Commercial Metals Company (CMC) — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2019; comparisons are to the periods ended May 31, 2018 unless otherwise noted. CMC manufactures, recycles, and markets steel and metal products through Americas Recycling, Americas Mills, Americas Fabrication, and International Mill. Results include the acquired Gerdau businesses from November 5, 2018.
Financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1.606 billion, up 33% | $4.286 billion, up 29% |
| Earnings from continuing operations | $78.6 million vs. $42.3 million | $112.9 million vs. $84.0 million |
| Net earnings | $78.4 million vs. $40.0 million | $112.0 million vs. $86.9 million |
| Diluted EPS, continuing operations | $0.66 vs. $0.36 | $0.95 vs. $0.71 |
| Adjusted EBITDA, continuing operations | $144.0 million vs. $101.0 million | $278.8 million vs. $245.2 million |
Reported gross margin, calculated as sales less cost of goods sold, was approximately 15.1% for the quarter (14.0% prior year) and 12.9% year to date (13.2% prior year). The acquired businesses contributed $453.5 million of quarterly and $958.6 million of year-to-date sales. The filing also reports a $10.3 million acquired-inventory step-up charged to cost of goods sold. ASC 606 adoption reduced reported net earnings by $1.1 million for the quarter and $4.6 million year to date versus the prior revenue-recognition rules.
Cash flow and liquidity: Operating cash flow was negative $218.5 million for the nine months, compared with negative $330.5 million. Investing cash flow was negative $416.4 million, largely reflecting $700.9 million spent on acquisitions; capital expenditures were $91.8 million. Financing cash flow was positive $124.9 million. Cash and cash equivalents were $120.3 million at May 31, down from $622.5 million at August 31, 2018. The company reported $1.372 billion of total debt ($1.362 billion carrying amount), including $1.307 billion of long-term debt. A $350 million revolver was undrawn; reported availability was $347.0 million. CMC said current cash, operating cash flows, and available liquidity should cover anticipated requirements.
Reported operating cash flow reflects the retrospective adoption of a cash-flow accounting standard: collection of beneficial interests in securitized receivables was classified as investing rather than operating cash flow, reducing operating cash flow by $367.5 million in 2019, with an offsetting investing classification.
Material changes and segment performance
- Americas Mills: Adjusted EBITDA rose to $158.1 million for the quarter and $384.4 million year to date, from $89.6 million and $195.0 million. The acquisition, higher selling prices, stronger metal margins, and higher production contributed. U.S. trade actions were cited as supportive of steel pricing.
- Americas Fabrication: Adjusted EBITDA losses widened to $23.3 million for the quarter and $109.9 million year to date, from losses of $8.2 million and $14.8 million. The acquired businesses added volume and losses, while fixed-price backlog and rising rebar input costs pressured margins.
- Americas Recycling: Adjusted EBITDA fell to $12.3 million for the quarter and $37.9 million year to date, as lower scrap prices and narrower nonferrous margins weighed on results.
- International Mill: Adjusted EBITDA declined to $24.1 million for the quarter and $77.4 million year to date. Lower selling prices, weaker margins, reduced melt-shop volumes, and adverse currency translation were cited.
Outlook, risks, and unusual items
- CMC estimated fiscal 2019 capital expenditures of $150 million to $175 million. It provided no specific earnings or revenue guidance in the supplied filing text.
- The acquired fabrication businesses included an unfavorable contract-backlog liability initially valued at $110.2 million. Amortization increased reported sales by $23.4 million in the quarter and $58.2 million year to date. Management said the existing fabrication business approached break-even at current rebar prices in the quarter and expected the acquired unfavorable backlog to become profitable in fiscal 2020.
- Management highlighted risks from cyclical steel demand, metal and scrap-price swings, imports and industry capacity, customer liquidity, foreign-exchange movements, acquisition integration and mill utilization, financing access, and environmental regulation and proceedings.
- CMC reported $3.8 million of CERCLA-site environmental liabilities, including $0.7 million accrued for estimated cleanup and remediation costs. Management did not expect pending litigation or environmental matters to have a material adverse effect, while noting estimates and outcomes may change.
- The company was in compliance with debt covenants at May 31, 2019; its reported interest-coverage ratio was 5.53 and debt-to-capitalization ratio was 0.47. Disclosure controls were concluded to be effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of sales and earnings growth is attributable to the acquisition versus comparable organic performance, and whether acquired mills achieve targeted utilization and integration benefits.
- Whether fabrication backlog converts to improved margins and whether the acquired unfavorable contracts become profitable on the stated timeline.
- Cash generation, working-capital needs, debt levels, and continued access to receivables programs and other liquidity sources.
- Exposure to steel and scrap prices, imports, foreign exchange, and customer credit quality, including the effect on margins and receivables.
- Any changes in environmental or legal exposures, acquisition purchase-price allocations, or the assumptions underlying management’s outlook.