates (Owen), the Company has presented certain claims against the portion of the purchase price remaining in escrow, approximately $5.1 million at August 31, 1997. On April 30, 1996, the Company filed suit against four representatives (one of whom is a current director of the Company) of the former Owen stockholders. The lawsuit alleges failure to release from escrow, funds for claims paid subsequent to acquisition on exposures that existed at the acquisition date, and recovery of delinquent accounts receivable. The total amount of claims by the Company approximates the escrow balance. The stockholder representatives have filed a response and counterclaims; the lawsuit is in the discovery phase. DIVIDENDS Quarterly cash dividends have been paid in each of the past 33 consecutive years. The annual dividend in 1997 was 52 cents a share paid at the rate of 13 cents each quarter. 16 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable for fiscal year ending August 31, 1997. 17 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except share data)
Year ended August 31, - -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------ Revenues: Net sales $ 2,248,267 $ 2,310,213 $ 2,107,426 Other revenues 10,121 12,150 9,353 - -------------------------------------------------------------------------------------------------------------------------------- 2,258,388 2,322,363 2,116,779 Costs and expenses: Cost of goods sold 2,004,155 2,068,534 1,892,540 Selling, general and administrative expenses 164,173 151,171 133,058 Interest expense 14,637 15,822 15,246 Employees' pension and profit sharing plans 14,468 13,915 11,277 Litigation accrual -- -- 6,650 - -------------------------------------------------------------------------------------------------------------------------------- 2,197,433 2,249,442 2,058,771 - -------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 60,955 72,921 58,008 Income taxes 22,350 26,897 19,800 - -------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 38,605 $ 46,024 $ 38,208 ================================================================================================================================ Net earnings per share $ 2.53 $ 3.01 $ 2.52 ================================================================================================================================
See notes to consolidated financial statements. 18 20 \ COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
August 31, - -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------ ASSETS Current assets: Cash $ 32,998 $ 24,260 Accounts receivable (less allowance for collection losses of $6,116 and $5,501) 289,735 294,611 Inventories 220,644 186,201 Other 41,899 34,411 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 585,276 539,483 Other assets 6,524 4,563 Property, plant and equipment: Land 17,844 17,272 Buildings 55,700 45,902 Equipment 447,553 407,286 Leasehold improvements 19,666 19,761 Construction in process 29,841 16,748 - -------------------------------------------------------------------------------------------------------------------------------- 570,604 506,969 Less accumulated depreciation and amortization (323,343) (284,259) - -------------------------------------------------------------------------------------------------------------------------------- 247,261 222,710 ------------------------------ $ 839,061 $ 766,756 ================================================================================================================================
19 21
August 31, - ------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Commercial paper $ -- $ -- Notes payable -- -- Accounts payable 136,988 116,971 Other payables and accrued expenses 129,036 128,879 Income taxes payable 618 6,729 Current maturities of long-term debt 11,502 11,494 - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 278,144 264,073 Deferred income taxes 20,834 21,044 Long-term debt 185,211 146,506 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 14,760,930 and 15,095,964 shares 80,663 80,663 Additional paid-in capital 13,627 13,193 Retained earnings 293,600 262,772 - ------------------------------------------------------------------------------------------------------------------------------- 387,890 356,628 Less treasury stock 1,371,653 and 1,036,619 shares at cost (33,018) (21,495) - ------------------------------------------------------------------------------------------------------------------------------- 354,872 335,133 ------------------------------- $ 839,061 $ 766,756 ===============================================================================================================================
See notes to consolidated financial statements. 20 22 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
August 31, - -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 38,605 $ 46,024 $ 38,208 Adjustments to earnings not requiring cash: Depreciation and amortization 43,720 41,599 38,134 Provision for losses on receivables 1,433 2,535 1,084 Deferred income taxes (210) (6) (524) Other (353) (258) (268) - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operations Before Changes in Operating Assets and Liabilities 83,195 89,894 76,634 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 3,443 (29,063) 6,652 Decrease (increase) in financial services loans and advances -- -- 19,560 Decrease (increase) in inventories (34,443) 21,913 (39,804) Decrease (increase) in other assets (9,449) 1,601 (5,635) Increase (decrease) in accounts payable, accrued expenses, and income taxes 14,063 2,253 15,472 - -------------------------------------------------------------------------------------------------------------------------------- Net Cash Flows From Operating Activities 56,809 86,598 72,879 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Owen net of cash acquired -- (2,799) (24,769) Temporary investments -- -- 19,174 Purchases of property, plant and equipment (70,955) (47,982) (39,311) Sales of property, plant and equipment 3,037 1,805 993 - -------------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (67,918) (48,976) (43,913) CASH FLOWS FROM FINANCING ACTIVITIES: Commercial paper - net change -- -- (20,000) Notes payable - net change -- -- (21,000) Financial services notes payable -- (5,189) (45,723) New long-term debt 50,000 -- 160,000 Refinance long-term debt of acquisition -- -- (32,000) Payments on long-term debt (11,287) (14,112) (64,801) Stock issued under stock option, purchase, and bonus plans 5,989 5,225 2,337 Tax benefits related to stock option plan 649 407 1,355 Treasury stock acquired (17,727) (13,465) -- Dividends paid (7,777) (7,246) (7,211) - -------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 19,847 (34,380) (27,043) Increase in Cash and Cash Equivalents 8,738 3,242 1,923 Cash and Cash Equivalents at Beginning of Year 24,260 21,018 19,095 - -------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 32,998 $ 24,260 $ 21,018 ================================================================================================================================
