Commercial Metals Company — FY2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended August 31, 2012, not a standalone fourth quarter. Commercial Metals manufactures, recycles and markets steel and other metal products through five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. Results include continuing operations unless noted.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $7.828 billion | $7.863 billion |
| Gross profit and gross margin | $719.5 million; 9.2% | $649.7 million; 8.3% |
| Continuing-operations earnings | $209.0 million; $1.79 diluted EPS | $19.3 million; $0.16 diluted EPS |
| Net earnings (loss) attributable to CMC | $207.5 million; $1.78 diluted EPS | $(129.6) million; $(1.12) diluted EPS |
| Adjusted EBITDA | $364.2 million | $237.3 million |
| Operating cash flow | $196.0 million | $27.7 million |
| Cash and cash equivalents at year-end | $262.4 million | $222.4 million |
| Long-term debt, excluding current maturities | $1.157 billion | $1.167 billion |
Capital expenditures were $113.9 million, leaving approximately $82.1 million of operating cash flow after capital expenditures. Current assets were $2.240 billion and current liabilities $901.1 million. The $300 million revolving credit facility had $271.1 million available, subject to covenants and outstanding letters of credit. The company paid $0.48 per share in dividends.
Material changes versus FY2011
- Sales were nearly flat, down about 0.4%, while continuing-operations earnings improved to $209.0 million from $19.3 million.
- Results benefited from a $45.5 million pre-tax LIFO income, versus $77.0 million of LIFO expense in FY2011. The year-over-year inventory-accounting swing materially aided reported earnings.
- Americas Mills adjusted operating profit rose to $233.9 million from $161.7 million, supported by higher shipments and improved margins, as well as the LIFO swing.
- Americas Fabrication improved by $113.4 million in adjusted operating results, but still reported a $15.7 million adjusted operating loss. Management cited stronger volumes and pricing, stable material costs and improved commercial construction conditions.
- International Mill adjusted operating profit declined to $23.0 million from $47.6 million amid European margin pressure. International Marketing and Distribution profit declined to $47.3 million from $76.3 million, including iron ore contract losses and weaker demand.
- Operating cash flow increased substantially, partly reflecting improved earnings and working-capital movements. Year-end inventory was $807.9 million, down from $908.3 million.
Outlook, commentary, risks and unusual items
- Management described the recovery as lacking meaningful momentum. It expected weaker scrap prices in early FY2013, with possible improvement during winter 2013; it cited improving U.S. residential construction but continued difficult European conditions and uncertainty about China.
- FY2013 capital expenditures were forecast at approximately $160 million. Management expected a continuing-operations effective tax rate of approximately 33% for FY2013.
- A $102.1 million tax benefit arose from ordinary worthless-stock and bad-debt deductions related to the Croatian operation; an additional $11.5 million benefit related to research and experimentation expenditures. These items drove the FY2012 effective tax rate to negative 28.4%.
- CMC exited its Croatian steel pipe operation, CMCS, which was classified as discontinued operations. The year included $18.0 million of severance expense and a $13.8 million pre-tax disposal gain, including a $7.5 million foreign-currency translation gain. The prior-year CMCS results included substantial impairment and closure charges.
- The company terminated interest-rate swaps with an $800 million notional value and received approximately $53 million in cash proceeds; the gain is deferred and amortized as a reduction of interest expense.
- Contractual cash obligations totaled $2.450 billion, including $758.1 million due within one year. The $200 million notes due November 2013 are a near-term refinancing or repayment consideration. Management said operating cash flow and debt facilities should cover expected needs and near-term payments.
- Key risks include cyclical construction and steel demand, volatile scrap and metal prices, import competition, energy costs, European and Chinese economic conditions, currency movements, customer credit and contract defaults, environmental compliance and litigation. CMC reported $958.4 million of receivables; about 60% were covered by credit insurance or letters of credit.
- CMC was named a potentially responsible party at multiple environmental sites and reported $9.0 million of environmental liabilities. It also faced steel-price antitrust class actions; management considered the claims without merit, but the filing said a loss range could not be reasonably estimated.
- Corporate expenses included $15.0 million of fees and expenses associated with a proxy contest and hostile tender offer. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable operating performance versus the $122.5 million pre-tax year-over-year LIFO swing and unusual tax benefits?
- Can Americas Fabrication return to profitability, and are its $718 million backlog and improving construction conditions converting into profitable work?
- What are the repayment or refinancing plans for the $200 million notes due in November 2013, and can CMC maintain covenant headroom as the interest-coverage requirement increases?
- Do the forecast FY2013 capital expenditures of $160 million and projected tax rate of approximately 33% remain appropriate as market conditions change?
- Could European weakness, China-related demand uncertainty, commodity-price changes, customer credit issues, or environmental and antitrust matters materially affect future results or cash flows?