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Slide 1: This is the difference. C O M M E R C I A L M E TA L S C O M PA N Y 2 0 0 5 A N N U A L R E P O R T
Slide 2: NET SALES ($ billions) 6.6 7 6 4.8 5 4 2.9 2.5 2.5 3 2 1 0 01 02 03 04 05 0 NET EARNINGS ($ millions) 286 300 250 200 150 100 41 24 01 02 19 0 03 04 05 50 132
Slide 3: COMMERCIAL METALS COMPANY achieved unprecedented success in fiscal 2005. We achieved record net earnings. And record net sales. And for CMC, success is not a recent phenomenon. Fiscal 2005’s performance was achieved directly following the new records set in fiscal 2004. But despite years of consistent earnings (28 consecutive years of profitability), strong growth and extraordinary performance, we remain misunderstood in some quarters. A less committed company might throw up its arms and say, “What’s the difference? We can never persuade everyone to see we’re not a typical steel company.” Well, in this year’s report, we’ll tell you exactly what the difference is – what makes us distinct from other steel companies. And if not everyone understands, our committed investors do. For them, we have awarded quarterly cash dividends for 164 consecutive quarters. And we remain committed to increasing value for our shareholders now, purchasing over three million shares of CMC stock in 2005 and authorizing the purchase of two million more.
Slide 4: FINANCIAL HIGHLIGHTS Year ended August 31, (in thousands, except share data) 2005 2004 % Increase Net sales Net earnings Diluted earnings per share Net working capital Cash dividends per share Cash dividends paid Average diluted shares outstanding Stockholders’ equity Stockholders’ equity per share Total assets *Adjusted for January 2005 stock split. $ 6,592,697 285,781 4.63 808,975 0.23 13,652 61,690,087 899,561 15.47 2,332,922 $ 4,768,327 132,021 2.21 * 640,755 0.17 * 9,764 59,688,678 660,627 11.28 * 1,988,046 38 116 110 26 35 40 3 36 37 17 TONNAGES SHIPPED (short tons in thousands) 2005 2004 2003 2002 2001 Domestic steel mill rebar shipments Domestic steel mill structural and other shipments CMCZ shipments Total mill tons shipped Fab plant rebar shipments Fab plant structural, joist and post shipments Total fabrication tons shipped Domestic scrap metal tons processed and shipped 944 1,322 1,092 3,358 890 452 1,342 3,331 1,014 1,387 1,082 3,483 829 421 1,250 3,411 1,007 1,277 — 2,284 611 365 976 2,811 971 1,200 — 2,171 521 425 946 2,568 833 1,070 — 1,903 497 451 948 2,308 TABLE OF CONTENTS Commercial Metals Company and subsidiaries manufacture, recycle and market steel and metal products, related materials and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, a copper tube mill, metal recycling facilities and marketing and distribution offices in the United States and in strategic overseas markets. 15 Domestic Mills 19 CMCZ 23 Domestic Fabrication 27 Recycling 31 Marketing & Distribution 83 Operations 85 Divisions and Subsidiaries
Slide 5: TO OU R STOC KHOLDE RS For the year ended August 31, 2005, your Company reported record annual net earnings per diluted share of $4.63 and record net earnings of $286 million on net sales of $6.6 billion. This compares with net earnings per diluted share of $2.21 and net earnings of $132 million on net sales of $4.8 billion last year. The current year included a pre-tax LIFO expense of $19.3 million ($0.20 per diluted share) compared with a pre-tax LIFO expense of $74.8 million ($0.81 per diluted share) in the previous year. The current year included as well pre-tax income of $20.1 million resulting from the settlement of the business interruption claims for the previously reported transformer failures at the Texas and South Carolina steel minimills. The effective tax rate for fiscal 2005 increased to 35.7% because of a shift in segment operating income. The net income return on beginning equity was 43%. We had thought that fiscal 2004 was a phenomenal year, only to be surpassed by an even more remarkable fiscal 2005. We continued to benefit from the favorable market conditions for most of our businesses and achieved excellent performance in the Domestic Mills, Domestic Fabrication, Recycling, and Marketing & Distribution segments. Meanwhile, results for our Polish steel manufacturing operation, CMC Zawiercie (CMCZ), while off sharply for the year, began to improve during the fourth quarter. Some of our markets were highly volatile, especially ferrous scrap, but on balance remained relatively strong, although generally not as robust in the second half of the fiscal year. There is no question that the wind remained at our back during much of this past year. But just as surely, as we have well demonstrated over the past two years, our longenacted strategy of vertical integration and diversification, the very strategy which has helped us profitably weather challenging market climates, has placed us in a position to reap maximum benefits from positive circumstances as well. Moreover, we again managed successfully the very large price swings in our markets. The theme of this year’s annual report is why CMC is different from other companies in the steel and metals sectors: differences in strategy, business mix, performance and financial strength. Domestic Mills In fiscal 2005, we far exceeded the very good performance of fiscal 2004, led by the four domestic steel minimills. Although production and shipping levels were lower than the prior year, we benefited from record-high metal margins. End-user demand generally was good, but it is important to note that our inventory management was excellent in a steel market in which many buyers were reducing their own inventories during a good part of the year. Segment adjusted operating profit of $217 million in fiscal 2005 was over 2.5 times the $84.2 million recorded in fiscal 2004. This year’s increase in the LIFO reserve was $8.2 million compared with $29.5 million last year. This year included as well the income from the business interruption insurance claims. Within the segment, adjusted operating profit of $212 million this year for the steel minimills compared with $75.1 million the prior year. On a year-to-year basis, tonnage melted was down 4% to 2.17 million tons; tonnage rolled was 2.02 million tons, 8% below last year; and shipments decreased 6% to 2.27 million tons. Our average total mill selling price of $473 per ton was $94 per ton above last year, while the average ferrous scrap purchase price rose by $22 per ton to $171 per ton. The FIFO metal margin increased $59 per ton to $274 per ton. Meanwhile, utility costs for fiscal 2005 increased by only 1% due to a decrease in usage which more than offset higher electricity rates and natural gas prices. Cost of supplies were up, especially alloys. The net result, though, was considerably higher profitability. The copper tube mill recorded an adjusted operating profit of $5.1 million versus last year’s $9.0 million. While end-use markets overall were strong, the copper tube market was impacted by additional plastics substitution and consolidation among buyers of plumbing tube. In addition, the market for industrial tube was affected by the relocation of air conditioning manufacturers abroad, we believe leading to increased production and supply of plumbing tube. FIFO metal margins for the year declined by 8 cents per pound to 64 cents per pound because higher copper tube prices could not offset the sharp rise in the underlying copper scrap price; however, spreads were improving as we moved into the new year. 3
Slide 6: 2005 N ET SALES Domestic Mills 18% CMCZ 7% Domestic Fabrication 21% Recycling 13% Marketing 41% 2005 EARNINGS B E F O R E I N C O M E TA X E S Domestic Mills 45% CMCZ (1)% Domestic Fabrication 24% Recycling 15% Marketing 17% 2 0 0 5 C A P I TA L EXPENDITURES Domestic Mills 43% CMCZ 21% Domestic Fabrication 24% Recycling 10% Marketing 2% 2 0 0 5 D E P R E C I AT I O N A N D A M O R T I Z AT I O N Domestic Mills 45% CMCZ 23% Domestic Fabrication 18% Recycling 10% Marketing 4%
Slide 7: For the year, copper tube production decreased 6% to 62.0 million pounds, while shipments declined 3% to 66.6 million pounds. CMCZ After a string of outstanding quarters since the acquisition in December 2003, results turned sharply downward in the second and third quarters of fiscal 2005. Although results had improved by the fourth quarter, the year was essentially breakeven. Major adverse factors were a severe winter slowing construction in Poland; spillover from weak construction activity in Western Europe, especially Germany; and the stronger Polish Zloty which greatly limited exports. For the year, the segment recorded an adjusted operating loss of $188 thousand on net sales of $478 million compared with an adjusted operating profit of $69.3 million (on a 100% owned basis) for only nine months of ownership in fiscal 2004. This year tons melted were 1.10 million, rolled tons equaled 871 thousand, and shipments totaled 1.09 million tons. For the prior year period, which encompassed only the nine months, the numbers were 1.16 million, 863 thousand, and 1.08 million tons, respectively. As an example of the impact on the steel market, the rebar price dropped in half from its peak of fiscal 2004 to its nadir in fiscal 2005. Meanwhile, the average selling price for the year fell to PLN 1,376 per ton from PLN 1,466 per ton, while the average scrap purchase cost decreased to PLN 650 per ton from PLN 690 per ton. The resultant metal margin fell 17% from PLN 705 per ton to PLN 586 per ton. On a positive note, operating levels and shipments improved significantly in the fourth quarter over the third quarter of this fiscal year. We continued to implement our basic strategy for CMCZ, which is to follow the vertical integration model that has been so successful for us in North America. The lead capital project is the installation of a scrap mega-shredder on the mill site, which is expected to start up during December 2005. During the latter part of last fiscal year, we took internal measures to improve our scrap procurement and steel marketing efficiency and effectiveness which will benefit us going forward. Other objectives include improved yields, reduced unit costs, and a broadened product line. Domestic Fabrication As we expected, our downstream businesses achieved outstanding results that were even better than we had anticipated. Our primary, non-residential construction markets, both private and public, were active and generally improving throughout the year. Adjusted operating profit was up exponentially to $118 million, compared with $7.3 million in fiscal 2004. LIFO expense this year was $6.6 million versus $26.3 million last year. Clearly, we benefited from a number of acquisitions made over the past several years along with organic growth. Shipments from our fab plants totaled 1.34 million tons, 7% above fiscal 2004. The composite average fab selling price (excluding stock and buyouts) rose by $224 per ton or 36% to $850 per ton. Within this segment, prices were higher across-theboard and volumes within the segment were mostly higher. All product areas – rebar fabrication, constructionrelated products (CRP), steel fence post fabrication, steel joist manufacturing, cellular beam fabrication, structural steel fabrication, and heat treating – participated in the improved profitability. Indeed, it was a record year for several of the divisions. Two acquisitions during the year added to our downstream capability in the western United States: in November 2004, another rebar fabrication facility in southern California and in August 2005, a joist manufacturing facility in Juarez, Mexico. Recycling It was another splendid year for CMC Recycling with profitability exceeding last year’s record. Once again we managed through tremendous volatility in the ferrous scrap market. The ferrous market remained relatively strong during the first half of the year, but declined sharply during the second half, although the market was rising again as the year concluded. Conversely, nonferrous markets remained strong throughout the fiscal year, thereby mitigating the effect of the weaker ferrous markets. Adjusted operating profit for fiscal 2005 was $70.8 million on net sales of $897 million compared with fiscal 2004’s adjusted operating profit of $67.9 million on net sales of $774 million. This year’s LIFO expense was $3.0 million versus an expense of $5.2 million the prior year. 5
Slide 8: Versus last year, the average ferrous scrap sales price increased by 8% to $186 per ton, whereas shipments fell 5% to 1.87 million tons. The average nonferrous scrap sales price for the year was approximately 18% above a year ago, while shipments were 13% higher at 292 thousand tons. The total volume of domestic scrap processed, including all our domestic processing plants, equaled 3.33 million tons against 3.41 million tons last year. Marketing & Distribution It was another record year for this segment in fiscal 2005 following an outstanding fiscal 2004, reflecting broadbased, robust sales and higher gross margins. Business conditions in most of our markets were favorable. While China continued to be a significant factor in our growth and a contributor to strong markets, we were able in all of our divisions to increase volume in existing product lines and to diversify into new products and source or sell in new markets. Important market areas for us included the U.S., China, other Asia, Australia, Germany, U.K., and Central Europe. Each of our divisions in the segment recorded a higher profit. Adjusted operating profit for this segment in fiscal 2005 equaled $90.4 million, which compared with $39.4 million in fiscal 2004. LIFO expense was $1.5 million this year against an expense of $13.8 million last year. Profitability was broad based with further profit increases in virtually all product lines, including steel, ores and minerals, ferroalloys, and nonferrous semis. Our value-added downstream processing businesses continued to generate solid profits in the current year, even higher than the previous fiscal year. Financial Condition/Stock Dividend Our financial position remained strong. At year end, long-term debt as a percentage of total capitalization was 29%, and the ratio of total debt to total capitalization plus short-term debt was 30%. Both ratios include the debt of CMCZ which has recourse only to the assets of CMCZ. Our working capital was $809 million, and the current ratio was 1.9. Our coverage ratios were strong. On November 22, 2004, the Company announced a two-for-one stock split in the form of a 100% stock dividend on the Company’s common stock payable January 10, 2005, to shareholders of record December 13, 2004, and announced a new quarterly cash dividend of 6 cents per share on the increased number of shares resulting from the stock dividend. The effect of the stock dividend combined with the new cash dividend rate resulted in stockholders receiving a 20% increase in cash dividend payments. During the third quarter we entered into a new $400 million, 5-year revolving credit facility backing our commercial paper program. The new facility is larger, has a longer tenure, less restrictive covenant tests, and lower costs than the former facility. During the year we repurchased 3.04 million shares of the Company’s common stock at an average price of $25.36 per share. Fiscal 2006 Capital Plan Capital spending for fiscal 2005 totaled $123 million, below plan because of the timing of certain projects. The fiscal 2006 capital plan envisions expenditures of $178 million. About $68 million, or 38%, represents carryover projects. The new plan is targeting improvements in raw material procurement, supply chain management, value-added opportunities, operating efficiencies, product mix management, product and market development, quality and safety enhancements, improved systems, and further transportation capabilities. Near-Term Outlook Four key assumptions for fiscal 2006 are: 1) The U.S. economy will remain strong, and nonresidential construction will continue to improve; 2) China will continue with economic growth of 8-9% per annum and the rest of Australia/Asia will do well economically; 3) Non-residential construction in Poland and the surrounding areas will accelerate; and 4) The U.S. dollar will not strengthen materially. We are optimistic for fiscal 2006, although we must be wary of the dampening effect of inflationary pressures on the global economy, the decline in consumer confidence in the U.S., and significantly increased energy costs for our operations. Still, the U.S. economy, in particular, has proved to be quite resilient and entered September 2005 with significant momentum in the manufacturing and construction sectors. Additionally, by the end of our fiscal year it appeared that the issue of excess inventories in the steel supply chain had been worked through in most markets. The passage of the multi-year transportation bill in the United States during August 2005 was especially favorable. We are also anticipating some steel demand 6
Slide 9: pickup in Asia and Europe, although increased availability will have a moderating effect on prices, and we must be concerned about apparent Chinese overproduction in certain product areas. An especially important factor going forward is the impact of Hurricanes Katrina and Rita on our industry sectors and CMC specifically. We have experienced some short-term disruptions to our Gulf Coast operations and markets, including some power outages and transportation difficulties, but overall effects are not major. Moreover, medium-term and longer-term effects should be extremely positive because of substantially increased demolition and recycled metals and the consequent reconstruction requirements in the United States Gulf area. By segment, we anticipate in the first quarter continued strong performance from Domestic Mills and Domestic Fabrication, a slight profit turnaround at CMCZ (including scheduled major maintenance), and good results in Recycling and Marketing & Distribution. Long-Term Outlook Major structural changes have occurred in our various industry sectors, including globalization, consolidation, and rapidly growing per capita consumption in some key developing countries, led by the explosive growth in China. It is true that production has grown as well, but we believe that expansion going forward will be prudent, yielding a favorable supply/demand situation. Global infrastructure spending should be a key demand driver, including the United States and Central Europe. We expect to see continued upward pressure on steel and nonferrous input costs, but supply and product prices will adjust and enable us to maintain relatively high metal spreads and strong shipping levels along the supply chain. Ingredients for Success We have often said that two main criteria for success are people and markets. These last two unprecedented years, and the more challenging year preceding them, are a testimonial to the men and women of CMC and the organization they have built. Cautionary Statement This letter to stockholders contains forward-looking statements regarding the outlook for the Company’s financial results including net earnings, product pricing and demand, production rates, energy expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements generally can be identified by phrases such as the company or its management “expect,” “anticipates,” “believe,” “ought,” “should,” “likely,” “appears,” “projected,” “forecast,” “presumes,” “will,” or other words or phrases of similar impact. 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 energy and supply prices, interest rate changes, construction activity, difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes, metals pricing over which the Company exerts little influence, increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, court decisions, industry consolidation or changes in production capacity or utilization, global factors including political and military uncertainties, credit availability, currency fluctuations and decisions by governments impacting the level of steel imports and pace of overall economic activity, particularly China. Stanley A. Rabin Chairman, President and Chief Executive Officer November 11, 2005 7
Slide 10: WHAT MAKES CMC DIFFERENT? IT’S A LONG STORY. FOCUS ON LONG PRODUCTS At CMC, our steel production is primarily in 8 long products–such as reinforcing bars and merchant bars–that are typically used in construction, a market that remains poised for growth worldwide. We do not produce flat rolled products. 8
Slide 12: WHAT MAKES C MC DIFFERENT? WE DO MORE. IN MORE PLACES. WHAT MAKES CMC DIFFERENT? LOTS OF IRONS IN LOTS OF FIRES. DIVERSIFICATION Unlike other companies in the industry, CMC doesn’t just 10 manufacture steel, with fortunes rising or falling based on one segment. We also manufacture copper tubing; we process ferrous and nonferrous scrap; we have diversified geographically, operating the second largest steel producing plant in Poland; we operate many fabrication plants, construction-related product warehouses, and a heat treating plant in the U.S.; and we globally market, distribute and process primary and secondary metals and other related raw materials and products through a global network of marketing and distribution offices, processing facilities and other joint ventures. 10
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Slide 14: WHAT MAKES CMC DIFFERENT? MAKING THE GRADE. FINANCIAL STRENGTH CMC’s sound management and commitment to 12 being an efficient, high-quality, low-cost producer have led to more than a quarter century of consistent profitability and financial stability. We are one of the very few companies in the steel industry to have earned and maintained an investment grade public debt rating. 12
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Slide 16: The Domestic Mills segment consists of four steel minimills with a capacity of 2.4 million tons, and a copper tube mill with a capacity of 80 million pounds. Steel minimill products include structurals, reinforcing bars, angles, channels and beams. The copper tube mill produces copper water tube and air conditioning and refrigeration tubing.
Slide 17: DOM ESTIC M I LLS Steel Minimills and Scrap Operations Fiscal 2005 was another record year for our domestic steel minimills and scrap operations. Although fiscal 2005 mill shipments were down and revenue was relatively flat versus a year ago, net earnings for the mills showed impressive improvement versus last year. The strong profit performance was due to an outstanding effort in safety, productivity improvements, providing quality products to serve the needs of our customers, and reduced pressure from imported steel. Rapid escalation of raw material, energy, and transportation costs were moderated by aggressive cost management. The ebb and flow of market demand in fiscal 2005 was very challenging and resulted in lower shipments in the last half of the year. The settlement of business interruption insurance claims associated with transformer outages in fiscal 2004 softened the impact of reduced shipments on the bottom line. Attention to working capital resulted in increased cash flow during the year. The fiscal year ended with significant upturn in shipments and bookings at all four mills boding a good start to fiscal 2006. CMC Steel Texas set all time records for revenues and net earnings despite a slight reduction in shipments. The Texas highway building program provided good business opportunities for the Seguin mill. A new automatic stacker/bundler was installed in fiscal 2005 that will reduce packaging cost and improve the aesthetics of the steel bundles. Construction of a state-of-theart continuous caster was initiated and is targeted for completion and start up in early calendar 2006. Once online, the caster will provide increased capacity and enable the plant to serve the needs of more demanding quality markets. CMC Steel South Carolina also enjoyed an all-time record year in sales revenue and net earnings. Cost management, improved productivity, enhanced yield and improved market pricing contributed to the strong earnings performance. The installation of a new and larger electric arc furnace transformer and expansion of the bag house increased steel melting capacity. The steel 15
Slide 18: Steel Manufacturing Recycling Copper Tube Manufacturing DOM ESTIC M I LLS 2005 N ET SAL E S 2005 EAR N I NGS B E F O R E I N C O M E TA X E S 2 0 0 5 C A P I TA L EXP E N DITU R ES Domestic Mills 18% Rest of CMC 82% Domestic Mills 45% Rest of CMC 55% Domestic Mills 43% Rest of CMC 57% 16
Slide 19: bundling system was upgraded, and a shipping bay was enlarged to double its storage capacity and was also converted to a climate controlled facility to meet the market needs for rust free steel. Our scrap operations had a truly outstanding year with commendable improvement in shipments and net earnings compared to last year. CMC Steel Arkansas turned in another solid performance in spite of CMC STEEL MILLS (tons in millions) 2.4 2.0 1.6 1.2 0.8 0.4 0 03 04 05 2.3 2.1 2.0 2.4 2.3 2.2 2.3 2.2 2.0 rising raw material, energy and transportation costs. Although volume declined, the majority of cost increases were recovered in increased selling prices. Cost management, improved conversion costs, quality production and an excellent safety performance allowed an improvement in earnings for the year. Melted Rolled Shipped CMC Steel Alabama recorded improvement in revenue and net earnings on shipments that were essentially the same as last year. Productivity improved significantly and the plant achieved a higher level of consistency in all steelmaking operations. A new scrap yard was established in Birmingham to supply the plant. The new facility will improve scrap flow, reduce congestion inside the plant and improve scrap handling costs. Land adjacent to the mill was purchased in preparation for constructing a new plant entrance. The new entrance and improved traffic flow will reduce congestion outside the plant and reduce truck waiting time for loading. Our continued focus on people, effective sourcing of raw materials and utilization of modern equipment and methods in all operations should provide for continued productivity improvements and profitability in the future. CMC COPPER TUBING (pounds in millions) 90 75 60 45 30 15 0 03 04 05 Copper Tube Mill Howell Metal Company manufactures copper tubing for the plumbing, air conditioning, and refrigeration industries. This fully integrated copper minimill utilizes primarily secondary copper in the manufacturing process. The copper is melted, cast, extruded and drawn into water and refrigeration tubing. Howell’s fleet of company operated trucks provides service to our customers east of the Rockies. Howell’s rolling stock is unique to the industry, providing an unparalleled level of service to our customers. Our marketing efforts and specialized deliveries allow Howell to sell the capacity of the mill. During fiscal 2005, Comex copper values moved dramatically higher, 75.0 61.9 60.7 73.1 68.4 66.3 XX.X 66.6 62.0 Produced Shipped reaching their highest levels in contract history. Howell was challenged to keep pace with material purchase price increases while maintaining profits. Foreign competitors are non-existent in water tubing due to the strong U.S. dollar. Plastic tubing has made inroads in material substitution, but is now experiencing the same raw material price increases affecting copper. The price of oil and natural gas could stay at elevated levels for years while copper is anticipated to return to normal trading levels next year as more production becomes available. 17
Slide 20: CMC Zawiercie S.A. (CMCZ), located in Zawiercie, Poland, is the second largest steel producer in Poland with a capacity of 1.1 million tons. It manufactures rebar and wire rod.