See notes to consolidated financial statements. 21 23 COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Common stock Treasury stock ------------------------ Additional -------------------------- Number of paid-in Retained Number of shares Amount capital earnings shares Amount - ------------------------------------------------------------------------------------------------------------------------------- Balance, September 1, 1994 16,132,583 $80,663 $ 1,019 $192,997 (1,857,576) $(31,906) Net earnings 38,208 Cash dividends - $.48 per share (7,211) Treasury stock acquired -- -- Treasury stock issued for acquisition of Owen 8,710 932,301 16,345 Stock issued under stock option, purchase and bonus plans 862 162,284 2,122 Tax benefits related to stock option plan 1,355 - -------------------------------------------------------------------------------------------------------------------------------- Balance, August 31, 1995 16,132,583 80,663 11,946 223,994 (762,991) (13,439) Net earnings 46,024 Cash dividends - $.48 per share (7,246) Treasury stock acquired (557,600) (13,465) Additional treasury stock issued for Owen acquisition 552 37,196 472 Stock issued under stock option, purchase and bonus plans 288 246,776 4,937 Tax benefits related to stock option plan 407 - -------------------------------------------------------------------------------------------------------------------------------- Balance, August 31, 1996 16,132,583 80,663 13,193 262,772 (1,036,619) (21,495) Net earnings 38,605 Cash dividends - $.52 per share (7,777) Treasury stock acquired (628,993) (17,727) Stock issued under stock option, purchase and bonus plans (215) 293,959 6,204 Tax benefits related to stock option plan 649 - -------------------------------------------------------------------------------------------------------------------------------- Balance, August 31, 1997 16,132,583 $80,663 $13,627 $293,600 (1,371,653) $(33,018) ================================================================================================================================
See notes to consolidated financial statements. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AUGUST 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company manufactures, recycles and markets steel and metal products and related materials. Its manufacturing and recycling facilities and primary markets are located in the Sunbelt from the mid-Atlantic area through the Southwest. Through its global marketing offices, the Company trades primary and secondary metals and other industrial products worldwide. As more fully discussed in footnote 12, the Manufacturing segment is the most dominant in terms of capital assets and operating profit. Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances are eliminated in consolidation. Revenue Recognition Sales are recognized when title to inventory passes to the customer based on customary industry practice. Inventories Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in, first-out (LIFO) method; cost of international and remaining inventories is determined by the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment is recorded at cost and is depreciated at annual rates based upon the estimated useful lives of the assets using substantially the straight-line method. Provision for amortization of leasehold improvements is made at annual rates based upon the estimated useful lives of the assets or terms of the leases, whichever is shorter. Startup Costs Startup costs associated with the acquisition and expansion of manufacturing and recycling facilities are expensed as incurred. Income Taxes Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in footnote 5. Benefits from tax credits are reflected currently in earnings. Foreign Currency The functional and the reporting currency of a majority of the Company's international subsidiaries is the United States dollar. There are no significant translation adjustments to be reported as a separate component of stockholders' equity. Gain or loss on foreign currency exchange contracts designated as hedges is deferred and recognized upon settlement of the related trade receivable or payable. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates regarding assets and liabilities and associated revenues and expenses. Management believes these estimates to be reasonable; however, actual results may vary. Cash Flows For purposes of the statements of cash flows, the Company considers investments that are short-term (generally with original maturities of three months or less) and highly liquid to be cash equivalents. Temporary investments include highly liquid instruments with longer original maturity dates. Cash and cash equivalents and temporary investments at August 31 were as follows (in thousands):
1997 1996 1995 - --------------------------------------------------------------- Cash and cash equivalents $32,998 $24,260 $21,018 Temporary investments (at lower of cost or market) -- -- -- - --------------------------------------------------------------- $32,998 $24,260 $21,018 ===============================================================
Other The Company will adopt Statement of Financial Accounting Standards No. 128, Earnings per Share, as of the quarter ending February 28, 1998. It is not expected to have a significant impact on reported amounts of earnings per share. Reclassifications Certain reclassifications have been made in the 1996 and 1995 financial statements to conform to the classifications used in the current year. 2. INVENTORIES Before reduction of LIFO reserves of $30,131,000 and $29,844,000 at August 31, 1997 and 1996, respectively, inventories valued under the first-in, first-out method approximated replacement cost. At August 31, 1997 and 1996, 72% and 79%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consist mainly of material dedicated to international business. 3. CREDIT ARRANGEMENTS Periodically, the Company is active in the commercial paper market with a program which permits borrowings up to $40,000,000. It is the Company's policy to maintain formal bank credit lines equal to 100% of the amount of all commercial paper outstanding. The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at banker's acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. 23 25 The Company's $100 million investment grade, unsecured notes have a coupon rate of 7.20% which, after netting the proceeds of an interest rate hedge, results in an effective interest rate of 7.04%. On July 30, 1997, the Company sold the remaining $50 million of notes under its $150 million shelf registration. The notes have an effective yield of 6.8%. On August 15, 1996, the Company arranged a 5 year, $40 million unsecured revolving credit loan facility with a group of four banks. The agreement provides for borrowing in United States dollars indexed to the reference rate or to the offshore dollar interbank market rate. A commitment fee of .1125% per annum is payable on the credit line. No compensating balances are required. Long-term debt and amounts due within one year as of August 31, 1997, are as follows (in thousands):
