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. For several years prior to 1995, the Company considered a much smaller Financial Services group to be a fourth business segment. During 1995 some of the activities of this segment were merged into the Marketing and Trading segment in view of the increased emphasis on supporting the Marketing and Trading segment's financial functions and cessation of financial services, including loans, to unrelated third parties. 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 13 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, nineteen steel fabricating plants, three steel joist manufacturing facilities, four steel fence post manufacturing plants, six metals recycling plants, two railcar rebuilding facilities and twelve warehouse stores which sell supplies and equipment to the concrete installation and construction trade.
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 $94 million or 69% of the Company's total capital expenditures have been for minimill
projects, not including the Owen acquisition cost. This emphasis on productivity improvements is 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:
(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 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. In October, 1995, a fire destroyed key electrical equipment at SMI Texas resulting in an almost week long shut down of the melt shop and restricted capacity thereafter. Despite this condition, 764,000 tons were melted during 1996 compared to 778,000 the prior year. A record 700,000 tons were rolled, up 5,000 from 1995.
SMI Steel, Inc. ("SMI Alabama"), a steel minimill in Birmingham, Alabama, was acquired in 1983. A substantial program to modernize and improve productivity at SMI Alabama has followed with approximately $111 million of capital expenditures from acquisition through 1996. Installation and start up of a new approximately $30 million direct current electric furnace melt shop was substantially complete by the beginning of 1995. During 1996 the melt shop recorded record production of 495,000 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 409,000 tons in 1996. 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.
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). 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 1996 SMI South Carolina melted 302,000 tons and rolled 243,000 tons.
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.
SMI Alabama's annual capacity is approximately 500,000 tons and SMI South Carolina annual capacity is approximately 300,000 tons.
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.
A fourth, much smaller mill has been in operation since 1987 and is located near Magnolia, Arkansas, ("SMI Arkansas"). 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 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 650,000 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 and Slidell, Louisiana and Magnolia and Hope, Arkansas. 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 former Owen structural steel operations have historically been active in large projects such as high rise office towers, stadiums, convention centers, hospitals and other large jobs.
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. These recycling plants have an aggregate 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. Joist consumers
are construction contractors. 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 ten 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.
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 1996 year-end was approximately $195,779,000. Backlog at 1995 year-end was approximately $229,000,000.
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 31 metal recycling plants (excluding six such facilities operated by the CMC Steel Group as a part of the manufacturing segment) and Commercial Metals Railroad Salvage Company which dismantles and recovers steel rail, track components and other materials from obsolete or abandoned railroads.
The Company's metal recycling plants purchase ferrous and nonferrous secondary or scrap metals, 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 1,397,000 tons of scrap metal during 1996. Ferrous metals comprised the largest tonnage of metals recycled at approximately 1,199,000 tons approximately the same as the prior year, followed by approximately 199,000 tons compared to 208,000 in 1995, of non-ferrous metals, primarily aluminum, copper and stainless steel. The Company also purchased and sold an additional 182,000 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 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. Two additional shredders are operated by the manufacturing segment. 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.
Railroad materials, primarily steel rail, are obtained by Commercial Metals Railroad Salvage Company from dismantling work it performs on abandoned rail lines acquired from railroads. Business is largely dependent on the pace of railroad abandonments. Used rail may be sold for relaying as usable track, rerolling, primarily by the Steel Group's SMI Arkansas operation, or melting by steel mills.
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 commodities and 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; Englewood Cliffs, New Jersey; Los Angeles; Hurstville near Sydney, Australia; Singapore; Zug, Switzerland; Hong Kong, Tokyo, and Surrey, England. 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 commodity related 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 commodity 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 Australian operations just-in-time steel warehousing business for steel imports continued to expand during 1996.
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 obtained in the Owen acquisition should enable the Company to compete throughout the United States for large structural steel projects.
The Company believes the recycling segment is among the largest entities recycling nonferrous secondary metals and is also a major regional processor of ferrous scrap. 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.
