Consolidated Results
Significant events affecting the Company this year:
/ Second-best net earnings year ever; fourth quarter was the highest quarterly earnings in history.
/ Manufacturing segment achieved record profits,
sales, and shipments.
/ Recycling segment's record four-year period of operating profits came to an abrupt end.
/ Marketing and Trading performed remarkably in
spite of demise of Far East markets.
Segments
Net sales and operating profit by business segment are shown in the following table:
Manufacturing
The Manufacturing segment includes the CMC Steel Group and Howell Metal Company.
With revenues up 14% and operating profit increasing 36%, the segment set all-time records for the year. The Steel Group led the way ending the fourth quarter with all-time record quarterly sales and record fourth quarter shipments. The Copper Tube Division's annual operating profit was down slightly from last year.
Selling prices were lower at the beginning of the year but recovered, and combined with record shipments produced a 42% increase in annual operating profit for the Steel Group. Mill tonnage shipped at 2,008,000 was 4% ahead of last year.
The four mills showed a 22% increase in operating profit led by SMI-Alabama and SMI-Arkansas, each with increases in excess of 24%; particularly notable is the turnaround in profitability of SMI-South Carolina which was profitable all fiscal year. Its results were all the more noteworthy as they were attained in the midst of construction of a new rolling mill. SMI-Texas operating profit was 7% ahead of the prior year, a strong performance as last year's results included a $1.7 million nonrecurring insurance recovery. By year end the Company's newest and largest shredder was in successful operation at SMI-Texas.
Operating profit in the Company's steel fabrication businesses more than doubled with record results in virtually all product areas. Fabricated shipments of 839,000 tons were well ahead of the previous year of 690,000 tons. SMI Owen Steel, the large structural fabrication facility in Columbia, South Carolina, had operating profit $4.4 million ahead of the prior year. A similar gain was accomplished by the combined joist plants. As of August 31, 1998, the Company ceased operations at its railcar rebuilding facility in Tulsa, Oklahoma. Substantially all employees were released and accruals raised for liabilities including severance, warranties, and facility costs.
Steel Group computer migration project expense totaled $8.6 million compared with $6 million last year. Final pension settlement cost of $3.3 million was incurred as the Company's only major defined benefit plan was terminated.
The Company had a record $120 million in capital spending for fiscal 1998, primarily at the steel mills. Construction of the new rolling mill and ancillary equipment at SMI-South Carolina will ultimately double capacity, reduce costs, and broaden the product line. The finishing upgrade at SMI-Alabama (replacement of the mill cooling bed, straighteners and stackers) will improve quality, enhance efficiency and also broaden the product line. Start up of both projects is scheduled to begin during the first calendar quarter of 1999.
Attractive interest rates continue to strengthen residential construction markets, maintaining demand for plumbing tube. Margins were weak in the early months of the year, but improved to moderate proportions by the fourth quarter. Copper tube shipments increased 11% over the prior year to 51 million pounds. Annual production was 4% ahead of last year's rate.
Recycling
The Asian economic crisis brought the Recycling segment's four-year period of record operating profits to an abrupt end. Scrap normally exported by competitors was diverted for domestic consumption. Selling prices were decimated, falling to their lowest levels in many years. Margins eroded while total processing costs increased due to acquisitions; however, the new capacity failed to bring in sufficient margin increases. All of these factors resulted in a moderate operating loss - the first in six years in this cyclical industry.
The fourth quarter saw ferrous scrap markets in full retreat with scrap sales especially difficult. Nonferrous markets had weakened earlier and remained soft. For the year the average copper and brass scrap price dropped 22%, aluminum fell 6%, and steel scrap was unchanged; at year end this left prices 20% below the previous year. Ferrous scrap shipped increased 11% to 1.28 million tons; however, nonferrous shipments declined 11% to 188,000 tons, due to a drop in copper and brass shipments. Total volume of scrap processed, including the Steel Group processing plants, reached 1,948,000 tons.
During the year the Company made several small acquisitions within existing geographic areas, none of which were significant to the overall operations of the Company. In the fourth quarter a new shredder in Jacksonville, Florida and a new shear in Odessa, Texas came online. The Division restructured its management into five autonomous profit centers, which should provide better coordination of processing equipment, personnel, marketing strength, sourcing and management.
