Commercial Metals Company — Q1 FY2017 Form 10-Q
Business context and period: This unaudited report covers the three months ended November 30, 2016, compared with the three months ended November 30, 2015. CMC operates across recycling, steel mills, fabrication, and international marketing and distribution. Results are not necessarily indicative of the full fiscal year.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $1,075.1 million | $1,154.9 million |
| Gross profit (sales less cost of goods sold) | $132.0 million; 12.3% margin | $157.6 million; 13.6% margin |
| Earnings from continuing operations | $7.2 million | $25.6 million |
| Net earnings attributable to CMC | $6.3 million | $25.1 million |
| Diluted EPS | $0.05 | $0.21 |
| Adjusted operating profit, continuing operations (non-GAAP) | $23.4 million | $56.1 million |
| Adjusted EBITDA, continuing operations (non-GAAP) | $53.8 million | $87.7 million |
| Operating cash flow | $(1.0) million | $219.6 million |
| Capital expenditures | $43.0 million | $11.2 million |
Balance sheet at November 30, 2016: Cash and equivalents were $465.2 million; current assets $1,912.7 million; and current liabilities $740.5 million. Total debt was $1,072.0 million before debt issuance costs, including $312.9 million of current maturities. Total liabilities were $1,672.5 million and equity $1,330.1 million. Cash was down $52.4 million from August 31, 2016. The company reported $346.983 million available on its $350 million revolving facility, with no amounts drawn, and $119.266 million availability under its U.S. receivables-sale facility. The filing reports covenant ratios of 4.84x interest coverage and 0.44x debt to capitalization, and compliance with debt covenants.
Changes versus prior-year quarter
- Sales fell 7%, while earnings from continuing operations declined 72%. Adjusted operating profit fell 58% and adjusted EBITDA fell 39%.
- Management attributed the overall deterioration mainly to lower selling prices and volumes in Americas Mills and Americas Fabrication, continued U.S. import pressure, and weaker metal margins. Americas Mills’ adjusted operating profit declined to $36.9 million from $59.1 million; Americas Fabrication’s fell to $6.7 million from $21.3 million.
- International Mill improved: shipments rose 14%, and adjusted operating profit increased to $10.0 million from $2.8 million, supported by construction demand and lower rebar imports.
- Americas Recycling’s adjusted operating loss narrowed to $5.1 million from $6.5 million. International Marketing and Distribution’s adjusted operating loss narrowed to $1.0 million from $2.2 million.
- Interest expense decreased $5.0 million, primarily following prior-year debt repayments and increased capitalized interest on the Oklahoma micro-mill project.
- Operating cash flow swung from $219.6 million provided to $1.0 million used. Management cited lower earnings and less cash generated by working-capital movements, notably receivables and inventories, compared with the prior period.
Outlook, commentary, risks and unusual items
- Management said the second fiscal quarter is typically seasonally slower due to winter weather and holidays. It nevertheless noted improving U.S. non-residential construction indicators, stronger ferrous scrap prices in November and December 2016, and possible infrastructure and policy support. These are expectations, not assured outcomes; the filing gives no earnings or revenue guidance.
- Fiscal 2017 capital expenditures were forecast at $250 million to $300 million, primarily including the Durant, Oklahoma steel micro-mill project. Q1 spending included $42.965 million in capital expenditures.
- Management expected cash, operating cash flow and available credit to cover near-term needs, including scheduled debt payments. It cited $300 million of 2017 Notes due July 2017 and said it expected to repay or refinance maturities using cash, operating cash flow and/or additional financing. Market deterioration could require additional liquidity.
- SG&A increased $7.0 million year over year. Drivers included higher equity-award mark-to-market expense, severance, lower gains on asset disposals, and an unfavorable foreign-currency impact. The filing reports $3.9 million of expense from modification and remeasurement of liability-accounted stock awards.
- CMC’s $0.12-per-share dividend was unchanged. It made no share repurchases in the quarter; $27.6 million remained authorized under the repurchase program.
- Risks include steel import competition and industry overcapacity, volatile steel and scrap prices, customer credit and liquidity, currency movements, energy and raw-material availability, environmental and litigation matters, and refinancing needs. Environmental liabilities totaled $3.2 million; management stated pending matters were not expected to have a material adverse effect.
- The company sold receivables through U.S. and Polish programs; the Australian program expired in October 2016 and was not renewed. The U.S. program has cross-default provisions linked to certain credit arrangements.
Important facts for investors to verify
- Whether steel pricing, import pressure, shipment volumes and metal margins improve, particularly in the Americas Mills and Fabrication businesses.
- Progress and capital costs for the Durant micro-mill, including the full-year capital expenditure range of $250 million to $300 million.
- Liquidity and refinancing plans for the $300 million 2017 Notes and subsequent 2018 Notes maturities, including compliance with applicable liquidity covenants.
- Whether working-capital cash generation recovers after the sharp year-over-year operating-cash-flow decline, and how receivables-sale activity affects reported cash flow.
- Potential effects of liability-award remeasurement, environmental matters, tax examinations and market or foreign-exchange risks on future results.