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, financial strength, 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 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 cannot, 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 would 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 from liability for sales of those materials to the same manufacturers for use, often interchangeably, 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 1996, the Company incurred environmental costs including disposal, permit, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $10.4 million. The Company believes that it is in material compliance with currently applicable environmental laws and regulations and does not anticipate material capital expenditures for new environmental control facilities during 1997.
EMPLOYEES
As of October, 1996, the Company had approximately 6,700 employees. Approximately 5,360 were employed by the manufacturing segment, 1,030 by the recycling segment, 250 by the marketing and trading segment, 35 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.
ITEM 2.
ITEM 2. PROPERTIES
The SMI Texas steel minimill is located on approximately 571 acres of land owned by the Company. Facilities including buildings occupying approximately 688,000 square feet, are used for 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 112 acres, all owned, with buildings occupying approximately 350,000 square feet. The SMI Arkansas facility at Magnolia is located on approximately 104 acres with buildings occupying approximately 136,000 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 750 acres of land and lease approximately 50 acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia and North Carolina. 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 355 acres owned by the Company located at Austin, Beaumont, Dallas, Galveston, Houston, Lubbock, Odessa, Victoria and Vinton, all in Texas; as well as the Jacksonville, Lake City, Orlando, and Tampa, Florida; Chattanooga, Tennessee; Springfield, Missouri; and Burlington, North Carolina plants. It leases the real estate at Clute, Corpus Christi, Edinburg, Laredo and Midland, Texas; Ocala, Port Sutton (Tampa) and Casselberry, Florida; Shreveport, Louisiana, and East Ridge, Tennessee. The smaller of two locations at Beaumont and Victoria, Texas, are leased. The Fort Worth recycling plant is partially owned and partially leased. Several 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, 1996, to be paid during fiscal 1997 is approximately $3,380,000. 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, 1996, to be paid during fiscal 1997, is approximately $3,275,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of August 31, 1996, 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 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, Metcoa, 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 and approximately 200 other PRPs recently agreed to a consent decree which, pending court approval, will provide for remediation of the Metcoa Site with no penalty and estimated cost to the Company of approximately $115,000. The Company is contesting its designation as a PRP at NL/Taracorp Site and believes it has adequate defenses to any attempt by the EPA to impose fines in those matters.
In 1993, the Federal Energy Regulatory Commission entered an Order (the "FERC Order") affirming in part and reversing in part a 1989 decision and proposed order of a administrative law judge affirming in
part, reversing in part and remanding for further consideration a Remedial order issued in 1986 by the Department of Energy to RFB Petroleum, Inc. (RFB) and CMC Oil Company (CMC Oil), a wholly-owned subsidiary of Commercial Metals Company. The FERC Order finds CMC Oil liable for alleged overcharges constituting violations of crude oil reseller regulations arising from the purchase and sale of crude oil in alleged joint ventures between CMC Oil and RFB totaling approximately $1,330,000 plus interest from their occurrence (December, 1977, to January, 1979) as calculated under the Department of Energy's interest rate policy. Utilizing that interest calculation, interest accrued through August, 1996, is estimated to be approximately $6,000,000. CMC Oil filed a complaint in United States District Court seeking judicial review to have enforcement of the FERC Order enjoined and the government filed a counterclaim seeking enforcement. In November, 1994, the District Court entered a Final Order for restitution by CMC Oil of $1,330,399 plus interest to date of judgment as provided in the Order and post judgment interest thereafter at 6.48% per annum. CMC Oil appealed the judgment to the United States Court of Appeals for the Federal Circuit. In November, 1995, the Court of Appeals entered Judgment affirming the District Court's decision. That Judgment is now final and non-appealable. CMC Oil, which has been inactive since 1985, accrued the liability for the judgment on its books during 1995. CMC Oil does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company in connection with 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 intend to dispute liability as to most or all of these claims.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
PART II
ITEM 5.
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.