Marketing and Trading
Revenues for the Marketing and Trading segment increased 4%, and operating income rose 17% over the prior year. This was a remarkable performance given the demise of traditional Far East markets and a higher LIFO credit
in the previous year. Most of the Asian markets did a complete reversal and induced a shift in trade flows. Purchases from new sources in the Far East increased significantly while sales were sharply reduced. Shipments into North America were brisk for most product lines and business in Europe increased.
Operating profits from steel marketing and distribution increased; however, profitability in steel trading decreased because of reduced volume and margins. Nonferrous metal product tonnage increased particularly in semi-finished aluminum products. Activity for ores, minerals and industrial materials continued solid; meanwhile, new marketing channels were added.
Near-Term Outlook
Despite the global weakness and import surge of low-priced steel into the U.S.A., the Company's domestic steel markets are relatively firm and manufacturing margins should remain at a good level. It is likely that in the long products that the Company produces the market can better absorb the quantities that will be imported and the effect on prices will be more limited while raw material costs decline further. The outlook for steel fabrication also is favorable. Demand for copper tube is good, but the supply is adequate. Activity in the Company's important end-use construction markets in the U.S., including private nonresidential, public, and residential, is robust, although it has diminished from the frenzied pace earlier in the year. Manufacturing sector and distributor demand are somewhat softer as service centers continue to reduce inventories.
Ferrous scrap prices have continued to fall and nonferrous prices remain very weak; consequently, the first part of fiscal 1999 will be very difficult for the Recycling segment. Nevertheless, some improvement in Recycling profits should be expected in the second half of the year with some restoration of margins beginning in the second quarter.
Marketing and Trading anticipates reasonably good sales in North America, Western Europe, and Australia. The sharply lower global demand and prices for steel and nonferrous metals will persist, and it appears that any recovery in Asia will be slow; however, the Company plans to continue to capitalize on new marketing opportunities as a result of the dislocations throughout the world.
Profitability in fiscal 1999 will be affected by the major project start ups in the Steel Group, higher depreciation, and increased interest expense. Conversely, some recoveries from the graphite electrode anti-trust litigation settlements are anticipated. Computer migration costs will be lower, and the Company's only major pension plan was terminated.
This year the $217 billion six-year transportation bill, known as The Transportation Equity Act for the 21st Century, was enacted. This legislation will help restore the nation's infrastructure and will substantially increase highway spending. Additionally, it includes especially large increases for the states of Texas and South Carolina. The Company should benefit considerably from this program.
Long-Term Outlook
Near term the Asian crisis has altered the nature of U.S. economic growth away from capital investment, manufacturing and exports toward personal consumption, housing, and services. Commodity-based industries have been impacted significantly in the short run.
The Company's long-term prospects remain encouraging. Some of the reasons for optimism include: first-class capable people are spread throughout the Company; expected continued high growth rates in the Sunbelt; capital projects that will contribute significant incremental profits; major computer migration costs will be completed by the end of fiscal 1999; high-cost producers will be compelled to reduce output on account of the prevailing low prices; a number of planned capacity increases around the world in steel and metal production will be canceled or delayed; European economies appear set to grow more strongly while Asia will recover and contribute to higher consumption; there is likely to be a concerted effort by the industrialized countries to tackle the global economic and financial problems and to combat deflation; the new transportation act will boost demand for steel long products in the U.S.
The sections regarding near- and long-term outlook contain forward-looking statements regarding the outlook for the Company's financial results including estimated expenses, shipments, pricing, demand and general market conditions. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include interest rate changes, construction activity, unanticipated start-up expenses and delays, metals pricing, over which the Company exerts little influence, new capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, global factors including credit availability, currency fluctuations, timing of litigation settlements and decisions by governments impacting the level and pace of overall economic activity.
1997 Compared to 1996
Segments
Manufacturing
The Steel Group achieved record sales and tons melted, rolled and shipped; however, operating profits were held back by computer migration costs, termination of a defined benefit plan, and the start-up costs of a new joist facility.
