Commercial Metals Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2018. Comparisons are with the corresponding periods ended February 28, 2017. Unless stated otherwise, amounts are in U.S. dollars.
Business context
CMC manufactures, recycles and markets steel and metal products through Americas Recycling, Americas Mills, Americas Fabrication and International Mill. Results reflect stronger selling prices and volumes in several businesses, but weaker fabrication profitability as input costs rose faster than prices on existing backlog. The company was exiting its International Marketing and Distribution business.
Key financial metrics
| Metric | Three months 2018 | Three months 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Continuing-operations net sales | $1,054.3 million | $862.3 million | $2,130.8 million | $1,715.2 million |
| Continuing-operations earnings | $9.8 million | $23.0 million | $41.7 million | $28.7 million |
| Net earnings, including discontinued operations | $10.2 million | $30.3 million | $47.0 million | $36.6 million |
| Diluted net EPS | $0.09 | $0.26 | $0.40 | $0.31 |
| Adjusted operating profit from continuing operations | $18.9 million | $43.4 million | $66.1 million | $65.1 million |
| Adjusted EBITDA from continuing operations | $64.9 million | $73.7 million | $144.1 million | $125.6 million |
Second-quarter continuing-operations sales increased 22%, while earnings fell, reflecting lower operating profit, the Durant mill start-up, structural-fabrication impairment, and other costs. Adjusted earnings from continuing operations were $31.0 million, or $0.26 per diluted share, for the quarter and $67.2 million, or $0.57 per diluted share, year to date; these non-GAAP figures include adjustments for acquisition and integration costs, mill start-up costs, impairment and tax effects.
For the six months, operating cash flow was $48.8 million, versus $12.0 million in the prior year. Capital expenditures were $101.0 million, compared with $90.8 million. Cash and cash equivalents declined $57.4 million from fiscal year-end to $195.2 million.
At February 28, 2018, total debt before debt issuance costs was $825.9 million, including $19.0 million of current maturities; reported long-term debt was $799.8 million. The company had $346.7 million available under its $350 million revolving facility and reported no revolver borrowings. It was in compliance with debt covenants; interest coverage was 7.63x and debt-to-capitalization was 0.36x. Total current assets were $1,648.0 million and current liabilities were $530.3 million.
Segment performance and changes
- Americas Recycling: Second-quarter sales rose 44% to $320.6 million and adjusted operating profit increased to $12.2 million from $7.8 million, supported by higher prices, shipment volumes and metal margins.
- Americas Mills: Sales rose 13% to $425.9 million, but adjusted operating profit declined to $31.5 million from $51.3 million. The Durant micro mill contributed $8.6 million of quarterly start-up costs; inflationary input costs and cold-weather utility costs also pressured results.
- Americas Fabrication: Adjusted operating loss was $27.1 million, compared with $0.5 million of profit. Lower shipments, compressed margins as scrap costs outpaced prices on backlog projects, and a roughly $12.1 million impairment were factors.
- International Mill: Sales increased 57% to $211.8 million and adjusted operating profit rose to $24.5 million from $9.5 million, reflecting stronger pricing and margins, higher shipments and favorable Polish-zloty translation.
Outlook, risks and unusual items
- Management expected strong Polish market conditions to continue and anticipated the Durant facility would approach its 350,000-ton annual capacity by fiscal year-end. Fiscal 2018 capital expenditures were forecast at $175 million to $225 million.
- CMC agreed to acquire specified Gerdau U.S. rebar mills and fabrication assets for $600 million, subject to customary adjustments and closing conditions; closing was expected before calendar year-end 2018. The FTC issued a second request for information, extending the antitrust review process. Financing arrangements include up to $400 million of Term Loan B commitments and a delayed-draw facility of up to $200 million. The filing describes a potential $40 million termination fee in specified circumstances.
- On March 1, 2018, after quarter-end, CMC agreed to sell substantially all structural steel fabrication assets. This transaction was not classified as discontinued operations. The company also sold certain Australian steel-trading assets on that date as part of its discontinued-operations exit.
- The Tax Cuts and Jobs Act resulted in $10.6 million of estimated discrete tax expense in the quarter, while reducing net deferred tax liabilities by $52.3 million. The company said estimates could change during the measurement period.
- Management cited cyclical steel demand, commodity and scrap-price volatility, import competition, customer credit exposure, foreign-exchange movements, energy and raw-material costs, and acquisition financing, regulatory approval and integration as risks. U.S. steel tariffs were expected to discourage imports from non-exempt countries, but CMC said the effects were not yet clear.
- CMC reported a mediated settlement of $1.1 million, net of insurance recoveries, for Texas environmental allegations; it denied wrongdoing, and the settlement was subject to formal approval. Environmental liabilities totaled $4.3 million. Management did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Whether Gerdau acquisition approvals, financing, closing timing and expected synergies materialize, and how the transaction affects leverage.
- Whether the fabrication business improves as backlog pricing catches up with input costs, and the final proceeds and effects of the structural-steel asset sale.
- Durant micro mill ramp-up, utilization, start-up costs and progress toward the stated year-end capacity expectation.
- Underlying cash generation and capital spending, including the effects of working capital and receivables-sale programs on reported operating cash flow and liquidity.
- Final tax-law accounting, the effect of steel trade measures, and developments in environmental and other legal contingencies.