Slide 21: CMCZ Our steel minimill in Central Europe, CMC Zawiercie, S.A., finalized its first full year under CMC ownership with production of over one million tons of melted steel and shipments of over one million tons of finished goods and semis. CMCZ, Poland’s second largest steel producer, maintained its strong position in rebar, wire rod, and merchant bar. CMCZ continues to differentiate itself through vertical integration. With the acquisition of the mill in December 2003, we entered the Polish recycling business, and our expansion plans in downstream operations will give us the added support of captive sales tonnage throughout the year. Steel Minimill Poland’s economic growth and healthy demand in the construction industry maintained sales at the one million ton mark. At the same time, the year was much different compared to the previous record nine month period. Recent privatizations in Poland consolidated the industry with an increase in competitiveness in our markets. By historical standards, Poland suffered a harsh winter, which in any case leads to more severe seasonality than with our domestic mills. Customer overstocking in 2004 led to reduced purchasing throughout much of 2005. The strength of the Polish currency against both the Euro and the U.S. dollar limited our ability to continue our export sales and had just the reverse effect – encouraging imports from neighboring markets into Poland. The delay in demand finally broke in early summer with improved results in the fourth quarter. Our employees are our most valuable assets and their safety is our top priority – safety first. We sharpened our focus on human resource development. We consider our technical skills and the experience of our production employees to be first rate. The local management team has been strengthened by both internal promotions and selected outside talent in the areas of scrap procurement, raw material purchasing, sales, and human resources. Additionally, we have seconded resources from our Domestic Mills, Recycling, and Marketing & Distribution segments. CMC constantly strives to improve the communities in which it operates and to be a good neighbor. We have dedicated significant resources to environmental improvements this year and have further projects for the coming year. 19
Slide 22: Steel Manufacturing Recycling CMCZ 2005 N ET SAL E S 2005 EAR N I NGS B E F O R E I N C O M E TA X E S 2 0 0 5 C A P I TA L EXP E N DITU R ES CMCZ Mills 7% Rest of CMC 93% CMCZ (1)% Rest of CMC 101% CMCZ 21% Rest of CMC 79% 20
Slide 23: Poland’s accession to the European Union in May 2004 confirmed our sales strategy – ours is a regional market, steel is a world commodity, and borders are not limiting factors. Our goal is to focus on end-user markets and bring a spectrum of products for our customers. In cooperation with our Marketing & Distribution segment, we have expanded our sales reach and have added agents in markets of interest. We have completed certification for our products in specific European markets which should boost sales in coming years. Technological innovation is key for our success. Capital expenditures already committed in areas of furnace burners, caster modernization, reheat furnace upgrade and slitting technology have brought improvements in CMCZ STEEL MILLS (tons in millions) 1.4 1.2 1.1 0.9 1.1 1.1 0.9 1.2 1.0 0.8 0.6 0.4 0.2 0 04 05 Melted Rolled Shipped costs, increased production capabilities and added new products to our mix. Further improvements will be made this year while working in conjunction with the technical expertise from our Domestic Mills segment. Recycling Our vertical integration upstream in scrap and downstream in value added, which has been so successful domestically, is being replicated in Poland. The tremendous volatility in scrap prices further confirms our strategy of control of our most significant raw material cost. Currently our two main and five feeder scrap yards generate about 30% of the mill’s needs. We operate one 2000 horsepower shredder in Herby, located about thirty miles from the mill, and are focused on improvements to infrastructure and equipment with the goal to increase our percentage of captive scrap. The most exciting development in our upstream strategy is the construction of a new 8000 horsepower shredder located at the mill. Commissioning will occur in fiscal 2006 and will substantially improve the quality of our scrap feed, leading to cleaner melting, higher yield, reduced energy and electrode usage and lower unit costs. Downstream Operations We have identified market opportunities for cut and bent rebar in the Polish market. We are pursuing a greenfield operation in cooperation with our Domestic Fabrication segment, which will start up this coming fiscal year. Further opportunities in both rebar fabrication and mesh production will be explored. Outlook The outlook remains positive. Poland’s economy and surrounding markets are growing at rates between 4% and 5% each year. Output in our main end-use market – construction – is expanding at even greater rates. Many infrastructure projects are underway or under development. With our vertical integration strategy, we intend to capture profit opportunities at various levels of the supply chain. 21
Slide 24: The Domestic Fabrication segment is comprised of rebar and structural fabrication plants, joist plants, a cellular beam fabricator, fence post manufacturing plants, a heat treating plant and construction-related product warehouses. Capacity exceeds 1.4 million tons.
Slide 25: D O M E S T I C FA B R I C AT I O N This segment includes a wide range of downstream, value-added operations. Fabrication and construction-related products operations continued to expand through acquisition and internal growth. We refined our business portfolio by selling our railcar repair business. Regional manager positions were established to speed decision making, improve coordination, and enhance customer service. Certain administrative functions were centralized to improve control and reduce costs. Rebar Fabrication Record shipments and net earnings were achieved in our rebar fabrication division due to increased demand and improved selling prices. Fiscal 2005 resulted in profitability turnarounds for recent acquisitions in Arizona and Texas due to increased sales, improved shop efficiencies and enhanced margins. West coast operations that included rebar placing business set net earnings records as they benefited from improved job execution and expanded markets. C&M Steel successfully acquired the assets of J.L. Davidson Steel Company and, with a larger facility, enjoyed greater sales and strong profits. E.L. Wills expanded its geographical coverage by establishing a new sales office in the San Francisco Bay area. The Lofland shops were successfully integrated into the segment and recorded a significant financial turnaround. The east coast region, led by the Florida shops, also registered record earnings. Bidding activity remains active in all regions for both highway and commercial projects. 23
Slide 26: Steel Fabrication Steel Joist Plants Fence Post Manufacturing Rail S alvage Construction-Related Products Warehousing Heat Treating Cellular Beam Fabrication D O M E S T I C FA B R I C AT I O N 2005 N ET SAL E S 2005 EAR N I NGS B E F O R E I N C O M E TA X E S 2 0 0 5 C A P I TA L EXP E N DITU R ES Domestic Fabrication 21% Rest of CMC 79% Domestic Fabrication 24% Rest of CMC 76% Domestic Fabrication 24% Rest of CMC 76% 24
Slide 27: Joist Excellent customer service, outstanding on-time shipment performance and improved market pricing contributed to a significant improvement in the joist division’s bottom line. Record shipments and net earnings were recorded in both the joist and special steel products operations. Market acceptance by architects and engineers of castellated and cellular beams gained momentum in fiscal 2005, and a second plant was reopened in the east to better serve the growing demand for the products. We successfully completed the acquisition of a joist plant in Juarez, Mexico, to enhance service in the western U.S. and participation in the Mexican market. We initiated the consolidation of two joist plants in South Carolina to reduce cost, improve efficiency and enhance delivery logistics. Construction- Related Products (C R P) The CRP division reported another record year with a significant increase in revenues and a robust improvement in annual net earnings. Earnings were driven by strong market demand and increased sales associated with serving new markets. New branch locations were established in Dallas and El Paso, Texas. A foundation for enhanced merchandising of our product lines was laid by renovations in our store fronts and showrooms at a number of locations. We continued to expand our shoring and bracing business as well as our sales of light equipment. Other Value-Added Businesses Impact Metals Products’ heat treating and distribution business continued to deliver impressive growth. Sales revenue registered double digit growth, and net earnings more than doubled in fiscal 2005. The unit continues to provide the potential for significant growth by leveraging the strengths of the Company’s steel mills, CMC’s international contacts and excellent third-party relationships with other domestic mills. The structural division’s net sales and earnings were up significantly for the year on about the same volume as last year. Improved market demand and a focus on higher margin jobs proved to be a winning combination. The division acquired Kilroy Steel, a structural steel fabricator located in Cleveland, Ohio, to capitalize on business opportunities in the region. Southern Post Company, the four location fence post manufacturing business, enjoyed an increase in net sales and earnings for the year, but saw a significant decline in shipments. The decline was primarily due to customer hedge buying in late fiscal 2004 as post prices increased due to rapid escalation in raw material costs. Shipments in fiscal 2005 declined as customers focused on reducing their inventory. The Company introduced a new product, trellis angles, to expand its offering to the vineyard business. 25
Slide 28: The Recycling segment is one of the country’s largest processors of nonferrous scrap metals and one of the largest regional processors of ferrous scrap metals. Nonferrous scrap processing capacity is 530,000 tons; ferrous scrap processing capacity is 3.0 million tons.
Slide 29: R E C YC L I N G C MC Recycling CMC Recycling (CMCR) had another truly remarkable year in 2005. Following a record-shattering performance last year, 2005 net sales were 16% higher, and adjusted operating profit was within 4% of last year’s unprecedented mark. Grounded by our core operating values and strong commitment to dealing with both consumers and suppliers with respect and integrity, CMCR’s success this year resulted from being prepared to take advantage of favorable markets. New records were established for net sales at $897 million, while total tons processed and shipped decreased slightly from 2.24 million tons in 2004 to 2.17 million tons this year. Our plants processed and shipped 1.87 million tons of ferrous scrap compared to 1.98 million tons in 2004. In 2005, nonferrous shipments totaled 584 million pounds, 13% higher than last year, with an additional 25 million pounds shipped by CMCR from other sources. On an FOB basis, ferrous prices rose another 8% over last year’s record levels to $186 per short ton. Total nonferrous prices were 18% above 2004 levels at $82 per cwt. All-time high copper and stainless steel prices in 2005, as well as a consistently strong aluminum market, contributed to this increase. Higher earnings were reported by two of our four operating regions and the National Accounts group. Both the South Texas region and National Accounts reported significant volume increases. The impressive growth of the National Accounts program continued in 2005 as new multi-plant service contracts were signed with Cemex, Waste Management, Hirschfeld Steel and Carolina Steel. With new executive leadership in place after the retirement of long-time divisional president Harry Heinkele in September 2004, operational changes in 2005 included the naming of a Vice President of International Development to focus CMCR’s continuing efforts in an increasingly global market. A Beijing-based sales manager and support staff have also been hired to enhance our growing business in China, and we are looking to make additional inroads in the expanding Pacific Rim and South Asian markets. China continues to exert a major influence on our business 27
Slide 30: Recycling Feeder Yards R E C YC L I N G 2005 N ET SAL E S 2005 EAR N I NGS B E F O R E I N C O M E TA X E S 2 0 0 5 C A P I TA L EXP E N DITU R ES Recycling 13% Rest of CMC 87% Recycling 15% Rest of CMC 85% Recycling 10% Rest of CMC 90% 28
Slide 31: and remains a prime mover in the direction taken by new steel and ferrous scrap prices. This market is our major outlet for low-grade, nonferrous metals and is increasingly important to our copper, brass and aluminum marketing effort. As we continue to sell both ferrous and nonferrous products in Mexico, we are also directly contacting U.S. and Mexican-based manufacturers doing business along our border and in the interior of Mexico. We now secure scrap from industrial suppliers in twenty-four locations within a few hundred miles of our yards in Laredo, Corpus Christi and El Paso, Texas. Over 12 million pounds of nonferrous scrap were procured through this effort in 2005. We also seek to expand our opportunities to both source and sell nonferrous scrap in Central and South America and various islands in the Caribbean. A new position, Vice President for Strategic Sourcing, was established in 2005 to facilitate the pooling of supply and equipment purchases for all of our yards and, when applicable, for other CMC divisions as well. The cost savings generated by the purchasing leverage of such a program will be of great importance as operating costs continue to escalate – especially in the areas of transportation and energy. To date, national supply agreements have been signed with such entities as Asko Blades, Office Depot, Caterpillar, Toyota, Linde and several telecommunications providers, and negotiations are ongoing with numerous other suppliers. Another recent divisional staff addition is the position of Manager of Human Resources. In 2006 and beyond, we anticipate that the resulting improvement and streamlining of our staffing, training and personnel services functions will greatly enhance employee performance. As we enter 2006, we believe global economic conditions are in place for a third consecutive outstanding year for the recycling industry, though perhaps at a slightly reduced pace than in 2004 and 2005. Worldwide per capita consumption of steel and other hard and soft commodities in 2006 is expected to proceed at a rate allowing for steady demand and pricing for both our ferrous and nonferrous products. Potential stumbling blocks include higher energy costs, significant downturns in the domestic housing, transportation and construction sectors, rising inflation and interest rates and currency fluctuations; but the occurrence of one of these alone would not change the outlook. It would take a combination of negative influences, or some unanticipated international event, to keep CMCR from enjoying another excellent year. 29
Slide 32: The Marketing & Distribution segment is a physical business which markets, distributes and processes primary and secondary metals, steels, ores, concentrates, industrial minerals, ferroalloys, chemicals and industrial products through a global network of marketing and distribution offices, processing facilities and other joint ventures.
Slide 33: MAR KETI NG & DISTR I B UTION Marketing & Distribution CMC’s Marketing & Distribution segment markets steel, nonferrous semis, primary and secondary metals, and industrial raw materials through a network of marketing offices, processing facilities, and other investments and joint ventures around the world. We thought that fiscal 2004 was an outstanding year, but fiscal 2005 exceeded all expectations. All our divisions – Cometals, Commonwealth Metal, Dallas Trading and the International Division – had record performances, both in sales and gross margin. Economic conditions in most of our markets were favorable. China continued to be a significant factor for the growth of our business and a major reason for the increases in prices of the products we market. In all our divisions we were able to increase volume in our existing product lines, but also diversify into new products and source or sell in new markets. Clearly, our strict risk exposure management and our policy of securing longer term supply arrangements and alliances and close customer relationships were particularly helpful in this year of turbulent price and volume swings. We attribute this success to the efforts of our highly qualified, loyal and dedicated worldwide staff and our discipline in keeping our core values and strategic direction. Reduced to basics, we say “no” to business propositions that do not meet our core values, “no” to customers and suppliers that do not share our ideas of quality and reliability, and “no” to business where we feel we do not add value or where we lack the proper expertise. Fortunately, as last year has shown, our reputation for integrity and fair dealing attracts favorable partners, so we look confidently forward to another successful year. 31
Slide 34: Processing Marketing & Distribution Represent ative Offices Agents Investments and Joint Ventures MAR KETI NG & DISTR I B UTION 2005 N ET SAL E S 2005 EAR N I NGS B E F O R E I N C O M E TA X E S 2 0 0 5 C A P I TA L EXP E N DITU R ES Marketing 41% Rest of CMC 59% Marketing 17% Rest of CMC 83% Marketing 2% Rest of CMC 98% 32
Slide 35: Cometals Division In 2005, Cometals celebrated its 50th anniversary as a division of CMC. What a year it was! We broke all previous records, even those which were achieved in 2004. Sales increased 64%, gross margin increased 78%, and net earnings increased 156%. We continue our business expansion in China and Russia. These two emerging markets remain the major contributors to the significant growth which the Cometals Division achieved in 2005. Milestones reached in prior years encouraged us to expand and strengthen our organization. Indeed, with additional manpower in all our locations, we were able to maintain and to expand the packages of tailor-made, vital services and value-added programs to a growing roster of customers and suppliers around the globe. We increased the number of multi-year off-take and supply arrangements, thereby securing long-term availability of crucial raw materials. We continue to be well-positioned to satisfy the enormous surge in demand from our customers in all of the industries we serve. CMC’s logo with the world globe is a perfect symbol of our market reach. During 2005, we benefited from strong global demand for most of our products, especially during the first half of the year. During the spring and summer months of 2005, we witnessed some market softening. However, our forward order book is strong, and we expect a very solid 2006. Commonwealth Metals Commonwealth Metals was founded forty years ago. Marking this milestone, the Division posted another banner year in terms of growth, diversification, and profitability. We commence our fifth decade strong in our position as a leading independent U.S. importer of nonferrous semi-finished specialty metals. Commonwealth Metals markets and distributes a wide spectrum of aluminum, copper and stainless steel to service centers and manufacturers throughout North America and China. We provide both suppliers and customers the unique combination of a broad product scope, global reach, and an extensive suite of services. Moreover, our continued investment in people and systems support a solid platform for market development and growth. 33
Slide 36: During the course of this year, we also aggressively expanded our capabilities in China, the world’s fastest growing metals market. Long term, our vision is a global marketplace for our import services, where the developing needs and requirements of our customers dictate how we follow the dynamic trade flows of semi-fabricated metals worldwide. We remain true to our original business purpose – import marketing – established 40 years ago. Yet we constantly adapt our enterprise in order to operate and succeed in increasingly global markets. Our strategy includes three main elements: enlarge our product portfolio, expand our geographic footprint, and enhance our services. In this way, Commonwealth targets the next generation of emerging market opportunities. Our enduring strategies, focused on our distinct competitive edge, represent the crucial difference that will drive our performance in the future. Dallas Trading Division The Dallas Trading Division markets and distributes steel semi-finished long and flat products, primary aluminum and aluminum semi-finished flat rolled and extruded products, nonferrous scrap, steel scrap, and steel re-rolling stock into the Americas and other global markets from a diverse base of international and domestic sources. Our customers and suppliers rely on us for a variety of services, including professional marketing, trading, financial and logistical services. We are pleased to report another year of record results in fiscal 2005. Our outstanding results should not obscure that this was a challenging year, particularly in our steel import business to the U.S. Both customers and suppliers entered the fiscal year with heavier than normal inventories and concerns about rising interest rates and the general health of the U.S. economy. Nevertheless, despite lower import levels and mediocre domestic market conditions, Dallas Trading was able to grow our share of the U.S. steel market during the fiscal year. Similarly, our nonferrous market share grew, resulting in record results in spite of less than stellar market conditions. In fiscal 2005, Dallas Trading emphasized the development of greater synergy within the CMC group. We are working more closely now than ever before within the CMC family of companies to develop tailored solutions for our suppliers and customers utilizing our combined strengths and expertise. 34
Slide 37: Dallas Trading’s overall strategy continues to provide the basis for our future growth and consistent results, namely, to attract and retain the best people in the industry, to ensure we have efficient internal training and operating systems, and to focus on profitable product and geographic diversification. During the year we organized our steel department into three key product groups – this will provide a great basis for future growth. Our disciplined and conservative business practices help us focus on non-speculative business where we can add value to the physical goods we trade through our expertise in order execution, customs, logistics, and financial strength. We believe this emphasis is a reliable base for profitability even in difficult markets. While we are susceptible to business cycles, we believe the team of professionals assembled in Dallas Trading represents the best our industry has to offer. We have a strong order book through the balance of calendar year 2005. Our business plan calls for continued profitable results during the next fiscal year. International Division The International Division of Commercial Metals Company globally markets steel and, in certain areas, raw materials and special metals in close cooperation with producers and consumers. With some selected long-term suppliers, we distribute steel on a joint venture basis. We concentrate on three major areas – Europe, Asia and Australia – where we also have strategic investments in value-added steel servicing, pickling, heat treatment and warehousing. We constantly work to enhance our services to the industry by developing new products, sources and outlets and taking on more logistics functions to add value. This also differentiates us from many competitors, and our trading partners welcome and appreciate “that difference.” Our great expertise in risk management, non-speculative business practices, strong position in the markets and close relations with key suppliers and buyers, helped us to benefit from the sharper and shorter demand and price cycles. As a result, fiscal 2005 turned out to be our best year. Apart from achieving excellent financial results, we also succeeded in many other fields: Our traditional distribution business in the United Kingdom and Germany/Benelux expanded tonnage and products. New regular outlets in southern Europe and Scandinavia were added. More export markets out of Europe were developed in Central America and Africa for niche products. Our presence in India has strengthened. The Europickling marketing business increased its customer 35
Slide 38: base further with more repeat orders received. Trinecke Zelezarny further enhanced product mix, and our joint marketing achieved higher returns. Our reduced exports to China were more than compensated by sharply increased sales to other Asian markets, in particular Vietnam. Overproduction in China and freer supply from other Asian producers also expanded our sourcing from Asia for our European markets. Asia is an important region for CMC, and in fiscal 2005 was a major contributor to profits through our inter-Asia steel marketing and the growing importance of steel sourcing for our global Marketing & Distribution operations. In fiscal 2005, we added aluminum to our product list. Through our own offices and exclusive agents, we have a footprint across most of Asia. China is the biggest and fastest growing steel market in the world. During fiscal 2005, we increased our manpower and presence in China. Sourcing options and tonnage grew, selling steel into China continued as an important part of our business, and we began our first domestic sales in China. We continue to look for the right downstream investment into processing to emulate our steel activities in other regions. Our Southeast Asia business, managed through our Singapore office, had an excellent year and continues to grow. We buy and sell steel in Vietnam, Indonesia, Malaysia, Singapore and Thailand. Southeast Asia offers opportunities for future growth and expansion. CMC’s strategy is to open markets first and follow later with investments to enhance our marketing activities. In Asia, we are reaching the point where our market activities will support further downstream investment. We have operated in Australia since 1980, and we have a national business across the country. Our activities include steel importing, steel distribution and processing. We also have a raw materials supply business which works closely with Cometals’ global activities and an aluminum import business to support CMC’s global push into marketing aluminum products. 36
Slide 39: Australia is a stable and mature market and CMC is well-positioned. Our steel distribution business, Coil Steels, is supported by a domestic supply agreement with BlueScope Steel which gives us local supply of steel sheet and coil from one of the world’s leading producers. Our strategy in Australia is to broaden our product base, expand our processing capabilities and grow through delivering value to both suppliers and customers. We continue to look for acquisitions to support our existing businesses and to grow our presence in the Australian market. During fiscal 2006, we will upgrade our processing facilities in Sydney and develop a new warehouse at Brisbane Port. The start of fiscal 2006 is on a positive note. De-stocking is over in Europe and some greater enthusiasm for steel imports is developing again. We look forward to delivering another great performance in our new financial year and to keep our stakeholders aware of “What’s the Difference?” 37
Slide 40: DOM ESTIC M I LLS MANAG E M E NT (left to right) CMC Steel Group Russell Rinn Clyde P. Selig Bob Unfried Steve Henderson Phil Seidenberger Dale Schmelzle Avery Hilton Dennis Malatek Howell Metal A. Leo Howell C MC Z MANAG E M E NT (left to right) Dorota Apostel Adam Rosenthal Marek Rozga Dorota Pieszczoch Peter Weyermann Justyna Miciak Ned Leyendecker Hanns Z¨ ollner Kazimierz Jeziorski Ludovit Gajdos Tomasz Skudlik DOM ESTIC FAB R ICATION MANAG E M E NT (left to right) Rick Jenkins Binh K. Huynh Ed Hall Karl Schoenleber Tracy Porter Jeff H. Selig John Richey R ECYC LI NG MANAG E M E NT (left to right) Brian Halloran Carl J. Nastoupil Larry Olschwanger Alan Postel Ellen Lasser Rocky Adams Chuck Grossman Jim Vermillion Robert J. Melendi MAR KETI NG & DISTR I B UTION MANAG E M E NT (left to right) Eugene L. Vastola Kevin S. Aitken J. Matthew Kramer Eliezer Skornicki Hanns Zollner ¨ Ruedi Auf der Maur 38
