Commercial Metals Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended November 30, 2012; comparisons are to the three months ended November 30, 2011 unless noted. Financial statements are unaudited. CMC operates in recycling, mills, fabrication, and international marketing and distribution.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $1.789 billion | $1.987 billion | Down 10% |
| Earnings from continuing operations | $49.5 million | $125.0 million | Down 60% |
| Net earnings attributable to CMC | $49.7 million | $107.7 million | Down 54% |
| Diluted EPS | $0.42 | $0.93 | Down $0.51 |
| Adjusted EBITDA, company-reported non-GAAP | $126.2 million | $55.5 million | Up 127% |
| Operating cash flow | $(34.3) million | $38.1 million | Shifted to cash use |
| Capital expenditures | $24.8 million | $29.9 million | Down $5.2 million |
Profitability context: The prior-year quarter included a $102.1 million tax benefit related to deductions associated with the former Croatian subsidiary, materially boosting prior-year earnings. Current-quarter continuing-operations adjusted operating profit was $90.2 million versus $47.7 million. It included a $26.1 million pretax gain from selling CMC’s 11% interest in Trinecke Zelezarny; therefore, reported adjusted EBITDA and operating-profit comparisons should be considered alongside underlying segment performance.
Balance sheet and liquidity: At November 30, 2012, cash and cash equivalents were $271.4 million, current assets $2.304 billion, and current liabilities $1.100 billion. Debt was approximately $1.170 billion, comprising $1.158 billion of long-term debt including current maturities and $12.6 million of short-term notes payable. The $200 million notes due November 2013 were classified as current maturities. Shareholders’ equity attributable to CMC was $1.308 billion. The company reported availability of $269.3 million under its revolving facility, $200 million under its domestic receivables facility, $171.5 million under international receivables facilities, and $95.0 million under uncommitted bank facilities; these facilities are not equivalent to cash on hand.
CMC’s revolving-credit covenants required an interest-coverage ratio of at least 3.00x and debt-to-capitalization no higher than 0.60x. Reported ratios were 6.12x and 0.49x, respectively. The quarterly dividend was $0.12 per share, unchanged year over year.
Material changes and segment results
- Americas Recycling: Adjusted operating profit fell to $4.5 million from $20.8 million. Lower ferrous and nonferrous volumes and prices, nonferrous margin compression, and $8.2 million less LIFO income weighed on results.
- Americas Mills: Adjusted operating profit declined to $52.5 million from $57.9 million. An extended South Carolina melt-shop outage, including about $5.5 million of related expenses, and weaker margins on higher-margin merchant products were factors.
- Americas Fabrication: Adjusted operating profit improved to $10.2 million from a $7.4 million loss, with stable material pricing and improved backlog margins cited as drivers.
- International Mill: Adjusted operating profit declined to $0.9 million from $9.8 million as European market conditions, volumes, and margins weakened.
- International Marketing and Distribution: Adjusted operating profit rose to $40.2 million from a $4.1 million loss. The result included the $26.1 million investment-sale gain, recovery in the raw-materials business, and $7.6 million more LIFO income; management also cited continued softness in volumes and margins.
Inventories increased to $914.3 million from $807.9 million at August 31, 2012. Management said inventory grew as sales declined faster than purchases and production; days’ sales in inventory rose to 51 from 45 in the prior-year quarter.
Outlook, risks, and unusual items
Management said the second fiscal quarter is normally the weakest because of holidays and winter weather. It noted encouraging signs of recovery in U.S. construction markets but said customers remained cautious and inventories low. CMC expected scrap-price improvement to benefit Recycling but potentially compress near-term margins in Mills and Fabrication; it expected continued challenges in the International Mill and ongoing softness in International Marketing and Distribution. The company planned to adjust operating rates and inventories while retaining flexibility. Fiscal 2013 capital expenditures were forecast at approximately $160 million; no earnings guidance was provided.
- CMC had $200 million of notes due November 2013 and was considering alternatives for the maturity. Management expected operating cash flow to cover interest and principal due over the next 12 months and believed refinancing or other financing would be available.
- Operating cash use reflected, among other factors, reduced use of receivables sales, inventory growth, and working-capital movements. CMC reported $1.186 billion of contractual cash obligations due in less than one year, including purchase obligations largely associated with ordinary-course inventory and operations.
- CMC described exposure to economic and construction activity, metals and scrap prices, European conditions, customer liquidity, credit-market access, foreign exchange, interest rates, and raw-material availability. It warned that customer financial stress could require additional receivable reserves.
- Antitrust class actions concerning alleged steel-price fixing remained unresolved. CMC said it believed the claims were without merit, but could not reasonably estimate a range of loss. The filing also discusses ordinary-course litigation and environmental matters.
- An Australian receivables-program subsidiary was out of compliance with financial covenants at quarter-end; CMC’s guarantee resulted in a waiver. A separate guarantee exposed CMC to a maximum $4.0 million for a supplier’s bank facility.
- The remaining assets of the discontinued Croatian steel-pipe operation were sold for $3.9 million without income-statement impact. The stockholder rights plan expired on December 6, 2012. Management reported effective disclosure controls and no material change in risk factors from its latest annual report.
Most important facts for investors to verify
- How much of the operating-profit and adjusted-EBITDA improvement is sustainable after excluding the $26.1 million investment-sale gain and considering LIFO effects.
- Plans and financing for the $200 million November 2013 debt maturity, alongside compliance headroom under the credit covenants.
- Whether inventory levels and operating cash flow improve, given the quarter’s inventory build and cash use.
- Progress in U.S. construction demand and the effect of scrap-price changes on downstream margins, as well as conditions in Europe and global distribution markets.
- Developments in the steel antitrust litigation, tax examinations and unrecognized tax benefits, and the implementation of the Recy enterprise system.