Commercial Metals Company — FY2014 Form 10-K
Reporting period: Fiscal year ended August 31, 2014. The filing is an annual report; selected fourth-quarter figures are identified separately. CMC recycles metals, manufactures steel, fabricates steel products, and markets and distributes metals and industrial materials through five segments in the Americas and internationally.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales from continuing operations | $7.040 billion | $6.890 billion |
| Gross profit / gross margin | $695.7 million / 9.9% | $662.3 million / 9.6% |
| Continuing-operations earnings | $102.1 million; diluted EPS $0.86 | $75.0 million; diluted EPS $0.64 |
| Net earnings attributable to CMC, including discontinued operations | $115.6 million; diluted EPS $0.97 | $77.3 million; diluted EPS $0.66 |
| Adjusted operating profit (non-GAAP) | $226.4 million | $206.4 million |
| Adjusted EBITDA (non-GAAP) | $361.7 million | $353.5 million |
| Cash from operating activities | $136.9 million | $147.7 million |
| Capital expenditures | $101.7 million | $89.0 million |
| Cash and cash equivalents at year-end | $434.9 million | $378.8 million |
| Long-term debt at year-end | $1.281 billion | $1.279 billion |
Gross profit and margin are calculated from reported net sales less cost of goods sold. Operating cash flow less capital expenditures was approximately $35.2 million. Current assets were $2.554 billion and current liabilities $891.2 million. CMC reported $321.9 million available under its $350 million revolving facility, plus availability under receivables-sale and other facilities. The company reported compliance with debt covenants; its interest-coverage ratio was 4.94 and debt-to-capitalization ratio 0.48.
CMC paid $0.48 per share in dividends for FY2014. Its notes included $400 million of 6.50% notes due 2017, $500 million of 7.35% notes due 2018, and $330 million of 4.875% notes due 2023.
Material changes and operating developments
- Revenue rose 2% and adjusted operating profit rose 10% year over year. Management attributed the improvement chiefly to higher Americas Mills shipments and stronger International Mill margins and cost savings.
- Americas Mills adjusted operating profit increased to $247.7 million from $204.3 million, supported by 8% higher shipments and improved conversion costs. International Mill profit rose to $30.6 million from $0.9 million, despite lower shipments.
- Americas Fabrication profit fell to $6.2 million from $28.0 million as selling prices and margins weakened amid import competition and higher material and labor costs. Americas Recycling shifted to a $3.2 million loss from $3.2 million profit; International Marketing and Distribution profit declined to $17.8 million from $35.6 million.
- Pre-tax LIFO results swung from $52.9 million of income in FY2013 to $13.6 million of expense in FY2014, an unfavorable $66.5 million change, primarily reflecting rising inventory prices in FY2014 versus falling prices in FY2013.
- Operating cash flow declined by $10.8 million. Higher inventory use of cash—including inventory buildup associated with an August Texas mill outage—and increased receivables were partly offset by increased receivables-sale proceeds and payables.
- CMC sold Howell Metal in October 2013 for $58.5 million and recorded an estimated $23.8 million pre-tax gain in discontinued operations. FY2014 discontinued-operations earnings were $13.5 million after tax.
Fourth quarter: Net sales were $1.903 billion, versus $1.699 billion in FY2013 Q4. Net earnings attributable to CMC were $34.9 million, versus $4.1 million; diluted EPS was $0.29, versus $0.03.
Outlook, risks, contingencies, and unusual items
- Management said key indicators showed strength and expected continued market growth in FY2015, citing improving U.S. construction indicators and gradual Eurozone growth, while acknowledging macroeconomic and geopolitical concerns. This is management’s outlook, not quantified earnings guidance.
- CMC estimated FY2015 capital expenditures of $140 million to $180 million.
- After year-end, CMC decided to exit its Australian steel distribution business, citing the additional time and investment required to achieve acceptable returns. It also decided in FY2014 to wind down its Zug, Switzerland steel-trading operation; associated exit costs were described as immaterial.
- Key risks include cyclical demand and construction activity, volatile scrap and steel prices, imports and excess industry capacity, energy costs and supply, customer credit and contract defaults, foreign exchange and international-market exposure, and ongoing capital requirements.
- Environmental compliance costs were $34.5 million in FY2014, with $6.6 million of environmental capital spending. Environmental liabilities totaled $6.2 million at year-end; CMC was a potentially responsible party at several cleanup sites. Management said estimates and ultimate costs remain uncertain.
- CMC paid approximately $4 million in April 2014 to settle direct-purchaser antitrust claims; the court granted final approval in October. Separate indirect-purchaser actions remained unresolved, and the filing says a loss range could not be reasonably estimated.
- Other notable items include a $3.2 million FY2014 asset impairment charge, $3.7 million of severance costs, and a new $100 million share-repurchase authorization announced after year-end. The authorization does not require CMC to repurchase shares.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of August 31, 2014.
Important facts for investors to verify
- Whether the improved Americas Mills and International Mill results can continue, and whether margin compression in fabrication, recycling, and distribution persists.
- How the FY2014 LIFO expense, inventory buildup, and Texas mill outage affect subsequent-period margins, working capital, and cash conversion.
- The financial and operational effects of exiting Australian distribution and winding down the Zug trading business, including any additional charges.
- Liquidity and refinancing capacity ahead of the 2017 and 2018 note maturities, and continued compliance with credit-facility covenants.
- Developments in indirect-purchaser litigation, environmental remediation matters, and the realization of deferred tax assets.
- Progress and returns from the planned FY2015 capital program, and whether any share repurchases are actually made.