Slide 41: 2005 FINANCIAL REVIEW 40 Selected Financial Data 42 Management’s Discussion and Analysis of Financial Condition and the Results of Operations 59 Report of Management on Internal Controls Over Financial Reporting 60 Report of Independent Registered Public Accounting Firm 61 Report of Independent Registered Public Accounting Firm 62 Financial Ratios and Statistics 63 Consolidated Statements of Earnings 64 Consolidated Balance Sheets 66 Consolidated Statements of Cash Flows 67 Consolidated Statements of Stockholders’ Equity 68 Notes to Consolidated Financial Statements
Slide 42: Commercial Metals Company and Subsidiaries SE LECTE D FI NANC IAL DATA (dollars in thousands, except share data) 2005 2004 2003 2002 Operations Net sales Net earnings Income taxes Earnings before income taxes Interest expense Depreciation and amortization EBITDA* EBITDA/interest expense Effective tax rate Balance Sheet Information $ 6,592,697 285,781 157,996 443,033 31,187 76,610 551,575 17.7 35.7% $ 4,768,327 132,021 65,055 211,947 28,104 71,044 296,224 10.5 30.7% $ 2,875,885 18,904 11,490 30,394 15,338 61,203 106,935 7.0 37.8% $ 2,479,941 40,525 22,613 63,138 18,708 61,579 143,425 7.7 35.8% Cash and cash equivalents Accounts receivable Inventories Total current assets Property, plant and equipment Original cost Net of depreciation and amortization Capital expenditures Total assets Commercial paper Notes payable Total current liabilities Net working capital Current ratio Acid test ratio Long-term debt** Long-term debt as a percent of total capitalization*** Total debt/total capitalization plus short-term debt*** Long-term deferred income tax liability Total stockholders’ equity Total capitalization*** Return on beginning stockholders’ equity Stockholders’ equity per share**** Share Information 119,404 829,192 706,951 1,700,917 1,200,742 505,584 110,214 2,332,922 — — 891,942 808,975 1.9 1.1 386,741 29.0% 29.5% 45,629 899,561 1,331,930 43.3% 15.47 123,559 607,005 645,484 1,424,232 1,090,530 451,490 51,889 1,988,046 — 530 783,477 640,755 1.8 0.9 393,368 36.4% 37.6% 50,433 660,627 1,118,661 26.0% 11.28 75,058 397,490 310,816 852,266 962,470 373,628 49,792 1,283,255 — — 452,841 399,425 1.9 1.1 254,997 31.6% 33.6% 44,418 506,933 806,348 3.8% 9.05 124,397 350,885 268,040 806,649 921,779 378,155 47,223 1,247,373 — — 427,544 379,105 1.9 1.1 255,969 32.8% 33.9% 32,813 501,306 794,988 9.4% 8.79 Diluted earnings per share**** Stock dividends/splits per share Cash dividends per share of common stock**** Total cash dividends paid Average diluted common shares**** Other Data 4.63 100% 0.23 13,652 61,690,087 2.21 — 0.17 9,764 59,688,678 0.33 — 0.16 9,039 57,211,190 0.72 100% 0.138 7,521 56,550,582 Number of employees at year-end Stockholders of record at year-end * ** *** **** 10,882 2,985 10,668 2,686 7,778 2,640 7,659 2,271 EBITDA = earnings before interest expense, income taxes, depreciation and amortization Excluding current portion Total capitalization = total long-term debt + deferred income taxes + total stockholders’ equity Restated for stock splits 40
Slide 43: 2001 2000 1999 1998 1997 1996 1995 $ 2,470,133 23,772 14,643 38,415 27,608 67,272 133,295 4.8 38.1% $ 2,661,420 44,590 26,070 70,660 27,319 66,583 164,562 6.0 36.9% $ 2,251,442 46,974 27,829 74,803 19,650 52,054 146,507 7.5 37.2% $ 2,367,569 42,714 25,355 68,069 18,055 47,460 133,584 7.4 37.2% $ 2,258,388 38,605 22,350 60,955 14,637 43,720 119,312 8.2 36.7% $ 2,322,363 46,024 26,897 72,921 15,822 41,599 130,342 8.2 36.9% $ 2,116,779 38,208 19,800 58,008 15,246 38,134 111,388 7.3 34.1% 56,021 297,611 223,859 632,991 896,896 395,851 53,022 1,095,604 — 3,793 359,178 273,813 1.8 1.0 251,638 35.5% 37.6% 30,405 433,094 718,817 5.7% 8.28 20,057 352,203 270,368 702,405 856,128 407,512 69,627 1,170,092 79,000 13,466 438,231 264,174 1.6 0.8 261,884 36.8% 44.7% 31,131 418,805 711,821 10.7% 7.95 44,665 297,664 247,154 643,376 804,247 402,272 141,752 1,079,074 10,000 4,382 357,648 285,728 1.8 1.0 265,590 37.6% 39.6% 23,263 418,312 707,165 12.3% 7.26 30,985 318,655 257,231 673,500 680,401 318,462 119,915 1,002,617 40,000 60,809 426,063 247,437 1.6 0.8 173,789 30.1% 41.5% 21,376 381,389 576,554 12.0% 6.54 32,998 289,735 220,644 585,276 570,604 247,261 70,955 839,061 — — 278,144 307,132 2.1 1.2 185,211 33.0% 34.4% 20,834 354,872 560,917 11.5% 6.01 24,260 294,611 186,201 539,483 506,969 222,710 47,982 766,756 — — 264,073 275,410 2.0 1.2 146,506 29.1% 30.7% 21,044 335,133 502,683 15.2% 5.55 21,018 268,657 208,114 534,105 456,705 209,739 39,311 748,103 — — 268,382 265,723 2.0 1.1 158,004 32.9% 35.5% 18,553 303,164 479,721 15.7% 4.93 0.45 — 0.13 6,780 52,641,976 0.78 — 0.13 7,304 57,000,340 0.80 — 0.13 7,540 58,506,160 0.71 — 0.13 7,717 60,483,144 0.63 — 0.13 7,777 60,878,908 0.75 — 0.12 7,246 61,104,632 0.63 — 0.12 7,211 60,828,344 7,956 2,526 8,379 2,691 7,630 2,550 7,376 2,672 7,103 2,674 6,681 2,593 6,272 2,256 41
Slide 44: Commercial Metals Company and Subsidiaries MANAG E M E NT’S DISC USSION AN D ANALYSIS OF FI NANC IAL CON DITION AN D R ESU LTS OF OP E RATIONS We manufacture, recycle, market and distribute steel and metal products through a network of over 150 locations in the United States and internationally. Our segment reporting includes five reportable segments: domestic mills, CMC Zawiercie (CMCZ), domestic fabrication, recycling and marketing and distribution. The domestic mills segment includes the Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The copper tube minimill is aggregated with the Company’s steel minimills because it has similar economic characteristics. The CMCZ minimill and subsidiaries in Poland have been presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are different from the Company’s domestic minimills. The domestic fabrication segment consists of the Company’s rebar and joist fabrication operations, fence post manufacturing plants, construction-related and other products facilities. The recycling segment consists of the CMC Recycling division’s scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales, distribution and processing of both ferrous and nonferrous metals and other industrial products. The segment’s activities consist only of physical transactions and not speculation. Domestic Fabrication Operations We conduct our domestic fabrication operations through a network of: • steel fabrication and processing plants that bend, weld, cut, fabricate and place steel, primarily reinforcing bar and angles; • warehouses that sell or rent products for the installation of concrete; • plants that produce special sections for floors and ceiling support; • plants that produce steel fence posts; • plants that treat steel with heat to strengthen and provide flexibility; and • a railroad salvage company. Recycling Operations We conduct our recycling operations through metal processing plants located in the states of Florida, Georgia, Kansas, Louisiana, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Marketing and Distribution Operations We market and distribute steel, copper and aluminum coil, sheet and tubing, ores, metal concentrates, industrial minerals, ferroalloys and chemicals through our network of marketing and distribution offices, processing facilities and joint ventures around the world. Our customers use these products in a variety of industries. You should read this management’s discussion and analysis in connection with your review of our consolidated audited financial statements and the accompanying footnotes. Domestic Mills Operations We conduct our domestic mills operations through a network of: • steel mills, commonly referred to as “minimills,” that produce reinforcing bar, angles, flats, rounds, fence post sections and other shapes; • scrap processing facilities that directly support these minimills; and • a copper tube minimill. Critical Accounting Policies and Estimates The following are important accounting policies, estimates and assumptions that you should understand as you review our financial statements. We apply these accounting policies and make these estimates and assumptions to prepare financial statements under accounting principles generally accepted in the United States (GAAP). Our use of these accounting policies, estimates and assumptions affects our results of operations and our reported amounts of assets and liabilities. Where we have used estimates or assumptions, actual results could differ significantly from our estimates. CMCZ Operations We conduct our CMCZ minimill operation through: • a rolling mill that produces primarily reinforcing bar; • a rolling mill that produces primarily wire rod; and • our majority-owned scrap processing facilities that directly support CMCZ. 42
Slide 45: Revenue Recognition We recognize sales when title passes to the customer either when goods are shipped or when they are received based on the terms of the sale. When we estimate that a contract with one of our customers will result in a loss, we accrue the entire loss as soon as it is probable and estimable. Contingencies We make accruals as needed for litigation, over the estimated useful lives of the assets. Depreciable lives are based on our estimate of the assets’ economically useful lives and are evaluated annually. To the extent that an asset’s actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred. Other Accounting Policies and New Accounting Pronouncements See Note 1, Summary of Significant administrative proceedings, government investigations (including environmental matters), and contract disputes. We base our environmental liabilities on estimates regarding the number of sites for which we will be responsible, the scope and cost of work to be performed at each site, the portion of costs that we expect we will share with other parties and the timing of the remediation. Where timing of expenditures can be reliably estimated, we discount amounts to reflect our cost of capital over time. We record these and other contingent liabilities when they are probable and when we can reasonably estimate the amount of loss. Where timing and amounts cannot be precisely estimated, we estimate a range, and we recognize the low end of the range without discounting. Also, see Note 11, Commitments and Contingencies, to the consolidated financial statements. Inventory Cost We determine inventory cost for most Accounting Policies, to our consolidated financial statements. Consolidated Results of Operations Year ended August 31, (in millions except share data) 2005 2004 2003 Net sales Net earnings Per diluted share EBITDA International net sales As % of total sales LIFO* effect on net earnings expense (income) Per diluted share $ 6,593 285.8 4.63 551.6 2,716 41% 12.5 0.20 $4,768 132.0 2.21 296.2 1,778 37% 48.6 0.81 $ 2,876 18.9 0.33 106.9 830 29% 6.1 0.11 domestic inventories by the last-in, first-out method, or LIFO. Beginning fiscal 2005, we refined our method of estimating our interim LIFO reserve by using quantities and costs at quarter end and recording the resulting LIFO expense in its entirety. At the end of each of the prior years’ quarters, we estimated both inventory quantities and costs that we expected at the end of the fiscal years for these LIFO calculations, and we recorded an amount on a pro-rata basis. These estimates could vary substantially from the actual year-end results, causing an adjustment to cost of goods sold in our fourth quarter. See Note 15, Quarterly Financial Data, to the consolidated financial statements. We record all inventories at the lower of their cost or market value. Property, Plant and Equipment Our domestic mills, *Last in, first out inventory valuation method. CMCZ and recycling businesses are capital intensive. We evaluate the value of these assets and other longlived assets whenever a change in circumstances indicates that their carrying value may not be recoverable. Some of the estimated values for assets that we currently use in our operations utilize judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer’s different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis In the table above, we have included a financial statement measure that was not derived in accordance with GAAP. We use EBITDA (earnings before interest expense, income taxes, depreciation and amortization) as a nonGAAP performance measure. In calculating EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization. EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. Also, we exclude interest cost in our calculation of EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. We use EBITDA as one guideline to assess our unleveraged performance return on our investments. EBITDA is also the target benchmark for our long-term cash incentive performance plan for management. Reconciliations to net earnings are provided below for the year ended August 31: (in millions) 2005 2004 2003 Net earnings Interest expense Income taxes Depreciation and amortization EBITDA $ 285.8 31.2 158.0 76.6 $ 551.6 $132.0 28.1 65.1 71.0 $296.2 $ 18.9 15.3 11.5 61.2 $ 106.9 43
Slide 46: EBITDA does not include interest expense, income taxes and depreciation and amortization. Because we have borrowed money in order to partially finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Also, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings determined under GAAP, as well as EBITDA, to evaluate our performance. Also, we separately analyze any significant fluctuations in interest expense, depreciation and amortization and income taxes. Our EBITDA increased 86% to $551.6 million for our fiscal year ended August 31, 2005 as compared to $296.2 million in 2004. The following events had a significant financial impact during our fiscal year ended August 31, 2005 as compared to our 2004 fiscal year: 1. We reported our highest net sales and net earnings ever. 2. Increased selling prices and margins resulted in significantly higher adjusted operating profits in all of our segments, except for CMCZ. 3. Our domestic steel mills’ adjusted operating profit increased due to much higher selling prices and metal margins, which more than offset a decline in finished goods shipments as compared to 2004. 4. Selling prices and margins at CMCZ decreased as compared to 2004 due largely to the relatively strong Polish Zloty which limited its exports and weak construction activity in western Europe, resulting in more competition in Poland. 5. Adjusted operating profit in our domestic fabrication segment increased significantly due to higher selling prices, margins and increased shipments. 6. Ferrous and nonferrous scrap prices were volatile although average prices increased during 2005 as compared to 2004. Total domestic scrap processed and shipped decreased slightly during 2005. 7. We attained record adjusted operating profits in our marketing and distribution segment due to robust demand across multiple product lines and geographic areas. 8. We recorded a $12.5 million after-tax LIFO expense ($0.20 per diluted share) compared to $48.6 million LIFO expense ($0.81 per diluted share) in 2004. 9. We recorded $20.1 million pre-tax related to insurance recoveries primarily for business interruption insurance at our SMI-Texas and SMI-South Carolina mills. 10. Our overall effective tax rate increased to 35.7% as compared to 30.7% in 2004 due to shifts in profitability among tax jurisdictions. In 2005, our net earnings reached all-time record levels as a result of the combination of historically high selling prices and margins in most of our segments. These positive factors more than offset increased purchase prices and other input costs. Global market conditions were favorable which resulted in significantly increased selling prices and metal margins, especially for our domestic steel mills, domestic fabrication and various products in our marketing and distribution segment. These market conditions included strong demand in Asia, a resilient U.S. economy and the relatively weak U.S. dollar. Our strategy of diversifying our business by segment, products and geography allowed us to take advantage of the positive environment. Conditions improved significantly during the fourth quarter of fiscal 2005 as end-users had depleted their inventories, and our net earnings in the fourth quarter of fiscal 2005 exceeded those for any previous fiscal quarter that we have ever reported. Segments Unless otherwise indicated, all dollars below are before minority interests and income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for making operating decisions. See Note 14, Business Segments, to the consolidated financial statements. We use adjusted operating profit (loss) to compare and evaluate the financial performance of our segments. Adjusted operating profit is the sum of our earnings before income taxes, minority interests and financing costs. Adjusted operating profit is equal to earnings before income taxes for our domestic mills and domestic fabrication segments because these segments require minimal outside financing. The following table shows net sales and adjusted operating profit (loss) by business segment: 44
Slide 47: Year ended August 31, (in millions) 2005 2004 2003 Net sales: Domestic mills CMCZ* Domestic fabrication Recycling Marketing and distribution Corporate and eliminations Adjusted operating profit (loss): Domestic mills CMCZ* Domestic fabrication Recycling Marketing and distribution Corporate and eliminations 216.9 (0.2) 117.9 70.8 90.4 (17.5) 84.2 69.3 7.3 67.9 39.4 (26.4) 19.7 — 0.7 15.2 21.8 (11.0) $ 1,298 478 1,474 897 2,926 (480) $1,109 427 1,047 774 1,882 (471) $ 770 — 743 441 1,150 (228) steel. Also, the competition from foreign steel imports was less as a result of the weaker U.S. dollar and stronger global markets. Average scrap purchase costs were higher than last year due primarily to increased world demand for ferrous scrap. Our overall metal margins increased, resulting in significantly higher total adjusted operating profits for the four steel minimills in 2005 as compared to 2004. The table below reflects domestic steel and ferrous scrap prices per ton for the year ended August 31: Increase 2005 2004 $ % Average mill selling price (finished goods) Average mill selling price (total sales) Average ferrous scrap purchase price Average FIFO metal margin 171 274 149 215 22 59 15% 27% 473 379 94 25% $489 $385 $104 27% *Acquired December 2003. Dollars are before minority interests. 2005 Compared to 2004 Domestic Mills We include our four domestic steel min- imills and our copper tube minimill in our domestic mills segment. In 2005, our domestic mills segment set an alltime annual record for adjusted operating profits. Our domestic mills segments’ adjusted operating profit for the year ended August 31, 2005 increased by $132.7 million (158%) as compared to 2004 on $189 million (17%) more net sales. Net sales and adjusted operating profit were higher in 2005 due primarily to higher selling prices and metal margins at our domestic steel mills as compared to 2004. Metal margins (the difference between the average selling price and cost of scrap consumed) for the segment increased significantly in 2005 as compared to 2004 because increases in selling prices at our domestic steel mills more than offset the increases in scrap purchase and other input costs. Although our copper tube minimill increased its selling prices during 2005 as compared to 2004, purchase prices of copper scrap increased even more. As a result, our metal margin declined for this mill. Also, expenses related to valuing our inventories under the LIFO method decreased as compared to 2004 primarily because scrap purchase and other input costs did not increase as rapidly in 2005 as compared to 2004. During the year ended August 31, 2005, we recorded $20.1 million recoveries for the settlement of insurance claims relating to prior year transformer failures at our steel minimills. Adjusted operating profit for our four domestic steel minimills was $211.8 million for the year ended August 31, 2005 as compared to $75.1 million for 2004. Selling prices and metal margins increased in 2005 as compared to 2004 due to strong global demand for The domestic steel minimills’ production and shipment levels (tons melted, rolled and shipped) for the year ended August 31, 2005 decreased slightly as compared to the at all-time record levels set in 2004 as our customers worked through excess inventories. During 2005, we scheduled our maintenance and lowered our production in order to most effectively manage our inventory levels. The table below reflects our domestic steel minimills’ operating statistics for the year ended August 31: Decrease (short tons in thousands) 2005 2004 Amount % Tons melted Tons rolled Tons shipped 2,173 2,024 2,266 2,265 2,195 2,401 (92) (171) (135) (4)% (8)% (6)% Adjusted operating profits for our domestic steel minimills were as follows for the year ended August 31: Increase (Decrease) (in thousands) 2005 2004 $ % SMI Texas SMI South Carolina SMI Alabama SMI Arkansas $ 94,906 58,918 43,332 4,807 $17,768 13,334 29,817 3,946 $ 77,138 45,584 13,515 861 434% 342% 45% 22% Overall, our domestic steel minimills recorded $7.7 million LIFO expense in 2005 as compared to $24.1 million in 2004. Our utility expenses increased by $924 thousand (1%) in 2005 as compared to 2004. Electricity decreased by $664 thousand (1%) due to both lower usage from decreased overall production and rate 45
Slide 48: decreases due to refunds. Natural gas costs increased by $1.6 million (7%) due to higher rates which more than offset lower usage. Costs for ferroalloys increased by $11.6 million in 2005 as compared to 2004 largely due to more demand from U.S. mills, the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items. Also, in 2005, all of our domestic steel minimills focused on controlling costs and improving productivity, quality and safety. The Texas highway building program provided good business opportunities for SMI Texas. A new scrap yard was established at SMI Alabama to improve scrap flow and reduce congestion inside the mill and reduce scrap handling costs. The installation of a new electric arc furnace transformer and expansion of the baghouse at SMI South Carolina increased our steel melting capacity. During the year ended August 31, 2005, SMI Texas and SMI South Carolina recorded $10.3 million and $9.8 million, respectively, from insurance recoveries (see Note 11 – Commitments and Contingencies, to the consolidated financial statements). Our copper tube minimill’s adjusted operating profit was $5.1 million during the year ended August 31, 2005 as compared to an adjusted operating profit of $9.0 million for 2004. Although our average selling price for copper tube increased, our average copper scrap purchase cost increased more than our average selling price resulting in decreased metal margins in 2005 as compared to 2004. Copper scrap purchase prices increased because global demand for copper scrap exceeded supply. However, we could not increase our selling prices for copper tube because of pressure from alternative competing products such as plastic water tubing and consolidation among our customers. The table below reflects our copper tube minimill’s prices per pound and operating statistics for the year ended August 31: Increase (Decrease) (pounds in millions) 2005 2004 Amount % (in thousands) Year Ended August 31, 2005 Nine Months Ended August 31, 2004 Tons melted Tons rolled Tons shipped Average mill selling price (total sales) Average ferrous scrap purchase price Average metal margin Average mill selling price (total sales) Average ferrous scrap purchase price Average metal margin *Polish Zlotys 1,101 871 1,092 1,376 PLN* 650 PLN 586 PLN $ 418 $ 198 $ 178 1,159 863 1,082 1,466 PLN 690 PLN 705 PLN $ 380 $ 179 $ 201 CMCZ recorded net sales of $478 million and an adjusted operating loss of $188 thousand for the year ended August 31, 2005 as compared to $427 million and an adjusted operating profit of $69.3 million, respectively, for the nine months following its acquisition in 2004. Our average selling prices and metal margins decreased significantly in 2005 as compared to 2004. Weaker markets in Europe during our 2005 second and third fiscal quarters led to greater competition in Poland. Also, our ability to export CMCZ’s products from Poland to other key international markets was limited in 2005 due to the strong Polish Zloty, especially relative to the Euro. However, we reported an adjusted operating profit from CMCZ of $1.85 million during our 2005 fourth quarter as market conditions improved. Functional currency fluctuations did not have a significant impact on adjusted operating profits. Domestic Fabrication Our domestic fabrication businesses reported an adjusted operating profit of $117.9 million for the year ended August 31, 2005 as compared to an adjusted operating profit of $7.3 million in 2004. Net sales were $1.5 billion in 2005, an increase of $427 million (41%) as compared to 2004. During the year ended August 31, 2005, we acquired the operating assets of J.L. Davidson Company’s rebar fabricating facility in California and a joist manufacturing plant in Juarez, Mexico. These acquisitions did not significantly impact our 2005 adjusted operating profit. On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) which operates steel reinforcing bar fabrication and construction-related product sales facilities in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. During the first four months of 2005, this acquisition accounted for $38 million and $1.6 million in net sales and adjusted operating profit, respectively, and also accounted for 56 thousand Pounds shipped Pounds produced Average selling price Average scrap purchase cost Average FIFO metal margin 66.6 62.0 $1.94 $1.38 $0.64 68.4 66.3 $1.69 $1.08 $0.72 (1.8) (3)% (4.3) (6)% $ 0.25 $ 0.30 15% 28% $(0.08) (11)% Our copper tube minimill recorded $436 thousand LIFO expense for the year ended August 31, 2005 as compared to $5.5 million in 2004. CMCZ On December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), a steel minimill in Zawiercie, Poland. The table below reflects CMCZ’s operating statistics (in thousands) and average prices per short ton: 46
Slide 49: tons shipped during the same period. See Note 2, Acquisitions, to the consolidated financial statements. Our domestic fabrication segment’s overall adjusted operating profit increased in 2005 as compared to 2004 due to our overall higher average selling prices and higher shipments which more than offset increases in our steel purchase costs. Market conditions were favorable, resulting in higher gross margins in all of our product lines including rebar fabrication, construction-related products, steel fence posts, steel joists, castellated beams and structural steel fabrication. The table below shows our average fabrication selling prices per short ton (excluding stock and buyout sales) and total fabrication plant shipments for the years ended August 31: Increase 2005 2004 Amount % nonferrous scrap shipments increased as compared to 2004 due to higher demand for aluminum, copper and stainless steel scrap, although demand for stainless weakened in our fourth quarter. The following table reflects our recycling segment’s average selling prices per short ton and tons shipped (in thousands) for the year ended August 31: Increase (Decrease) 2005 2004 Amount % Average ferrous selling price $ 186 Average nonferrous selling price Ferrous tons shipped Nonferrous tons shipped Total volume processed and shipped* 3,331 $1,634 1,871 292 $ 172 $1,382 1,979 258 3,411 $ 14 8% 18% 13% $ 252 34 (108) (5)% (80) (2)% Average selling price* Tons shipped (in thousands) $ 850 1,342 $ 626 1,250 $224 92 36% 7% *Includes all of our domestic processing plants. *Excluding stock and buyout sales We recorded $6.6 million of LIFO expense in our domestic fabrication segment for the year ended August 31, 2005, due to the higher cost of steel and more inventories on hand. During the year ended August 31, 2004, we recorded $26.3 million of LIFO expense. During the year ended August 31, 2004, we recorded impairment charges of $6.6 million. See Note 5, Asset Impairment Charges, to the consolidated financial statements. We are continuing to evaluate certain other facilities which are performing below our expectations or for which we are considering alternative uses. Our current estimates of cash flows do not indicate that the assets are impaired. However, these estimates and expected uses could change resulting in additional asset impairments. Recycling Our recycling segment reported an adjusted Also, we recorded $3.0 million LIFO expense for the year ended August 31, 2005 as compared to $5.2 million in 2004, due primarily to increased average material purchase costs for the fiscal year. Marketing and Distribution Net sales in our marketing and distribution segment increased by $1 billion (55%) for the year ended August 31, 2005 to $2.9 billion as compared to 2004, $55 million of which resulted from functional currency fluctuations. Our adjusted operating profit for the year ended August 31, 2005 was $90.4 million as compared to $39.4 million in 2004, an increase of 129%. Our increased profitability in marketing and distribution was largely the result of our strategy in recent years to build up our regional business around the world and to increase our downstream presence. The net effect of functional currency fluctuations on our adjusted operating profit was immaterial. The majority of the increases in net sales and adjusted operating profit were due to higher shipments and selling prices in 2005 as compared to 2004. The effect of these increases was partially offset by $1.5 million LIFO expense in 2005. LIFO expense of $13.8 million was recorded in 2004. Markets were favorable in most geographic regions around the world. We imported more steel, aluminum, copper and stainless steel semi-finished products into the United States, and gross margins for these products were higher in 2005 as compared to 2004. Our net sales to and within Europe, Asia (including China) and Australia increased significantly in 2005 as compared to 2004 due mainly to significant selling price increases which more than offset increases in purchases costs for our products and higher freight costs. Our 2005 sales and adjusted operating profits for industrial materials and products (including minerals, ores, refractories, ferroalloys and various metals and alloys) were at record levels because operating profit of $70.8 million for the year ended August 31, 2005 as compared with an adjusted operating profit of $67.9 million in 2004. Net sales for the year ended August 31, 2005 were 16% higher at $897 million. Gross margins in 2005 were 5% higher as compared to 2004. Our ferrous and nonferrous scrap selling prices increased because demand from Far Eastern buyers, especially China, and the weaker U.S. dollar resulted in more scrap exports by our competitors, especially early in fiscal 2005. The ferrous scrap market was extremely volatile during 2005, and scrap prices generally decreased after our first quarter. Our ferrous sales volumes decreased slightly during 2005 as compared to 2004 due to production cutbacks and cautious buying by our steel mill customers. However, by the end of the 2005 fourth quarter, global demand for ferrous scrap increased which resulted in increased prices. During 2005, our 47
