Commercial Metals Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2019. Amounts are in U.S. dollars; financial results are unaudited. CMC manufactures, recycles, and markets steel, metals, and related products and services in the U.S. and Poland.
Financial performance
| Metric | Three months ended February 28, 2019 | Six months ended February 28, 2019 |
|---|---|---|
| Net sales from continuing operations | $1.403 billion, up 33% year over year | $2.680 billion, up 26% |
| Earnings from continuing operations | $14.9 million, versus $9.8 million | $34.3 million, versus $41.7 million |
| Diluted EPS from continuing operations | $0.13, versus $0.08 | $0.29, versus $0.35 |
| Net earnings, including discontinued operations | $13.9 million, versus $10.2 million | $33.6 million, versus $47.0 million |
| Adjusted EBITDA from continuing operations | $69.3 million, versus $64.9 million | $134.9 million, versus $144.1 million |
Quarterly sales and earnings comparisons reflect the November 2018 acquisition of Gerdau’s U.S. rebar fabrication facilities and four mini mills. The acquired businesses contributed $383.6 million in quarterly sales and $26.7 million in pretax earnings from the acquisition date. There is no directly comparable prior-period contribution in reported results.
For the quarter, Americas Mills adjusted EBITDA rose to $112.4 million from $50.2 million, supported by higher prices, volumes, and metal margins. Americas Fabrication’s adjusted EBITDA loss widened to $49.6 million from $8.6 million: higher input and labor costs had outpaced selling-price increases on existing project backlogs. Americas Recycling and International Mill adjusted EBITDA declined year over year to $10.1 million and $20.5 million, respectively.
Cash flow, balance sheet, and liquidity
- Operating cash flow was a use of $352.9 million in the first six months, compared with a use of $183.6 million in the prior-year period. Management cited higher working capital; the reported cash-flow presentation also reflects accounting changes for receivables programs.
- Investing cash flow was a use of $393.1 million, including $701.0 million for acquisitions and $67.5 million of capital expenditures. Fiscal 2019 capital spending was estimated at $175 million to $225 million.
- Financing cash flow provided $181.8 million, including $180 million of term-loan proceeds and net borrowings under receivables programs. Cash and cash equivalents were $66.7 million at period-end, down from $622.5 million at August 31, 2018.
- Total debt was $1.410 billion, including $59.5 million of short-term borrowings; long-term debt was $1.310 billion. Stockholders’ equity was $1.498 billion.
- Available liquidity included $346.7 million under the revolving credit facility, $120.6 million under the U.S. receivables facility, and $18.4 million under the Poland facility. The company reported no revolver borrowings.
- CMC reported compliance with debt covenants. Its interest coverage ratio was 5.41 to 1.00 against a 2.50 minimum; debt-to-capitalization was 0.48 to 1.00 against a 0.60 maximum.
- Cash dividends were $0.12 per share for the quarter. No shares were repurchased during the six-month period.
Material changes, outlook, and risks
- The $701.2 million acquisition was funded with cash and borrowings. Purchase-price allocations remain preliminary. Acquisition accounting included a $10.3 million inventory step-up charge in cost of goods sold and $34.8 million of unfavorable contract-backlog amortization recognized as increased sales in the six-month period.
- CMC adopted the new revenue standard using the modified retrospective method. It reduced opening retained earnings by $2.7 million; reported six-month sales and earnings were $4.6 million and $3.5 million lower, respectively, than under the prior standard.
- Interest expense increased to $18.5 million for the quarter and $35.2 million for the six months, primarily reflecting acquisition-related financing and lower capitalized interest.
- The effective tax rate from continuing operations was 54.9% for the quarter and 40.9% for the six months, versus 15.0% and 19.6% in the prior-year periods. The current period included a $7.6 million tax charge related to finalizing the company’s Tax Cuts and Jobs Act accounting.
- Management said U.S. non-residential construction and infrastructure demand remained strong, while inclement weather slowed shipments in several U.S. markets. New fabrication bookings showed pricing beginning to reflect higher input costs, but existing backlog margins remained pressured. International Mill shipments were affected by customer delays ahead of EU safeguard measures and adverse currency translation.
- Management expected existing cash, operating cash flow, and available liquidity to meet expected needs, while warning that sustained market deterioration could require additional liquidity. The filing provides no specific earnings or revenue guidance.
- Key risks include steel-market cyclicality, metal-price and input-cost volatility, customer credit pressure, acquisition integration and utilization, currency movements, financing access, and environmental and legal matters. Environmental liabilities for CERCLA sites totaled $4.0 million; management said pending proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the acquired mills and fabrication facilities integrate successfully and deliver expected operating benefits; purchase accounting remains subject to refinement.
- Whether fabrication pricing catches up with raw-material and labor costs as existing contracts roll off, given the segment’s substantial adjusted EBITDA losses.
- How working-capital needs and the amended receivables programs affect operating cash flow, reported debt, and liquidity.
- Debt levels, covenant headroom, and renewal of the Polish uncommitted credit facilities, which were due to expire in March 2019.
- Whether tax charges, legal and environmental exposures, and other disclosed risks change materially in subsequent filings.