Long-term Current debt maturities Total - -------------------------------------------------------------- 7.20% notes due 2005 $100,000 $ -- $100,000 6.80% notes due 2007 50,000 -- 50,000 8.49% notes due 2001 28,571 7,143 35,714 8.75% note due 1999 6,427 4,286 10,713 Other 213 73 286 - -------------------------------------------------------------- $185,211 $ 11,502 $196,713 ==============================================================
All interest is payable semiannually. The 7.20% notes are due in July 2005; the 6.80% notes in August 2007. The 8.49% notes provide for annual principal repayments beginning on December 1, 1995; all other notes are payable semiannually. Certain of the note agreements include various covenants. The most restrictive of these requires maintenance of consolidated net current assets of $75,000,000 and net worth (as defined) of $150,000,000. At August 31, 1997, approximately $187,000,000 of retained earnings was available for cash dividends under these covenants. The aggregate amounts of all long-term debt maturities for the five years following August 31, 1997 are (in thousands): 1998 - $11,502; 1999 - $11,485; 2000 - $9,317; 2001 - $7,164; 2002 - $7,147. Interest expense is comprised of the following (in thousands):
Year ended August 31, - --------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------- Long-term debt $10,894 $11,903 $ 9,105 Financial services debt -- -- 1,364 Commercial paper 731 360 516 Notes payable 3,012 3,559 4,261 - --------------------------------------------------------------- $14,637 $15,822 $15,246 ===============================================================
Interest of $804,000, $320,000 and $149,000 was capitalized in the cost of property, plant and equipment constructed in 1997, 1996, and 1995, respectively. Interest of $15,578,000, $16,467,000, and $12,641,000 was paid in 1997, 1996, and 1995, respectively. 4. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK Management believes that the historical financial statement presentation is the most useful for displaying the Company's financial position. However, generally accepted accounting principles require disclosure of an estimate of the fair value of the Company's financial instruments as of year end. These estimated fair values disregard management intentions concerning these instruments and do not represent liquidation proceeds or settlement amounts currently available to the Company. Differences between historical presentation and estimated fair values can occur for many reasons including taxes, commissions, prepayment penalties, make-whole provisions and other restrictions as well as the inherent limitations in any estimation technique. Because of this management believes that this information may be of limited usefulness in understanding the Company and minimal value in making comparisons between companies. Due to near-term maturities, allowances for collection losses, investment grade ratings and security provided, the following financial instruments' carrying amounts are considered equivalent to fair value: o Cash and temporary investments o Commercial paper o Notes payable The Company's long-term debt is both publicly and privately held. Fair value was determined for private debt by discounting future cash flows at current market yields and for public debt at indicated market values.
(in thousands) - ------------------------------------------------------------- Long-Term Debt 1997 1996 - ------------------------------------------------------------- Carrying Amount $196,713 $158,000 Estimated Fair Value $196,494 $159,162 =============================================================
The notional amount of foreign currency exchange contracts outstanding at year end was $49,656,000. The fair value of these contracts effective as hedges if settled at August 31, 1997 would result in a gain of $424,000. The fair value of all outstanding letters of credit is not meaningful. The Company does not have significant off-balance-sheet risk from financial instruments. It enters into foreign exchange contracts as hedges of trade receivables and payables denominated in currencies other than the functional currency. Effects of changes in currency rates are therefore minimized. As a matter of Company policy, foreign exchange contracts are used to hedge only firm commitments, not anticipated transactions. Pricing of certain firm sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity contracts (predominantly copper) as hedges of gross margins on these commitments. The hedges are closed when the underlying sales and purchase commitments are priced and gain or loss is recognized when the sale or purchase is recorded. 24 26 The Company maintains both corporate and divisional credit departments. Limits are set for customers and countries. Letters of credit issued or confirmed through sound financial institutions are obtained to further ensure prompt payment in accordance with terms of sale; generally, collateral is not required. At August 31, 1997, $8,644,000 of bankers acceptances were included in accounts receivable. In the normal course of its marketing activities, the Company transacts business with substantially all sectors of the metals industry. Customers are internationally dispersed, cover the spectrum of manufacturing and distribution, deal with various types and grades of metal, and have a variety of end markets in which they sell. The Company's historical experience in collection of accounts receivable falls within the recorded allowances. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed inherent in the Company's accounts receivable. 5. INCOME TAXES The provisions for income taxes include the following (in thousands):
Year ended August 31, - -------------------------------------------------------------- 1997 1996 1995 --------------------------------- Current: United States $19,986 $22,356 $17,816 Foreign 680 1,364 615 State and local 2,065 2,880 1,893 - -------------------------------------------------------------- 22,731 26,600 20,324 Deferred (381) 297 (524) - -------------------------------------------------------------- $22,350 $26,897 $19,800 ==============================================================