Slide 50: of strong global demand from the metals industry and short supply. Also, we added several new products. However, during our fourth quarter, prices decreased for some industrial materials and products, returning to more historical levels. During 2005, we received a dividend of CZK 62.4 million ($2.6 million) from our 11% investee, Trinecke Zelezarny, a Czech steel mill, as compared to a dividend of CZK 34.1 million ($1.6 million) received in 2004. Corporate and Eliminations We recognized income of Near-Term Outlook We expect that the positive market conditions that resulted in our record 2005 net sales and adjusted operating profits will continue in our fiscal year ending August 31, 2006. Overall, our selling prices and volumes should be sustainable. We are concerned about the potential impacts of inflationary pressures on the global economy, the decline in consumer confidence in the U.S. and significantly higher energy costs. However, the U.S. economy has been historically quite resilient and the manufacturing and construction sectors remained quite strong as we began our first quarter of fiscal 2006. We believe that excess inventories in the steel supply chain have been utilized in most of our markets. We anticipate that our domestic steel mills and fabrication operations will benefit significantly from the U.S. multi-year transportation bill that was passed during August 2005. We are also anticipating some increased demand in Asia and Europe, but prices could moderate with increasing supply, partially due to Chinese overproduction of certain products. We have experienced some short-term power outages and transportation difficulties at our U.S. Gulf Coast operations in those markets affected by Hurricanes Katrina and Rita. The overall short-term effects of these storms have not significantly impacted our operations. In the medium and longer term, we believe that the resulting increased demolition and recycled metals, and the reconstruction requirements in the U.S. Gulf area will significantly benefit our operations. We anticipate that our net earnings will continue to be strong for our first quarter ended November 30, 2005, especially in our domestic mills and domestic fabrication segments. Although we have scheduled major maintenance, we believe that CMCZ will be profitable. We also expect good earnings in our recycling and marketing and distribution segments. Accordingly, we estimate that our first quarter LIFO diluted net earnings per share will be between $1.10 and $1.25. On October 1, 2004, the President signed the American Jobs Creation Act of 2004 (the Act) which offers a limited window of opportunity to repatriate certain cash dividends from foreign subsidiaries at a reduced rate. The Company is currently still evaluating the Act, and we anticipate reaching final conclusions regarding the implications of the Act in fiscal 2006. We anticipate that our capital spending for 2006 will be $178 million, including the completion of our shredder at CMCZ and our continuous caster project at our SMI Texas melt shop. We believe that we will derive benefits from reduced operating costs and increased productivity in 2006 from these projects and other capital projects that we completed during 2005. $4.8 million on investment assets in our segregated trust for our benefit restoration plan during the year ended August 31, 2005. See Note 10, Employees’ Retirement Plans, to the consolidated financial statements. During the year ended August 31, 2004, we incurred a $3.1 million charge from the repurchase of $90 million of our notes payable otherwise due in 2005. Consolidated Data On a consolidated basis, the LIFO method of inventory valuation decreased our net earnings by $12.5 million and $48.6 million (20 cents and $0.81 per diluted share) for the years ended August 31, 2005 and 2004, respectively. Our overall selling, general and administrative expenses increased by $57.4 million (16%) for the year ended August 31, 2005 as compared to 2004. Most of this increase was due to higher discretionary bonuses and profit sharing accruals during the year ended August 31, 2005 as compared to 2004 due to increased earnings. Our acquisitions of CMCZ and Lofland accounted for $10.0 million of the increase for the year ended August 31, 2005. Our selling, general and administrative expenses for the year ended August 31, 2004 included asset impairment charges of $6.6 million and losses on reacquisition of debt of $3.1 million. Foreign currency fluctuations resulted in increases in selling, general and administrative expenses of $1.3 million for the year ended August 31, 2005 as compared to 2004. Our interest expense increased by $3.1 million during 2005 as compared to 2004 due primarily to increased discount costs on extended term documentary letters of credit. In addition, short-term interest rates increased more than 1% on an annualized basis during the year ended August 31, 2005 as compared to 2004. Our effective tax rate for the year ended August 31, 2005 increased to 35.7% as compared to 30.7% in 2004 due to a shift in profitability from low tax jurisdictions (Poland) to those domestic jurisdictions subject to state taxes. 48
Slide 51: Long-Term Outlook The rapid expansion of a number of emerging economies, including China and India, has been a major catalyst for the strong steel and nonferrous markets around the world. The magnitude of the growth in these economies has been a new dynamic in the global marketplace. Therefore, we believe that there is an enhanced prospect of significant long-term growth in demand for the global materials sector. We believe that we are wellpositioned to exploit long-term opportunities. We expect strong demand for our products due to continuing recovery in demand throughout the major global economies as well as continued growth in developing countries. Emerging countries often have a higher growth rate for steel and nonferrous metals consumption. We believe that the demand will increase in Asia, particularly in China and India, as well as in Central and Eastern Europe. We believe that there will be further consolidation in our industries, and we plan to continue to participate in a prudent way. The reasons for further consolidation include a historically inadequate return on capital for many companies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing. rous scrap. Our overall metal margins increased, resulting in significantly higher total adjusted operating profits for the four steel minimills in 2004 as compared to 2003. The table below reflects domestic steel and ferrous scrap prices per ton for the year ended August 31: Increase 2004 2003 $ % Average mill selling price (finished goods) Average mill selling price (total sales) Average ferrous scrap purchase price Average FIFO metal margin 149 215 97 169 52 46 54% 27% 379 278 101 36% $ 385 $287 $ 98 34% The domestic steel minimills’ production and shipment levels (tons melted, rolled and shipped) for the year ended August 31, 2004 increased as compared to 2003, in spite of the transformer failure at SMI-Texas on May 31, 2004. The table below reflects our domestic steel minimills’ operating statistics for the year ended August 31: Increase (short tons in thousands) 2004 2003 Amount % Tons melted Tons rolled Tons shipped 2,265 2,195 2,401 2,081 1,972 2,284 184 223 117 9% 11% 5% 2004 Compared to 2003 Domestic Mills Our domestic mills segments’ adjusted operating profit for the year ended August 31, 2004 increased by $64.5 million as compared to 2003 on $339 million (44%) more net sales. Net sales and adjusted operating profit were higher in 2004 due primarily to higher selling prices and shipments as compared to 2003. Metal margins (the difference between the average selling price and the cost of scrap consumed) for the segment increased significantly in 2004 as compared to 2003 because increases in selling prices more than offset the increases in scrap purchase and other input costs and much higher expenses related to valuing our inventories under the LIFO method. Our LIFO expenses increased due to our higher scrap purchase and other input costs, as well as increased inventory quantities. Adjusted operating profit for our four domestic steel minimills was $75.1 million for the year ended August 31, 2004 as compared to $19.1 million for 2003. Selling prices and shipments increased in 2004 as compared to 2003 due to stronger demand, which was partially due to the recovering U.S. economy. Also, the competition from foreign steel imports was less as a result of the weaker U.S. dollar and stronger global markets, especially in China. Average scrap purchase costs were higher than last year due primarily to increased world demand for fer- Due to the factors discussed above, all of our domestic steel minimills, except for SMI-Texas, were more profitable for the year ended August 31, 2004 as compared to 2003. SMI-Alabama reported an adjusted operating profit of $29.8 million, an increase of $25.7 million for the year ended August 31, 2004 as compared to 2003. SMI-South Carolina reported $13.3 million in adjusted operating profit for the year ended August 31, 2004 as compared to a $7.1 million adjusted operating loss in 2003. Adjusted operating profit at SMI-Arkansas increased by $3.8 million to an adjusted operating profit of $3.9 million for the year ended August 31, 2004. However, adjusted operating profit at SMI-Texas decreased by $1.5 million (8%) to $17.8 million for the year ended August 31, 2004 as compared to 2003. This decrease was due largely to the failure of SMI-Texas’ primary transformer on May 31, 2004, with the subsequent failure of the principal back up transformer in June 2004 and accruals related to a sales tax audit and unclaimed property. Although another replacement transformer was installed, it had a lower capacity, resulting in lower production than we had planned. In order to meet our sales commitments to our SMI-Texas customers in the fourth quarter of 2004, we purchased and rolled billets 49
Slide 52: from other affiliated and unrelated minimills at higher costs. We subsequently filed a claim with our business interruption insurance carrier. See Note 11, Commitments and Contingencies, to the consolidated financial statements. Overall, the steel minimills recorded $24.1 million LIFO expense in 2004 as compared to $5.7 million in 2003. Utility expenses increased by $7.3 million (12%) in 2004 as compared to 2003. Electricity increased by $4.5 million (10%) due to both higher usage from increased overall production and rate increases. Natural gas costs increased by $2.8 million (15%) due to higher rates and usage. Costs for ferroalloys and graphite electrodes increased by $8.4 million and $2.3 million, respectively, in 2004 as compared to 2003 largely to more demand from U.S. mills, the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items. Our copper tube minimill’s adjusted operating profit was $9.0 million during the year ended August 31, 2004 as compared to an adjusted operating profit of $620 thousand for 2003. Copper tube selling prices and shipments increased due to stronger demand from residential and commercial customers. The strong U.S. market in 2004 more than compensated for increased foreign imports, alternative competing products such as plastic water tubing, and consolidation among our customers. Our average selling price increased more than our average copper scrap purchase cost resulting in increased metal margins in 2004 as compared to 2003. The table below reflects our copper tube minimill’s prices and costs per pound and operating statistics for the year ended August 31: Increase (pounds in millions) 2004 2003 Amount % domestic steel minimills affected CMCZ as well, except that it did not benefit from the weaker U.S. dollar. However, although market conditions remained favorable, the average selling price decreased by 4% during the fourth quarter as compared to the third quarter of 2004 due to increased competition. Subsequent to our acquisition, CMCZ, in coordination with our international marketing and distribution operation, found new outlets for its products. The table below reflects CMCZ’s steel and ferrous scrap prices per ton and our key operating statistics (short tons in thousands) for the nine months ended August 31, 2004: $ PLN Average mill selling price (total sales) Average ferrous scrap purchase price Average metal margin 179 201 690 705 Tons rolled 863 Tons shipped 1,082 $ 380 1,466 Tons melted 1,159 Domestic Fabrication Our domestic fabrication businesses Pounds shipped Pounds produced Average selling price Average FIFO metal margin 68.4 66.3 $1.69 $ 0.72 61.9 60.7 $ 1.17 $ 0.72 $ 0.45 6.5 5.6 $ 0.52 $ 0.36 $ 0.27 11% 9% 44% 50% 60% Average scrap purchase cost $1.08 Our copper tube minimill recorded $5.5 million LIFO expense for the year ended August 31, 2004 as compared to $519 thousand in 2003. CMCZ On December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), a steel minimill in Zawiercie, Poland. See Note 2, Acquisitions, to the consolidated financial statements. This acquisition greatly expanded our international manufacturing operations. CMCZ recorded net sales of $427.1 million and an adjusted operating profit of $69.3 million (before minority interests) for the year ended August 31, 2004. The factors described above affecting our reported an adjusted operating profit of $7.3 million for the year ended August 31, 2004 as compared to an adjusted operating profit of $701 thousand in 2003. Net sales were $1.0 billion in 2004, an increase of $304.7 million (41%) as compared to 2003. On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) which operates steel reinforcing bar fabrication and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complemented our existing Texas rebar fabrication and construction-related products sales operations and expanded our service areas in each of the neighboring states. See Note 2, Acquisitions, to the consolidated financial statements. Lofland accounted for $78.3 million of the increase in net sales and reported a $5.8 million adjusted operating loss during 2004 subsequent to our acquisition. Lofland recorded a loss primarily because the overall purchase costs from our steel suppliers increased against our selling prices. Lofland’s sales prices did not increase as fast as our steel purchase costs because much of our fabrication work was sold months in advance at a fixed price. However, our domestic fabrication segment’s overall adjusted operating profit increased in 2004 as compared to 2003 due to overall higher average selling prices and shipments. As 2004 progressed, market conditions became increasingly favorable, resulting in higher gross margins in all of our product lines including rebar fabrication, construction-related products, steel fence posts, steel joists, castellated beams and structural steel fabrication. Increases in steel purchase costs were more than offset by increased selling prices and shipments. Although construction activity was mixed and varied by region, some private nonresidential construction markets improved and public and institutional 50
Slide 53: construction continued at a solid level enabling us to obtain higher selling prices and increase shipments to meet demand. Our acquisition of Lofland resulted in 127 thousand additional tons shipped. The table below shows the average fabrication selling prices per short ton (excluding stock and buyout sales) and total fabrication plant shipments for the years ended August 31: Increase 2004 2003 Amount % Increase 2004 2003 Amount % Average ferrous selling price $ 172 Average nonferrous selling price Ferrous tons shipped Nonferrous tons shipped Total volume processed and shipped* 3,411 $1,382 1,979 258 $ 100 $1,021 1,639 231 2,811 $ 72 $ 361 340 27 600 72% 35% 21% 12% 21% Average fabrication selling price* Tons shipped (in thousands) 1,250 976 274 28% *Excluding stock and buyout sales. *Includes all of our domestic processing plants. $ 626 $536 $ 90 17% Also, we recorded $5.2 million LIFO expense for the year ended August 31, 2004 as compared to $1.3 million in 2003, due primarily to increased material purchase costs. Marketing and Distribution Net sales in our marketing We recorded $26.3 million of LIFO expense in our domestic fabrication segment for the year ended August 31, 2004, due to the higher cost of steel and more inventories on hand. During the year ended August 31, 2003, we recorded $1.6 million of LIFO expense. During the year ended August 31, 2004, we recorded impairment charges of $6.6 million. See Note 5, Asset Impairment Charges, to the consolidated financial statements. During 2003, we acquired substantially all of the operating assets of the Denver, Colorado location of Symons Corporation, E.L. Wills in Fresno, California and Dunn Del Re Steel in Chandler, Arizona for a total of $13.4 million. No single one of these acquisitions was significant to our operations, nor were they significant in the aggregate. Recycling Our recycling segment reported an adjusted operating profit of $67.9 million for the year ended August 31, 2004 as compared with an adjusted operating profit of $15.2 million in 2003. Net sales for the year ended August 31, 2004 were 75% higher at $774 million. Gross margins in 2004 were much higher as compared to 2003. Our selling prices, particularly ferrous scrap, increased significantly because demand from Far Eastern buyers, especially China, and the weaker U.S. dollar resulted in more scrap exports by our competitors. In addition, domestic demand for ferrous scrap increased due to high levels of steel production, resulting in higher shipments. We exported nonferrous scrap to both Asia and Europe during 2004. Our sales volumes increased as well, partially due to additional materials that we were able to obtain through our National Accounts program directed at the management of scrap for our manufacturing customers. The following table reflects our recycling segment’s average selling prices per short ton and tons shipped (in thousands) for the year ended August 31: and distribution segment increased $732 million (64%) for the year ended August 31, 2004 as compared to 2003, $93 million of which resulted from functional currency fluctuations. Our adjusted operating profit for the year ended August 31, 2004 was $39.4 million as compared to $21.8 million in 2003, an increase of 81%. Our increased profitability in marketing and distribution was largely the result of our strategy in recent years to build up our regional business around the world and to increase our downstream presence. The net effect of functional currency fluctuations on our adjusted operating profit was an increase of $2.7 million. The remainder of the increases in net sales and adjusted operating profit was due to higher shipments and selling prices in 2004 as compared to 2003 for all divisions. The effect of these increases was partially offset by $13.8 million LIFO expense in 2004. LIFO expense of $266 thousand was recorded in 2003. Our higher 2004 LIFO expense was due to increases in both inventory purchase costs and quantities. Markets were favorable in several geographic regions around the world. Our sales increased significantly in the United States and Europe. We imported more steel, aluminum, copper and stainless steel semifinished products into the United States, and gross margins for these products were higher in 2004 as compared to 2003. Also, sales increased for most of our product lines. Sales to and within Asia were up significantly, and the economy in Australia was still strong. Our 2004 sales and adjusted operating profits for industrial materials and products were at record levels because of strong demand, especially in China, Europe and the U.S. During 2004, we received a dividend of CZK 34.1 million ($1.6 million) from our 11% investee, Trinecke Zelezarny, a Czech steel mill. Corporate and Eliminations Commensurate with our overall increase in profitability, discretionary items such as bonuses, profit sharing and contributions increased for 51
Slide 54: the year ended August 31, 2004 as compared to 2003. Our interest expense for the year ended August 31, 2004 increased as compared to 2003 due primarily to our issuance of $100 million additional long-term debt which we used to finance the acquisitions of CMCZ and Lofland. See Note 6, Credit Arrangements, to the consolidated financial statements. Also, our average short-term borrowings increased in 2004 as compared to 2003 to finance additional working capital including our operations in Poland. Our overall effective tax rate decreased to 30.7% for the year ended August 31, 2004 as compared to 37.8% in 2003, due to the effective tax rate in Poland of 20%. We consider our investment in CMCZ to be permanent. 2005 Liquidity and Capital Resources See Note 6, Credit Arrangements, to the consolidated financial statements. We discuss liquidity and capital resources on a consolidated basis. Our discussion includes the sources and uses of our five reportable segments and centralized corporate functions. We have a centralized treasury function and use inter-company loans to efficiently manage the short-term cash needs of our operating divisions. We invest any excess funds centrally. We rely upon cash flows from operating activities, and to the extent necessary, external short-term financing sources for liquidity. Our short-term financing sources include the issuance of commercial paper, securitization and sales of accounts receivable, documentary letters of credit with extended terms, short-term trade financing arrangements and borrowing under our bank credit facilities. From time to time, we have issued long-term public and private debt. Our investment grade credit ratings and general business conditions affect our access to external financing on a cost-effective basis. Depending on the price of our common stock, we may realize significant cash flows from the exercise of stock options. Moody’s Investors Service (P-2) and Standard & Poor’s Corporation (A-2) rate our $400 million commercial paper program in the second highest category. To support our commercial paper program, we have an unsecured contractually committed revolving credit agreement with a group of banks. In May 2005, we renewed and amended our $275 million facility resulting in an increase to $400 million. Our amended facility expires in May 2010. We may use $150 million of the program to issue standby letters of credit which totaled $34.9 million at August 31, 2005. The costs of our revolving credit agreement may be impacted by a change in our credit ratings. We plan to continue our commercial paper program and the revolving credit agreements in comparable amounts to support the commercial paper program. Also, we have numerous informal, uncommitted, short-term credit facilities available from domestic and international banks. These credit facilities are available to support documentary letters of credit (including those with extended terms), foreign exchange transactions and, in certain instances, short-term working capital loans. Our long-term public debt was $350 million at August 31, 2005 and is investment grade rated by Standard & Poor’s Corporation (BBB) and by Moody’s Investors Services (Baa2). We believe we have access to the public markets for potential refinancing or the issuance of additional long-term debt. During the year ended August 31, 2004, we purchased $90 million of our 7.20% notes otherwise due in 2005, and issued $200 million of 5.625% notes due November 2013. In March 2004, we refinanced the notes payable that we assumed upon the acquisition of CMCZ with a fiveyear term note with a group of four banks for 150 million PLN ($38.4 million) and a revolving credit facility with maximum borrowings of 60 million PLN. In December 2004, we increased our revolving credit facility to 120 million PLN ($36.4 million), and in March 2005, we extended this facility by one year. The term note and the revolving credit facilities are secured by the majority of CMCZ assets and contain certain financial covenants. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt. At August 31, 2005, no amount was outstanding on CMCZ’s revolving credit facility. In order to facilitate certain trade transactions, we utilize letters of credit, advances and non- or limited-recourse trade financing arrangements to provide assurance of payments and advance funding to our suppliers. The letters of credit may be for prompt payment or for payment at a future date, conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of credit. Our banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the committed revolving credit agreement. In some cases, if our suppliers choose to discount the future dated obligation we may absorb the discount cost in order to extend the terms. Credit ratings affect our ability to obtain short- and long-term financing and the cost of such financing. If the rating agencies were to reduce our credit ratings, we would pay higher financing costs and probably would have less availability of the informal, uncommitted facilities. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off- 52