Shipments by the four minimills increased 11% to 1.93 million tons while fabricated shipments increased 6% to 690 thousand tons. A decrease of $4 per ton to $321 for average mill prices combined with slightly higher fabrication prices of $656 per ton resulted in a 7% increase in revenues to over $1 billion.
Steel Group revenues were $1.0 billion compared with $949 million in the prior year. Operating profit for the Steel Group was $48.6 million or 15% lower. Computer migration costs totalled $6 million, and pension expense included a $541,000 curtailment loss for termination of the Company's last defined benefit plan. The Company's fourth joist plant, which opened in Nevada in June 1997, had start-up costs of $2.8 million, all of which were expensed as incurred.
SMI-Texas set new records for shipments and production, and SMI Alabama had record profits. Most notable was SMI South Carolina's turnaround from a very weak performance last year to break even this year. Steel fabrication profits were only half of last year's strong results due to delays on larger structural jobs, generally lower margins, and the joist plant start up.
In January 1997 the Company acquired the assets of a heat treating plant in Pennsylvania. The purchase price was not significant to the Company. The operation has been profitable since the acquisition.
The Copper Tube Division operating profit was up 40% from last year based on 6% higher shipments and increased productivity. Late in the year, margins came under pressure due to imports from Mexico and reduced housing starts.
Recycling
Although revenues increased 4%, the Recycling segment reported a 37% decrease in operating profit compared to last year. The largest single factor was a LIFO charge this year versus a credit the prior year resulting in a change in LIFO expense of $4.7 million. Gross margins on nonferrous scrap improved, but ferrous margins were less because of lower volume. Shipments amounted to 1.15 million tons of ferrous scrap and 212 thousand tons of nonferrous scrap, down 2% in total from last year (excludes scrap tons processed by the six Steel Group processing plants). Rail service disruption, especially in the Southwest, was a problem.
Domestic demand for scrap was good, while exports were slack except for Mexico. Average steel scrap prices were down slightly from last year. Aluminum prices were a bit higher while copper prices were 9% lower.
The consolidation within the scrap industry accelerated during the past year with major acquisitions pursued at what the Company believes are overvaluations. The Company made an acquisition in 1997 of a complementary processing facility in Midland/Odessa, Texas, which was not significant to its overall operations. The synergism of the combined operations fueled a turnaround in profitability for the location.
Marketing and Trading
Operating income for the Marketing and Trading segment was consistent with last year although revenues were down 15%. For the year, the segment had pretax LIFO income of $2,006,000 compared to an expense of $324,000 last year.
Steel trading margins were pressured by intensely competitive global markets, diminished buying by China and continuing exports from the CIS. The Southeast Asian markets, wracked in the latter stages of the year with severe financial downturns, were particularly weak. The steel and nonferrous marketing and distribution businesses achieved good results with just-in-time delivery and other warehousing programs, especially in Australia. Similar programs in the United Kingdom reversed the poor results of the prior year. Trading operations located in the U.S., which import substantial quantities into North America, had excellent results. Semi-fabricated metals and minerals and chemicals had equivalent results to the prior year. New steel products surpassed last year.
In the second half of the year, a steel supply contract was consummated with Essar Steel in India, and CMC Trading AG will market over $100 million of steel products for Essar during the next three years. At year end, a similar but smaller arrangement was concluded with a mill in China for performance over the next year. The Tokyo office was converted to an exclusive representative agency arrangement, and a small office was opened in Germany to facilitate steel imports.
Liquidity and Capital Resources
Cash flow from operations (before changes in operating assets and liabilities) for fiscal 1998 was the highest in the Company's history. Strong Company earnings and record depreciation expense generated the cash flow.
Cash flow from operating activities was used to fund increases in accounts receivable in the Manufacturing segment (particularly fabrication operations) and Marketing and Trading. The Recycling segment had a significant decrease in accounts receivable. Inventories increased in all segments. Other assets increased due to almost $22 million in advances to suppliers for inventory commitments. Accounts payable increased due to normal seasonal commercial activity in the Manufacturing segment.
Due to expanded operations, strong sales activity in the fourth quarter, and a record capital expenditure program, short-term borrowings increased $101 million over the prior year.
