Commercial Metals Company — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended May 31, 2018. Financial statements are unaudited. CMC manufactures, recycles and markets steel and metal products through its Americas Recycling, Americas Mills, Americas Fabrication and International Mill segments.
Financial performance
| Metric | Three months ended May 31, 2018 | Prior-year quarter | Nine months ended May 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Continuing-operations sales | $1,204.5 million | $1,044.7 million | $3,335.3 million | $2,759.9 million |
| Continuing-operations earnings | $42.3 million | $31.6 million | $84.0 million | $60.2 million |
| Net earnings, including discontinued operations | $40.0 million | $39.3 million | $86.9 million | $75.9 million |
| Diluted EPS | $0.34 | $0.34 | $0.74 | $0.65 |
| Adjusted operating profit from continuing operations | $67.4 million | $55.3 million | $133.5 million | $120.3 million |
| Adjusted EBITDA from continuing operations | $101.0 million | $87.2 million | $245.2 million | $212.8 million |
Quarterly continuing-operations sales increased 15% and earnings increased 34% year over year; nine-month sales rose 21% and earnings 39%. Quarterly net earnings were nearly unchanged because a $2.4 million discontinued-operations loss partly offset higher continuing earnings. Continuing-operations diluted EPS was $0.36 for the quarter and $0.71 for the nine months. Adjusted measures are non-GAAP and should not be treated as substitutes for GAAP results.
For the quarter, cost of goods sold was $1,035.9 million and SG&A was $101.4 million. Reported continuing-operations earnings before tax were $55.6 million. The effective tax rate on continuing operations was 23.9% for the quarter and 21.8% year to date, versus 25.9% and 26.1% in the comparable prior-year periods.
Segments and material changes
- Americas Recycling: Quarterly sales rose 24% to $364.1 million; adjusted operating profit rose to $14.4 million from $9.2 million, supported by higher metal margins and shipments.
- Americas Mills: Quarterly sales increased 29% to $553.1 million and adjusted operating profit rose to $70.4 million from $50.7 million. Higher selling prices and shipment volumes helped; new Durant, Oklahoma micro-mill start-up costs and inflation in freight and manufacturing supplies were offsets.
- Americas Fabrication: Quarterly sales were broadly flat at $378.2 million, but adjusted operating results shifted to a $16.1 million loss from $1.8 million profit. Backlog pricing lagged higher input costs; rebar fabrication metal margin fell 31%. Results included a $0.9 million quarterly impairment charge tied to the structural steel business sale.
- International Mill: Quarterly sales increased 20% to $201.7 million and adjusted operating profit rose to $24.4 million from $13.0 million. Higher selling prices and favorable currency translation contributed; shipments declined about 10% in the quarter amid increased Polish-market imports.
- CMC substantially completed its exit from International Marketing and Distribution; those activities are reported as discontinued operations. Quarterly discontinued-operations sales fell to $3.3 million from $337.9 million as the business was wound down. The Australian steel-trading asset sale contributed to a $5.3 million transaction loss.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $91.6 million, up from $18.9 million. Working capital used cash, reflecting higher input costs and volumes; cash flow also included exit-related inflows and $71.9 million of net repayments of receivables-program advances.
- Investing cash outflow was $20.9 million, compared with $207.1 million. Capital expenditures were $144.3 million versus $162.1 million; proceeds included $75.5 million from subsidiary sales and $25.0 million from life-insurance settlements.
- Financing cash inflow was $277.5 million, mainly reflecting $350.0 million of 5.75% senior notes issued in May 2018, due 2026. Cash and cash equivalents rose to $600.4 million from $252.6 million at August 31, 2017.
- Total debt was $1,171.1 million before debt issuance costs, including $1,139.1 million of long-term debt and $19.9 million of current maturities. The $350 million revolver had no borrowings; $346.7 million was available. CMC reported covenant compliance, with interest coverage of 7.89x and debt-to-capitalization of 0.45x.
- CMC reported total contractual obligations of approximately $2.0 billion. It also had $172.7 million available under its U.S. receivables-sale facility and $36.1 million under international receivables-sale facilities; these programs are liquidity sources, not equivalent to cash on hand.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2018 capital expenditures of $175 million to $200 million, to be funded from internally generated capital. It stated that cash, operating cash flow and available liquidity were expected to cover anticipated needs, while warning that sustained market deterioration could require additional financing.
- CMC expected to close its $600 million acquisition of Gerdau U.S. rebar mill and fabrication assets before calendar year-end 2018, subject to customary closing conditions, including regulatory review. Planned funding included the 2026 notes, a delayed-draw term loan and cash on hand.
- Management cited improved global economic indicators, including non-residential construction spending, as supporting demand and pricing. It also noted that new fabrication bookings were beginning to reflect higher input costs, although existing backlog continued to pressure margins.
- The Tax Cuts and Jobs Act reduced the U.S. statutory corporate rate; CMC recorded $9.9 million of additional tax expense for estimated effects and a $45.8 million reduction in net deferred tax liabilities. Management said estimates could change during the measurement period. A future tax-reserve release of approximately $8.0 million was reasonably possible within 12 months.
- Structural steel fabrication asset-sale impairments totaled $13.0 million for the nine months; the filing also reports a $0.5 million goodwill impairment. Acquisition-related costs and Durant micro-mill start-up costs were included in reported results.
- Risks highlighted include steel-industry cyclicality, metal-price volatility, imports and excess capacity, customer credit pressure, raw-material and energy availability and cost, currency movements, environmental matters, acquisition approval and integration, and the ability to realize benefits from the new micro mill.
- An environmental lawsuit concerning the Odessa recycling facility reached a mediated settlement requiring a $1.1 million payment net of insurance, subject to formal state approval. CMC denied wrongdoing; the settlement contains no admission of liability. Environmental liabilities totaled $4.0 million at May 31, 2018.
Important facts for investors to verify
- Whether the Gerdau transaction received approvals and closed on expected terms, and how the acquisition was financed and integrated.
- Whether fabrication margins recover as backlog reprices, and whether new contract pricing covers input and production costs.
- Whether operating cash generation and available facilities remain adequate as working-capital needs, capital spending and debt obligations evolve.
- The final tax effects of the TCJA and any change in unrecognized tax benefits or audit outcomes.
- Actual fiscal 2018 capital expenditures versus the $175 million to $200 million estimate, and progress toward profitable operation of the Durant micro mill.