Commercial Metals Company — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below identify the three months ended August 31, 2019. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
CMC manufactures, recycles and markets steel and metal products through four segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill. The company completed its acquisition of 33 U.S. rebar fabrication facilities and four EAF mini mills from Gerdau on November 5, 2018, and FY2019 includes approximately ten months of the acquired businesses. The $701.2 million cash purchase price was funded with cash and borrowings.
Financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $5.829 billion | $4.644 billion |
| Earnings from continuing operations | $198.8 million | $135.2 million |
| Net earnings | $198.1 million | $138.5 million |
| Diluted EPS from continuing operations | $1.67 | $1.14 |
| Gross profit / gross margin | $803.5 million / 13.8% | $622.2 million / 13.4% |
| Adjusted EBITDA from continuing operations | $424.1 million | $352.2 million |
| Operating cash flow, as reported | $37.0 million | ($433.9 million) |
| Capital expenditures | $138.8 million | $174.7 million |
| Cash and cash equivalents at year-end | $192.5 million | $622.5 million |
| Total debt, including current maturities | $1.255 billion | $1.170 billion |
Reported net sales increased 26%, with the acquisition contributing $1.379 billion. Earnings from continuing operations rose 47%, primarily due to the acquired businesses. Interest expense increased $30.4 million to $71.4 million, mainly from acquisition financing. The effective tax rate from continuing operations was 26.0%, versus 18.2%; FY2019 included $7.4 million of non-recurring tax expense related to final measurement of TCJA repatriation-tax provisions.
Cash flow comparisons require care: adoption of cash-flow guidance and changes to the receivables programs shifted cash flows from operating to investing or financing activities. Management reported that operating working capital generated $48.7 million in FY2019, compared with a $89.6 million use in FY2018. The company spent $700.9 million net of acquired cash on the Gerdau acquisition. Year-end current assets were $2.080 billion and current liabilities $694.6 million.
At August 31, 2019, CMC had $192.5 million cash, $347.0 million available under its $350 million revolver, $149.8 million available under its U.S. receivables facility and $46.3 million available under its Polish receivables facility. No revolver borrowings were outstanding. The company was in compliance with debt covenants; its interest coverage ratio was 5.93x and debt-to-capitalization ratio 0.44x. Quarterly dividends were $0.12 per share ($0.48 for the year).
Material changes and segment performance
- Americas Mills: Segment sales rose 54% to $3.068 billion and adjusted EBITDA increased to $545.2 million from $301.8 million. Higher shipments, including acquired mills, improved selling prices and a wider metal margin contributed. Section 232 trade actions supported U.S. steel pricing, while conversion costs also rose.
- Americas Fabrication: Segment sales rose 56% to $2.223 billion, but adjusted EBITDA loss widened to $123.0 million from $39.4 million. Acquired operations and margin compression contributed; input prices rose faster than selling prices on fixed-price backlog work. CMC said legacy locations reached break-even in Q4 and expected the acquired-business backlog to turn profitable in 2020.
- Americas Recycling: Segment sales fell 16% to $1.147 billion and adjusted EBITDA declined to $42.1 million from $68.7 million, reflecting lower scrap prices and volumes, compressed margins and reduced scrap flows.
- International Mill: Segment sales decreased 8% to $817.0 million and adjusted EBITDA fell to $100.1 million from $131.7 million. A stronger U.S. dollar reduced translated sales by $53.9 million; European imports also pressured prices.
- Backlog: U.S. fabrication backlog was $1.1 billion, up from $679.3 million, including $272.3 million attributable to the acquired businesses. Americas Mills backlog was $370.5 million, versus $326.4 million; Polish fabrication backlog was $33.9 million, down from $53.5 million.
FY2019 fourth-quarter net sales were $1.543 billion, gross profit $252.7 million, continuing-operations earnings $85.9 million and diluted continuing-operations EPS $0.72. Quarterly earnings improved from the first half, although the filing does not provide a separate Q4 segment-adjusted EBITDA summary.
Outlook, risks and unusual items
- CMC estimated a FY2020 capital budget of $150 million to $200 million and said cash, operating cash generation and available credit were expected to cover near-term obligations and planned uses of capital. This is a capital-spending estimate, not earnings guidance.
- Management cited strong rebar bidding activity; fabrication selling prices in Q4 FY2019 were 14% above Q4 FY2018. The acquired fabrication backlog was expected to become profitable in 2020.
- Key risks include cyclical construction and steel demand, volatile scrap and steel prices, global overcapacity and imports, energy and raw-material availability, customer credit and contract defaults, acquisition integration, foreign exchange, environmental compliance and remediation, and access to financing.
- Environmental expenses were $42.5 million in FY2019, with $4.1 million of environmental capital expenditures. Accrued environmental liabilities were $3.6 million; $0.7 million was accrued for CERCLA sites. CMC was named a potentially responsible party at multiple sites and said outcomes and ultimate costs remain uncertain.
- Reported cash declined by $430.0 million year over year, while debt increased. Contractual cash obligations totaled $2.144 billion, including $1.255 billion of debt principal and $365.9 million of stated interest payments.
- FY2019 acquisition accounting included a $110.2 million unfavorable-contract-backlog liability; $74.8 million was amortized during the year as a reduction to revenue. Acquisition valuation remained subject to measurement-period refinement.
- Auditors issued unqualified opinions on the financial statements and internal control. Management’s internal-control assessment excluded the acquired businesses, which represented 24% of consolidated assets and sales; those businesses were to be included in the 2020 assessment.
Important facts for investors to verify
- Whether the acquired mills and fabrication operations achieve expected integration benefits and profitability, especially the acquired fabrication backlog.
- How much reported cash flow reflects sustainable operating performance after accounting for receivables-program changes and acquisition spending.
- Whether fabrication margins recover as fixed-price backlog is completed and new projects reflect higher input costs.
- Debt maturities, financing costs, covenant headroom and liquidity needs alongside the FY2020 capital budget and dividend.
- Potential changes in scrap and steel prices, import levels, trade measures and the Polish zloty/euro exchange rates.
- Whether environmental, legal and tax contingencies or acquisition fair-value estimates change materially; the filing does not quantify a clear maximum exposure for these matters.