Commercial Metals Company — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017; quarterly figures below refer to the fiscal fourth quarter ended August 31, 2017. CMC manufactures, recycles and markets steel and metal products through U.S. and international operations. Unless noted, annual operating results are from continuing operations; CMC Cometals and the Australian steel distribution business are reported separately as discontinued operations.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales, continuing operations | $4.570 billion | $4.178 billion |
| Gross profit | $546.4 million | $596.9 million |
| Earnings from continuing operations | $32.6 million; diluted EPS $0.27 | $57.9 million; diluted EPS $0.50 |
| Net earnings, including discontinued operations | $46.3 million; diluted EPS $0.39 | $54.8 million; diluted EPS $0.47 |
| Adjusted operating profit from continuing operations | $89.9 million | $132.5 million |
| Adjusted EBITDA from continuing operations | $222.3 million | $297.8 million |
| Net cash from operating activities | $174.5 million | $586.9 million |
| Capital expenditures | $213.1 million | $163.3 million |
| Cash and cash equivalents at year-end | $252.6 million | $517.5 million |
| Total debt, including current maturities | $824.8 million | $1.071 billion |
| Stockholders’ equity | $1.401 billion | $1.367 billion |
Gross margin was approximately 12.0% versus 14.3% in FY2016, based on reported sales and cost of goods sold. Operating cash flow fell $412.4 million year over year, principally reflecting working-capital needs amid higher commodity prices and volumes, as well as lower earnings. Cash flow less capital expenditures was approximately negative $38.6 million. The company paid $0.48 per share in dividends, unchanged from FY2016.
At year-end, CMC reported $346.98 million available on its $350 million revolving facility and $39.8 million available under its U.S. receivables program. Current assets were $1.714 billion and current liabilities $608.4 million. Management said cash, operating cash flows and available credit were expected to cover near-term requirements. CMC complied with debt covenants; its reported interest coverage ratio was 5.29x against a 2.50x minimum, and debt-to-capitalization was 0.37x against a 0.60x maximum.
Material changes and notable items
- Sales rose 9%, primarily on higher scrap prices and shipments, stronger construction and energy demand, and higher Polish selling prices. Despite higher sales, continuing-operations earnings fell 44% and adjusted operating profit fell 32%.
- Americas Recycling adjusted operating profit improved to $14.8 million from a $61.3 million loss, helped by stronger scrap prices, expanded margins, higher volumes, and the absence of FY2016’s $38.9 million impairment.
- Americas Mills adjusted operating profit declined to $168.8 million from $209.8 million: scrap costs rose while average selling prices were flat, compressing metal margin by $34 per short ton.
- Americas Fabrication adjusted operating profit dropped to $4.1 million from $68.6 million, as lower selling prices and a 15% decline in composite metal margin outweighed modestly lower shipments. Management cited aggressive competition and low-priced rebar imports.
- International Mill adjusted operating profit increased to $47.0 million from $28.9 million, supported by 10% growth in shipments and higher prices; scrap-cost increases slightly reduced metal margin.
- CMC announced an exit from International Marketing and Distribution. It sold CMC Cometals on August 31, 2017 for $170.9 million, subject to customary adjustments, and recorded a $7.0 million sale loss. The segment’s remaining trading operations were to be restructured and sold or wound down. Discontinued operations generated $13.8 million of FY2017 earnings.
- CMC issued $300 million of 5.375% notes due 2027, drew a $150 million term loan due 2022, and redeemed its outstanding 2017 and 2018 notes. Debt-extinguishment costs were $22.7 million.
FY2017 fourth quarter: Continuing-operations sales were $1.261 billion. Consolidated net loss was $29.5 million, or $0.25 per diluted share, compared with a $0.1 million loss in the prior-year quarter. Quarterly gross profit was $111.6 million versus $158.4 million.
Outlook, risks and contingencies
- Management described U.S. non-residential construction demand as positive but emphasized challenging conditions, rising input costs, pressured metal margins and the risk of renewed rebar imports. It said Poland’s outlook was supported by trade measures and infrastructure funding.
- The Durant, Oklahoma micro mill was expected to be commissioned in the second quarter of FY2018. Total direct and indirect investment was expected to exceed approximately $250 million; FY2018 capital spending was forecast at $150–$200 million, primarily for the project. Start-up, cost-overrun, operational and market risks remain.
- Other principal risks include cyclical demand, global steel overcapacity and imports, metal and scrap-price volatility, energy costs and supply, customer credit and contract defaults, foreign exchange, environmental compliance, equipment failures, and access to capital.
- Environmental costs were $29.9 million in FY2017, with $8.0 million of environmental capital expenditures; approximately $5.7 million of environmental capital spending was anticipated for FY2018. Environmental liabilities totaled $4.3 million, including $0.7 million accrued for CERCLA sites.
- A Texas state and county lawsuit alleges environmental violations at CMC’s Odessa recycling facility. CMC disputes the allegations and is defending the case; no loss was accrued. Management could not estimate the high end of the potential loss, which could be material.
- The filing describes potentially significant uncertainty around remediation obligations and other litigation, though management stated it believed pending matters would not materially affect the company. Actual outcomes could differ from estimates.
Key facts for investors to verify
- Whether U.S. steel imports and scrap-cost increases continue to constrain margins, particularly in Mills and Fabrication.
- Progress, cost, commissioning and expected returns of the Durant micro mill and related projects.
- Execution and financial effects of the International Marketing and Distribution exit, including proceeds and remaining liabilities.
- Operating cash generation, working-capital requirements, receivables-sale facility usage and debt levels after the substantial FY2017 cash decline.
- Developments in the Odessa lawsuit and CERCLA matters, including any change in estimated exposure or accruals.
- CMC reported unqualified audit opinions on its financial statements and internal control over financial reporting; investors may review the complete audited statements and debt-covenant disclosures.