Taxes of $25,506,000, $16,537,000 and $21,000,000 were paid in 1997, 1996 and 1995, respectively. Deferred taxes arise from temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. The sources and tax effects of these differences are (in thousands):
August 31, - -------------------------------------------------------------- 1997 1996 --------------------- U.S. taxes provided on foreign income and foreign taxes $11,524 $11,670 Tax on difference between tax and book depreciation 19,294 20,071 Net operating losses (6,692) (6,692) Alternative minimum tax credit (1,713) (1,713) Other accruals (754) (1,917) Other (825) (375) - -------------------------------------------------------------- Total $20,834 $21,044 ==============================================================
The Company uses substantially the same depreciable lives for tax and book purposes. Changes in deferred taxes relating to depreciation are mainly attributable to differences in the basis of underlying assets recorded under the purchase method of accounting. As noted above the Company provides United States taxes on unremitted foreign earnings. Such earnings have been reinvested in the foreign operations except for dividends of $6,062,000. The Company's effective tax rates were 36.7% in 1997, 36.9% in 1996, and 34.1% in 1995. Reconciliations of the United States statutory rates to the effective rates are as follows:
Year ended August 31, - -------------------------------------------------------------- 1997 1996 1995 ------------------------------- Statutory rate 35.0% 35.0% 35.0% Tax credits (.5) (.5) (.5) State and local taxes 2.2 2.6 2.1 Other -- (.2) (2.5) - -------------------------------------------------------------- Effective tax rate 36.7% 36.9% 34.1% ==============================================================
The Company acquired Owen Steel Company,Inc. and subsidiaries in a tax free merger transaction during 1995. As a result of this transaction, there are $16 million of federal net operating losses and $1.7 million of alternative minimum tax credits that were recorded as deferred tax assets under purchase accounting. These assets will be reduced as tax expense is recognized in future periods. The net operating losses consist of $4 million and $12 million that are due to expire in 2008 and 2009, respectively. The $1.7 million alternative minimum tax credit is available indefinitely. 6. CAPITAL STOCK Stock Purchase Plan Substantially all employees may participate in the Company's employee stock purchase plan. The Directors have authorized the annual purchase of up to 200 shares at a discount of 25% from the stock's price. Annual activity of the stock purchase plan was as follows:
1997 1996 1995 - -------------------------------------------------------------- Shares subscribed 165,300 158,490 146,710 Price per share $ 23.80 $ 17.80 $ 18.41 Shares purchased 152,260 138,180 107,110 Price per share $ 17.80 $ 18.41 $ 19.94 Shares available 142,531
The Company recognized compensation expense for this plan of $906,000, $844,000 and $712,000 in 1997, 1996 and 1995, respectively. Stock Option Plans The 1986 Stock Incentive Plan (1986 Plan) terminated November 23, 1996, except as to awards outstanding. Under the 1986 Plan, stock options were awarded to full-time salaried employees. The option price was the fair market value of the Company's stock at the date of grant, and the options are exercisable two years from date of grant. The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996. Under the 1996 Plan, stock options, stock appreciation rights, and restricted stock may be awarded to employees. The option price for both the stock options and the stock rights will not be less than the fair market value of the Company's stock at the date of grant. Vesting periods are variable but no award may be exercised after ten years. The only outstanding award under the 1996 Plan vests 50% after one year and 50% after two years from date of grant and will expire seven years after grant. 25 27 Combined share information for the two plans is as follows:
Weighted Price Average Range Number Exercise Price Per Share - --------------------------------------------------------------- September 1, 1994 Outstanding 1,272,782 $16.69 $8.72-27.61 Granted 293,000 24.50 24.50 Exercised (126,843) 16.61 8.72-20.20 Forfeited (8,646) 23.74 8.72-27.61 Exercisable 860,253 17.36 8.72-27.61 - --------------------------------------------------------------- August 31, 1995 Outstanding 1,430,293 20.81 8.72-27.61 Granted 435,050 27.29 26.25-27.31 Exercised (119,362) 17.92 8.72-27.61 Forfeited (31,486) 24.57 12.61-27.61 Exercisable 1,003,670 20.02 8.72-27.61 - --------------------------------------------------------------- August 31, 1996 Outstanding 1,714,495 22.58 8.72-27.61 Granted 390,251 28.00 28.00 Exercised (161,879) 18.60 8.72-27.61 Forfeited (23,559) 26.46 18.42-28.00 Exercisable 1,108,337 21.32 8.72-27.61 - --------------------------------------------------------------- August 31, 1997 Outstanding 1,919,308 $23.99 $8.72-28.00 Authorized Shares Remaining 361,399 ===============================================================
Share information for options at August 31, 1997:
Outstanding Exercisable - ---------------------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life Price Outstanding Price - ---------------------------------------------------------------------- $8.72-18.42 367,591 3.3 years $15.64 367,591 $15.64 20.20-28.00 1,551,717 7.1 years $25.97 740,746 $24.14 - ---------------------------------------------------------------------- $8.72-28.00 1,919,308 6.3 years $23.99 1,108,337 $21.32
The Company has maintained its historical method for accounting for stock options which recognizes no compensation expense for fixed options granted at current market values. Generally accepted accounting principles require disclosure of an estimate of the weighted-average grant date fair value of options granted during the year and pro forma disclosures of the effect on earnings if compensation expense had been recorded. The Black-Scholes option pricing model used requires the following weighted- average assumptions:
1997 1996 - ------------------------------------------------------------- Risk-free interest rate 6.22% 6.74% Expected life 4.85 years 4.85 years Expected volatility .160 .160 Expected dividend yield 1.7% 1.7%
Management believes that the resulting answer has narrow reliability as characteristics of the Company's options such as nontransferability, forfeiture provisions, and long lives are inconsistent with the option model's basic purpose of valuing traded options. For purposes of pro forma earnings disclosures, the assumed compensation expense is amortized over the option's vesting period. The 1996 pro forma information includes only options granted during 1996 and none previous. The 1997 pro forma information includes options granted in both 1996 and 1997.
