CMC

Business Context and Reporting Period

Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2009 (First Quarter of Fiscal Year 2010)
Business Overview: CMC operates in five reportable segments: Americas Recycling, Americas Mills, Americas Fabrication and Distribution, International Mills, and International Fabrication and Distribution. The company processes scrap metal, manufactures steel and copper products, and distributes industrial materials globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 39% year-over-year to $1.45 billion, driven by significant declines in average selling prices and lower demand across most segments, particularly Americas Fabrication and Distribution (down 63%) and Americas Mills (down 25%).
• Profitability Reversal: The company reported a net loss of $31.2 million compared to net earnings of $62.0 million in the prior year. This swing was primarily due to margin compression, lower volumes, and a reduction in LIFO income from $113.6 million in Q1 2009 to $17.3 million in Q1 2010.
• Segment Performance:
  • Americas Recycling: Improved to breakeven adjusted operating profit from a $28 million loss, aided by price and volume increases.
  • Americas Mills: Adjusted operating profit decreased $120.3 million due to margin compression and $11.3 million in start-up losses at the new Arizona micromill.
  • International Fabrication: Adjusted operating profit increased $10.1 million despite a 38% sales decline, due to margin expansion in recovering markets.
• Working Capital: Accounts receivable and inventories decreased significantly, contributing to a strong operating cash flow of $31.9 million.

Guidance, Outlook, and Risks

• Outlook: Management anticipates the second quarter will be challenging due to seasonal winter downturns, expecting mill utilization between 55% and 60%. Results are expected to be similar to the first quarter barring significant LIFO swings. The second half of the fiscal year appears more promising, driven by potential U.S. economic stabilization and strong demand from China and Australia.
• Liquidity: The company maintains strong liquidity with $334 million in cash and access to over $1.5 billion in committed and uncommitted credit facilities. It is currently in compliance with its revolving credit facility covenants (interest coverage ratio of 1.78 vs. 1.50 required).
• Risks and Contingencies:
  • Covenant Compliance: Subsidiaries CMCZ (Poland) and the Australian subsidiary were not in compliance with certain financial covenants; however, parent company guarantees were issued to waive these requirements.
  • Market Volatility: Significant exposure to fluctuations in metal commodity prices, foreign currency exchange rates, and natural gas prices.
  • Construction Sector: Continued weakness in private nonresidential construction and state budget constraints impacting the Fabrication segment.

Investor Verification Checklist

• LIFO Impact: Verify the sensitivity of future earnings to LIFO inventory adjustments, which swung from a $113.6M benefit to a $17.3M benefit in one year.
• Subsidiary Covenants: Monitor the status of CMCZ (Poland) and Australian subsidiary covenants to ensure parent guarantees remain sufficient and no default events occur.
• Micromill Start-up: Track the ramp-up progress and cost absorption of the new Arizona micromill, which contributed $11.3M in operating losses this quarter.
• Scrap Price Spreads: Assess the margin squeeze risk as domestic ferrous scrap prices rise while finished goods prices remain under pressure.
• Capital Expenditures: Confirm adherence to the $165 million capital budget for 2010, including the $24 million melt shop upgrade in Croatia.