Business context and reporting period
Commercial Metals Company (CMC) filed this Form 10-K for the fiscal year ended August 31, 2015. CMC recycles and markets metals and operates steel mills and fabrication businesses through five segments in the United States and international markets. The filing is annual, not a standalone Q4 report; fiscal Q4 figures are noted below. Financial amounts are in U.S. dollars.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Continuing-operations net sales | $5,988.6 million | $6,790.4 million |
| Gross profit | $775.4 million | $681.1 million |
| Continuing-operations earnings | $161.3 million | $109.1 million |
| Diluted EPS from continuing operations | $1.37 | $0.92 |
| Adjusted operating profit (non-GAAP) | $323.8 million | $232.7 million |
| Adjusted EBITDA (non-GAAP) | $464.6 million | $366.4 million |
| Cash provided by operating activities | $313.5 million | $136.9 million |
| Capital expenditures | $119.6 million | $101.7 million |
Continuing-operations gross margin was approximately 13.0%, compared with 10.0% in FY2014. Total net earnings attributable to CMC, including discontinued operations, were $141.6 million ($1.20 diluted EPS); discontinued operations reported a $19.7 million loss. Fiscal Q4 continuing-operations net sales were $1,411.5 million; total net loss attributable to CMC was $5.8 million, or $0.05 per diluted share.
At year-end, cash and cash equivalents were $485.3 million, current assets $2,307.1 million, and current liabilities $617.3 million. Long-term debt was $1,277.9 million, with $10.1 million in current maturities; notes payable were $20.1 million. The $350 million revolving facility had $326.6 million available. CMC reported compliance with debt covenants; its interest coverage ratio was 5.76x and debt-to-capitalization ratio 0.49x. The annual dividend was $0.48 per share.
Material changes versus FY2014
- Sales fell 12%, reflecting lower shipments and selling prices across several segments, adverse foreign-exchange effects, a stronger U.S. dollar, and import competition. Operating profit and earnings nevertheless improved.
- Americas Mills adjusted operating profit rose to $304.3 million, helped by lower scrap costs and improved metal margins. Americas Fabrication profit increased to $39.2 million as shipments, selling prices, and margins improved.
- Americas Recycling’s adjusted operating loss widened to $18.6 million amid weaker prices, lower ferrous shipments, margin compression, and a $7.3 million goodwill impairment. International Mill profit fell to $17.6 million as selling prices and metal margins declined and currency effects were unfavorable.
- International Marketing and Distribution adjusted operating profit rose to $57.9 million, but included a $45.5 million customer contract-termination benefit and was partly offset by a $12.4 million inventory write-down.
- Pre-tax LIFO income was $79.3 million, versus $13.6 million of expense in FY2014, contributing materially to the year-over-year improvement. CMC changed its interim LIFO estimation method effective FY2015.
- Operating cash flow increased by $176.5 million. Working-capital movements were significant, including cash released from receivables and inventories; days sales outstanding increased to 56 from 49.
Outlook, commentary, risks, and unusual items
Management cited stronger U.S. non-residential construction spending and described Americas Mills as strong, with a good fabrication backlog. It also expected continued pressure from high steel imports in the U.S. and Poland, a strong dollar, weak scrap markets, global excess capacity, and China’s inability to absorb its production. Management emphasized cost control, working-capital improvement, supply-chain savings, and disciplined capital allocation. The first fiscal quarter is seasonally slower.
CMC planned a new minimill in Durant, Oklahoma, expected to be commissioned in fall 2017, with investment exceeding approximately $250 million and funding expected from internally generated capital. The FY2016 capital budget was estimated at $200–$230 million. CMC decided to exit Australian steel distribution; six sites were sold in July 2015, three more ceased operations, and one remained held for sale at year-end. Environmental costs were $31.7 million in FY2015, with $10.4 million of environmental capital spending; approximately $28.2 million of environmental capital expenditures were anticipated for FY2016.
Key risks include steel-market cyclicality and import pressure, volatile scrap and metal prices, energy availability and cost, foreign exchange, customer credit and contract performance, environmental compliance and remediation, equipment failures, and access to financing. CMC had $400 million of 6.50% notes due in 2017 and $500 million of 7.35% notes due in 2018. It reported $1.0 million accrued for CERCLA sites and $4.3 million in total environmental liabilities; management did not expect pending legal matters to have a material adverse effect. A $45.5 million customer contract-termination benefit and the substantial LIFO benefit are notable nonrecurring or price-sensitive contributors to reported performance.
Important facts for investors to verify
- How much FY2015 earnings and adjusted operating profit depended on the $45.5 million contract-termination benefit and $79.3 million pre-tax LIFO income.
- Whether steel import pressure, scrap-price movements, and foreign exchange continue to affect volumes and segment margins.
- Cash conversion and receivables quality, including the rise in days sales outstanding and use of accounts-receivable sale programs.
- Funding, permitting, costs, and timing for the Oklahoma minimill, alongside the planned FY2016 capital budget.
- Execution and final proceeds from the Australian distribution exit, plus debt refinancing needs ahead of the 2017 and 2018 maturities.
- Potential changes to inventory accounting: management was considering changing the costing method for LIFO inventories in FY2016.