1997 1996 - ------------------------------------------------------------- Net Earnings (in thousands) As reported $38,605 $46,024 Pro Forma 37,584 45,667 Net Earnings per share As reported $2.53 $3.01 Pro Forma 2.47 2.98
The weighted-average fair value of options granted in 1997 and 1996 was $6.27 and $6.44. Preferred Stock Preferred stock has a par value of $1.00 a share, with 2,000,000 shares authorized. It may be issued in series, and the shares of each series shall have such rights and preferences as fixed by the Board of Directors when authorizing the issuance of that particular series. There are no shares of preferred stock outstanding. 7. EMPLOYEES' PENSION AND PROFIT SHARING PLANS Substantially all employees of the Company and its subsidiaries are covered by profit sharing or savings plans. Company contributions, which are discretionary, to all plans were $13,945,000, $13,394,000, and $10,801,000, for 1997, 1996 and 1995, respectively. During 1997 the Company terminated its only remaining defined benefit plan. Payment of benefits to participants is expected to occur by May 31, 1998. Pension expense for 1997 totaled $1,892,000 including a $541,000 curtailment loss. Estimated total pension expense for 1998 is $2.5 million which includes both normal pension costs and a one time settlement liability. Thereafter, pension expense will be eliminated altogether. 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS The Company has no significant postretirement obligations. The Company's historical costs for postemployment benefits have not been significant and are not expected to be in the future. 9. COMMITMENTS AND CONTINGENCIES Minimum rental commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 1997, are as follows for the fiscal periods specified (in thousands):
Real Equipment Estate - -------------------------------------------------------------- 1998 $3,225 $ 3,836 1999 2,554 3,303 2000 809 3,163 2001 1,229 2,177 2002 and thereafter 87 3,772 - -------------------------------------------------------------- $7,904 $16,251 ==============================================================
26 28 Total rental expense was $8,621,000, $7,834,000 and $7,953,000 in 1997, 1996 and 1995, respectively. In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at thirteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its PRP designation. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, 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 loss in connection with the above-referenced matters, it makes accruals as warranted. Due to evolving remediation technology, changing regulations, possible third party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the business or consolidated financial position of the Company. The November 22, 1994 Final Order of the United States District Court for the Southern District of Texas against CMCOil Company, a subsidiary of the Company, is now a final, non-appealable order. This liability has been accrued in the financial statements of CMCOil Company. CMCOil does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company in connection with this litigation. Under the terms of the acquisition agreement of Owen Steel Company, Inc. and affiliates (Owen), the Company presented certain claims against the portion of the purchase price remaining in escrow, approximately $5.1 million at August 31, 1997. On April 30, 1996, the Company filed suit against four representatives (one of whom is a current director of the Company) of the former Owen stockholders. The lawsuit alleges failure to release from escrow, funds for claims paid subsequent to acquisition on exposures that existed at the acquisition date, and recovery of delinquent accounts receivable. The total amount of claims by the Company approximate the escrow balance. The stockholder representatives have filed a response and counterclaims; the lawsuit is in the discovery phase. 10. EARNINGS PER SHARE Earnings per share are computed on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The shares used in the calculation of earnings per share were 15,232,749, 15,306,413 and 15,151,072 in 1997, 1996 and 1995, respectively. 11. OTHER PAYABLES AND ACCRUED EXPENSES
(in thousands) August 31, - -------------------------------------------------------------- 1997 1996 ----------------------- Salaries, wages and commissions $ 29,330 $ 29,570 Advance billings on contracts 5,306 8,801 Pension and profit sharing 17,028 13,747 Insurance 9,516 8,864 Accrual for contract losses 1,163 1,406 Environmental 4,477 8,434 Litigation accrual 6,650 6,650 Freight 5,593 4,263 Taxes other than income taxes 6,044 5,518 Interest 3,732 3,543 Other accrued expenses 40,197 38,083 - -------------------------------------------------------------- $129,036 $128,879 ==============================================================
12. BUSINESS SEGMENTS Summarized data for the Company's international operations located outside of the United States (principally in Europe, Australia and the Far East) are as follows (in thousands):
Year ended August 31, - --------------------------------------------------------------- 1997 1996 1995 ------------------------------- Revenues-unaffiliated customers $360,283 $ 505,255 $ 376,332 =============================================================== Operating profit $ 3,469 $ 6,731 $ 10,051 =============================================================== Identifiable assets $ 95,358 $ 108,492 $ 88,711 ===============================================================
Export sales from the Company's United States operations are as follows (in thousands):
Year ended August 31, - --------------------------------------------------------------- 1997 1996 1995 -------------------------------- Far East $ 39,863 $ 60,008 $ 42,439 Canada and Mexico 38,883 40,565 42,698 Other 4,590 3,414 6,074 - --------------------------------------------------------------- Total $ 83,336 $ 103,987 $ 91,211 ===============================================================
The Company operates in three business segments, as indicated below. Intersegment sales generally are priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. 27 29 12. BUSINESS SEGMENTS (CONTINUED):