Slide 55: balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industry condition and contingencies. Maintaining our investment grade ratings is a high priority for us. Certain of our financing agreements include various covenants. Our revolving credit agreement contains financial covenants which require that we (a) not permit our ratio of consolidated long-term debt (including current maturities) to total capitalization (defined in our credit agreement as stockholders’ equity less intangible assets plus long-term debt) to be greater than 0.60 to 1.00 at any time and, (b) not permit our quarterly ratio of consolidated EBITDA to consolidated interest expense on a rolling twelve month basis to be less than 2.50 to 1.00. At August 31, 2005, our ratio of consolidated debt to total capitalization was 0.31 to 1.00. Our ratio of consolidated EBITDA to interest expense for the year ended August 31, 2005 was 17.7 to 1.00. In addition, our credit agreement contains covenants that restrict our ability to, among other things: • create liens; • enter into transactions with affiliates; • sell assets; • in the case of some of our subsidiaries, guarantee debt; and • consolidate or merge. The indenture governing our long-term public debt contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions, consolidate or merge and limits the ability of some of our subsidiaries to incur certain types of debt or to guarantee debt. Also, our five-year term note at CMCZ contains certain covenants including minimum debt to EBITDA, debt to equity and tangible net worth requirements (as defined for CMCZ only). We have more than adequately complied with the requirements, including the covenants of our financing agreements as of and for the year ended August 31, 2005. Off-Balance Sheet Arrangements For added flexibility, ongoing basis to replace those receivables that have been collected from our customers. The U.S. securitization program contains certain cross-default provisions whereby a termination event could occur should we default under another credit arrangement, and contains covenants amended in June 2005 to conform to the same requirements contained in our amended revolving credit agreement. We use the securitization program as a source of funding that is not reliant on either our short-term commercial paper program or our revolving credit facility. As such, we do not believe that any reductions in the capacity or termination of the securitization program would materially impact our financial position, cash flows or liquidity because we have access to other sources of external funding. Our domestic mills, CMCZ and recycling businesses are capital intensive. Our capital requirements include construction, purchases of equipment and maintenance capital at existing facilities. We plan to invest in new operations, use working capital to support the growth of our businesses, and pay dividends to our stockholders. We continue to assess alternative means of raising capital, including potential dispositions of under-performing or non-strategic assets. Any future major acquisitions could require additional financing from external sources such as the issuance of common or preferred stock. Cash Flows Our cash flows from operating activities primarily result from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products. We also sell and rent construction-related products and accessories. We have a diverse and generally stable customer base. We use futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices. See Note 7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements. The volume and pricing of orders from our U.S. customers in the manufacturing and construction sectors affect our cash flows from operating activities. The pace of economic expansion and retraction of major industrialized and emerging markets (especially China) outside of the U.S. also significantly affect our cash flows from operating activities. The weather can influence the volume of products we ship in any given period. Also, the general economy, the strength of the U.S. dollar, governmental action, and various other factors beyond our control influence our volume and prices. Periodic fluctuations in our prices and volumes can result in variations in cash flows from operating activities. Despite these fluctuations, we have historically relied on operating activities as a steady source of cash. we may secure financing through securitization and sales of certain accounts receivable both in the U.S. and internationally. See Note 3, Sales of Accounts Receivable, to the consolidated financial statements. Our domestic securitization program provides for such sales in an amount not to exceed $130 million. In addition to our domestic securitization program, our European and Australian subsidiaries can sell, without recourse, up to 25 million Great British pounds (GBP) and 50 million Australian dollars (AUD) of additional accounts receivable. We may continually sell accounts receivable on an 53
Slide 56: During the year ended August 31, 2005, we generated $200.6 million of net cash flows from our operating activities as compared to the $49.7 million of net cash flows provided by our operating activities for the year ended August 31, 2004. Our net earnings were $153.8 million higher for the year ended August 31, 2005 as compared to 2004. Including the $21.5 million impact of foreign currency exchange rate fluctuations, our accounts receivable and inventories increased $288.2 million during the year ended August 31, 2005 as compared to an increase in these items of $514.3 million in 2004. Accounts receivable for all our segments, except CMCZ and Recycling, significantly increased in 2005, primarily due to higher selling prices. Higher shipments in our domestic mills, domestic fabrication and marketing and distribution segments were also a factor. Inventories increased primarily in our marketing and distribution segment during the year ended August 31, 2005 due to higher purchase costs and quantities, including goods in transit. Our income taxes payable increased by $28.8 million during the year ended August 31, 2005 due to higher earnings as compared to 2004. Our accounts payable increased by $32.7 million (including effects of foreign currency fluctuations of $9.5 million) during the year ended August 31, 2005 due primarily to higher scrap purchases by CMCZ in the fourth quarter of 2005. Also, our accrued expenses and other payables increased by $44.8 million during the year ended August 31, 2005 as compared to 2004 due primarily to increased discretionary incentive accruals, including bonuses and profit sharing. The increase in our net cash flows from operating activities for the year ended August 31, 2004 as compared to 2003 primarily resulted from higher net earnings in 2004 which was partially offset by increases in accounts receivable and inventories. Accounts receivable significantly increased in all segments in 2004, primarily due to higher selling prices and shipments with the majority of the increases in domestic fabrication, recycling and marketing and distribution. Inventories increased in 2004 as compared to 2003 primarily due to higher purchase costs and higher inventory quantities in anticipation of increased sales and goods in transit. We invested $110.2 million in property, plant and equipment during the year ended August 31, 2005, which was significantly more than during 2004 and 2003. Also, during 2005, we spent $12.3 million for the acquisitions of substantially all of the operating assets of two fabrication businesses. During 2004, we spent $99.4 million of cash for the acquisitions of Lofland and CMCZ. We expect our capital spending for fiscal 2006 to be $178 million. We assess our capital spending each quarter and reevaluate our requirements based upon current and expected results. In November 2003, we issued $200 million of longterm notes due in 2013. The proceeds from this offering were used to purchase $90 million of our notes otherwise due in 2005 and finance our purchases of CMCZ and Lofland. In March 2004, we refinanced $38.4 million of CMCZ’s notes payable that we had assumed in our acquisition through the issuance of a long-term note and a revolving credit facility. Also during 2004, we obtained more extended payment terms through the use of discounted documentary letters of credit rather than through more traditional extended terms with our trade suppliers. In October 2003, we entered into a trade financing arrangement to enable us to provide a low risk $35.3 million advance to one of our key suppliers. The advance was substantially repaid during 2005 as the supplier delivered the materials that we purchased under a related supply agreement. At August 31, 2005, 58,130,723 common shares were outstanding and 6,399,609 were held in our treasury. In January 2005, we paid a two-for-one stock split in the form of a 100% stock dividend on our common stock and also increased our quarterly cash dividend to 6 cents per share on the increased number of shares resulting from the stock dividend. During the year ended August 31, 2005, we received $18.7 million from stock issued under our employee incentive and stock purchase plans as compared to $19.5 million in 2004 and $6.2 million in 2003. We purchased 3,039,110 shares of our common stock during the year ended August 31, 2005 at $25.36 per share for a total of $77.1 million. During 2004 and 2003, we spent $4.6 million and $14.6 million, respectively, to acquire our common stock. We paid dividends of $13.7 million during the year ended August 31, 2005 as compared to $9.8 million and $9.0 million in 2004 and 2003, respectively. We paid $10 million in longterm debt principal when it matured in July 2005. We believe that our cash flows from operating activities will continue to provide liquidity during 2006. In addition, at August 31, 2005 we had $130.0 million and $365.1 million unused capacity under our domestic accounts receivable securitization and commercial paper programs, respectively. Therefore, we believe that we have sufficient liquidity to enable us to meet our contractual obligations of $890 million over the next twelve months, the majority of which are expenditures associated with normal revenueproducing activities and to make our planned capital expenditures of $178 million. 54
Slide 57: Contractual Obligations The following table represents our contractual obligations as of August 31, 2005 (dollars in thousands): Payments Due By Period* Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Contractual Obligations: Long-term debt(1) Trade financing arrangement(1) (2) Interest(3) Operating leases(4) Purchase obligations(5) Total contractual cash obligations $ 393,964 1,667 127,645 84,521 1,094,305 $1,702,102 $ 7,223 1,667 23,730 19,277 838,302 $890,199 $ 73,963 — 41,893 30,010 185,494 $331,360 $111,983 — 25,868 18,664 50,535 $ 207,050 $ 200,795 — 36,154 16,570 19,974 $ 273,493 *We have not discounted the cash obligations in this table. (1)Total amounts are included in the August 31, 2005 consolidated balance sheet. See Note 6, Credit Arrangements, to the consolidated financial statements. (2)Paid in full September 2005. (3)Interest payments related to our short-term debt are not included in the table as they do not represent a significant obligation as of August 31, 2005. (4)Includes minimum lease payment obligations for non-cancelable equipment and real-estate leases in effect as of August 31, 2005. See Note 11, Commitments and Contingencies, to the consolidated financial statements. (5)Approximately 92% of these purchase obligations are for inventory items to be sold in the ordinary course of business. Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement. Agreements with variable terms are excluded because we are unable to estimate the minimum amounts. Other Commercial Commitments We maintain stand-by letters of credit to provide support for certain transactions that our customers or suppliers request. At August 31, 2005, we had committed $34.9 million under these arrangements. All commitments expire within one year. In January 2005, we entered into a guarantee agreement to assist one of our Chinese coke suppliers to obtain pre-production financing from a bank. See Note 11, Commitments and Contingencies, to the consolidated financial statements. Environmental and Other Matters See Note 11, Commitments and Contingencies, to the consolidated financial statements. General We are subject to federal, state and local pollution control laws and regulations. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. Our original business and one of our core businesses for over nine decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are contrary to the goal of greater recycling. Such regulations expose us and the industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, 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 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. Contingencies In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and government investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, and the uncertainties involved in litigation. Accordingly, we cannot always estimate a meaningful range of possible exposure. We believe that we have adequately provided in our consolidated financial statements for the estimable probable impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particular quarter. 55
Slide 58: Solid and Hazardous Waste We currently own or lease, and in the past owned or leased, properties that have been used in our operations. Although we used operating and disposal practices that were standard in the industry at the time, wastes may have been disposed or released on or under the properties or on or under locations where such wastes have been taken for disposal. We are currently involved in the investigation and remediation of several such properties. State and federal laws applicable to wastes and contaminated properties have gradually become stricter over time. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. We have been named as a potentially responsible party at a number of contaminated sites. We generate wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act (RCRA) and comparable state and/or local statutes where we operate. These statutes, regulations and laws may have limited disposal options for certain wastes. Superfund The U.S. Environmental Protection Agency (EPA) or an equivalent state agency notified us that we are considered a potentially responsible party (PRP) at fourteen sites, none owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or a 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. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. At August 31, 2005, based on currently available information, which is in many cases preliminary and incomplete, we believe that our aggregate liability for cleanup and remediation costs in connection with nine of the fourteen sites will be between $1.7 million and $2.7 million. We have accrued for these liabilities based upon our best estimates. We are not able to estimate the possible range of loss on the other sites. The amounts paid and the expenses incurred on these fourteen sites for the year ended August 31, 2005, 2004 and 2003 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material. Clean Water Act The Clean Water Act (CWA) imposes restrictions and strict controls regarding the discharge of wastes into waters of the United States, a term broadly defined. These controls have become more stringent over time and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into federal waters; comparable permits may be required at the state level. The CWA and many state agencies provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge, we may be liable for penalties and costs. Clean Air Act Our operations are subject to regulations at the federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification and/or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increased scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources are required to construct what is referred to as the Best Available Control Technology. Additionally, the EPA is implementing new, more stringent standards for ozone and fine particulate matter. The EPA recently has promulgated new national emission standards for hazardous air pollutants for steel mills which will require all major sources in this category to meet the standards by reflecting application of maximum achievable control technology. Compliance with the new standards could require additional expenditures. In fiscal 2005, we incurred environmental expenses of $19.2 million. The expenses included the cost of environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse 56
Slide 59: dust removal and various other expenses. Approximately $5.4 million of our capital expenditures for 2005 related to costs directly associated with environmental compliance. At August 31, 2005, $6.2 million was accrued for environmental liabilities of which $3.4 million was classified as other long-term liabilities. Business Interruption Insurance Claims and Unclaimed Property See Note 11, Commitments and Contingencies Commodity Prices We base pricing in some of our sales to the consolidated financial statements. Dividends We have paid quarterly cash dividends in each of the past 164 consecutive quarters. We paid dividends in our fiscal year 2005 at the rate of 5 cents per share for the first quarter and 6 cents per share for the last three quarters. and purchase contracts on forward metal commodity exchange quotes which we determine at the beginning of the contract. Due to the volatility of the metal commodity indexes, we enter into metal commodity forward or futures contracts for copper, aluminum, nickel and zinc. These forwards or futures mitigate the risk of unanticipated declines in gross margins on these contractual commitments. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses from ineffectiveness. Interest Rates If interest rates increased or decreased by one percentage point, the effect on interest expense related to our variable-rate debt and the fair value of our long-term debt would be approximately $367 thousand and $17 million, respectively. The following table provides certain information regarding the foreign exchange and commodity financial instruments discussed above. Market Risk Approach to Minimizing Market Risk See Note 7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements for disclosure regarding our approach to minimizing market risk. Also, see Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements. The following types of derivative instruments were outstanding at August 31, 2005, in accordance with our risk management program. Currency Exchange Forwards We enter into currency exchange forward contracts as economic hedges of international trade commitments denominated in currencies other than the United States dollar, or, if the transaction involves our Australian or European subsidiaries, their local currency. No single foreign currency poses a primary risk to us. Fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments. 57
Slide 60: Foreign Currency Exchange Contract Commitments as of August 31, 2005: Functional Currency Type Amount (in thousands) Foreign Currency Type Amount (in thousands) Range of Hedge Rates U.S. $ Equivalent (in thousands) AUD PLN EUD GBP GBP AUD AUD USD USD 167,137 95,433 20,107 6,940 3,321 3,919 2,442 637 254 USD EUD USD USD EUD JPY** EUD PLN EUD 125,700 23,500 24,656 12,353 4,828 321,873 1,495 2,100 202 $ 0.6758–0.7755 0.2420–0.2932 1.2216–1.2456 1.7498–1.7899 1.4403–1.4672 80.00–84.03 0.5796–0.6277 3.297 0.7468–0.8192 $ 125,700 29,915 24,656 12,353 6,146 2,998 1,903 637 254 204,562 204,727 $ 165 Revaluation as of August 31, 2005, at quoted market Unrealized gain • Substantially all foreign currency exchange contracts mature within one year. The range of hedge rates represents functional to foreign currency conversion rates. **Japanese Yen As of August 31, 2004 (in thousands): Revaluation at quoted market Unrealized loss Metal Commodity Contract Commitments as of August 31, 2005: Range or Amount of Hedge Rates Per MT/lb. $168,610 $ 246 Terminal Exchange Metal Long/ Short # of Lots Standard Lot Size Total Weight Total Contract Value at Inception (in thousands) London Metal Exchange (LME) Aluminum Aluminum Copper Copper Nickel Nickel Cast Aluminum Zinc Zinc New York Mercantile Exchange Copper Commodities Division (Comex) Copper Long Short Long Short Long Short Long Short Long 180 283 13 8 48 58 60 4 4 25 MT 4,500 MT $ 1,649.00–1,932.00 $ 8,306 25 MT 7,075 MT 1,712.00–1,917.25 12,802 25 MT 325 MT 2,840.00–3,680.00 1,044 25 MT 200 MT 3,336.15–3,797.75 713 6 MT 288 MT 14,892.73–15,012.46 5,200 6 MT 348 MT 14,210.00–16,520.00 5,423 20 MT 1,200 MT 1,658.00 1,989 55,000 lbs. 220,000 lbs. 1,298.39–1,366.84 135 55,000 lbs. 220,000 lbs. 1,296.00 130 Per 100/wt. 121.00–169.50 148.70–170.50 Long Short 439 484 25,000 lbs. 11.0 MM lbs. 25,000 lbs. 12.1 MM lbs. 17,018 19,570 72,330 72,069 $ 261 Revaluation as of August 31, 2004, at quoted market Unrealized gain • • • • Seven lots mature after one year MT = Metric Tons M M = Millions lbs. = Pounds As of August 31, 2004 (in thousands): Revaluation at quoted market Unrealized gain 58 $ 49,183 $ 849
Slide 61: Commercial Metals Company and Subsidiaries R E P ORT OF MANAG E M E NT ON I NTE R NAL CONTROLS OVE R FI NANC IAL R E P ORTI NG The management of Commercial Metals Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of August 31, 2005, the Company’s internal control over financial reporting is effective based on the COSO criteria. Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our assessment of our internal control over financial reporting which immediately follows this report. November 9, 2005 59
Slide 62: Commercial Metals Company and Subsidiaries R E P ORT OF I N DE P E N DE NT R EG ISTE R E D P U B LIC ACCOU NTI NG FI R M Board of Directors and Stockholders Commercial Metals Company Irving, Texas We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Commercial Metals Company and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of August 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of August 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 31, 2005 of the Company and our report dated November 9, 2005 expressed an unqualified opinion on those financial statements. Dallas, Texas November 9, 2005 60
Slide 63: Commercial Metals Company and Subsidiaries R E P ORT OF I N DE P E N DE NT R EG ISTE R E D P U B LIC ACCOU NTI NG FI R M Board of Directors and Stockholders Commercial Metals Company Irving, Texas We have audited the accompanying consolidated balance sheets of Commercial Metals Company and subsidiaries (the “Company”) as of August 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 the Company at August 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2005, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of August 31, 2005, based on the criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 9, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Dallas, Texas November 9, 2005 61
Slide 64: Financial Ratios and Statistics Dividend Data and Price Range of Common Stock* Year ended August 31, 2005 2004 2003 2005 Fiscal Quarter Price Range of Common Stock High Low Cash Dividends Liquidity Current ratio Acid test ratio 1.9 1.1 1.8 0.9 1.9 1.1 1st 2nd 3rd 4th $22.92 36.15 39.00 30.70 $16.35 20.06 22.74 23.00 5¢ 6¢ 6¢ 6¢ Turnover Average day’s sales Accounts receivable No. of days’ sales outstanding Inventories No. of days’ sales on hand 44.7 55.8 43.3 45.8 49.4 50.4 1st 2nd 3rd 4th $13.00 15.98 17.20 18.60 $ 9.01 12.88 11.05 14.67 4¢ 4¢ 4¢ 5¢ $ 18.1 million $13.1 million $ 7.9 million 2004 Fiscal Quarter Price Range of Common Stock High Low Cash Dividends * Adjusted for January 2005 stock split Leverage Long-term debt as a percent of total capitalization* Total debt to total capitalization* plus short-term debt Ratio of total debt to tangible net worth Ratio of total liabilities to total assets Short-term borrowings as a percent of total borrowings 0.4% 2.4% 8.3% 0.6 0.6 0.6 0.5 0.7 0.6 29.5% 37.6% 33.6% 29.0% 36.4% 31.6% Coverage Times interest earned pre-tax Ratio of earnings to fixed charges 12.4 7.3 2.6 15.2 8.5 3.0 Taxes Effective tax rate 35.7% 30.7% 37.8% Profitability Earnings before taxes/net sales** Net earnings/net sales Return on beginning stockholders’ equity 43.3% 26.0% 3.8% 6.8% 4.4% 4.5% 2.8% 1.1% 0.7% * Total capitalization = long-term debt + deferred income taxes + total stockholders’ equity ** Before minority interests 62
Slide 65: Commercial Metals Company and Subsidiaries CONSOLI DATE D STATE M E NTS OF EAR N I NGS Year ended August 31, (in thousands, except share data) 2005 2004 2003 Net sales $ 6,592,697 $ 4,768,327 $ 2,875,885 Costs and expenses: Cost of goods sold Selling, general and administrative expenses Interest expense 5,693,483 424,994 31,187 6,149,664 4,160,726 367,550 28,104 4,556,380 2,586,845 243,308 15,338 2,845,491 Earnings before income taxes and minority interests Income taxes 443,033 157,996 211,947 65,055 30,394 11,490 Earnings before minority interests Minority interests (benefit) 285,037 (744) 146,892 14,871 18,904 — Net earnings $ 285,781 $ 132,021 $ 18,904 Basic earnings per share Diluted earnings per share $ $ 4.84 4.63 $ $ 2.29 2.21 $ $ 0.34 0.33 See notes to consolidated financial statements. 63
Slide 66: Commercial Metals Company and Subsidiaries CONSOLI DATE D BALANC E SH E ETS August 31, (in thousands) 2005 2004 Assets Current assets: Cash and cash equivalents Accounts receivable (less allowance for collection losses of $17,167 and $14,626) Inventories Other Total current assets 829,192 706,951 45,370 1,700,917 607,005 645,484 48,184 1,424,232 $ 119,404 $ 123,559 Property, plant and equipment: Land Buildings and improvements Equipment Construction in process 41,887 245,924 863,748 49,183 1,200,742 Less accumulated depreciation and amortization (695,158) 505,584 Goodwill Other assets 30,542 95,879 $ 2,332,922 35,862 222,179 810,801 21,688 1,090,530 (639,040) 451,490 30,542 81,782 $1,988,046 See notes to consolidated financial statements. 64
Slide 67: August 31, (in thousands, except share data) 2005 2004 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable-trade Accounts payable-documentary letters of credit Accrued expenses and other payables Income taxes payable Short-term trade financing arrangements Notes payable – CMCZ Current maturities of long-term debt Total current liabilities $ 408,342 140,986 293,598 40,126 1,667 — 7,223 891,942 $ 385,108 116,698 248,790 11,343 9,756 530 11,252 783,477 Deferred income taxes Other long-term liabilities Long-term trade financing arrangement Long-term debt Total liabilities 45,629 58,627 — 386,741 1,382,939 50,433 39,568 14,233 393,368 1,281,079 Minority interests Commitments and contingencies Stockholders’ equity: Capital stock: Preferred stock Common stock, par value $5.00 per share: authorized 100,000,000 shares; issued 64,530,332 and 32,265,166 shares; Outstanding 58,130,723 and 29,277,964 shares Additional paid-in capital Accumulated other comprehensive income Unearned stock compensation Retained earnings 50,422 46,340 — — 322,652 14,813 24,594 (5,901) 644,319 1,000,477 161,326 7,932 12,713 — 524,126 706,097 Less treasury stock 6,399,609 and 2,987,202 shares at cost Total stockholders’ equity (100,916) 899,561 $ 2,332,922 (45,470) 660,627 $ 1,988,046 See notes to consolidated financial statements. 65
Slide 68: Commercial Metals Company and Subsidiaries CONSOLI DATE D STATE M E NTS OF CASH FLOWS Year ended August 31, (in thousands) 2005 2004 2003 Cash Flows From (Used By) Operating Activities: Net earnings Adjustments to reconcile net earnings to cash from operating activities: Depreciation and amortization Minority interests (benefit) Asset impairment charges Provision for losses on receivables Tax benefits from stock plans Stock-based compensation Loss on reacquisition of debt Net gain on sale of assets Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable Accounts receivable sold Inventories Other assets Accounts payable, accrued expenses, other payables and income taxes Deferred income taxes Other long-term liabilities Net Cash Flows From Operating Activities Cash Flows From (Used By) Investing Activities: $ 285,781 $ 132,021 $ 18,904 76,610 (744) 300 6,604 12,183 1,115 — (877) 71,044 14,871 6,583 6,154 6,148 — 3,072 (1,319) 61,203 — 630 5,162 330 — — (886) (217,398) — (49,313) (6,997) 83,757 (8,934) 18,499 200,586 (223,845) 77,925 (290,474) 10,001 223,968 2,142 11,403 49,694 (65,736) 18,662 (36,351) 5,042 (2,947) 11,568 (1,275) 14,306 Purchases of property, plant and equipment (110,214) Sales of property, plant and equipment and other 5,034 — Acquisitions of CMCZ and Lofland, net of cash acquired Acquisitions of other fabrication businesses, net of cash acquired (12,310) Net Cash Used By Investing Activities Cash Flows From (Used By) Financing Activities: (51,889) 3,192 (99,401) (2,110) (150,208) (49,792) 1,388 — (13,416) (61,820) (117,490) Increase in documentary letters of credit Proceeds from trade financing arrangements Payments on trade financing arrangements Short-term borrowings, net change Proceeds from issuance of long-term debt Payments on long-term debt Stock issued under incentive and purchase plans Treasury stock acquired Dividends paid Debt reacquisition and issuance costs Net Cash From (Used By) Financing Activities Effect of Exchange Rate Changes on Cash Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year 66 24,288 — (22,322) (586) — (17,222) 18,703 (77,077) (13,652) — (87,868) 617 (4,155) 123,559 $ 119,404 41,916 35,307 (34,343) (702) 238,400 (132,680) 19,530 (4,586) (9,764) (4,989) 148,089 926 48,501 75,058 $ 123,559 9,930 15,000 (9,175) — — (373) 6,216 (14,610) (9,039) — (2,051) 226 (49,339) 124,397 $ 75,058 See notes to consolidated financial statements.
