Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2008 (Third Quarter of Fiscal Year 2008)
Business Overview: CMC is a global steel and metal products company operating through five segments: Americas Recycling, Americas Mills, Americas Fabrication and Distribution, International Mills, and International Fabrication and Distribution. The company recently reorganized its segment structure in the first quarter of 2008.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended May 31, 2008 | Nine Months Ended May 31, 2008 |
|---|---|---|
| Net Sales | $2,910,730 | $7,280,902 |
| Net Earnings | $59,484 | $168,423 |
| Diluted EPS | $0.51 | $1.43 |
| EBITDA | $136,600 | $393,400 |
| Cash and Equivalents | $68,578 | (Balance Sheet Item) |
| Total Debt (Current + Long-term) | $779,760 | (Balance Sheet Item) |
| Operating Cash Flow | (Not provided for quarter) | $(53,569) |
Note: EBITDA is a non-GAAP measure. Total Debt includes $33,000 commercial paper, $32,233 notes payable, $104,855 current maturities of long-term debt, and $641,872 long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 29.7% for the quarter and 20.4% for the nine-month period compared to the prior year, driven by higher steel and scrap prices and favorable foreign exchange rates.
- Earnings Decline: Despite revenue growth, Net Earnings decreased 40.1% for the quarter and 32.8% for the nine-month period. This was primarily caused by a record pre-tax LIFO (Last-In, First-Out) expense of $127.2 million for the quarter ($181.8 million for nine months) due to spiking ferrous scrap prices.
- EBITDA Decline: EBITDA decreased 24.7% for the quarter and 19.1% for the nine-month period.
- Cash Flow: Operating cash flow turned negative, using $53.6 million for the nine months ended May 31, 2008, compared to generating $122.4 million in the prior year. This was due to increased working capital requirements (higher receivables and inventories) and lower net earnings.
- Segment Performance:
- Americas Recycling: Adjusted operating profit increased 63% due to higher scrap prices.
- Americas Mills: Adjusted operating profit decreased 49% due to LIFO charges.
- Americas Fabrication: Reported an adjusted operating loss of $22.3 million due to margin compression on fixed-price contracts and LIFO charges.
- International Fabrication: Set an all-time record for adjusted operating profit ($40.3 million), up 86%.
Guidance, Outlook, and Risks
- Outlook: Management expects four of five segments to have a strong fourth quarter. The Americas Fabrication segment is expected to face further margin compression due to rising steel prices. Global demand for scrap and steel remains robust, supported by infrastructure growth in the Middle East and North Africa.
- Capital Expenditures: The company expects total capital spending for fiscal year 2008 to be significantly below the budgeted $494 million due to project delays. $227 million was invested in property, plant, and equipment in the first nine months.
- Stock Repurchases: The company purchased 5.4 million shares of common stock during the nine-month period at an average price of $28.00 per share. As of May 31, 2008, authorization remained for 812,547 additional shares.
- Risks and Contingencies:
- Commodity Prices: Significant exposure to fluctuations in metals commodity prices and energy costs.
- LIFO Impact: Continued volatility in scrap prices could result in further significant LIFO charges.
- Fixed-Price Contracts: Risk of margin compression in the fabrication segment if steel prices rise faster than contract rollovers.
- Acquisitions: Subsequent events include the acquisition of PHP NIKE S.A. and ABC Coating Companies for approximately $112 million.
- Legal/Environmental: Ongoing litigation and environmental matters, though management believes provisions are adequate.
Investor Verification Checklist
- LIFO Reserve Impact: Verify the magnitude of the $127.2 million quarterly LIFO charge and its effect on reported earnings versus cash flow.
- Working Capital Trends: Analyze the $308 million increase in accounts receivable and $239 million increase in inventories driving negative operating cash flow.
- Fixed-Price Exposure: Assess the backlog of fixed-price contracts in the Americas Fabrication segment and the risk of further losses as steel prices rise.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the increase in debt levels and negative operating cash flow.
- Acquisition Integration: Monitor the performance and integration costs of recent acquisitions (CMC Sisak, CMC Albedo, and subsequent PHP NIKE/ABC Coating deals).