Adjustments Marketing and 1997 (in thousands) Manufacturing Recycling and Trading Corporate eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Revenues - unaffiliated customers $ 1,077,296 $ 453,436 $ 727,532 $ 124 $ -- $ 2,258,388 Intersegment revenues 5,703 31,182 30,672 (67,557) - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 1,082,999 484,618 758,204 124 (67,557) 2,258,388 ============================================================================================================================== Operating profit (loss) 54,782 7,615 17,636 (4,441) 75,592 Interest expense (14,637) Earnings before income taxes 60,955 ============================================================================================================================== Depreciation and amortization 32,915 9,926 669 210 43,720 ============================================================================================================================== Capital expenditures 50,773 15,885 4,023 274 70,955 ============================================================================================================================== Identifiable assets $ 510,951 $ 112,875 $ 192,224 $ 23,011 $ -- $ 839,061 ============================================================================================================================== 1996 (in thousands) - ------------------------------------------------------------------------------------------------------------------------------ Revenues - unaffiliated customers $ 1,008,231 $ 443,825 $ 869,646 $ 661 $ -- $ 2,322,363 Intersegment revenues 9,625 20,348 20,394 (50,367) - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 1,017,856 464,173 890,040 661 (50,367) 2,322,363 ============================================================================================================================== Operating profit (loss) 61,818 12,091 17,680 (2,846) 88,743 Interest expense (15,822) Earnings before income taxes 72,921 ============================================================================================================================== Depreciation and amortization 31,319 9,410 614 256 41,599 ============================================================================================================================== Capital expenditures 37,315 8,727 1,611 329 47,982 ============================================================================================================================== Identifiable assets $ 457,939 $ 91,885 $ 195,042 $ 21,890 $ -- $ 766,756 ============================================================================================================================== 1995 (in thousands) - ------------------------------------------------------------------------------------------------------------------------------ Revenues - unaffiliated customers $ 900,922 $ 483,428 $ 732,419 $ 10 $ -- $ 2,116,779 Intersegment revenues 11,817 27,707 16,806 (56,330) - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 912,739 511,135 749,225 10 (56,330) 2,116,779 ============================================================================================================================== Operating profit (loss) 54,417 11,337 17,621 (10,121) 73,254 Interest expense (15,246) Earnings before income taxes 58,008 ============================================================================================================================== Depreciation and amortization 28,847 8,524 635 128 38,134 ============================================================================================================================== Capital expenditures 24,689 14,103 431 88 39,311 ============================================================================================================================== Identifiable assets $ 452,145 $ 111,119 $ 165,692 $ 19,147 $ -- $ 748,103 ==============================================================================================================================
28 30 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1997, 1996 and 1995 are as follows (in thousands except per share data):
Three Months Ended 1997 ---------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 ---------------------------------------- Net sales $526,859 $523,463 $586,141 $611,804 Gross profit 57,552 56,119 62,504 67,937 Net earnings 9,177 7,201 9,510 12,717 Net earnings per share .60 .47 .63 .85 Three Months Ended 1996 ---------------------------------------- Nov. 30 Feb. 29 May 31 Aug. 31 ---------------------------------------- Net sales $588,238 $514,855 $634,569 $572,551 Gross profit 57,956 57,628 61,663 64,432 Net earnings 10,832 10,010 12,012 13,170 Net earnings per share .70 .67 .79 .86 Three Months Ended 1995 ---------------------------------------- Nov. 30 Feb. 28 May 31 Aug. 31 ---------------------------------------- Net sales $411,434 $530,907 $572,520 $592,565 Gross profit 45,751 58,204 60,370 50,561 Net earnings 6,372 10,277 11,371 10,188 Net earnings per share .44 .67 .73 .66
The quantities and costs used in calculating cost of goods sold on a quarterly basis include estimates of the annual LIFO effect. The actual effect cannot be known until the year-end physical inventory is completed and quantity and price indices are developed. The quarterly cost of goods sold above includes such estimates. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Commercial Metals Company Dallas, Texas We have audited the consolidated balance sheets of Commercial Metals Company and subsidiaries at August 31, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Commercial Metals Company and subsidiaries at August 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1997, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE, LLP Deloitte &Touche, LLP Dallas, Texas October 15, 1997 29 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No event reportable herein took place. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required in response to this Item with regard to directors is incorporated herein by reference from the registrant's Definitive Proxy Statement for the annual meeting of shareholders to be held January 22, 1998, which will be filed no later than 120 days after the close of the Registrant's fiscal year. The following is a listing of employees believed to be considered "Executive Officers" of the registrant as defined under Rule 3b-7 as of August 31, 1997:
NAME CURRENT TITLE & POSITION AGE OFFICER SINCE - ---- ------------------------ --- ------------- Lawrence A. Engels Vice President, Treasurer and 64 1977 Chief Financial Officer Hugh M. Ghormley Vice President and 68 1981 CMC Steel Group - President Fabrication Plants Harry J. Heinkele Vice President and Secondary Metals 65 1981 Processing Division - President A. Leo Howell Vice President and 76 1977 Howell Metal Company - President; Director and Chairman of the Executive Committee William B. Larson Controller 44 1995 Murray R. McClean Vice President and 49 1995 International Division - President
30 32 Stanley A. Rabin President and Chief Executive 59 1974 Officer; Director Bert Romberg Senior Vice President 67 1968 Marvin Selig CMC Steel Group - Chairman 74 1968 and Chief Executive Officer; Director Clyde P. Selig Vice President and 65 1981 CMC Steel Group - President and Chief Operating Officer David M. Sudbury Vice President, Secretary and 52 1976 General Counsel
The Executive Officers are employed by the Board of Directors of the registrant or the respective subsidiary usually at its first meeting after the registrant's Annual Shareholders Meeting and continue to serve for terms set from time to time by the registrant's Board of Directors in its discretion. All of the Executive Officers of the Company have served in the positions indicated above or in positions of similar responsibility for more than five years except for Messrs. Larson and McClean. Mr. Larson was employed by the Company in June, 1991 as Assistant Controller and was named Controller in March 1995. Mr. McClean has been employed by the Company's subsidiary CMC (Australia) Pty. Limited since 1984. In September, 1993, he assumed the function of President of the International Division of the Company. Marvin Selig is the brother of Clyde P. Selig. There are no other family relationships among the officers of the registrant or among the Executive Officers and Directors. ITEM 11. EXECUTIVE COMPENSATION Information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the annual meeting of shareholders to be held January 22, 1998, which will be filed no later than 120 days after the close of the Registrant's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the annual meeting of shareholders to be held January 22, 1998, which will be filed no later than 120 days after the close of the Registrant's fiscal year. 31 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS To the extent applicable, information required in response to this Item is incorporated herein by reference from the Registrant's Definitive Proxy Statement for the annual meeting of shareholders to be held January 22, 1998, which will be filed no later than 120 days after the close of the Registrant's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 2. Commercial Metals Company and Subsidiaries Consolidated Financial Statement Schedules Independent Auditors' Report as to Schedules Valuation and qualifying accounts (Schedule VIII) All other schedules have been omitted because they are not applicable, are not required, or the required information is shown in the financial statements or notes thereto. 3. The following is a list of the Exhibits and Index required to be filed by Item 601 of Regulation S-K: (3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). (3)(i)a - Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)b - Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated hereby by reference). (4) Indenture between the Company and Chase Manhattan Bank dated as of July 31, 1995 (Filed as Exhibit 4.1 to the Company's Registration Statement No. 33-60809 on July 18, 1995 and incorporated herein by reference). (11) Calculation of primary and fully diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . E1 (21) Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . E2 32 34 (23) Independent Auditors' consent to incorporation by reference of report dated October 15, 1997 accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 1997 into previously filed Registration Statements No. 033-61073, No. 033-61075, and 333-27967 on Form S-8 and Registration Statement No. 33-60809 on Form S-3 . . . . . E3 (27) Financial Data Schedule . . . . . . . . . . . . . . . . . . E4 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter covered by this report. 33 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL METALS COMPANY /s/ STANLEY A. RABIN ---------------------------------- By: Stanley A. Rabin President and Chief Executive Officer Date: November 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ ALBERT A. EISENSTAT - -------------------------------------- Albert A. Eisenstat, November 24, 1997 Director /s/ CHARLES B. PETERSON -------------------------------------- /s/ MOSES FELDMAN Charles B. Peterson, November 24, 1997 - -------------------------------------- Director Moses Feldman, November 24, 1997 Director /s/ STANLEY A. RABIN -------------------------------------- Stanley A. Rabin, November 24, 1997 - -------------------------------------- President, Chief Executive Officer Laurence E. Hirsch, November 24, 1997 and Director Director /s/ MARVIN SELIG -------------------------------------- Marvin Selig, November 24, 1997 - -------------------------------------- Chairman and Chief Executive Officer A. Leo Howell, November 24, 1997 CMC Steel Group and Director Vice President and Director /s/ LAWRENCE A. ENGELS -------------------------------------- /s/ WALTER F. KAMMANN Lawrence A. Engels, November 24, 1997 - -------------------------------------- Vice President and Walter F. Kammann, November 24, 1997 Chief Financial Officer Director /s/ WILLIAM B. LARSON -------------------------------------- /s/ RALPH E. LOEWENBERG William B. Larson, November 24, 1997 - -------------------------------------- Controller Ralph E. Loewenberg, November 24, 1997 Director /s/ DOROTHY G. OWEN - -------------------------------------- Dorothy G. Owen, November 24, 1997 Director 34 36 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Commercial Metals Company Dallas, Texas We have audited the consolidated financial statements of Commercial Metals Company as of August 31, 1997 and 1996, and for each of the three years in the period ended August 31, 1997, and have issued our report thereon dated October 15, 1997; such financial statements and report are included in Item 8 herein. Our audits also included the consolidated financial statement schedule of Commercial Metals Company listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Dallas, Texas October 15, 1997 37 SCHEDULE VIII COMMERCIAL METALS COMPANY AND SUBSIDIARIES ------------------------------------------ VALUATION AND QUALIFYING ACCOUNTS --------------------------------- YEARS ENDED AUGUST 31, 1997, 1996 AND 1995 ------------------------------------------ ( In thousands ) Allowance for collection losses deducted from notes and accounts receivable:
