Commercial Metals Company — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended February 28, 2015; fiscal year ends August 31. Amounts below are in millions of dollars unless stated otherwise. The filing presents unaudited results.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales from continuing operations | $1,391.1 | $1,597.5 | $3,071.1 | $3,214.5 |
| Continuing-operations earnings | $61.7 | $13.3 | $100.1 | $47.0 |
| Net earnings attributable to CMC, including discontinued operations | $54.5 | $11.1 | $90.7 | $57.1 |
| Diluted EPS | $0.46 | $0.09 | $0.77 | $0.48 |
| Adjusted operating profit (non-GAAP) | $112.2 | $37.0 | $185.5 | $105.8 |
| Adjusted EBITDA (non-GAAP) | $145.1 | $69.3 | $251.5 | $171.6 |
Q2 gross profit was approximately $221.4 million, or 15.9% of sales, versus $142.4 million, or 8.9%, a year earlier. Six-month gross profit was approximately $407.6 million, or 13.3% of sales, versus $319.2 million, or 9.9%. These figures include a substantial favorable LIFO effect; CMC recorded LIFO income of $72.5 million in Q2 and $78.7 million for six months. Management reported favorable year-over-year pre-tax LIFO changes of $91.4 million and $102.0 million, respectively. CMC changed its interim LIFO estimation method in FY2015, and actual year-end costs and quantities may differ materially from interim estimates.
Cash flow: Operating activities used $139.3 million in the first six months, compared with $36.4 million provided in the prior-year period. Capital expenditures were $49.5 million; investing activities used $38.9 million. Financing activities provided $59.9 million, principally reflecting greater use of documentary letters of credit. Cash and cash equivalents fell to $313.0 million from $434.9 million at August 31, 2014.
Balance sheet, debt and liquidity
- At February 28, 2015, total assets were $3.59 billion, total liabilities $2.28 billion, and equity $1.31 billion.
- Long-term debt was $1.281 billion, plus $9.1 million of current maturities and $5.1 million of notes payable. CMC had no borrowings under its $350 million revolving facility; reported availability was $326.6 million after standby letters of credit.
- Other reported liquidity included $160.0 million available under the U.S. receivables program and $38.5 million under international receivables facilities. These facilities and receivables sales are subject to terms and, for the U.S. program, cross-default provisions.
- CMC reported covenant compliance: interest coverage of 5.61x against a 2.50x minimum, and debt-to-capitalization of 0.49x against a 0.60x maximum. Total reported liquidity included $313.0 million cash; facility availability is not the same as cash on hand.
- Trade and documentary-letter-of-credit payables shifted substantially: documentary letters of credit rose to $247.0 million from $125.1 million at August 31, while trade payables declined. The company said the increase in their use contributed $137.5 million of financing cash flow.
Material changes and segment results
- Sales declined 13% in Q2 and 4% for six months. CMC attributed weakness to lower volumes and/or selling prices in recycling, international mills and, in Q2, international marketing and distribution; a strong U.S. dollar, imports and softer metal markets were factors.
- Adjusted operating profit rose sharply, but the favorable LIFO change was a major contributor. Americas Mills profit increased to $98.5 million in Q2 from $44.1 million; Americas Fabrication improved to $11.8 million from a $5.3 million loss. International Marketing and Distribution rose to $15.7 million from $4.5 million.
- International Mill adjusted operating profit fell to $0.8 million from $8.3 million, as selling prices and product mix pressured margins. Americas Recycling reported a small adjusted operating loss of $0.2 million.
- Q2 continuing-operations income tax rate was 33.3%, versus 22.6%; the six-month rate was 31.6%, versus 28.8%. CMC cited higher U.S. income associated with LIFO income, among other factors.
- CMC classified its Australian steel distribution business as discontinued operations after deciding in September 2014 to exit and sell it. Discontinued operations generated a $7.3 million Q2 loss and a $9.3 million six-month loss before tax. Howell Metal, sold in FY2014, also remains classified as discontinued operations.
Outlook, risks and contingencies
- Management said CMC entered the spring construction season with healthy backlogs. It described elevated imports, a strong dollar and global excess supply as key challenges; lower oil prices were slowing demand for some raw materials and steel-related products. Demand in Poland was described as good, with competitive pressure expected to constrain margins.
- CMC expected FY2015 capital expenditures of $130 million to $150 million and stated that current liquidity was adequate for ongoing operations and planned capital spending. Management expected operating cash to cover debt interest and principal due in the next 12 months and believed it could refinance or obtain financing at note maturities.
- Major risks include the cyclical construction and metals markets, steel imports and competition, metal and scrap-price volatility, foreign exchange, customer credit, energy availability and costs, debt covenants, litigation, and access to financing. Management cautioned that forward-looking statements are subject to risks and actual results may differ.
- CMC paid approximately $4 million to settle the direct-purchaser steel antitrust case; the court approved the settlement in October 2014. Related indirect-purchaser cases remain pending. CMC said it could not reasonably estimate a loss range and intended to defend them. It stated that pending proceedings were not expected to have a material adverse effect, while noting ultimate litigation losses may differ from estimates.
- The board authorized a $100 million share-repurchase program in October 2014. CMC repurchased 2.76 million shares for $39.6 million in the six-month period; $60.4 million remained authorized at February 28.
Most important facts for investors to verify
- How much of the earnings and margin improvement is sustainable apart from the FY2015 LIFO estimate and its unusually favorable year-over-year comparison.
- Whether operating cash flow recovers as inventory, receivables and payable timing normalize; six-month operating cash flow was negative, and inventory days and days sales outstanding increased year over year.
- The continuation of market pressures: imports, strong-dollar effects, metal-price declines, oil-related demand weakness and margin compression, particularly at International Mill and Recycling.
- Availability and terms of receivables-sale and documentary-letter-of-credit financing, including cross-default exposure and fluctuations in working-capital funding.
- Progress and potential financial effect of the Australian distribution-business exit and the pending indirect-purchaser antitrust litigation.