Slide 69: Commercial Metals Company and Subsidiaries CONSOLI DATE D STATE M E NTS OF STOC KHOLDE RS’ EQU ITY Common Stock Number of Shares (in thousands, except share data) Amount Accumulated Additional Other Unearned Paid-In Comprehensive Stock Capital Income (Loss) Compensation Treasury Stock Retained Earnings Number of Shares Amount Total Balance, September 1, 2002 32,265,166 $ 161,326 $ 170 $ (1,458) $ $ 392,004 18,904 (3,746,713) $ (50,736) $ 501,306 18,904 Comprehensive income: Net earnings Other comprehensive income (loss)– Foreign currency translation adjustment, net of taxes of $2,076 Unrealized loss on derivatives, net of taxes of $(16) Comprehensive income Cash dividends Treasury stock acquired Stock issued under incentive and purchase plans Tax benefits from stock plans Balance, August 31, 2003 3,855 (29) 3,855 (29) 22,730 (9,039) (951,410) (14,610) 5,853 (59,493) (9,039) (14,610) 6,216 330 506,933 132,021 32,265,166 161,326 363 330 863 427,647 2,368 401,869 (4,270,476) 132,021 Comprehensive income: Net earnings Other comprehensive income– Foreign currency translation adjustment, net of taxes of $4,996 Unrealized gain on derivatives, net of taxes of $574 Comprehensive income Cash dividends Treasury stock acquired Stock issued under incentive and purchase plans Tax benefits from stock plans Balance, August 31, 2004 9,279 1,066 9,279 1,066 142,366 (9,764) (143,847) (4,586) 18,609 (45,470) (9,764) (4,586) 19,530 6,148 660,627 285,781 32,265,166 161,326 921 6,148 7,932 1,427,121 12,713 524,126 (2,987,202) 285,781 Comprehensive income: Net earnings Other comprehensive income– Foreign currency translation adjustment, net of taxes of $240 Unrealized loss on derivatives, net of taxes of $(257) Comprehensive income Cash dividends Treasury stock acquired Restricted stock awarded Stock-based compensation Stock issued under incentive and purchase plans Tax benefits from stock plans Two-for-one stock split Balance, August 31, 2005 12,778 (897) 12,778 (897) 297,662 (13,652) (13,652) (77,077) — 1,115 2,600 279 (6,737) 836 (3,039,110) 272,000 (77,077) 4,137 1,209 2,174,293 17,494 18,703 12,183 12,183 32,265,166 161,326 (9,390) (151,936) (2,819,590) — 64,530,332 $322,652 $14,813 $24,594 $(5,901) $644,319 (6,399,609) $(100,916) $ 899,561 See notes to consolidated financial statements. 67
Slide 70: Commercial Metals Company and Subsidiaries NOTES TO CONSOLI DATE D FI NANC IAL STATE M E NTS 1. 1 S U M MARY O F S I G N I F I C ANT AC C O U NTI N G P O L I C I E S Nature of Operations The Company manufactures, recycles and markets steel and metal products and related materials. Its domestic mills, recycling facilities and primary markets are located in the Sunbelt from the midAtlantic area through the West. Also, the Company operates a steel minimill in Poland and processing facilities in Australia. Through its global marketing offices, the Company markets and distributes steel and nonferrous metal products and other industrial products worldwide. See Note 14, Business Segments. Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances are eliminated. Investments in 20% to 50% owned affiliates are accounted for on the equity method. All investments under 20% are accounted for under the cost method. The Company owns a 71.1% interest in CMC Zawiercie (CMCZ). The accounts of CMCZ are consolidated beginning December 1, 2003. See Note 2, Acquisitions. Revenue Recognition Sales are recognized when title international and remaining inventories is determined by the first-in, first-out (FIFO) method. Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance and production wages. Also, the costs of departments that support production including materials management and quality control, are allocated to inventory. In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, which specifies that certain abnormal costs must be recognized as current period charges. Management does not believe that this Statement, which is effective for inventory costs incurred after September 1, 2005, will materially affect the Company’s results of operations or financial position. Property, Plant and Equipment Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. 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. At August 31, 2005, the useful lives used for depreciation and amortization were as follows: Buildings 7 to 40 years Land improvements 3 to 25 years Leasehold improvements 3 to 15 years Equipment 2 to 25 years The Company evaluates the carrying value of property, plant and equipment whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If an impairment exists, the net book values are reduced to fair values as warranted. Major maintenance is expensed as incurred. Intangible Assets The following intangible assets sub- passes to the customer either when goods are shipped or when they are received based upon the terms of the sale. When the Company estimates that a contract with a customer will result in a loss, the entire loss is accrued as soon as it is probable and estimable. Cash and Cash Equivalents The Company considers temporary investments that are short term (with original maturities of three months or less) and highly liquid to be cash equivalents. 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 2005 Gross Carrying Amount ject to amortization are included within other assets on the consolidated balance sheets as of August 31: 2004 Gross Carrying Amount Accumulated Amortization (in thousands) Accumulated Amortization Net Net Non-competition agreements Production backlog Customer base Favorable land leases Brand name Other Total 68 $ 1,572 63 5,655 4,096 4,233 113 $15,732 $ 709 — 1,102 86 810 54 $2,761 863 63 4,553 4,010 3,423 59 $12,971 $ $ 2,272 1,200 5,661 3,642 813 556 $14,144 $ 1,088 800 504 32 282 447 $ 3,153 $ 1,184 400 5,157 3,610 531 109 $10,991
Slide 71: Management has changed its plan for the use of one of its previously acquired brand names and now has determined that it has a finite life. Excluding goodwill, there are no other significant intangible assets with indefinite lives. Goodwill represents the difference between the purchase price of acquired businesses and the fair value of their net assets. The Company has elected to test annually for goodwill impairment in the fourth quarter of the fiscal year or if a triggering event occurs. Aggregate amortization expense for intangible assets for the years ended August 31, 2005, 2004, and 2003 was $1.9 million, $2.1 million, and $857 thousand, respectively. At August 31, 2005, the weighted average remaining useful lives of these intangible assets, excluding the favorable land leases in Poland, was 7 years. The weighted average lives of the favorable land leases were 84 years. Estimated amounts of amortization expense for the next five years are as follows (in thousands): Year Stock-Based Compensation The Company applies 2006 2007 2008 2009 2010 $ 1,853 1,703 1,519 1,116 919 Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for grants of stock options, restricted stock and stock appreciation rights (SARs). No compensation cost has been recognized for grants of stock options because the exercise price is equal to the market price of the underlying stock on the date of the grant. Compensation expense related to the issuance of restricted stock and the change in underlying stock price subsequent to issuance of SARs is recognized on a straight line basis over the vesting period of the related shares of stock or right. The Company has determined the pro forma net earnings and earnings per share information as if the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation, had been applied to its stock-based compensation for employees and directors. The BlackScholes valuation model was used to calculate the pro forma stock-based compensation costs for the stock options and SARs. The following assumptions were required for grants in the years ended August 31: 2005 2004 2003 Risk-free interest rate Expected life Expected volatility Expected dividend yield 3.93% 4.94 years 0.305 1.3% 2.94% 4.36 years 0.260 1.0% 3.05% 5.44 years 0.257 1.8% Environmental Costs The Company accrues liabilities for environmental investigation and remediation costs based upon estimates regarding the sites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where amounts and timing can be reliably estimated, amounts are discounted. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is recognized on an undiscounted basis. Asset Retirement Obligations In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of SFAS No. 143 (FIN 47). FIN 47 clarifies that an asset retirement obligation for which the timing and (or) the method of settlement are conditional on a future event that may or may not be within the Company’s control must be recognized as a liability when incurred or acquired if it can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the Company’s fiscal year ending August 31, 2006 and its implementation will not have a material impact on the Company’s results of operations and financial position. If the Company had used the fair-value based method of accounting, net earnings and earnings per share would have been reduced to the pro forma amounts listed in the table below. For purposes of pro forma earnings disclosures, the assumed compensation expense is amortized on a straight line basis over the vesting periods of the awards. (in thousands, except per share amounts) 2005 2004 2003 Net earnings, as reported expense recognized Less: Pro forma stock-based compensation cost Net earnings-pro forma Basic Diluted Basic Diluted $285,781 715 (3,025) $283,471 $ $ $ $ 4.84 4.63 4.80 4.60 $132,021 — (2,829) $129,192 $ $ $ $ 2.29 2.21 2.25 2.16 $18,904 — (1,875) $17,029 $ $ $ $ 0.34 0.33 0.30 0.30 Add: Stock-based compensation Net earnings per share-as reported: Net earnings per share-pro forma: The weighted-average per share fair value of the awards granted in 2005, 2004 and 2003 was $7.19, $3.68 and $1.74, respectively. 69
Slide 72: In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires the measurement at fair value and recognition of compensation expense for all stock-based compensation payments and supersedes the Company’s current intrinsic method of accounting for unvested outstanding awards and awards issued after the effective date for the Company of September 1, 2005. The Company is currently completing its evaluation of the impact of SFAS 123(R) on its operating results and financial condition and anticipates that stock-based compensation expense for the year ending August 31, 2006 for unvested awards outstanding at September 1, 2005 will be approximately $6.3 million pre-tax and that the cumulative effect of adoption will be immaterial. Accounts Payable – Documentary Letters of Credit adjustments are reported as a component of accumulated other comprehensive income (loss). Transaction gains from transactions denominated in currencies other than the functional currencies were $1.5 million, $2.8 million and $1.9 million for the years ended August 31, 2005, 2004, and 2003, respectively. 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. Derivatives The Company records derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses from the changes in the values of the derivatives are recorded in the statement of earnings, or are deferred if they are designated and are highly effective in achieving offsetting changes in fair values or cash flows of the hedged items during the term of the hedge. Reclassifications Certain immaterial reclassifications In order to facilitate certain trade transactions, the Company utilizes documentary letters of credit to provide assurance of payment to its suppliers. These letters of credit may be for prompt payment or for payment at a future date conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of credit. The banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the Company’s contractually committed revolving credit agreement. In some cases, if the Company’s suppliers choose to discount the future dated obligation, the Company may pay the discount cost. The amounts currently payable under letters of credit in connection with such discount arrangements are classified as Accounts Payable – Documentary Letters of Credit. Income Taxes The Company and its U.S. subsidiaries have been made in the 2004 and 2003 financial statements to conform to the classifications used in the current year. AC Q U I S ITI O N S 2 On August 16, 2005, the Company acquired substantially all of the operating assets of a Juarez, Mexico joist manufacturing facility from a subsidiary of Canam Group, Inc. of Quebec, Canada for $9.4 million cash. This facility will operate as part of the Company’s domestic fabrication segment and allow the Company to achieve production synergies with its existing plants and expand the territory for its joist operations in the southwestern United States and northern Mexico. On November 4, 2004, the Company acquired substantially all of the operating assets of the J.L. Davidson Company’s rebar fabricating facility located in Rialto, California. The Company paid $2.9 million in cash and executed notes payable of $2.3 million for this acquisition. The following summarizes the allocation of the purchase prices at fair value as of the date of the acquisitions (in thousands). The fair value data were determined primarily on a market-based approach. The purchase price allocation for the Joist Juarez acquisition may be revised following the completion of the Company’s review of market value estimates. The pro forma impact from these acquisitions on consolidated net earnings would not have been materially different than reported. file a consolidated federal income tax return, and federal income taxes are allocated to subsidiaries based upon their respective taxable income or loss. Deferred income taxes are provided for temporary differences between financial and tax reporting. The principal differences are described in Note 8, Income Taxes. Benefits from tax credits are reflected currently in earnings. The Company provides for taxes on unremitted earnings of foreign subsidiaries, except for CMCZ and its operations in Australia, which it considers to be permanently invested. Foreign Currencies The functional currency of most of the Company’s European marketing and distribution operations is the Euro. The functional currencies of the Company’s Australian, United Kingdom, German, CMCZ, and certain Chinese operations are the local currencies. The remaining international subsidiaries’ functional currency is the United States dollar. Translation 70
Slide 73: J. L. Davidson Joist Juarez Total Inventories Property, plant and equipment Backlog Other assets Liabilities $ 681 4,550 — — — $ 5,231 $ 2,360 6,928 63 113 (104) $ 9,360 $ 3,041 11,478 63 113 (104) $14,591 adjustments for amortization of acquired intangible assets, depreciation expense based upon the new basis of property, plant and equipment, and interest expense for new and assumed debt. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. (Unaudited) Year ended August 31, On December 3, 2003, the Company’s Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland, for 200 million Polish Zlotys (PLN) ($51.9 million) cash on the acquisition date. In connection with the acquisition, the Company also assumed debt of 176 million PLN ($45.7 million), acquired $3.8 million in cash and incurred $1.7 million of directly related costs. CMCZ operates a steel minimill which manufactures rebar, wire rod and merchant bar products. On December 23, 2003, the Company acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash, $9 million of which was placed in escrow which could be used to resolve any claims that the Company might have against the sellers post-acquisition. Claims made against the escrow to date are not material and at August 31, 2005, $5 million remained in escrow. In connection with the acquisition, the Company also incurred $1.1 million of external costs. Lofland was the sole stockholder of the Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related product sales facilities. The following summarizes the allocation of the purchase prices at fair value as of the dates of the acquisitions (in thousands). The minority interest in CMCZ was recorded at historical cost. CMCZ Lofland Total (in thousands, except per share data) 2004 2003 Net sales Net earnings Diluted earnings per share $ 4,882,421 133,007 2.23 $ 3,297,712 26,061 0.46 In 2003, the Company acquired substantially all of the operating assets of E.L. Wills, Inc., a rebar fabrication company located in Fresno, California, the concrete form and construction-related product Denver, Colorado sales location of Symons Corporation, and Dunn Del Re Steel, Inc., a rebar fabrication company located in Chandler, Arizona. The Company paid $13.4 million in total, and the pro forma impact from these acquisitions on consolidated net earnings would not have been materially different than reported. SAL E S O F AC C O U NTS 3 R E C E I VA B L E Accounts receivable Inventories Goodwill Other intangible assets Other assets Liabilities Debt Minority interest $ 42,355 30,360 — 3,451 8,441 (44,943) (45,717) (29,101) $ 49,827 $ 18,894 5,139 10,268 23,405 9,800 1,219 (19,151) — — $ 49,574 $ 61,249 35,499 95,249 23,405 13,251 9,660 (64,094) (45,717) (29,101) $ 99,401 Property, plant and equipment 84,981 The results of operations from these acquisitions are included in the consolidated statement of earnings from the dates of their acquisition. The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisitions of CMCZ and Lofland had taken place at the beginning of the period. The pro forma information includes primarily The Company has an accounts receivable securitization program which it utilizes as a cost-effective, short-term financing alternative. Under this program, the Company and several of its subsidiaries periodically sell certain eligible trade accounts receivable to the Company’s wholly-owned consolidated special purpose subsidiary (CMCRV). CMCRV is structured to be a bankruptcy-remote entity and was formed for the sole purpose of buying and selling receivables generated by the Company. The Company, irrevocably and without recourse, transfers all applicable trade accounts receivable to CMCRV. CMCRV, in turn, sells an undivided percentage ownership interest in the pool of receivables to affiliates of two third party financial institutions. On April 20, 2005, the agreement with the financial institution affiliates was extended to April 14, 2006. CMCRV may sell undivided interests of up to $130 million, depending on the Company’s level of financing needs. The Company accounts for its transfers of receivables to CMCRV together with CMCRV’s sales of undivided interests in these receivables to the financial institutions as sales. At the time an undivided interest in the pool of receivables is sold, the amount is removed from the consolidated balance sheet and the proceeds from the sale are reflected as cash provided by operating activities. 71
Slide 74: At August 31, 2005 and 2004, uncollected accounts receivable of $275 million and $236 million, respectively, had been sold to CMCRV. The Company’s undivided interest in these receivables (representing the Company’s retained interest) was 100% and 83% at August 31, 2005 and 2004, respectively. At August 31, 2004, the financial institution buyers owned $40.0 million in undivided interests in CMCRV’s accounts receivable pool, which was reflected as a reduction in accounts receivable on the Company’s consolidated balance sheets. The average monthly amounts of undivided interests owned by the financial institution buyers were $32.8 million, $22.1 million and $15.4 million for the years ended August 31, 2005, 2004 and 2003, respectively. The carrying amount of the Company’s retained interest in the receivables approximated fair value due to the short-term nature of the collection period. The retained interest is determined reflecting 100% of any allowance for collection losses on the entire receivables pool. No other material assumptions are made in determining the fair value of the retained interest. This retained interest is subordinate to, and provides credit enhancement for, the financial institution buyers’ ownership interest in CMCRV’s receivables, and is available to the financial institution buyers to pay any fees or expenses due to them and to absorb all credit losses incurred on any of the receivables. The Company is responsible for servicing the entire pool of receivables. This U.S. securitization program contains certain crossdefault provisions whereby a termination event could occur if the Company defaulted under another credit arrangement. In addition to the securitization program described above, the Company’s international subsidiaries in Europe and Australia periodically sell accounts receivable. These arrangements also constitute true sales and, once the accounts are sold, they are no longer available to satisfy the Company’s creditors in the event of bankruptcy. In August 2004, the Company’s Australian subsidiary entered into an agreement with a financial institution to periodically sell certain trade accounts receivable up to a maximum of 50 million AUD ($37.3 million). This Australian program contains covenants in which our subsidiary must meet certain coverage and tangible net worth levels (as defined). At August 31, 2005, our Australian subsidiary was in compliance with these covenants. Uncollected accounts receivable that had been sold under these international arrangements and removed from the consolidated balance sheets were $63.2 million and $58.7 million at August 31, 2005 and 2004, respectively. The average monthly amounts of international accounts receivable sold were $65.3 million, $27.7 million and $16.5 million for the years ended August 31, 2005, 2004 and 2003, respectively. Discounts (losses) on domestic and international sales of accounts receivable were $4.1 million, $1.6 million, and $584 thousand for the years ended August 31, 2005, 2004 and 2003, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses. I NVE NTO R I E S 4 Before deduction of last-in, first-out (LIFO) inventory valuation reserves of $111.4 million and $92.2 million at August 31, 2005 and 2004, respectively, inventories valued under the first-in, first-out method (FIFO) approximated market value. At August 31, 2005 and 2004, 56% and 60%, respectively, of total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to CMCZ and certain marketing and distribution businesses. The majority of the Company’s inventories are in the form of finished goods, with minimal work in process. Approximately $39.9 million and $58.1 million were in raw materials at August 31, 2005 and 2004, respectively. A S S E T I M PA I R M E N T C H A R G E S 5 The Company recognized non-cash asset impairment charges of $6.6 million in its domestic fabrication segment during the year ended August 31, 2004. These impairment charges were recorded in selling, general and administrative expenses. Asset impairment charges during the years ended August 31, 2005 and 2003 were not material. C R E DIT AR RANG E M E NTS 6 In May 2005, the Company increased its commercial paper program to permit maximum borrowings of up to $400 million from the prior level of $275 million. The program’s capacity is reduced by outstanding standby letters of credit which totalled $34.9 million at August 31, 2005. It is the Company’s policy to maintain contractual bank credit lines equal to 100% of the amount of the commercial paper program. On May 23, 2005, the Company amended and restated its unsecured revolving credit agreement to (1) extend the maturity of the facility from August 6, 2006 to May 23, 2010, (2) increase the facility to $400 million from $275 million, (3) reduce the minimum interest coverage ratio (as defined) requirement 72
Slide 75: from three to two and one-half times, and (4) increase the maximum debt capitalization (as defined) requirement from 55% to 60%. The agreement provides for interest based on Bank of America’s prime rate and facility fees of 12.5 basis points per annum. No compensating balances are required. The Company was in compliance with these requirements at August 31, 2005. At August 31, 2005 and 2004, no borrowings were outstanding under the commercial paper program or the related revolving credit agreements. The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at bankers’ acceptance rates or on a cost of funds basis. No compensating balances or commitment fees are required under these credit facilities. Amounts outstanding on these facilities relate to accounts payable settled under bankers’ acceptances as described in Note 1, Summary of Significant Accounting Policies. In order to facilitate certain trade transactions, the Company utilizes documentary letters of credit, advances and non- or limited-recourse trade financing arrangements to provide assurance of payments and advanced funding to its suppliers. In October 2003, one of the Company’s international subsidiaries (Subsidiary) entered into a financing arrangement with an independent third party lender for the sole purpose of advancing funds for steel purchases to a key supplier of which the Company owns an 11% interest (Supplier). The 30 million Euro financing agreement was secured by a marketbased supply agreement between the Subsidiary and the Supplier for the delivery of steel requiring quarterly purchases of 21 million Euro or 87.5 thousand metric tons, whichever is higher. These agreements terminate October 31, 2006. At August 31, 2005 and 2004, liabilities to the lender of $1.7 million (1.4 million Euro) and $24.0 million (19.7 million Euro), respectively, were recorded as short- and long-term trade financing arrangements and the advances to the Supplier were recorded as current and other assets on the consolidated balance sheets. The outstanding balance on the financing arrangement was paid in September 2005. The total amount of purchases from the Supplier (including those under this trade financing arrangement) was $251 million, $146 million, and $110 million for the years ended August 31, 2005, 2004 and 2003, respectively. At August 31, 2005 and 2004, $11.6 million and $9.6 million, respectively, were included in accounts payable on the consolidated balance sheets for amounts due from the Company to the Supplier. Long-term debt and amounts due within one year are as follows, as of August 31: (in thousands) 2005 2004 7.20% notes due July 2005 6.80% notes due August 2007 6.75% notes due February 2009 CMCZ term note due March 2009 5.625% notes due November 2013 Other Less current maturities $ — $ 10,246 50,000 100,000 39,773 200,000 4,191 50,000 100,000 41,096 200,000 3,278 404,620 11,252 393,964 7,223 $386,741 $393,368 Interest on these notes is payable semiannually, excluding CMCZ which is paid quarterly. During the year ended August 31, 2004, the Company repurchased $90 million of its 7.20% notes due in 2005. The Company recorded a pre-tax charge of $3.1 million for the year ended August 31, 2004, resulting from the cash payments made to retire the notes, which was included in selling, general and administrative expenses. Also, in November 2003, the Company issued $200 million of its 5.625% notes due in November 2013. The Company entered into an interest rate lock on a portion of the new debt resulting in an effective rate of 5.54%. In March 2004, CMCZ borrowed 150 million PLN ($38.4 million) under a five-year term note to refinance a portion of its notes payable. The note has scheduled principal payments in eight equal, semi-annual installments beginning in September 2005. Interest is accrued at the Warsaw Interbank Offered Rate (WIBOR) plus 1.25%, and the average effective annual rate was 7.05% for the year ended August 31, 2005. The term note is collateralized by CMCZ’s inventory and fixed assets. In March 2004, CMCZ also entered into a revolving credit facility with the same group of banks with maximum borrowings of 60 million PLN ($18.2 million) bearing interest at WIBOR plus 0.8% and collateralized by CMCZ’s accounts receivable. On December 9, 2004, the facility was increased to 120 million PLN ($36.4 million), and on March 2, 2005, it was extended for one year. At August 31, 2005, no amounts were outstanding under this facility. The term note and the revolving credit facility contain certain financial covenants for CMCZ. CMCZ was in compliance with these covenants at August 31, 2005 and 2004. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt. The aggregate amounts of all long-term debt maturities for the five years following August 31, 2005 are (in thousands): 2006–$7,223; 2007–$62,258; 2008–$11,705, 2009–$111,686; 2010 and thereafter–$201,092. Interest of $1.3 million, $372 thousand, and $254 thousand was capitalized in the cost of property, plant and 73