Charged to Charged Deductions Balance, profit and to other from Balance beginning loss or accounts reserves end Year of year income ( A ) ( B ) of year -------- ---------- ---------- ---------- ---------- ---------- 1995* 3,724 1,084 611 676 4,743 1996 4,743 2,535 269 2,046 5,501 1997 5,501 1,433 354 1,172 6,116
* Includes opening balance of $196 from the acquisition of the Owen Companies in November 1994. ( A ) Recoveries of accounts written off. ( B ) Write-off of uncollectible accounts. 38 INDEX TO EXHIBITS Exhibit No. Description - ----------- ----------- (3)(i) Restated Certificate of Incorporation (Filed as Exhibit (3)(i) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). (3)(i)a Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (Filed as Exhibit 3(i)a to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(i)b Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (Filed as Exhibit 3(i)b to the Company's Form 10-K for the fiscal year ended August 31, 1995, and incorporated herein by reference). (3)(ii) By-Laws (Filed as Exhibit (3)(ii) to the Company's Form 10-K for the fiscal year ended August 31, 1993 and incorporated hereby by reference). (4) Indenture between the Company and Chase Manhattan Bank dated as of July 31, 1995 (Filed as Exhibit 4.1 to the Company's Registration Statement No. 33-60809 on July 18, 1995 and incorporated herein by reference). (11) Calculation of primary and fully diluted earnings per share . E1 (21) Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . E2 (23) Independent Auditors' consent to incorporation by reference of report dated October 15, 1997 accompanying the consolidated financial statements of Commercial Metals Company and subsidiaries for the year ended August 31, 1997 into previously filed Registration Statements No. 033-61073, No. 033-61075, and 333-27967 on Form S-8 and Registration Statement No. 33-60809 on Form S-3 . . . . . . . . . . . . . . . . . . . . . . . . E3 (27) Financial Data Schedule . . . . . . . . . . . . . . . . . . . E4 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 ----------- COMMERCIAL METALS COMPANY AND SUBSIDIARIES ------------------------------------------ CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE* ------------------------------------------------------------ ( In thousands except share data )
YEAR ENDED AUGUST 31, ------------------------------------------------------ 1997 1996 1995 ------- ------- ------- Net earnings $ 38,605 $ 46,024 $ 38,208 Weighted average number of shares outstanding 15,005,217 15,106,882 14,895,475 Dilutive effect of stock option and purchase plans, after application of treasury stock method 227,532 199,531 255,597 Shares used in calculating primary net earnings per share 15,232,749 15,306,413 15,151,072 ----------- ----------- ----------- Net earnings per share $ 2.53 $ 3.01 $ 2.52 =========== =========== ===========
*Fully diluted earnings per share are identical to primary earnings per share. EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY AS OF AUGUST 31,1997
JURISDICTION OF PERCENTAGE NAME OF SUBSIDIARY INCORPORATION OWNED ------------------ --------------- ---------- AHT, Inc. Pennsylvania 100 CMC (Australia) Pty., Limited Australia 100 CMC Comercio de Metias, Ltda. Brazil 100 CMC Concrete Accessories, Inc. Texas 100 CMC Fareast Limited Hong Kong 100 CMC International (S.E. Asia) Pte., Limited Singapore 100 CMC Oil Company Texas 100 CMC Steel Holding Company Delaware 100 CMC Steel Fabricators, Inc. Texas 100 CMC Steel IPH Company Delaware 100 CMC Trading A.G. Switzerland 100 CMC (UK) Limited England 100 Cometals China, Inc. Texas 100 Cometals Far East, Inc. Texas 100 Commercial Metals - Austin Inc. Texas 100 Commercial Metals Deutschland Gmbh Germany 100 Commercial Metals (International) A.G. Switzerland 100 Commercial Metals Overseas Export (FSC) Corp. US Virgin Islands 100 Commercial Metals Railroad Salvage Company Texas 100 Commercial Metals SF/JV Company Tennessee 100 Daltrading Limited Switzerland 100 Howell Metal Company Virginia 100 Mini-Mill Consultants, Inc. Texas 100 Owen Electric Steel Company of South Carolina South Carolina 100 Owen Industrial Products, Inc. South Carolina 100 Owen Joist Corporation South Carolina 100 Owen Joist of Florida, Inc. Florida 100 Owen of Georgia, Inc. Georgia 100 Owen Steel Company of Florida Florida 100 Owen Steel Company of N.C., Inc. North Carolina 100 Owen Supply Company, Inc. South Carolina 100 Regency Advertising Agency, Inc. Texas 100 SMI-Owen Steel Company, Inc. South Carolina 100 SMI Rebar Coating JV, Inc. North Carolina 100 SMI Steel Inc. Alabama 100 Structural Metals, Inc. Texas 100 Zenith Finance and Construction Company Texas 100
EX-23 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-60809 on Form S-3 and Registration Statements Nos. 033-61073, 033-61075 and 333-27967 on Form S-8 of Commercial Metals Company of our reports dated October 15, 1997, appearing in this Annual Report on Form 10-K of Commercial Metals Company for the year ended August 31, 1997. DELOITTE & TOUCHE LLP Dallas, Texas November 25, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1997 SEP-01-1996 AUG-31-1997 32,998 0 295,851 6,116 220,644 585,276 570,604 323,343 839,061 278,144 185,211 0 0 80,663 274,209 839,061 2,248,267 2,258,388 2,004,155 2,004,155 0 1,433 14,637 60,955 22,350 38,605 0 0 0 38,605 2.53 0
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