Commercial Metals Company — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016; the filing also reports fiscal fourth-quarter results. CMC manufactures, recycles, fabricates and markets steel and other metals through five segments in the Americas and internationally.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $4.611 billion | $5.989 billion |
| Gross profit / gross margin | $636.0 million / 13.8% | $676.8 million / 11.3% |
| Earnings from continuing operations | $72.5 million | $99.1 million |
| Net earnings attributable to CMC | $54.8 million | $79.4 million |
| Diluted EPS, continuing operations / total | $0.62 / $0.47 | $0.84 / $0.67 |
| Adjusted operating profit (non-GAAP) | $149.1 million | $225.3 million |
| Adjusted EBITDA (non-GAAP) | $314.4 million | $366.1 million |
| Cash from operating activities | $586.9 million | $313.5 million |
| Capital expenditures | $163.3 million | $119.6 million |
| Cash and cash equivalents | $517.5 million | $485.3 million |
| Total debt, including current maturities | $1.071 billion | $1.282 billion |
FY2016 operating cash flow less capital expenditures was approximately $423.5 million. Cash exceeded operating cash flow in part because of working-capital movements, including cash generated from inventories. At year-end, CMC reported $347.0 million available on its revolving facility, plus availability under receivables-sale and uncommitted bank facilities. The company reported covenant compliance, with interest coverage of 5.00x and debt to capitalization of 0.44x. Annual cash dividends were $0.48 per share.
For the fourth quarter, net sales were $1.209 billion, gross profit was $168.1 million, and net loss attributable to CMC was $0.1 million; diluted EPS rounded to $0.00.
Changes versus the prior year
- Revenue fell 23%, mainly from lower selling prices across segments and lower shipments in Americas Recycling, Americas Mills and International Marketing and Distribution. Import pressure, global steel overcapacity, weak oil-and-gas demand and a stronger U.S. dollar weighed on results.
- Adjusted operating profit declined 34%. Americas Recycling’s adjusted operating loss widened to $61.3 million, including $38.9 million of fixed-asset impairment charges. Americas Mills profit fell 18% to $209.8 million as metal margins compressed 11%.
- Americas Fabrication adjusted operating profit rose to $68.6 million from $22.4 million, reflecting improved metal margins and lower costs. International Mill adjusted operating profit increased to $28.9 million from $17.6 million, helped by lower utility costs despite weaker metal margins.
- International Marketing and Distribution moved to a $7.1 million adjusted operating loss from $35.4 million profit. FY2015 included a one-time $45.5 million customer contract-termination benefit.
- Operating cash flow increased by $273.4 million. Debt declined following a cash tender offer for approximately $100 million principal each of the 2017 and 2018 notes; the transactions generated an $11.5 million debt-extinguishment loss.
Outlook, risks and unusual items
- Management expected modest demand strength, but a slow start to FY2017. It anticipated continued pricing and margin pressure from U.S. steel imports and the strong dollar; Americas Mills and International Mill were expected to remain stable, partly offset by margin compression in Americas Fabrication. Management emphasized cost control, disciplined capital and working-capital allocation, and supply-chain savings.
- CMC forecast FY2017 capital expenditures of $250–$300 million, primarily funded internally. The Durant, Oklahoma micro-mill was expected to be commissioned in late 2017, with investment exceeding approximately $250 million.
- Key exposures include steel imports and global overcapacity, cyclical construction and energy markets, volatile scrap and metal prices, currency movements, customer credit and contract defaults, energy supply and cost, equipment failures, environmental compliance and remediation, and litigation.
- Environmental costs were $33.9 million in FY2016, with $19.6 million of environmental capital spending; approximately $21.9 million of environmental capital expenditures was anticipated for FY2017. CMC reported $3.3 million in accrued environmental liabilities and $0.7 million accrued for CERCLA sites; management did not expect pending matters to have a material adverse effect, while noting uncertainty in ultimate costs.
- CMC recorded $17.8 million of losses from discontinued operations, principally related to the Australian steel distribution exit. It completed the sale of the remaining Australian location in FY2016 and decided to exit its Cardiff steel trading operation; related exit costs were not material.
- CMC changed inventory accounting in FY2016, replacing LIFO for specified U.S. operations with weighted-average or specific-identification methods and applying the main change retrospectively. The change reduced FY2016 earnings by $17.9 million versus LIFO; reported prior-year results were restated, so comparisons should use the revised figures.
Investor verification priorities
- Check the durability and cash-conversion quality of the $586.9 million operating cash flow, including working-capital effects and receivables-sale activity.
- Assess the refinancing and repayment plan for the $302.6 million 2017 notes and $408.9 million 2018 notes, alongside liquidity and covenant headroom.
- Evaluate whether steel import pressure, commodity pricing and margin trends are improving, especially in Americas Recycling and International Marketing and Distribution.
- Review the assumptions underlying the $38.9 million Americas Recycling impairment and the potential for further impairments or restructuring costs.
- Track Durant micro-mill construction, projected spending, commissioning timing and funding, and confirm the expected returns on this investment.
- Verify the accounting-method effects, discontinued-operation results, and status and potential cost of environmental and other contingencies against the financial-statement notes.