Net working capital was $247 million as of August 31, 1998, compared to $307 million last year. The current ratio was lower at 1.6.
The Company's sources of short-term funds include a commercial paper program of $40 million. The Company's commercial paper is rated in the second highest category by both Standard & Poor's Corporation (A-2) and Fitch IBCA, Inc. (F-2). Formal bank credit lines equal to 100% of the amount of all commercial paper outstanding are maintained.
The Company's $150 million long-term notes issued in July 1997 ($50 million) and July 1995 ($100 million) are rated investment grade by Standard & Poor's Corporation and Fitch IBCA, Inc. (BBB+) and by Moody's Investors Service (Baa1).
The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are priced at banker's acceptance rates or on a cost of funds basis.
At August 31, 1998, the Company had filed a shelf registration of $200 million of long- and medium-term notes, of which $100 million is expected to be drawn in fiscal 1999.
Management believes it has adequate capital resources available from internally generated funds and from short-term and long-term capital markets to meet anticipated working capital needs, planned capital expenditures, dividend payments to shareholders, stock repurchases and to take advantage of new opportunities requiring capital.
Capital investments in property, plant and Vequipment were a record $120 million in 1998 compared to $71 million the prior year. Capital spending for fiscal 1999 is projected to be the largest plan in Company history at $150 million. The most important projects to be completed are the rolling mill at SMI-South Carolina and the finishing upgrade at SMI-Alabama. These expenditures are expected to be funded from internally generated funds and existing credit facilities.
Total capitalization was $577 million at the end of fiscal 1998. The ratio of long-term debt to capitalization was 30%, down from 33% last year. Stockholders' equity was $381 million or $26.18 per share. During the fiscal year, the Company repurchased 496,000 shares of Company stock at an average cost of $29.70 per share. The Company has authorized an additional 585,081 for repurchase. On August 31, 1998, 1,562,972 treasury shares were held by the Company. There were 14,569,611 million shares outstanding at year end.
Contingencies
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters.
The Company's origin and one of its core businesses for over three quarters of a century has been metals recycling. In the present era of conservation of natural resources and ecological concerns, the Company has a continuing commitment to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are presently at odds with goals of greater recycling and expose the Company and the industry to potentially significant risks. Such exposures are causing the industry to shrink, leaving fewer but more well-financed operators as survivors to face the challenge.
The Company believes that materials that are recycled are commodities that are neither discarded nor disposed. They are diverted by recyclers from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications.
Environmental agencies at various federal and state levels would classify certain recycled materials as hazardous substances and subject recyclers to material remediation costs, fines and penalties. Taken to extremes, such actions could cripple the recycling industry and undermine any national goal of material conservation. Enforcement, interpretation, and litigation involving these regulations are not well developed.
The Company has received notices from the U.S. Environmental Protection Agency (EPA) or equivalent state agency that it is considered a potentially responsible party (PRP) at thirteen sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or similar state statute to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its PRP designation. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites.
Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, may have a material impact on earnings and cash flows for a particular quarter. While the Company is unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with the above-referenced matters, it makes accruals as warranted. It is the opinion of the Company's management that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the business or consolidated financial position of the Company.
In fiscal 1998, the Company incurred environmental expense of $10.9 million. This included the cost to staff environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessment, and remediation, consultant fees, baghouse dust removal and various other expenses. The Company estimates that approximately $1.4 million of its capital expenditures for fiscal 1998 related to costs directly associated with environmental compliance. The nature and timing of these environmental costs is such that it is not practical for the Company to estimate their magnitude in future periods. At August 31, 1998, $5.7 million remained in accrued expenses for environmental liabilities.
The November 22, 1994 Final Order of the United States District Court for the Southern District of Texas against CMC Oil Company, a subsidiary of the Company, is a final, non-appealable order. This liability has been accrued in the financial statements of CMC Oil Company. CMC Oil does not have sufficient assets to satisfy the judgment. No claim has been asserted against Commercial Metals Company in connection with this litigation. Commercial Metals Company will vigorously contest liability should any such claim be asserted.
