Commercial Metals Company — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended February 28, 2014; unaudited. Dollar amounts below are in millions unless stated otherwise. The company operates recycling, steel mills, fabrication, and international marketing and distribution businesses.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $1,649.1 | $1,688.7 | $3,332.0 | $3,438.2 |
| Continuing-operations earnings | $11.1 | $3.9 | $43.0 | $52.9 |
| Net earnings attributable to CMC | $11.1 | $4.6 | $57.1 | $54.3 |
| Diluted EPS | $0.09 | $0.04 | $0.48 | $0.46 |
| Adjusted operating profit | $35.1 | $25.6 | $102.2 | $115.0 |
| Adjusted EBITDA | $67.7 | $58.3 | $168.9 | $182.5 |
- Quarterly gross profit, calculated as sales less cost of goods sold, was $145.2 million (8.8% of sales), versus $139.4 million (8.3%) a year earlier. The filing does not present this as a stated margin measure.
- Second-quarter continuing-operations earnings improved despite lower sales; adjusted operating profit rose 37%. For the first half, continuing earnings declined 19% and adjusted operating profit declined 11%.
- Cash provided by operating activities was $36.4 million in the first half, versus $51.2 million used in the prior-year period. Investing activities provided $22.4 million, including $52.3 million from the Howell sale; financing activities used $6.4 million. Cash increased $53.0 million to $431.8 million.
- At February 28, cash was $431.8 million, current assets $2,418.5 million, and current liabilities $766.5 million. Total debt was approximately $1,292.1 million, including current maturities and notes payable; long-term debt was $1,276.8 million. Cash less total debt was approximately $860 million.
- CMC paid $0.12 per share in dividends in the quarter and $0.24 per share in the first half. Capital expenditures were $36.2 million in the first half.
Changes and operating drivers
- Sales fell 2% in the quarter and 3% in the first half, primarily because of lower volumes in one U.S.-based trading division in International Marketing and Distribution.
- International Mill adjusted operating profit improved to $8.3 million in the quarter from a $4.2 million loss, and to $23.6 million in the first half from a $3.3 million loss. Management attributed the improvement to higher selling prices, lower scrap costs, and better Polish market conditions.
- Americas Mills first-half adjusted operating profit increased to $109.9 million from $99.3 million, helped by higher shipment volumes. Quarterly profit declined to $44.1 million from $47.7 million as metal-margin compression, higher freight, and LIFO expense offset volume gains.
- International Marketing and Distribution first-half adjusted operating profit fell to $3.0 million from $44.1 million. Drivers included a $26.1 million prior-year gain on the Trinecke investment sale, unfavorable LIFO changes, and lower trading volumes. Americas Fabrication reported a first-half adjusted operating loss of $3.1 million versus $6.4 million profit, largely reflecting an unfavorable LIFO swing.
- Pre-tax LIFO was unfavorable by $19.4 million for the quarter and $47.0 million for the first half versus the comparable periods, as inventory prices generally rose in FY2014.
Outlook, liquidity, risks and unusual items
- Management expected seasonal improvement in construction activity in the third quarter and noted gradual U.S. construction-market improvement. A new electric arc furnace in Poland was expected to produce meaningful operating-cost improvements once commissioned.
- Management cited slower Chinese growth, competitive import pricing, aggressive competition in Australia, and Ukraine-related turmoil as risks to operations. Other disclosed risks include cyclical demand, construction activity, scrap and energy costs, currency movements, customer credit, competition, regulation, and financing-market conditions.
- Fiscal 2014 capital expenditures were expected to be $130 million to $140 million. Management said operating cash flow should cover obligations and planned capital spending, and expected cash and available facilities to cover principal and interest due in the next 12 months.
- Reported liquidity included $431.8 million cash, $261.4 million available under the $300 million revolving facility, $120.0 million under the domestic receivables facility, and $31.5 million under international receivables facilities. The company was in compliance with debt covenants; interest coverage was 4.89x against a 3.00x minimum, and debt-to-capitalization was 0.50x against a 0.60x maximum.
- The company sold Howell for $58.5 million in October 2013 and recorded an estimated pre-tax gain of $23.8 million, reported in discontinued operations. First-half discontinued-operations earnings were $14.0 million, including the disposal-related gain; this helped lift total net earnings even as continuing earnings declined.
- On March 14, 2014, CMC agreed to pay approximately $4.0 million to settle the direct-purchaser steel antitrust class action, subject to court approval. The company maintained that the claims lacked merit. Related indirect-purchaser cases remained unresolved, and management said a loss range could not be reasonably estimated.
- Operating cash flow benefited from receivables activity: cash-flow changes in accounts receivable sold were a positive $149.8 million in the first half. Inventory consumed $214.3 million of cash; management said inventory was built ahead of construction season and Poland furnace installation. The domestic receivables program includes cross-default provisions.
Most important facts to verify
- Whether the Polish furnace commissioning and anticipated cost savings occur on schedule and at the expected scale.
- Whether the improvement in continuing operations is sustainable given LIFO volatility, margin pressure, and weak trading volumes.
- How much reported operating cash flow depends on receivables sales and whether working-capital requirements normalize.
- Whether Howell’s final proceeds and gain remain consistent with the reported estimates, and whether the antitrust settlement receives court approval; monitor the remaining indirect-purchaser litigation.
- Whether liquidity, refinancing access, and covenant headroom remain adequate amid cyclical market, customer-credit, and financing risks.
Adjusted operating profit and adjusted EBITDA are non-GAAP measures; the filing cautions that they are not substitutes for GAAP earnings or operating cash flow.