Commercial Metals Company — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2017. CMC recycles, manufactures, fabricates, and markets steel and metal products. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $1,382.6 million | $1,227.4 million | $3,607.3 million | $3,401.9 million |
| Continuing-operations earnings | $39.6 million | $35.1 million | $76.4 million | $71.6 million |
| Net earnings attributable to CMC | $39.3 million | $19.3 million | $75.9 million | $54.9 million |
| Diluted EPS | $0.34 | $0.17 | $0.65 | $0.47 |
| Adjusted operating profit | $64.8 million | $60.9 million | $140.5 million | $147.0 million |
| Adjusted EBITDA | $96.9 million | $92.5 million | $233.4 million | $241.3 million |
Quarterly sales rose 13%; nine-month sales rose 6%. Continuing-operations earnings increased in both periods, while nine-month adjusted operating profit and EBITDA declined. The prior-year comparison for net earnings included a $15.8 million discontinued-operations impairment loss. Gross margin, calculated as sales less cost of goods sold, was approximately 12.5% in Q3 versus 14.3% a year earlier, and 12.9% for nine months versus 13.8%.
- Cash flow: Nine-month operating cash flow was $18.9 million, down from $506.9 million. Working-capital changes used $164.4 million of cash, reflecting higher commodity prices and activity. Capital expenditures were $162.1 million; operating cash flow less capital expenditures was approximately negative $143.2 million.
- Liquidity: Cash and equivalents were $275.8 million at May 31, down from $517.5 million at August 31, 2016. Current assets were $2.052 billion and current liabilities $916.5 million. The filing’s liquidity table lists $346.98 million available under the revolving facility, $176.29 million under the U.S. receivables program, and additional international and uncommitted bank availability.
- Debt: Debt totaled approximately $1.067 billion before debt issuance costs, including $311.7 million of current maturities. No revolving-credit borrowings were outstanding. CMC reported covenant compliance; interest coverage was 5.98x against a 2.50x minimum, and debt-to-capitalization was 0.43x against a 0.60x maximum.
- Dividends: $0.12 per share for the quarter and $0.36 for the nine-month period.
Material changes and segment trends
- Higher ferrous scrap prices, stronger demand, and acquisitions lifted Americas Recycling sales and profit. Nine-month segment adjusted operating profit improved to $12.0 million from a $16.2 million loss.
- Americas Mills sales increased, but profit fell as scrap-cost inflation outpaced selling-price increases; nine-month adjusted operating profit declined to $139.0 million from $164.7 million.
- Americas Fabrication weakened amid low-priced rebar imports and lower selling prices. Nine-month adjusted operating profit fell to $9.0 million from $59.0 million.
- International Mill results improved with higher selling prices, shipments, and a more favorable product mix. Nine-month adjusted operating profit rose to $32.4 million from $10.2 million.
- CMC acquired post-tensioning/fabrication assets, a Hawaii fabrication facility, and seven southeastern U.S. recycling facilities. The acquisitions were described as not material individually or in aggregate.
Outlook, risks, and unusual items
- Management expected stable key macroeconomic drivers for the remainder of FY2017, continued strong U.S. and Polish demand, and historically low U.S. steel margins. It was optimistic that trade actions could provide relief from unfairly priced rebar imports.
- FY2017 capital expenditures were expected to be $250–$300 million; $81.7 million of commitments related to the Oklahoma minimill. The minimill was expected to commission in late calendar 2017; a Durant T-post shop was expected to commission in summer 2018.
- After quarter-end, CMC announced plans to exit International Marketing and Distribution, agreed to sell its U.S. raw-materials trading business, and planned a sale or restructuring of other trading operations.
- After quarter-end, CMC amended its revolving-credit agreement to extend maturity to June 2022 and provide for a potential $150 million term loan. It also announced a tender offer for up to $300 million of 2018 Notes and plans to issue $300 million of 2027 Notes. These were announced plans, not completed transactions as of the filing.
- Risks include cyclical demand, volatile scrap and metal prices, import competition, customer credit/liquidity, currency movements, energy and raw-material availability, and environmental and litigation matters. Environmental liabilities were $4.0 million; management said pending matters were not expected to have a material adverse effect.
- Purchase obligations totaled $954.1 million, mostly inventory-related. The filing also disclosed a possible $9.3 million reduction in unrecognized tax benefits within the following twelve months if audits or statutes of limitation resolve favorably.
Investor verification priorities
- Track working capital, inventory days, and operating cash conversion after the $164.4 million nine-month working-capital cash use.
- Assess whether steel selling prices recover sufficiently to offset scrap costs, particularly in Americas Mills and Fabrication, and monitor rebar import/trade developments.
- Verify completion, financing, and terms of the announced 2017/2018 debt transactions and assess near-term maturities and liquidity afterward.
- Monitor execution and proceeds from the planned International Marketing and Distribution exit, including which operations qualify as discontinued operations.
- Compare actual Oklahoma project spending, commissioning dates, and returns with management’s capital expenditure outlook.