During 1998, the Company and former stockholders of Owen Steel Company, Inc. and affiliates settled litigation with regard to the Company's claims against a portion of the purchase price held in escrow since the November 1994 acquisition. The Company received approximately $3 million of the approximately $5 million escrow balance. The proceeds were substantially offset against claim payments paid and deferred pending settlement.
Dividends
Quarterly cash dividends have been paid in each of the past 34 consecutive years. The annual dividend in 1998 was 52 cents a share paid at the rate of 13 cents each quarter.
Year 2000
The Company's three operating segments, Manufacturing, Recycling, and Marketing and Trading (combined with Corporate), have undertaken management information system initiatives that address a broad spectrum of functionalities including the Year 2000 issue, the ability of computer software to correctly interpret dates at the turn of the century. The following is a discussion by segment of the status of each of these initiatives.
Manufacturing
Since fiscal year 1995, the Steel Group has been in preparation and implementation of a Year 2000 compliant enterprise resource planning system. This system will cover all traditional financial systems and, in addition, cover sales, raw material usage, transportation management, purchasing, maintenance and other functional areas. Each of the four mills in the Steel Group, SMI-Texas, SMI-Alabama, SMI-South Carolina, and SMI-Arkansas, have Year 2000 task teams that meet periodically. Non-mill operations have less formalized structures as the effect is significantly reduced. Each of these teams is charged with identifying, analyzing, implementing, and validating a plan that will address the impact of the Year 2000 on the following areas:
1. State of readiness of key suppliers and vendors.
2. Conversion or changes necessary to any programs developed by the internal information systems.
3. Verifying and validating the embedded electronic control systems in equipment.
An infrastructure migration completed in July 1998 upgraded all personal computer hardware and software to common compliant platforms. Major modules of the enterprise system, e.g., general ledger, have been successfully rolled out at every location. Remaining modules are being phased in so that the complete system will be functioning by August 1999.
There are other niche software programs in use at various rebar and structural fabrication operations, scrap yards, and concrete related products locations. Some software vendors have already issued written letters of compliance; the rest will be sought before the end of calendar 1998. Systems in place at the Steel Group scrap yards, a relatively small portion of the Steel Group, will need to be upgraded to a current release.
Recycling
The Recycling segment is completing a multi-year transition of its systems for Year 2000 compliance. The segment is evaluating, determining alternatives, implementing solutions, and testing the applications in each of the following categories:
1. Mainframe computer hardware - All current computers have been certified by the manufacturer as compliant. Outside of Year 2000 issues, some older machines are being retired and replaced by certified compliant hardware.
2. Workstation hardware - Personal computer testing software has been acquired and based on random sampling, perhaps 50% of the installed base of 200 PC's will require chip replacements; of those, 20% may be more cost effective to replace. All PC's should be compliant by April 1999.
3. Business application software - Core applications developed in-house have had conversion processes completed and are fully compliant. Outside package software (general ledger, payroll, and fixed assets), is being upgraded with completion expected by March 1999.
4. Systems software - The mainframe replacements discussed in point 1 above will bring all operating systems up to a certified compliant version. It is believed that all PC's have had Year 2000 patches installed; however, this will be confirmed by the audit discussed in point 2.
5. User level software and applications - Standard spreadsheet and word processing software has been upgraded to current versions. There may remain pockets of applications that will be discovered during the audit process, which will be addressed as uncovered.
6. Communication equipment and software - The segment-wide communications equipment will be compliant by December 1998. Individual branches will then need to assess local phone and messaging systems.
7. Non-computer automated systems - Although considered a minor risk, processing equipment, security systems, and other equipment will be evaluated on a branch-by- branch basis.
Marketing and Trading, Including Corporate
The Marketing and Trading segment, combined with the Corporate functions, represent the most geographically dispersed operations of the Company. Several systems were in place to address both financial applications and marketing information needs. Compliance evaluations begun two years ago indicated that generally the international divisions were compliant but reaching capacity constraints and that the domestic operations had sufficient size but were not compliant. Therefore, a joint program was developed to address both the functional marketing requirements and the financial systems with the goal to have the entire segment on a common platform with Corporate.