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 15, 1996, was approximately 2,542.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of selected consolidated financial information of the Company for the periods indicated:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED RESULTS (in millions except share data)
Significant events affecting the Company this year:
o Record revenues, earnings, earnings per share and cash flow.
o Steel Group reports record earnings and record tons melted and shipped.
o Secondary Metals has solid year completing the best three year period of operating profits.
o Marketing and trading operating profit up despite intense competition and global oversupply.
SEGMENTS
Revenues and operating profit by business segment are shown in the following table:
Manufacturing
The Manufacturing segment includes the CMC Steel Group and Howell Metal Company.
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.
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.
OUTLOOK
The positive operating outlook for fiscal 1997 is based on a continuation of internal improvements in all segments of CMC, although the inventory correction in steel and metals continues in Europe and the Pacific Rim.
In the United States construction markets are good, capital spending has softened but remains at a healthy level, and industrial output is steady. Moderate economic expansion should occur in most of the world, and there are signs of recovery in Japan and some further improvement in Mexico. European economies continue to struggle. Another challenge is that it appears new steel production capacity in Asia has been brought on stream too rapidly.
Over three-quarters of the Company's business is steel related; therefore, steel markets have a major effect on results, especially those in the U.S. On balance the Company's key steel markets should be relatively firm. Prices of nonferrous metals always are volatile and are expected to remain under pressure. A key will be steel and nonferrous metal consumption in the Pacific Rim. Ferrous scrap volume and prices should retain their underlying strength on account of the new electric furnaces requiring scrap. Domestic markets should continue to be stronger than those abroad.
The Steel Group is undertaking a three year computer technology migration that will touch every aspect of its business. At its conclusion, the Steel Group will have state of the art information systems. During fiscal 1997 an estimated $6.4 million will be incurred as the initial sites are brought onstream.
1995 COMPARED TO 1994
SEGMENTS
Manufacturing
On November 15, 1994, the Company completed its acquisition of Owen Steel Company, Inc. and related entities (SMI-Owen) headquartered in Columbia, SouthCarolina. The purchase price was approximately $50 million (payable one-half each in cash and common stock), subject to adjustments based upon the net worth of SMI-Owen and other factors. The Company also retired $32 million of Owen Steel Company, Inc. debt at closing. The acquisition was accounted for under the purchase method of accounting.
Propelled by nonresidential private construction and public construction, particularly highway work, the Manufacturing segment achieved record revenues and record operating profit.
Steel Group revenues were $840 million, an increase of 54% over last year. Operating profits increased 47% to $49.9 million with a 29% increase in tonnage shipped and a 19% increase in average prices. These record results were realized in spite of startup costs and initial losses at SMI-Owen and a pre-tax LIFO charge of $4.8 million.
The four mills produced record shipments of 1.5 million tons and operating profits increased 43%. SMI-Texas had a record year and SMI-Alabama achieved excellent performance from its new melt shop. SMI-Arkansas also had a good year. SMI-South Carolina incurred a slight loss before allocation of intercompany interest.
The steel fabrication companies shipped 564,000 tons representing a 62% increase. Operating profits rose not-withstanding a combined first year loss at the SMI-Owen fabricating plants.
Copper Tube Division operating profit increased 18% even though business was impacted by weaker single family housing construction and some industry overproduction of copper water tube. Shipments were up 9% approaching 50 million pounds.
Recycling
The Recycling segment (excludes six recycling plants in the CMCSteel Group), buoyed by a resounding second quarter, reported a 127% increase in operating profit compared to last year. At mid-year many product prices were at their highest levels since the robust period of the late 1980's. The second half of the year saw price declines but demand for steel scrap, copper, brass and aluminum remained strong with the usual volatility. The overall rise in prices resulted in a pre-tax LIFO charge of $3.8 million.
Ferrous shipments were about 1.2 million tons, an increase of 10% over the previous year. Nonferrous tonnage processed and shipped was 208,000 tons, up 32%. Good export demand augmented the domestic markets.
