Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 8-K (Current Report)
Date of Report: January 27, 1995
Reporting Period: This filing supplements a previous November 30, 1994, report regarding the acquisition of Owen Steel Company, Inc. and two affiliates (Owen Miscellaneous Metals, Inc. and South Carolina Steel Corporation, collectively "Owen"). The filing provides audited financial statements for Owen for the years ended December 31, 1991, 1992, and 1993, and unaudited statements for the nine months ended September 30, 1994. It also includes unaudited pro forma financial information combining CMC and Owen as if the acquisition occurred on September 1, 1993.
Key Financial Metrics (Owen Steel Company, Inc. and Subsidiaries)
Note: The following metrics reflect the acquired entity (Owen) for the fiscal year ended December 31, 1993, as detailed in the attached audited statements.
- Revenue (Sales): $211,656,333
- Gross Income: $15,829,258 (7.50% margin)
- Net Operating Loss: $(17,561,845)
- Net Loss: $(13,886,598)
- Total Assets: $101,766,577
- Total Liabilities: $58,242,015
- Stockholders' Equity: $40,739,242
- Cash and Cash Equivalents: $5,086,292
- Net Cash Provided by Operating Activities: $8,611,070
- Debt Structure:
- Short-term Notes Payable: $15,151,225
- Long-term Notes and Loans Payable: $19,157,192
- Total Debt: Approximately $34.3 million
Material Changes and Acquisition Details
Acquisition Terms: On November 15, 1994, CMC acquired Owen via merger. The total consideration was approximately $50 million, consisting of $25 million in cash and 932,301 shares of CMC common stock (valued at $26.875 per share). Additionally, CMC provided funds to retire approximately $32 million of Owen's debt at closing. Approximately $9 million of the purchase price is held in escrow pending final net worth determination.
Financial Performance Trends (Owen):
- Owen reported a net loss of $13.9 million for the year ended December 31, 1993, compared to a net loss of $9.6 million in 1992 and $2.4 million in 1991.
- Revenue declined slightly from $216.3 million in 1991 to $211.7 million in 1993.
- Gross margins compressed significantly, dropping from 15.57% in 1991 to 7.50% in 1993, primarily due to rising scrap steel costs.
Pro Forma Impact: The pro forma statements indicate that for the year ended August 31, 1994, the combined entity would have reported net earnings of $8.6 million (diluted EPS of $0.54), compared to CMC's historical net earnings of $26.2 million. The acquisition added significant debt and operating losses to the combined entity in the short term.
Outlook, Risks, and Contingencies
- Legal Proceedings: CMC Oil Company, a subsidiary, filed a Notice of Appeal on January 20, 1995, regarding a District Court Order affirming a Federal Energy Regulatory Commission (FERC) Remedial Order. The appeal was filed in the U.S. Court of Appeals for the Fifth and Federal Circuits.
- Operational Risks (Owen):
- Scrap Price Volatility: Owen's management noted that substantial increases in scrap steel prices in 1993 threatened profitability on fixed-price reinforcing steel contracts. As of December 31, 1993, approximately 78,411 net tons remained to be fabricated, with no provisions made for potential future losses.
- Suspended Operations: Structural fabrication operations at plants in Gastonia, NC; Lawrenceville, GA; and Jacksonville, FL were temporarily suspended pending economic improvement.
- Debt Covenants: Owen Steel Company, Inc. and its subsidiaries were in non-compliance with certain financial ratio and capital expenditure provisions of their loan agreements as of December 31, 1993. However, interest payments were current.
- Pro Forma Limitations: The pro forma financial information is for informational purposes only and does not reflect the actual results that would have occurred if the acquisition had taken place on the assumed dates. The allocation of purchase price is preliminary and subject to change.
Key Facts for Investor Verification
- Debt Retirement: Verify the extent to which the $32 million of Owen debt retired at closing impacts CMC's overall leverage ratios and liquidity.
- Escrow Terms: Review the specific conditions governing the $9 million escrow account and the timeline for its release or forfeiture.
- Contract Exposure: Assess the risk of future losses on Owen's remaining 78,411 tons of reinforcing steel contracts given the volatility of scrap metal prices.
- Legal Outcome: Monitor the status of the CMC Oil Company appeal against the FERC order, as this represents a material contingency.
- Covenant Compliance: Confirm whether the debt covenant violations noted in Owen's 1993 statements were resolved or waived as part of the acquisition restructuring.