Separate teams have been established for completing the upgrade process for both marketing and financials. To date, the committees have evaluated and purchased software. Training is in process concurrently with implementation. Both systems are expected to be rolled out, tested, and online by May 1999. A common PC hardware and software platform has been established. All locations are in substantial compliance with these requirements; however, there may be some remaining individual PC's requiring upgrade.
Summary
The area of greatest risk is the readiness of the Company's suppliers and vendors. A letter requesting notice of their plans will be circulated in November 1998 requesting a response before year end. Regardless of the response, there will be a factor of the unknown until January 1, 2000.
The Company has implemented the program described above with the use of internal personnel and outside consultants. Resources are considered available and adequate to meet the Company's goals. If necessary, contingency plans will be developed by the end of March 1999 to address any anticipated shortfall.
The Steel Group's migration project has a remaining estimated expense of $6 million, all to be incurred in fiscal 1999. The Recycling segment should have minimal costs (less than $100,000) to meet its plans. The Marketing and Trading plus Corporate project has an estimated budget of $4 million, which will be capitalized and amortized over five years.
The section titled "Year 2000" contains forward-looking statements regarding the Company's expectations regarding addressing the Year 2000 computer problem. These plans among other factors include the timing of implementation phases, reallocation of in-house resources, use of outside personnel, third-party hardware and software, and reliance on representations of third parties. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and could be materially different from management's current opinion. Developments that could impact the Company's expectations include the availability of Company personnel, malfunctions of third-party software and hardware, over which the Company has no control, availability of outside consultants, and the inability to fully assess the readiness of key vendors and suppliers.
Market Risk
Approach to Minimizing Market Risk
The Company's product lines and its worldwide operations expose it to risks associated with fluctuations, sometimes volatile, in exchange and interest rates and commodity prices. It employs various strategies to mitigate the effects of this volatility. None of the instruments used are entered into for trading purposes or speculation; all are effected as hedges of underlying physical transactions. The accompanying information mandated by the Securities and Exchange Commission should be read in conjunction with footnotes 1 and 4 to the annual financial statements with particular attention to the limitations on its usefulness.
Foreign Exchange
The Company enters into foreign exchange contracts as hedges of trade receivables and payables denominated in currencies other than the functional currency. Effects of changes in currency rates are therefore minimized. No single currency poses a primary risk to the Company; fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments. As a matter of Company policy, foreign exchange contracts are used to hedge only firm commitments, not anticipated transactions. Certain information in the accompanying chart assumes that the foreign exchange contracts were settled at August 31, 1998; this would defeat their purpose as hedges on transactions that will not occur for some period after year end. Due to customary weight and quality settlements on physical transactions, small gains and losses do occur upon close of the foreign exchange contracts.
Interest Rates
Substantially all of the Company's short- and long-term debt is denominated in United States dollars. The Company's financial results as affected by interest rates are most vulnerable to swings in short-term commercial borrowing rates. At August 31, 1998, approximately $7 million Australian dollars notional amount of debt was covered by an interest rate swap. The swap is variable to fixed, terminating June 2, 2003, intending to match physical asset lives with debt provisions in one foreign subsidiary. The variable rate at year end was 5.6% and the fixed rate 5.5%. At August 31, 1998, it had a fair value of $112,000.
Commodity Prices
Pricing of certain firm sales and purchase commitments is fixed to forward metal commodity exchange quotes. The Company enters into metal commodity contracts for copper, aluminum, and zinc as hedges of gross margins on these commitments. Of these, copper is the most predominant. The hedges are closed when the underlying sales and purchase commitments are priced, and gain or loss is recognized when the sale or purchase is recorded. In general the Company is most affected in periods of declining commodity prices as spreads narrow and sources withhold recycled metals from the market. The settlement values expressed in the accompanying chart as of August 31, 1998, should be read with caution as the offsetting physical transactions for which the commodity futures are effective as hedges are not quantified. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses at settlement.
The following table provides certain information regarding the financial instruments discussed above.
Thirty-four lots mature after one year
MT = Metric Tons
Metal commodity contracts effective as hedges have no book carrying value until maturity; a two million dollar letter of credit stands as margin requirement for Comex transactions.