In August 1995, the Company acquired the operating assets of a small secondary metals operation in South Texas with two locations in Corpus Christi and one in Laredo. The
1995 COMPARED TO 1994 (CONTINUED):
Corpus Christi equipment was combined with the Company's location in Corpus Christi and the Company continued operations at the Laredo location. The acquisition was not significant to the consolidated Company.
Marketing and Trading
Operating profit (excluding financial services income) increased 8% on constant revenue with the prior year. Demand for nonferrous semis, primary metals, secondary metals and industrial raw materials remained strong, offsetting lower steel sales volume mainly due to the continued weak Chinese import market. Inter-Asia trading was active including exports from China. The weak U.S. dollar and strengthening local demand made sourcing in parts of Europe difficult and caused an increase in local general and administrative expenses. The segment had a pre-tax LIFO charge of $3.0 million. The operations of Enterprise Metal Corporation were consolidated into Commonwealth Metal Corporation.
Financial Services
During 1995 the Financial Services segment was merged with the Marketing and Trading segment in recognition of its greater emphasis on supporting internal Treasury activities instead of third party lending.
Corporate
Interest expense increased from$9.3 million in 1994 to $15.2 million in 1995. The principal cause was increased borrowing related to the financing of the Owen Steel Company acquisition.
As more fully discussed under Contingencies, CMCOil Company, a subsidiary of the Company, incurred a litigation accrual in connection with alleged overcharges for crude oil sales dating back to the 1970's.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations (before changes in operating assets and liabilities) for fiscal 1996 was an all time high for the Company. Record Company earnings and depreciation expense generated the cash flow.
Cash flow from operating activities was used to fund increases in accounts receivable primarily in the Marketing and Trading segment. Cash flow was provided by a decrease in inventories in all segments. Strong cash flow at year end enabled the Company to retire all short-term borrowings.
The Company settled contingencies related to the net worth purchase price calculation of Owen Steel Company, Inc. during fiscal 1996. The net worth adjustment resulted in the Company paying the former shareholders $3.2 million, half in cash and half in the Company's common stock.
Net working capital was $275 million as of August 31,1996 compared to $266 million last year. The current ratio was maintained at 2.0.
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 were renegotiated during the year. The new revolving credit agreement is less restrictive than the former covenants.
The Company's $100 million long-term notes issued in July 1995 are rated investment grade by Standard & Poor's Corporation and Fitch Investors Service, Inc. (BBB+) and by Moody's Investors Service (Baa2). As part of that issue, the Company has a shelf registration on file with the Securities and Exchange Commission for an additional $50 million of notes.
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, treasury shares and from short-term and long-term capital markets to meet anticipated working capital needs, planned capital expenditures, dividend payments to shareholders and to take advantage of new opportunities requiring capital.
Capital investments in property, plant and equipment were $48 million in 1996 compared to $39 million the prior year. Capital spending for fiscal 1997 is projected at $70 million of which $48 million will be invested in steel manufacturing, $1 million in copper tube, $15 million in recycling, and $6 million in marketing and trading. These expenditures are expected to be funded from internally generated funds.
Total capitalization was $503 million at the end of fiscal 1996. The ratio of long-term debt to capitalization was 29%, down from 33% last year. Stockholders' equity was $335 million or $22.20 per share. The Board of Directors has authorized the repurchase of the Company's common stock and at
August 31,1996, 710,074 shares remain authorized. During the fiscal year, the Company repurchased 557,600 shares of Company stock at an average cost of $24.15 per share. On August 31,1996, 1,037,000 treasury shares were held by the Company. There were 15.1 million shares outstanding at year end.
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 governmental 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 13 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 1996, the Company incurred environmental expense of $10.4 million. This included the cost to staff environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessment, remediation, consultant fees, baghouse dust removal and various other expenses. The Company estimates that approximately $1.8 million of its capital expenditures for fiscal 1996 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 31,1996 $8.4 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. The judgment and interest have been accrued in the financial statements of CMC Oil Company. CMC Oil (the subsidiary) does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company (the parent) in connection with this litigation. Commercial Metals Company will vigorously contest liability should any such claim be asserted.