Slide 76: equipment constructed in 2005, 2004 and 2003, respectively. Interest of $31.7 million, $25.1 million, and $14.4 million was paid in 2005, 2004 and 2003, respectively. F I NAN C IAL I N STR U M E NTS, 7 MAR KET AN D C R E DIT R ISK 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: • Cash and cash equivalents • Accounts receivable/payable • Notes payable - CMCZ • Trade financing arrangements The Company’s long-term debt is predominantly publicly held. Fair value was determined by indicated market values. August 31, (in thousands) 2005 2004 Long-Term Debt: Carrying amount Estimated fair value $ 386,741 396,351 $ 404,620 427,801 The Company maintains both corporate and divisional credit departments. Credit limits are set for customers. Credit insurance is used for some of the Company’s divisions. Letters of credit issued or confirmed by sound financial institutions are obtained to further ensure prompt payment in accordance with terms of sale; generally, collateral is not required. Approximately $260 million and $242 million of the Company’s accounts receivable at August 31, 2005 and 2004, respectively, were secured by credit insurance and/or letters of credit. 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. The Company’s worldwide operations and product lines expose it to risks from fluctuations in foreign currency exchange rates and metals commodity prices. The objective of the Company’s risk management program is to mitigate these risks using futures or forward contracts (derivative instruments). The Company enters into metal commodity forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodities’ prices, and enters into foreign currency forward contracts which match the expected settlements for purchases and sales denominated in foreign currencies. Also, when its sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to minimize the effect of the volatility of ocean freight rates. The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the years ended August 31, 2005, 2004 and 2003. Certain of the foreign currency and all of the commodity and freight contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges. All of the instruments are highly liquid and none are entered into for trading purposes. The following chart shows the impact on the consolidated statements of earnings of the changes in fair value of these economic hedges included in determining net earnings (in thousands) for the year ended August 31. Settlements are recorded within the same line item as the related unrealized gains (losses). Earnings (Expense) 2005 2004 2003 Net sales (foreign currency instruments) Cost of goods sold (commodity instruments) $ (293) (400) $ 377 670 $ (317) 328 The Company’s derivative instruments were recorded as follows on the consolidated balance sheets (in thousands) at August 31: 2005 2004 Derivative assets (other current assets) Derivative liabilities (other payables) $ 2,563 $2,909 2,151 1,700 The following table summarizes activities in other comprehensive income (losses) related to derivatives classified as cash flow hedges held by the Company during the years ended August 31 (in thousands): 2005 2004 2003 Change in market value (net of taxes) (Gain) losses reclassified into net earnings, net Other comprehensive gain (loss)—unrealized gain (loss) on derivatives $ (897) $1,066 $ (29) (112) (98) — $ (785) $1,164 $ (29) 74
Slide 77: During the twelve months following August 31, 2005, negligible losses are anticipated to be reclassified into net earnings as the related capital expenditure is placed into service, and an additional $112 thousand in gains will be reclassified as interest expense related to the interest rate swap. The Company has hedged its foreign currency risk on the forecasted purchase of equipment through 2006. I N C O M E TA X E S Amounts recognized in the consolidated balance sheets consist of: August 31, (in thousands) 2005 2004 Deferred tax asset—current Deferred tax asset—long term Deferred tax liability—long term Net deferred tax liability $ 2,895 6,947 45,629 $ 35,787 $ 2,473 3,269 50,433 $ 44,691 8 The provisions for income taxes include the following: Year ended August 31, (in thousands) 2005 2004 2003 Current: United States Foreign State and local Deferred $137,118 3,196 9,257 149,571 8,425 $157,996 $ 41,005 18,050 4,317 63,372 1,683 $ 65,055 $ (2,220) 1,848 257 (115) 11,605 $ 11,490 Taxes of $118.8 million, $33.9 million and $3.9 million were paid in 2005, 2004 and 2003, 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 deferred tax liabilities (assets) associated with these differences are: August 31, (in thousands) 2005 2004 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. The Company provides United States taxes on unremitted foreign earnings except for its operations in CMCZ and Australia, which it considers to be permanently invested. The amounts of these permanently invested earnings at August 31, 2005 were $44.8 million and $33.5 million for CMCZ and Australia, respectively. In the event that the Company repatriated these earnings, incremental U.S. taxes may be incurred. The Company has determined that it is not practicable to determine the amount of these incremental U.S. taxes. Net operating losses consist of $70.5 million of state net operating losses that expire during the tax years ending from 2007 to 2025. These assets will be reduced as tax expense is recognized in future periods. Reconciliations of the United States statutory rates to the effective rates are as follows: Year ended August 31, 2005 2004 2003 Statutory rate State and local taxes Extraterritorial Income Exclusion Foreign rate differential Other Effective tax rate 35.0% 1.4 (0.4) (0.3) — 35.7% 35.0% 1.3 (1.3) (4.4) 0.1 30.7% 35.0% 0.6 (0.9) — 3.1 37.8% Deferred tax assets: Deferred compensation Net operating losses (less allowances of $720 and $1,184) Other Deferred tax assets Deferred tax liabilities: Tax on difference between tax and book depreciation U.S. taxes provided on foreign income and foreign taxes Other Deferred tax liabilities Net deferred tax liability 21,094 964 $ 64,725 $ 35,787 19,474 1,568 $ 65,292 $ 44,691 42,667 44,250 3,885 7,748 $ 28,938 1,894 6,543 $ 20,601 $ 17,305 $ 12,164 The American Jobs Creation Act of 2004 (AJCA) would allow the Company a one time opportunity to repatriate undistributed foreign earnings through its fiscal year ended August 31, 2006 at a 5.25% tax rate (without consideration of possible foreign withholding taxes) rather than the normal U.S. tax rate of 35%, provided that certain criteria, including qualified U.S. reinvestment, are met. Available tax credits related to the repatriation would be reduced under provisions of the AJCA. As of August 31, 2005, the Company was not in a position to decide on whether, and to what extent, foreign earnings that have not yet been remitted to the U.S. may be repatriated. Based on analysis to date, however, it is reasonably possible that the Company may repatriate some amount up to $26 million, with the respective tax liability ranging 75
Slide 78: up to $5 million for which the Company, consistent with its practice noted above, has recorded $9.2 million of deferred taxes. The Company’s analysis was based on the statute as currently enacted. Technical corrections, clarifications and regulations related to the statute could impact the Company’s estimate of the tax liability associated with the repatriation. C A P I TA L S T O C K 2005 2004 2003 Shares subscribed Price per share Shares purchased Price per share Shares available $ $ 727,260 15.88 524,040 10.07 $ 1,125,412 $ 595,740 10.05 454,680 6.18 $ $ 578,420 6.18 447,760 6.24 9 On November 22, 2004, the Company declared a twofor-one stock split in the form of a 100% stock dividend on the Company’s common stock payable January 10, 2005 to shareholders of record on December 13, 2004. This resulted at the record date in the issuance of 32,265,166 additional shares of common stock and a transfer of $9.4 million from additional paid in capital (the balance in additional paid in capital as of the date of the split) and $151.9 million from retained earnings. All per share and weighted average share amounts in the accompanying consolidated financial statements have been restated to reflect this stock split. The Company also increased its quarterly cash dividend from five to six cents per share on the increased number of shares resulting from the stock dividend effective with the January 31, 2005 dividend payment. In January 2004, the Company’s stockholders increased the number of shares of common stock that are authorized for issuance to 100,000,000. The Company increased its quarterly cash dividend by 25 percent to five cents per common share, effective with the July 2004 payment. Previously, the quarterly cash dividend was four cents per share. At August 31, 2005, the Company had authorization to purchase 905,500 of its common shares. Stock Purchase Plan Almost all U.S. resident employees The Company recorded compensation expense for this plan of $3.0 million, $1.5 million and $932 thousand in 2005, 2004 and 2003, respectively. Stock Incentive Plans The 1986 Stock Incentive Plan with a year of service at the beginning of each calendar year may participate in the Company’s employee stock purchase plan. The Directors establish the purchase discount from the market price. The discount was 25% for each of the three years ended August 31, 2005, 2004 and 2003. In January 2003, the Company’s stockholders approved an amendment to the plan that increased by 1,000,000 the maximum number of shares that may be eligible for issuance and increased the maximum number of shares that an eligible employee may purchase annually from 200 to 400 shares. Yearly activity of the stock purchase plan was as follows: (1986 Plan) ended November 23, 1996, except for 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 outstanding awards under this Plan are 100% vested and expire through 2006. The 1996 Long-Term Incentive Plan (1996 Plan) was approved in December 1996. Under the 1996 Plan, stock options, SARs, and restricted stock may be awarded to employees. The option price for both the stock options and the SARs will not be less than the fair market value of the Company’s stock at the date of grant. The outstanding option awards under the 1996 Plan vest 50% after one year and 50% after two years from date of grant and will expire seven years after grant. The terms of the 1996 Plan resulted in additional authorized shares of 1,316,328 in 2005, 1,869,940 in 2004, and 125,612 in 2003. On July 8, 2005, the Company issued 256,000 shares of restricted stock to employees and issued SARs relating to the appreciation in 520,250 shares of its common stock at an exercise price of $24.62 per share (the market price on that date). These SARs and the restricted stock vest over a three-year period in increments of one-third. For the year ended August 31, 2005, the Company recorded pre-tax compensation expense of $1.1 million relating to the restricted stock and SARs. In January 2000, the Company’s stockholders approved the 1999 Non-Employee Director Stock Option Plan. Under this Plan, any outside director could elect to receive all or part of fees otherwise payable in the form of a stock option. The price of these options is the fair market value of the Company’s stock at the date of the grant. The options granted automatically vest 50% after one year and 50% after two years from the grant date. Options granted in lieu of fees are immediately vested. All options expire seven years from the date of grant. The 1999 Non-Employee Director Stock Plan was amended with stockholder approval in January 2005 in order to provide annual grants of either options or restricted stock to non-employee directors. This annual award can either be in the form of a nonqualified stock option grant for 76
Slide 79: 12,000 shares or a restricted stock award of 2,000 shares. On January 27, 2005, the Company issued an aggregate of 16,000 shares of common stock to eight non-employee directors with a market value of $27.16 per share under that plan. This restricted stock award vests over a two-year period. Prior to vesting, the restricted stock recipients will receive an amount equivalent to any dividend declared on the Company’s common stock. Combined information for shares subject to options and SARs for the three plans was as follows: Weighted Average Exercise Price Price Range Per Share 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. Stockholder Rights Plan On July 28, 1999, the Company’s Board of Directors adopted a stockholder rights plan pursuant to which stockholders were granted preferred stock rights (Rights) to purchase one one-thousandth of a share of the Company’s Series A Preferred Stock for each share of common stock held. In connection with the adoption of such plan, the Company designated and reserved 100,000 shares of preferred stock as Series A Preferred Stock and declared a dividend of one Right on each outstanding share of the Company’s common stock. Rights were distributed to stockholders of record as of August 9, 1999. The Rights Agreement provides that the number of Rights associated with each share of common stock shall be adjusted in the event of a stock split. After giving effect to subsequent stock splits, each share of common stock now carries with it one-quarter of a Right. The Rights are represented by and traded with the Company’s common stock. The Rights do not become exercisable or trade separately from the common stock unless at least one of the following conditions are met: a public announcement that a person has acquired 15% or more of the common stock of the Company or a tender or exchange offer is made for 15% or more of the common stock of the Company. Should either of these conditions be met and the Rights become exercisable, each Right will entitle the holder (other than the acquiring person or group) to buy one one-thousandth of a share of the Series A Preferred Stock at an exercise price of $150.00. Each fractional share of the Series A Preferred Stock will essentially be the economic equivalent of one share of common stock. Under certain circumstances, each Right would entitle its holder to purchase the Company’s stock or shares of the acquirer’s stock at a 50% discount. The Company’s Board of Directors may choose to redeem the Rights (before they become exercisable) at $0.001 per Right. The Rights expire July 28, 2009. Number September 1, 2002 Outstanding Exercisable Granted Exercised Forfeited Increase authorized August 31, 2003 Outstanding Exercisable Granted Exercised Forfeited Increase authorized August 31, 2004 Outstanding Exercisable Granted Exercised Forfeited Increase authorized August 31, 2005 Outstanding Exercisable Available for grant* 5,374,129 3,979,879 3,208,729 11.64 9.08 5.48–27.16 5.48–27.16 6,838,530 4,278,748 528,495 (1,964,896) (28,000) 1,316,328 9.50 7.43 24.66 7.71 8.69 5.49–15.57 5.49–15.05 24.62–27.16 5.49–15.56 5.88–15.56 7,689,836 5,311,606 1,785,144 (2,577,790) (58,660) 1,869,940 7.30 7.12 15.54 7.16 8.09 5.49–10.71 5.49–10.71 15.05–15.57 5.88–8.59 5.89–15.57 6,491,470 4,223,488 1,694,860 (423,236) (73,258) 125,612 7.23 6.97 7.28 6.20 7.33 5.05–10.71 5.05–9.03 7.27–7.55 6.66–9.62 5.05–8.59 *Includes shares available for options, SARs and restricted stock grants. Share information for options and SARs at August 31, 2005: Outstanding Weighted Average Remain- Weighted ing Con- Average Number tractual Exercise Outstanding Life (Yrs) Price Exercisable E M P L OY E E S ’ Weighted Average Number Exercise Outstanding Price 10 R ETI R E M E NT P LANS Range of Exercise Price $ 5.48–7.98 2,292,486 8.58–10.71 24.62–27.16 890,752 528,495 15.05–15.56 1,662,396 2.9 3.4 5.5 6.8 4.2 $ 6.97 2,292,486 $ 6.97 8.66 15.54 24.66 890,752 788,396 8,245 8.66 15.54 27.16 $ 5.48–27.16 5,374,129 $ 11.64 3,979,879 $ 9.08 Substantially all employees in the U.S. are covered by defined contribution profit sharing and savings plans. These tax qualified plans are maintained and contributions made in accordance with ERISA. The Company also provides certain eligible executives benefits pursuant to a nonqualified benefit restoration plan (BRP Plan) 77
Slide 80: equal to amounts that would have been available under the tax qualified ERISA plans, save for limitations of ERISA, tax laws and regulations. Company contributions, which are discretionary, to all plans were $47.0 million, $32.8 million, and $13.2 million, for 2005, 2004 and 2003, respectively. These costs were recorded in selling, general and administrative expenses. The deferred compensation liability under the BRP Plan was $37.4 million and $22.7 million at August 31, 2005 and 2004, respectively, and recorded in other long-term liabilities. Though under no obligation to fund the plan, the Company has segregated assets in a trust whose current value at August 31, 2005 and 2004 was $34.5 million and $20.2 million, respectively, and recorded in other long-term assets. The net unrealized holding gain on these segregated assets was $4.8 million for the year ended August 31, 2005. The amounts recognized in earnings in the prior years were not material. A certain number of employees outside of the U.S. participate in defined contribution plans maintained in accordance with local regulations. Company contributions to these international plans were $2.7 million, $1.4 million, and $902 thousand for the years ended August 31, 2005, 2004, and 2003, respectively. 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. COM M ITM E NTS AN D 11 CONTI NG E NC I ES Minimum lease commitments payable by the Company and its consolidated subsidiaries for noncancelable operating leases in effect at August 31, 2005, are as follows for the fiscal periods specified: (in thousands) Equipment Real Estate 2006 2007 2008 2009 2010 and thereafter $ 13,317 11,682 10,676 7,804 16,789 $ 60,268 $ 5,960 4,348 3,304 2,689 7,952 $ 24,253 Total rental expense was $18.8 million, $16.0 million and $13.4 million in 2005, 2004 and 2003, respectively. Environmental and Other Matters In the ordinary course 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 fourteen 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 liability at the sites. 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. At August 31, 2005, based on currently available information, which is in many cases preliminary and incomplete, management estimates that the Company’s aggregate liability for cleanup and remediation costs in connection with nine of the fourteen sites will be between $1.7 million and $2.7 million. The Company has accrued for these liabilities based upon management’s best estimates. At August 31, 2005, $6.2 million was accrued for environmental liabilities of which $2.0 million was classified as other long-term liabilities. 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. Historically, the amounts that we have ultimately paid for such remediation activities have not been material. In general, state escheat statutes allow the examination for unclaimed property to extend back ten or more years. Although no audits are currently in process, the Company has recorded liabilities for the estimated minimum potential unclaimed property. The Company is unable to estimate a meaningful range for such exposure. Management believes that adequate provision has been made in the financial statements for the potential impact of these issues, and that the outcomes will not significantly impact the results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular quarter. Insurance Claims On August 18, 2003, the Company’s new electric arc furnace transformer failed at its SMI-South Carolina melt shop after only six days in operation. After the failure of the new transformer, the Company’s former transformer was reinstalled. Costs for repairing the transformer were covered by the equipment of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. 78
Slide 81: manufacturer. In May and June 2004, the Company’s primary and secondary transformers at SMI-Texas’ melt shop failed. In August 2005, the Company settled all of its insurance claims (primarily for business interruption) relating to these transformer failures. Total settlement amounts (net of deductibles) were $10.3 million and $9.8 million for the SMI-Texas and SMI-South Carolina claims, respectively. These amounts were recorded in net sales for the year ended August 31, 2005. Guarantees In January 2005, one of the Company’s AC C R U E D E X P E N S E S 13 (in thousands) A N D O T H E R PAYA B L E S August 31, 2005 2004 Salaries, bonuses and commissions Employees’ retirement plans Freight Advance billings on contracts Insurance Taxes other than income taxes Contract losses Litigation accruals Interest Environmental Other $ 117,615 44,282 20,034 22,966 11,779 14,644 4,222 6,650 5,047 2,807 43,552 $293,598 $ 94,501 30,477 22,903 18,058 15,359 11,575 7,470 6,650 5,205 2,185 34,407 $248,790 international subsidiaries entered into a guarantee agreement with a bank in connection with a $30 million advance by an affiliate of the bank to one of the subsidiary’s suppliers. The subsidiary has entered into an offtake agreement with the supplier with a total purchase commitment of $45 million. The subsidiary’s maximum exposure under the guarantee is $3 million (except in an event of default by the subsidiary under the offtake agreement). The fair value of the guarantee is negligible. EAR N I NGS P E R SHAR E B USI N ESS SEG M E NTS 14 The Company’s reportable segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise. The Company has five reportable segments: domestic mills, CMCZ, domestic fabrication, recycling and marketing and distribution. The domestic mills segment includes the Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The copper tube minimill is aggregated with the Company’s steel minimills because it has similar economic characteristics. The CMCZ minimill and subsidiaries in Poland have been presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are different from that of the Company’s domestic minimills. The domestic fabrication segment consists of the Company’s rebar and joist fabrication operations, fence post manufacturing plants, construction-related and other products facilities. The recycling segment consists of the CMC Recycling division’s scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales, distribution and processing of both ferrous and nonferrous metals and other industrial products. The segment’s activities consist only of physical transactions and not position taking for speculation. The corporate segment 12 In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for any years presented. The reconciliation of the denominators of the earnings per share calculations are as follows at August 31: 2005 2004 2003 Shares outstanding for basic earnings per share Stock-based incentive/purchase plans Shares outstanding for diluted earnings per share 61,690,087 59,688,678 57,211,190 2,665,647 2,152,764 805,232 59,024,440 57,535,914 56,405,958 Effect of dilutive securities: All of the Company’s outstanding stock options, restricted stock and SARs were dilutive at August 31, 2005 and 2004 based on the average share prices of $27.16 and $16.52, respectively. Stock options with total outstanding share commitments of 20,000 were anti-dilutive at August 31, 2003. All stock options and SARs expire by 2012. 79
Slide 82: contains expenses of the Company’s corporate headquarters and interest expense relating to its long-term public debt and commercial paper program. The Company uses adjusted operating profit to measure segment performance. Intersegment sales are generally priced at prevailing market prices. Certain corporate Domestic Mills Domestic Fabrication administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following is a summary of certain financial information by reportable segment (in thousands): Marketing and Distribution 2005 CMCZ Recycling Corporate Eliminations Consolidated Net sales– unaffiliated customers Intersegment sales Net sales Interest expense* Capital expenditures $ 1,014,021 $466,529 $1,472,858 $820,984 $2,813,462 284,400 1,298,421 1,622 52,041 33,669 306 468,532 11,726 478,255 (188) 3,602 25,730 17,808 — 276,219 828 1,473,686 117,856 9,993 17,487 13,383 27,006 594,000 75,962 896,946 70,828 (1,738) 12,021 7,858 3,230 146,620 112,863 2,926,325 90,417 9,330 2,331 2,810 — 746,951 $ 4,843 — 4,843 (17,463) 9,379 604 1,082 — $ — (485,779) (485,779) — (1,001) — — — — $6,592,697 — 6,592,697 478,325 31,187 110,214 76,610 30,542 2,332,922 Adjusted operating profit (loss) 216,875 Depreciation and amortization Goodwill Total assets 2004 100,600 Net sales– unaffiliated customers Intersegment sales Net sales $ 845,348 $354,328 $1,041,690 $ 717,557 $1,809,276 263,888 1,109,236 84,156 2,370 25,734 36,324 306 421,517 72,813 427,141 69,318 3,175 7,913 10,098 — 242,547 5,631 1,047,321 7,288 5,135 7,954 13,369 27,006 497,044 56,618 774,175 67,887 (93) 8,688 7,705 3,230 143,504 72,507 1,881,783 39,427 4,056 1,214 2,665 — 569,220 $ 128 — 128 (26,394) 13,833 386 883 — $ — (471,457) (471,457) — (372) — — — — $4,768,327 — 4,768,327 241,682 28,104 51,889 71,044 30,542 1,988,046 Adjusted operating profit (loss) Interest expense* Capital expenditures Depreciation and amortization Goodwill Total assets 2003 114,214 Net sales– unaffiliated customers Intersegment sales Net sales $ 596,418 $ 173,635 770,053 19,664 (273) 25,979 37,908 306 412,403 — $ 739,677 $409,554 $1,129,777 — — — — — — — — 2,961 742,638 701 3,649 12,060 12,319 3,601 326,541 31,890 441,444 15,206 844 5,765 7,936 2,930 106,749 19,920 1,149,697 21,784 1,214 3,560 2,134 — 350,601 $ 459 — 459 (11,039) 10,158 2,428 906 — 86,961 $ — $2,875,885 — 2,875,885 46,316 15,338 49,792 61,203 6,837 1,283,255 (228,406) (228,406) — (254) — — — — Adjusted operating profit (loss) Interest expense* Capital expenditures Depreciation and amortization Goodwill Total assets * Includes intercompany interest expense (income) in the segments. 80
