Commercial Metals Company — Q3 FY2016 Form 10-Q
Reporting period: Quarter ended May 31, 2016; results are unaudited. Unless stated otherwise, amounts below are U.S. dollars. Comparisons are with the corresponding prior-year period; the company retrospectively changed certain inventory-costing methods, affecting comparability.
Business context and financial results
CMC operates steel mills, fabrication, recycling, and international marketing and distribution businesses. The quarter’s results reflected lower steel and metal prices, import pressure, global steel overcapacity, and weakness in energy markets. The Australian steel distribution business is reported as discontinued operations.
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Net sales | $1,227.4 million, down 19% | $3,401.9 million, down 26% |
| Earnings from continuing operations | $35.1 million, versus $39.2 million | $71.6 million, versus $86.9 million |
| Net earnings attributable to CMC | $19.3 million, versus $28.7 million | $54.9 million, versus $67.1 million |
| Diluted EPS | $0.17, versus $0.25 | $0.47, versus $0.57 |
| Adjusted operating profit (non-GAAP) | $60.9 million, versus $82.2 million | $147.0 million, versus $187.0 million |
| Adjusted EBITDA (non-GAAP) | $92.5 million, versus $114.7 million | $241.3 million, versus $285.6 million |
Cost of goods sold was $1,051.9 million in the quarter and $2,934.0 million year to date. Derived gross profit was approximately $175.5 million (14.3% of sales) and $467.9 million (13.8%), respectively. The filing does not present gross margin as a reported measure. Cash dividends were $0.12 per share for the quarter and $0.36 year to date.
Cash flow, balance sheet, and debt
- Operating cash flow was $506.9 million for the first nine months, compared with $58.8 million a year earlier. Working-capital movements provided $294.4 million, principally from lower inventories and receivables.
- Investing cash outflow was $150.1 million, including $104.5 million of capital expenditures and $49.1 million of increased restricted cash for the Durant, Oklahoma micro-mill. Financing cash outflow was $357.5 million, including $208.6 million of long-term debt repayments.
- Cash and cash equivalents were $483.9 million at May 31, 2016, versus $485.3 million at August 31, 2015. Total assets were $3.11 billion and stockholders’ equity was $1.36 billion.
- Debt was approximately $1.08 billion, including current maturities; long-term debt on the balance sheet was $1.07 billion. CMC repurchased about $100 million of its 2017 and 2018 notes in February. It had no borrowings under its $350 million revolving facility and reported $348.3 million available under it.
- Debt-to-capitalization covenant ratio was 0.44 against a maximum of 0.60; interest coverage was 4.70 against a minimum of 2.50. CMC reported compliance with debt covenants. It expects operating cash flow to cover interest and principal due within twelve months and believes it can refinance or otherwise fund note maturities.
Material changes and segment performance
- International Marketing and Distribution was the largest drag: quarterly adjusted operating profit fell to $0.9 million from $25.6 million; year-to-date results shifted to a $3.6 million loss from $49.7 million profit. Lower volumes and margins, weak energy markets, and the prior-year $45.5 million customer-contract termination benefit affected comparisons.
- Americas Mills quarterly adjusted operating profit declined to $55.0 million from $63.3 million as selling prices fell faster than scrap costs; average metal margin declined 22%. Year-to-date profit was $164.7 million, down from $195.4 million.
- Americas Fabrication improved: quarterly adjusted operating profit was $22.8 million versus $13.7 million, and year-to-date profit was $59.0 million versus $3.8 million. Better metal margins and higher shipments contributed.
- Americas Recycling remained loss-making, with a quarterly adjusted operating loss of $2.0 million and year-to-date loss of $16.2 million. Margin and volume pressure prompted a long-lived-asset review; no impairment was recorded for these assets in the quarter, but further deterioration could lead to impairment.
- CMC recorded a $15.8 million impairment on the remaining Australian steel distribution assets held for sale, including approximately $13.5 million of accumulated currency translation loss. A definitive sale agreement was signed June 10, 2016, after quarter-end; fair value less costs to sell at May 31 was $10.4 million.
Outlook, risks, and unusual items
- Management expected fiscal fourth-quarter results to remain strong and consistent with Q3, citing U.S. construction demand. It also expected productivity and cost benefits from capital projects to begin in Q4. Fiscal 2016 capital expenditures were projected at $185–$195 million.
- Management cited non-residential construction as a supportive market, while risks include metal-price volatility, imports and industry overcapacity, weak global energy markets, foreign exchange movements, customer credit conditions, and potential liquidity or refinancing constraints.
- The nine-month results include an $11.5 million loss on debt extinguishment from the note tenders. The company’s adjusted EPS was $0.53 year to date versus GAAP diluted EPS of $0.47, excluding the after-tax debt-extinguishment effect.
- Inventory accounting changed in FY2016: U.S. LIFO inventories moved to weighted-average or specific-identification costing, with prior periods restated. The change increased Q3 FY2016 earnings by $1.0 million but reduced nine-month FY2016 earnings by $28.3 million versus the former LIFO method.
- Environmental liabilities totaled $3.3 million. Management said pending litigation and proceedings were not expected to have a material adverse effect; outcomes remain uncertain. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Australian asset sale closes on expected terms and whether any additional gain or loss is recognized.
- Whether Q4 operating strength and expected capital-project benefits materialize, particularly amid steel-price and import pressure.
- How much operating cash flow reflects sustainable operations versus inventory and receivables reductions.
- Upcoming 2017 and 2018 note maturities, refinancing access, and compliance with liquidity and debt covenants.
- The sensitivity of Americas Recycling asset values to scrap prices, demand, and other cash-flow assumptions, and the effect of the inventory-accounting change on comparisons.