DIVIDENDS
Quarterly cash dividends have been paid in each of the past 32 consecutive years. The annual dividend in 1996 was 48 cents a share paid at the rate of 12 cents each quarter. On September 16,1996 the Board of Directors increased the Company's regular quarterly cash dividend 8% to 13 cents per share.
ITEM 8.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTAL DATA (in thousands, except share data)
See notes to consolidated financial statements.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
See notes to consolidated financial statements
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See notes to consolidated financial statements.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AUGUST 31, 1996
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 commodities worldwide. As more fully discussed in footnote 13, 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 6. 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):
The Company will adopt Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" during fiscal 1997. Presently there are no known asset impairments and management, therefore, believes the statement should not have any significant impact.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to the classifications used in the current year.
2. ACQUISITION
After the November 15, 1994 acquisition of Owen Steel Company, Inc. and affiliates (Owen), the Company settled contingencies related to the net worth purchase price calculation and certain uncollected accounts receivable of Owen during fiscal 1996. The net worth adjustment resulted in the company paying the former shareholders $3.2 million, half in cash and half in the Company's # common stock, as a purchase price adjustment. The Company assigned certain uncollected accounts receivable to the former shareholders and was reimbursed $1.1 million. Under the acquisition agreement, the Company has until November 15, 1996 to present certain claims against the portion of the purchase price remaining in escrow which was approximately $4.4 million at August 31, 1996.
On April 30, 1996 the Company filed suit against the 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 totaling approximately $2.4 million paid subsequent to acquisition on exposures that existed at the acquisition date. The stockholder representatives have filed a response and counterclaims.
3. INVENTORIES
Before reduction of LIFO reserves of $29,844,000 and $34,255,000 at August 31, 1996 and 1995, respectively, inventories valued under the first-in, first-out method approximated replacement cost.
At August 31, 1996 and 1995, 79% and 86%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consist mainly of material dedicated to international business.
4. 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.
On July 26, 1995 the Company sold $100 million of investment grade, unsecured notes with a coupon rate of 7.20% in its initial entry into the long-term public debt market. After netting the proceeds of an interest rate hedge closed simultaneously with the pricing of the bonds, the effective interest rate is 7.04%. The shelf registration filed for the $100 million of notes also makes available an additional $50 million of securities which may be issued in the form of medium term notes.
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, 1996, are as follows (in thousands):
All interest is payable semiannually. The 7.20% notes are due in July 2005. 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, 1996, approximately $177,000,000 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, 1996 are (in thousands): 1997 - $11,494; 1998 - $11,480; 1999 - $11,457; 2000 - $9,284; 2001 - $7,143.
Interest expense is comprised of the following (in thousands):
Interest of $320,000, $149,000 and $1,176,000 was capitalized in the cost of property, plant and equipment constructed in 1996, 1995 and 1994, respectively. Interest of $16,467,000, $12,641,000, and $10,453,000 was paid in 1996, 1995 and 1994, respectively.
5. 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.
The notional amount of foreign currency exchange contracts outstanding at year end was $50,389,000. The fair value of these contracts effective as hedges is not significant. 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 only to hedge firm commitments, not anticipated transactions.
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, 1996, $34,719,000 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.
6. INCOME TAXES
The provisions for income taxes include the following (in thousands):
Taxes of $16,537,000, $21,000,000 and $14,736,000 were paid in 1996, 1995 and 1994, 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):
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 36.9% in 1996, 34.1% in 1995, and 36% in 1994. Reconciliations of the United States statutory rates to the effective rates are as follows:
During 1995, the Company resolved all issues for its returns through 1992. The settlement amount was negligible and as a result the Company credited income tax expense $1,350,000 during 1995. This is reflected in Other in the table above. The Company acquired Owen Steel Company,Inc. and sub-
sidiaries in a tax free merger transaction during 1995. As a result of this transaction, there are $19 million of 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 $15 million that are due to expire in 2008 and 2009, respectively. The $1.7 million alternative minimum tax credit is available indefinitely.