Slide 83: The following table provides a reconciliation of consolidated adjusted operating profit to net earnings: Year ended August 31, (in thousands) 2005 2004 2003 Q U A R T E R LY F I N A N C I A L 15 D ATA ( U N A U D I T E D ) Net earnings Minority interests (benefit) Income taxes Interest expense Discounts on sales of $ 285,781 (744) 157,996 31,187 4,105 $ 132,021 14,871 65,055 28,104 1,631 $ 241,682 $ 18,904 — 11,490 15,338 Summarized quarterly financial data for fiscal 2005, 2004 and 2003 are as follows (in thousands except per share data): Three Months Ended 2005 Nov. 30 Feb. 28 May 31 Aug. 31 Net sales 584 $ 46,316 Gross profit Net earnings $ 478,325 Basic EPS Diluted EPS $1,529,072 $ 1,597 ,313 $1,726,251 $1,740,061 232,964 73,725 1.26 1.21 208,521 56,575 0.95 0.91 229,532 71,741 1.20 1.14 228,196 83,740 1.44 1.38 accounts receivable Adjusted operating profit The following represents the Company’s external net sales by major product and geographic area: Year ended August 31, (in thousands) 2005 2004 2003 Nov. 30 Three Months Ended 2004 Feb. 29 May 31 Aug. 31 Net sales Gross profit Net earnings Basic EPS Diluted EPS $ 830,007 $1,068,060 $1,407 ,206 $1,463,054 92,519 12,628 0.22 0.22 128,615 21,155 0.37 0.35 202,169 50,884 0.88 0.84 184,298 47,354 0.81 0.78 Major product information: Steel products Industrial materials Ferrous scrap Nonferrous scrap Other products Net sales Geographic area: United States Europe Asia Australia/New Zealand Other Net sales $3,876,683 1,237,551 853,317 403,696 221,450 $6,592,697 $2,989,554 827,249 493,609 315,442 142,473 $ 4,768,327 $2,045,965 203,831 298,335 223,213 104,541 $2,875,885 $4,290,435 816,322 387,963 427,652 670,325 $6,592,697 $ 2,991,272 519,967 384,196 328,357 544,535 $ 4,768,327 $1,821,506 242,912 155,054 249,619 406,794 $2,875,885 Three Months Ended 2003 Nov. 30 Feb. 28 May 31 Aug. 31 Net sales Gross profit Net earnings Basic EPS Diluted EPS $ 636,179 $ 660,816 $ 774,151 $ 804,739 61,060 2,205 0.04 0.04 67,919 2,933 0.05 0.05 74,419 3,022 0.05 0.05 85,641 10,744 0.19 0.19 The following represents long-lived assets by geographic area: (in thousands) 2005 Year ended August 31, 2004 2003 United States Poland Australia Other $ 491,528 119,378 13,199 7,900 $ 437,170 95,057 11,346 20,241 $ 409,284 — 11,009 10,696 $ 430,989 Total long-lived assets $ 632,005 $ 563,814 During the fourth quarter of 2005, the Company reached a formal settlement with its insurance carrier and recorded $11.6 million representing the final settlement of its insurance claims relating to its prior year transformer failures at SMI-Texas and SMI-South Carolina. All funds were received in September 2005. Also, during the fourth quarter of 2005, the Company reduced its accrued discretionary incentive compensation accrual by $6.9 million following finalization and approval by its Board of Directors. The final determination of LIFO inventory quantities and prices (after tax) resulted in $10.8 million income, $25.3 million expense, and $857 thousand expense in the fourth quarters of 2005, 2004, and 2003, respectively. Also, during the fourth quarter of 2005, the Company incurred charges of $6.5 million to write-down its FIFO inventories to current market value. 81
Slide 84: Commercial Metals Company and Subsidiaries COM M E RC IAL M ETALS COM PANY DI R ECTORS AN D OFFIC E RS BOAR D OF DI R ECTORS (left to right) Ralph E. Loewenberg President, R.E. Loewenberg Capital Management Corporation, New York, NY; 2, 3 Stanley A. Rabin Chairman of the Board, President and Chief Executive Officer Moses Feldman President, AeroMed, Inc., Hatfield, Pennsylvania; 1, 2, 3 Anthony A. Massaro Retired Chairman of the Board, The Lincoln Electric Company, Cleveland, Ohio; Chairman of Nominating and Corporate Governance Committee; 2, 3 Robert R. Womack Retired Chairman and Chief Executive Officer of Zurn Industries, Inc., Addison, Texas; Chairman of Compensation Committee; 1, 2, 3 Clyde P. Selig Vice President, CMC; CMC Steel Group–President and Chief Executive Officer Dorothy G. Owen Chairman-Emeritus, Owen Steel Company, Inc., Columbia, South Carolina; 3 J. David Smith Chairman, President and Chief Executive Officer, Euramax International, Inc., Norcross, Georgia; 1, 3 Harold L. Adams Chairman-Emeritus, RTKL Associates Inc., Baltimore, Maryland; 1, 3 Robert D. Neary Retired Co-Chairman of Ernst & Young, Cleveland, Ohio; Chairman of Audit Committee; 1, 2, 3 1 Member of the Audit Committee 2 Member of the Compensation Committee 3 Member of the Nominating and Corporate Governance Committee COR P ORATE OFFIC E RS (left to right) Louis A. Federle Treasurer William B. Larson Vice President and Chief Financial Officer Sharon L. Campbell Assistant Treasurer Murray R. McClean Executive Vice President and Chief Operating Officer Keith M. Shull Vice President, Human Resources Malinda G. Passmore Controller David M. Sudbury Vice President, Secretary and General Counsel Jimmy R. Hodges Assistant Controller 82
Slide 85: Commercial Metals Company and Subsidiaries OP E RATIONS Domestic Mills S T E E L M A N U FA C T U R I N G R A I L S A LVA G E SMI Alabama 101 South 50th Street Birmingham, AL 35212 SMI Arkansas P. O. Box 1147 Magnolia, AR 71754 SMI South Carolina 310 New State Road Cayce, SC 29033 SMI Texas P. O. Box 911 Seguin, TX 78156 SC RAP P ROC ESSI NG SMI Rail P. O. Box 911 Seguin, TX 78156 COP P E R TU B E M A N U FA C T U R I N G CMC Joist Juarez Carratera Panamericana 9920 Colonia Puente Alto Ciudad Juarez, Chih. Mexico 32695 CMC - Kilroy Steel 8500 Union Avenue Cleveland, OH 44105 CMC Steel Fabricators, Inc. P. O. Box 911 Seguin, TX 78156 Capitol City Steel Company 900 North IH 35 Buda, TX 78610 Capitol Steel 2655 N. Foster Drive Baton Rouge, LA 70805 Capitol Steel-Slidell P. O. Box 3219 Slidell, LA 70459 Cary Engineering 534 Old Howell Road Greenville, SC 29615 D&G Enterprises 10792 Leslie Road San Antonio, TX 78254 Dunn Del Re Steel 353 S. Washington Chandler, AZ 85225 E.L. Wills 2914 N. Argyle Fresno, CA 93727 Fontana Steel 12451 Arrow Route Etiwanda, CA 91739 Fontana Steel 2375 West March Lane Stockton, CA 95207 Golden Gate Rebar 6425 Christie Avenue Suite 110 Emeryville, CA 94608 Houston Steel Service Company 7077 Fairbanks North Houston Houston, TX 77040 Impact Metal Products 7127 Gadsden Highway Suite 207 Trussville, AL 35173 Lofland 10245 Locust Mountain Rd. Mountainburg, AR 72946 Lofland 700 Dixie Street N. Little Rock, AR 72114 Lofland 11507 Old Mansfield Road Keithville, LA 71047 Lofland 2300 First Street N.W. Albuquerque, NM 87102 Lofland 2101 South Villa Avenue Oklahoma City, OK 73108 Lofland 1925 South 33rd West Avenue Tulsa, OK 74108 Lofland-CoMet 4846 Singleton Boulevard Dallas, TX 75212 Lofland-CoMet 2400 N.E. 36th Street Fort Worth, TX 76111 Lofland-CoMet 2202 McKinney Street Melissa, TX 75454 Lofland-CoMet 4100 North I-35E Waxahachie, TX 75165 Safety Steel Service 6802 Safety Steel Drive Corpus Christi, TX 78414 Safety Steel Service 255 Skytop Road Victoria, TX 77901 SMI Florida Fabricators– Ft. Myers 2665 Prince Street Ft. Myers, FL 33916 SMI Florida Fabricators – Jacksonville 10483 General Avenue Whitehouse, FL 32220 SMI Georgia Rebar 251 Hosea Road Lawrenceville, GA 30046 SMI Joist Company 3565 U.S. Hwy. 32N Hope, AR 71801 SMI Joist Florida 14099 S.E. 44th Avenue Starke, FL 32091 SMI Joist Iowa 1120 Commercial Street Iowa Falls, IA 50126 SMI Joist Nevada 8200 Woolery Way Fallon, NV 89406 Howell Metal Company State Route 728 New Market, VA 22844 C MC Z S T E E L M A N U FA C T U R I N G CMC Zawiercie S.A. ul. Pilsudskiego 82 42-400 Zawiercie Poland SC RAP P ROC ESSI NG AMP Recycling 1704 Howard Lane Austin, TX 78728 CMC-Augusta 1890 Old Savannah Road Augusta, GA 30901 CMC-Birmingham 3431 27th Ave. North Birmingham, AL 35202 CMC-Cayce 603 Godley Street Cayce, SC 29033 CMC-Florence 5308 Liberty Chapel Road Florence, SC 29501 CMC-Gaston 4908 Hwy. 321 South Gaston, SC 29053 CMC-Lexington 2308 Two Notch Road Lexington, SC 29072 CMC-North Augusta 1119 Atomic Road North Augusta, SC 29841 CMC-Spartanburg 7931 Valley Falls Road Spartanburg, SC 29303 Commercial Metals-Austin Inc. 710 Industrial Boulevard Austin, TX 78745 Horowitz Salvage 1558 N. Austin Street Seguin, TX 78155 SMI-Texas P. O. Box 911 Seguin, TX 78156 CMC Poland S.A. ul. Pilsudskiego 82 42-400 Zawiercie Poland Centrozlom-Katowice ul. Surowcow 30 40-431 Katowice Poland Centrum Zawiercie ul. Okolna 10 42-400 Zawiercie Poland Scrapena S.A. ul. Lubliniecka 41 42-284 Herby Poland Domestic Fabrication S T E E L FA B R I C AT I O N A N D WA R E H O U S I N G ABC Coating of North Carolina 2528 N. Chester Gastonia, NC 28053 Alamo Steel Company 2784 Old Dallas Road Waco, TX 76705 Allegheny Heat Treating P. O. Box U Chicora, PA 16025 Allegheny Heat Treating 15 Union Street Building 3 Struthers, OH 44471 C&M Steel 2755 South Willow Avenue Bloomington, CA 92316 83
Slide 86: SMI Joist South Carolina 850 Taylor Street Cayce, SC 29033 SMI Rebar North Carolina 2528 N. Chester Street Gastonia, NC 28052 SMI Rebar South Carolina 2105 S. Beltline Boulevard Columbia, SC 29201 SMI Rebar Virginia 9434 Crossroads Parkway Fredericksburg, VA 22408 SMI Rebar Virginia-Farmville 300 SMI Way Farmville, VA 23901 SMI Steel Products P. O. Box 2099 Hope, AR 71802 SMI Valley Steel 2120 Industrial Crossways Harlingen, TX 78550 South Carolina Steel 113 East Warehouse Court Taylors, SC 29687 South Metro Rebar 6031 LaGrange Boulevard S.W. Atlanta, GA 30336 Southern Post Company P. O. Box 1147 Magnolia, AR 71754 Southern Post– South Carolina 1540 Pine Ridge Drive West Columbia, SC 29172 Southern Post– Texas 440 Wonder World Drive San Marcos, TX 78666 Southern Post– Utah 920 W. 600 North Brigham City, UT 84302 Southern States Steel Company 9675 Walden Road Beaumont, TX 77707 Sterling Steel Company 2001 Brittmoore Road Houston, TX 77043 Texas Cold Finished Steel 235 Portwall Street Houston, TX 77029 C O N S T R U C T I O N - R E L AT E D P RODUCTS CMC Construction Services 600 St. George St. Jefferson, LA 70132 CMC Construction Services 3310 East Napoleon Lake Charles, LA 70664 CMC Construction Services 2135 McClellan Street Shreveport, LA 71103 CMC Construction Services 1851 Country Club Drive Jackson, MS 39209 CMC Construction Services 6665 N. Washington Street Denver, CO 80229 CMC Construction Services 1100 Central Florida Parkway Orlando, FL 32837 CMC Construction Services 1201 N. 34th Street Tampa, FL 33610 CMC Construction Services 10380 Auto Mall Pkwy. D’Iberville, MS 39540 CMC Construction Services 2300 First Street N.W. Albuquerque, NM 87102 CMC Construction Services 2740 Azalea Drive Charleston, SC 29405 CMC Construction Services 500 Huger Street Columbia, SC 29201 CMC Construction Services 99 North Tyler Amarillo, TX 79101 CMC Construction Services 4123 Todd Lane Austin, TX 78744 CMC Construction Services 10650 SH 30 College Station, TX 77845 CMC Construction Services 2309 N. Frazier Conroe, TX 77303 CMC Construction Services 301 45th Street Corpus Christi, TX 78405 CMC Construction Services 4844 Singleton Boulevard Dallas, TX 75212 CMC Construction Services 1000 Penedale El Paso, TX 79907 CMC Construction Services 2400 N.E. 36th Street Fort Worth, TX 76111 CMC Construction Services 777 N. Eldridge Pkwy, #500 Houston, TX 77079 CMC Construction Services 2001 Brittmoore Road Houston, TX 77043 CMC Construction Services 7063 Fairbanks No. Houston Houston, TX 77040 CMC Construction Services 513 32nd Street Lubbock, TX 79404 CMC Construction Services 2202 McKinney Street Melissa, TX 75454 CMC Construction Services 16709 Central Commerce Drive Round Rock, TX 78664 CMC Construction Services 4911 Whirlwind Drive San Antonio, TX 78217 CMC Construction Services 3430 First Avenue South Texas City, TX 77590 CMC Construction Services 4100 North I-35E Waxahachie, TX 75165 Commercial Metals Company 4614 Agnes Street (Hwy. 44) Corpus Christi, TX 78405 Commercial Metals Company 601 North Throckmorton Fort Worth, TX 76106 Commercial Metals Company 71st and Broadway Streets Galveston, TX 77551 Commercial Metals Company 2160 Harbor Street Houston, TX 77020 Commercial Metals Company 2015 Quitman Street Houston, TX 77026 Commercial Metals Company 2038 North Lane Avenue Jacksonville, FL 32254 Feeder Yards: Gainesville, FL Lake City, FL Commercial Metals Company 12th & Iowa Streets Joplin, Missouri 64801 Feeder Yards: Independence, KS Miami, OK Tulsa, OK Commercial Metals Company 217 Chihuahua St. Laredo, TX 78040 Commercial Metals Company Interstate 27 & County Road 58 Lubbock, TX 79401 Commercial Metals Company 3501 West Second Street Odessa, TX 79763 Feeder Yard: Odessa, TX Commercial Metals Company 3647 Hollywood Shreveport, LA 71109 Commercial Metals Company 634 E. Phelps Springfield, MO 65806 Commercial Metals Company 1900 N. 62nd Street Tampa, FL 33619 Commercial Metals Company 398 Industrial Park Drive Victoria, TX 77905 Commercial Metals Company 8230 Doniphan Drive Vinton, TX 79821 Liberty Division Commercial Metals Company 1729 North Westmoreland Road Dallas, TX 75212 Recycling C M C R E C YC L I N G Commercial Metals Company P. O. Box 607069 Orlando, FL 32860-7069 Feeder Yard: Palm Bay, FL Commercial Metals Company 4351 W. Hwy. 40 Ocala, FL 34482 Feeder Yard: Ocala, FL American Iron & Metal Company Division Commercial Metals Company 2215 South Good-Latimer Dallas, TX 75226 Feeder Yard: Waco, TX Commercial Metals Company 2600 Park Road Extension Burlington, NC 27215 Commercial Metals Company 5250 College Street Beaumont, TX 77707 Feeder Yard: Lufkin, TX Commercial Metals Company 400 E. 20th Street Chattanooga, TN 37408 Feeder Yard: Chattanooga, TN Commercial Metals Company 215 Mockingbird Clute, TX 77531 CMC Construction Services 4212 N. Bolton Avenue Alexandria, LA 71303 CMC Construction Services 18909 Highland Road Baton Rouge, LA 70821 84
Slide 87: Marketing & Distribution NORTH AM E R ICA ASIA Cometals Division Commercial Metals Company 2050 Center Avenue Suite 250 Fort Lee, NJ 07024 Commonwealth Metals Division Commercial Metals Company 560 Sylvan Avenue Englewood Cliffs, NJ 07632 Dallas Trading Division Division Commercial Metals Company 1929 South 6th Avenue Arcadia, CA 91006 Dallas Trading Division Division Commercial Metals Company 6565 N. MacArthur Boulevard Suite 800 Irving, TX 75039 EUROPE CMC China Limited Room 3105, 31/F, Metro Plaza 183 Tian He Bei Road Guangzhou, Guangdong China 510073 CMC Fareast Limited Unit C, 12th Floor 128 Gloucester Road Hong Kong CMC International (S.E. Asia) Pte. Limited #03-03 Central Plaza 298 Tiong Bahru Road Singapore 168730 AU STR AL IA Coil Steels Sheet & Coil 121 Evans Road Salisbury Brisbane, Queensland 4107 Australia Coil Steels Sheet & Coil 2 Draper Place Kewdale, Perth WA 6105 Australia Coil Steels Sheet & Coil 301 Hanson Road Wingfield, Adelaide SA 5013 Australia Coil Steels Sheet & Coil 16 Harbord Street Granville NSW 2142 Australia Cometals - Perth Unit 1, Building B 174 Barrington Street Bibra Lake, Perth WA 6163 Australia R E P R E S E N TAT I V E O F F I C E S AG E NTS CMC (Australia) Pty., Limited Suite 47 223 Calam Road Sunnybank Hills Queensland 4109 Australia CMC (Australia) Pty., Limited Level 5, 4-8 Woodville Street Hurstville, Sydney N.S.W. 2220 Australia CMC (Australia) Pty., Limited Level 6, 697 Burke Road Camberwell, Victoria 3124 Australia CMC (Australia) Pty., Limited 2 Draper Place Kewdale, Perth WA 6105 Australia Coil Steels Group Pty Limited 16 Harbord Street Granville, Sydney NSW 2142 Australia Coil Steels Plate & Long Products Queensland 124 Compton Road Woodbridge, Brisbane, Queensland 4114 Australia Coil Steels Processing 32 Howleys Road Notting Hill, Victoria 3168 Australia Coil Steels Processing 121 Evans Road Salsbury Queensland 4107 Australia Coil Steels Sheet & Coil 32 Howleys Road Notting Hill, Melbourne Victoria 3168 Australia Athens, Greece Auckland, New Zealand Bangkok, Thailand Bucharest, Romania Buenos Aires, Argentina Cairo, Egypt Caracas, Venezuela Delhi, India Ho Chi Minh City, Vietnam Istanbul, Turkey Jakarta, Indonesia Kaohsiung, Taiwan Lisbon, Portugal Manila, Philippines Milan, Italy Mumbai, India Sao Paulo, Brazil Seoul, Korea Shanghai, China Sosnowiec, Poland Temse, Belgium Tokyo, Japan Divisions and Subsidiaries Domestic Mills C M C STE E L G R O U P CMC Cometals, Inc. Room 500, 27 B. Kommunisticheskaya Str. Moscow 109004 Russia Cometals China, Inc. China World Tower 2 Suite 2020 1 Jianguomenwai Avenue Beijing 100004, P.R. China Commonwealth Metals China, Inc. Lippo Plaza Suite 2212-13 No. 222 Huai Hai Zhong Road Shanghai 200021, China JOI NT VE NTU R E OFFIC ES CMC (Europe) AG Lindenstrasse 14 CH-6340 Baar Switzerland CMC (International) AG Lindenstrasse 14 CH-6340 Baar Switzerland CMC (UK) Limited Somerton, Ballyboden Road, Rathfarnham, Dublin 14 Ireland CMC (UK) Limited Unit 1, Bradwall Court Bradwall Road Sandbach, Cheshire CW11 1GE United Kingdom Commercial Metals Deutschland GmbH Theodorstr. 42-90 Loft 623 D-22761 Hamburg Germany Commercial Metals Deutschland GmbH Cliev 19 51515 Kuerten-Herweg Germany Commercial Metals (International) AG Lindenstrasse 14 CH-6340 Baar Switzerland Clyde P. Selig President & Chief Executive Officer Russell Rinn Chief Operating Officer Bob Unfried EVP-Finance & Administration Kyle K. Kraft VP & Controller H. Avery Hilton, Jr. EVP & Mills Division Manager Phil Seidenberger EVP & General Manager, SMI Texas Steve Henderson VP & General Manager, SMI Arkansas Dennis Malatek VP & General Manager, SMI South Carolina Dale Schmelzle EVP & General Manager, SMI Alabama H O W E L L M E TA L C O M PA N Y CMC-Trinec Stahlhandel GmbH Cliev 19 51515 Kuerten-Herweg Germany CMC-Trinec Stahlhandel GmbH (Rail Division) Oberbau Kardinal-Hengsbach-Strasse 4 D-46236 Bottrop Germany Europickling N.V. I.Z. Durmakker B-9940 Evergem Belgium Trinec-CMC Limited 5, Bradwall Court, Bradwall Road Sandbach, Cheshire CW11 1GE United Kingdom A. Leo Howell President James K. Forkovitch Vice President Willard G. Williams Controller 85
Slide 88: C MC Z ¨ Hanns Zollner Chairman, Supervisory Board Marek Rozga Chairman of the Management Board and CEO Peter Weyermann Member of the Management Board and Marketing Director Ludovit Gajdos Member of the Management Board and Strategy & Integration Director Dorota Apostel Scrap Purchasing Director Kazimierz Jeziorski Sales Director Ned Leyendecker Technical Development Director Justyna Miciak Controller Dorota Pieszczoch Finance Director Tomasz Skudlik Human Resources Director Adam Rosenthal Director of Scrap Yard Operations Recycling C M C R E C YC L I N G Richard Conk Vice President, Finance and Administration Charles J. Schaffer Vice President, Aluminum Steven E. Shur Vice President, Copper & Stainless Steel Julio Pelletier Controller DAL L AS TR AD I N G D IVI S I O N Alan Postel President Rocky Adams Vice President - Texas Yards Chuck Grossman Vice President - Southeast U.S.A. Brian Halloran Vice President International Development Ellen Lasser Vice President Strategic Sourcing Robert J. Melendi Vice President Marketing & Sales Carl J. Nastoupil Vice President & Controller Larry Olschwanger Vice President National Accounts Jim Vermillion Vice President - Central U.S.A. John Paterson General Manager - Business Development, CMC International (S.E. Asia) Pte. Ltd. I N T E R N AT I O N A L D I V I S I O N EUROPE Ruedi Auf der Maur President Hans-Ruedi Meuwly Controller Roland Wismer Treasurer Peter Weyermann General Manager CMC (Europe) AG CMC (International) AG Richard Adams Managing Director, CMC (UK) Ltd. Klaus Marschall General Manager Commercial Metals Deutschland GmbH C E NTR AL EASTE R N E U ROP E /C MC Z J. Matthew Kramer President Joseph D. McNamara General Manager, Steel Trading Albert Lee Manager, Steel Trading Michael Jackson Manager, Nonferrous Products Michael Malone Operations Manager/Controller Tom Cargill Manager, Traffic Department Catharine Foote Customs Compliance Manager William E. Wyatt Credit & Collections Manager I N T E R N AT I O N A L D I V I S I O N AS IA AN D AU STR AL IA Marketing & Distribution Hanns Zollner ¨ President C O M E TA L S DIVISION COM M E RC IAL M E TA L S C O M PA N Y Ludovit Gajdos President STR U C TU R E D F I NAN C E GROUP Kai Leung Chan Asia Ludovit Gajdos Central & Eastern Europe Jose Puente Americas Roland Wismer Europe Kevin S. Aitken President Kevin Forbes Commercial Director CMC (Australia) Pty. Ltd. Mark Morrison General Manager - Steel CMC (Australia) Pty. Ltd. Colin Iles General Manager, Cometals, a division of CMC (Australia) Pty. Ltd. Peter Muller Managing Director Coil Steels Group Peter Cook Director and Chief Financial Officer Coil Steels Group Jimmy Dee Managing Director, CMC Fareast Ltd. Kai Leung Chan General Manager, CMC International (S.E. Asia) Pte. Ltd. Domestic Fabrication Ed Hall EVP & Regional Manager Rebar Fab Gulf Coast Binh K. Huynh EVP & Regional Manager Rebar Fab Far West Rick Jenkins EVP & Regional Manager Rebar Fab Central Texas Tracy Porter EVP & Regional Manager Rebar Fab Lofland John Richey EVP & Regional Manager Construction-Related Products Division Karl Schoenleber EVP & Regional Manager Structural and Joist Division Jeff H. Selig EVP & Regional Manager Rebar Fab East Eliezer Skornicki President Weston Liu Vice President, Cometals; General Manager, Cometals China, Inc. Dennis C. Gates Vice President Joel D. Kahn Vice President Jeffrey L. Kofsky Vice President Manfred R. Roeschel Vice President Matthew Lionetti Vice President & Controller C O M M O N W E A LT H M E TA L S DIVISION COM M E RC IAL M E TA L S C O M PA N Y Eugene L. Vastola President Greg Barczy Vice President, Development and Technical Director 86
Slide 89: Corporate Information C O R P O R AT E H E A D Q U A R T E R S C O M M E R C I A L M E TA L S C O M PA N Y O N T H E I N T E R N E T Commercial Metals Company 6565 N. MacArthur Blvd. Suite 800 Irving, Texas 75039 Telephone: 214.689.4300 SHAR E HOLDE R SE RVIC ES Commercial Metals Company publications and important shareholder information are available on the internet at: www.commercialmetals.com • • • • • • • • Annual Reports SEC Filings Press Releases Corporate Governance Information Current Stock Price Dividend Information Management Presentations Contact Information Shareholder inquiries should be addressed to Commercial Metals Company Shareholder Services at Mellon Investor Services, LLC, Commercial Metals’ transfer agent: Mellon Investor Services, LLC 480 Washington Blvd. Jersey City, New Jersey 07310 800.303.4931 An automated voice response system is available 24 hours a day, 7 days a week. Service representatives are available during normal business hours. As a CMC shareholder, you are invited to take advantage of our convenient shareholder services or request more information about CMC. Mellon Investor Services, our transfer agent, maintains the records for our registered shareholders and can help you with a variety of shareholder-related services at no charge, including: • • • • • Change of name or address Consolidation of accounts Duplicate mailings Lost stock certificates Transfer of stock to another person C O R P O R AT E G O V E R N A N C E Our corporate governance materials are available by selecting About the Company on our website at www.commercialmetals.com, including: • • • • • • Governance Guidelines Board Committee Charters Policy of Business Conduct and Ethics Financial Code of Ethics Policy on Insider Trading Accounting Complaint Procedure & Policy E X E C U T I V E C E R T I F I C AT I O N S Access your account online 24 hours a day, 7 days a week. For more information, go to www.melloninvestor.com/isd. DIVI DE N D DI R ECT DE P OSIT Commercial Metals Company has included as Exhibit 31 to its 2005 Annual Report on Form 10-K filed with the Securities & Exchange Commission certificates of the principal executive officer and principal financial officer of the Company regarding the quality of the Company’s public disclosure as required by Section 302 of the Sarbanes-Oxley Act. The Company has also submitted to the New York Stock Exchange (NYSE) a certificate of the CEO certifying that he is not aware of any violation by the Company of NYSE corporate governance listing standards. AU D ITO R S For information about direct deposit of dividends to your bank account at no charge to you, visit www.melloninvestor.com/isd or contact Mellon Investor Services at 800.303.4931. E L E C TR O N I C AC C O U NT AC C E S S AN D E MAI L D E L IVE RY O F S H A R E H O L D E R M AT E R I A L S V I A M L I N K S M Deloitte & Touche LLP Dallas, Texas AN N UAL M E ETI NG Electronic access to your financial statements and shareholder communications is now available with MLink SM, a new program from Mellon Investor Services. Access your important shareholder communications online 24 hours a day, 7 days a week within a secure, customized mailbox. You can view and print your 1099 tax documents, notification of ACH transmissions, transaction activities, annual meeting materials and other selected correspondence. Here are just some of the benefits of online access: • Email notifications of account activity • Secure access to your documents in a customized, online mailbox • Convenient, flexible access to your mailbox 24 hours a day, 7 days a week • Convenient management of your shareholder documents (download and print) Enrollment in MLink SM is quick and easy! Just log on to Investor Service Direct at www.melloninvestor.com/isd and follow the step-by-step instructions. January 26, 2006 10:00 A.M. C.S.T. Four Seasons Conference Facility 4150 N. MacArthur Blvd. Irving, Texas STO C K E XC HAN G E L I STI N G New York Stock Exchange Symbol: CMC FOR M 10- K Copies of the Corporation’s Form 10-K are available from Secretary Commercial Metals Company P. O. Box 1046 Dallas, Texas 75221-1046 WE B SITE www.commercialmetals.com 87
Slide 90: Sculptures from CMC’s 27th Annual “Scrap Can Be Beautiful” contest. Students created the artwork using metal collected at a CMC scrap processing facility. 88
Slide 92: 6565 N. MacArthur Blvd. Suite 800 Irving, Texas 75039 Phone 214.689.4300