7. 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:
Stock Option Plans
The 1986 Stock Incentive Plan (Incentive Plan) was approved in November 1986 by the Board of Directors. Under the Incentive Plan, stock options and stock appreciation rights may be awarded to full-time salaried employees, including directors, of the Company. 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, and the options are exercisable two years from date of grant. The Incentive Plan also provides for issuance of common stock to eligible employees as performance awards for achievement of specified objectives. The Incentive Plan will terminate November 23, 1996, except as to awards outstanding. Annual activity of the Incentive Plan is as follows:
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.
8. 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 $13,394,000, $10,801,000, and $6,999,000, for 1996, 1995 and 1994, respectively.
One subsidiary maintains a defined benefit pension plan that covers substantially all its employees. Benefits are based on an employee's average monthly earnings and years of service. The contribution required for 1996 is not significant. Financial statement pension expense and related balance sheet and funded status are not significant.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT BENEFITS
The Company has no significant postretirement obligations other than pensions (see footnote 8). The Company's historical costs for postemployment benefits have not been significant and are not expected to be in the future.
10. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 1996, are as follows for the fiscal periods specified (in thousands):
Total rental expense was $7,834,000, $7,953,000 and $6,086,000 in 1996, 1995 and 1994, 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 CMC Oil Company, a subsidiary of the Company, is now a final, non-appealable order. The judgment and interest have been accrued in the financial statements of CMC Oil Company. CMC Oil (the subsidiary) does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company (the parent) in connection with this litigation.
11. 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 15,306,413, 15,151,072 and 14,956,479 in 1996, 1995 and 1994, respectively.
12. OTHER PAYABLES AND ACCRUED EXPENSES
13. 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):
Export sales from the Company's United States operations are as follows (in thousands):
The Company operates in three business segments, as indicated below. During 1995 the Financial Services segment was discontinued and its assets were merged with the Marketing and Trading segment. Intersegment sales generally are priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense.
13. BUSINESS SEGMENTS (CONTINUED):
*Interest expense of the Financial Services segment has been included in operating profit in the amount of $1,953 in 1994.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996, 1995 and 1994 are as follows (in thousands except per share data):
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. Fourth quarter 1995 and 1994 net earnings decreased $5,195,000 and $3,084,000, respectively, after the final determination of quantities and prices was made.
As discussed in footnote 6, there are credits to income tax expense of $1,350,000 ($1,000,000 in the first quarter and $350,000 in the fourth quarter) in 1995 resulting from the favorable resolution of tax issues with the Internal Revenue Service for years audited.
As discussed in footnote 10, CMC Oil Company recorded a nonrecurring net charge of $4.1 million in the first quarter of 1995 as a litigation accrual.
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, 1996 and 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP Dallas, Texas October 16, 1996
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No event reportable herein took place.
PART III
ITEM 10.
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 23, 1997, 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, 1996:
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. For five years prior to June, 1991, he had been employed by and was a partner when he left Deloitte & Touche LLP. 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. Director and Executive Officer Marvin Selig is the brother of Executive Officer Clyde P. Selig. There are no other family relationships among the officers of the registrant or among the Executive Officers and Directors.
ITEM 11.
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 23, 1997, which will be filed no later than 120 days after the close of the Registrant's fiscal year.
ITEM 12.
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 23, 1997, which will be filed no later than 120 days after the close of the Registrant's fiscal year.
ITEM 13.
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 23, 1997, which will be filed no later than 120 days after the close of the Registrant's fiscal year.
PART IV
ITEM 14.
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:
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 26, 1996
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:
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, 1996 and 1995, and for each of the three years in the period ended August 31, 1996, and have issued our report thereon dated October 16, 1996; such financial statements and report are included in your 1996 Annual Report to Stockholders which is included 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 consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas October 16, 1996
SCHEDULE VIII
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
( In thousands )
Allowance for collection losses deducted from notes and accounts receivable:
* 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. INDEX TO EXHIBITS