Business context and reporting period
Commercial Metals Company (CMC) filed this unaudited Form 10-Q for the quarter and nine months ended May 31, 2014. CMC operates in recycling, steel mills, fabrication, and international marketing and distribution. Comparisons are with the periods ended May 31, 2013; discontinued operations are reported separately.
Financial results and condition
- Revenue: Third-quarter net sales were $1.805 billion, up 3% year over year. Nine-month sales were $5.137 billion, down 1%.
- Earnings: Third-quarter earnings from continuing operations were $23.8 million ($0.20 diluted EPS), versus $18.4 million ($0.16). Nine-month continuing earnings were $66.9 million ($0.56 diluted EPS), down from $71.2 million ($0.60). Nine-month net earnings, including discontinued operations, were $80.6 million ($0.68 diluted EPS), versus $73.3 million ($0.62).
- Operating performance: Adjusted operating profit, a non-GAAP measure, was $57.7 million for the quarter, up 5%, and $159.9 million for nine months, down 6%. Adjusted EBITDA was $90.4 million for the quarter, up 3%, and $259.3 million for nine months, down 4%. Cost of goods sold was $1.621 billion for the quarter and $4.627 billion for nine months. Interest expense was $19.0 million and $57.8 million, respectively.
- Cash flow: Nine-month cash from operating activities was $94.3 million, compared with $43.1 million. Investing activities used $8.7 million, including $67.7 million of capital expenditures and $52.3 million of proceeds from the Howell sale. Financing activities used $28.1 million, including $42.3 million of dividends. Cash increased $58.4 million to $437.2 million.
- Balance sheet and liquidity: At May 31, cash was $437.2 million, current assets $2.498 billion and current liabilities $818.6 million. Long-term debt, including current maturities, was $1.284 billion; total liabilities were $2.268 billion. Under the then-existing revolving facility, reported availability was $264.5 million; availability under domestic and international receivables programs was $130.0 million and $48.6 million, respectively. The company reported a 4.84-to-1 interest coverage ratio and 0.50-to-1 debt-to-capitalization ratio, and compliance with debt covenants.
- Dividends: CMC paid $0.12 per share in the quarter and $0.36 per share for nine months, unchanged from the comparable periods.
Material changes versus prior periods
- Americas Mills was the principal improvement: quarterly adjusted operating profit rose to $74.1 million from $46.6 million, supported by higher shipments and metal margins, and favorable quarterly LIFO effects. Nine-month profit increased to $183.9 million from $145.9 million.
- Americas Fabrication adjusted operating profit fell to $1.2 million for the quarter and recorded a $1.9 million loss for nine months, reflecting margin pressure and unfavorable LIFO effects.
- International Mill returned to profitability: adjusted operating profit was $2.0 million for the quarter and $25.6 million for nine months, versus losses in both prior-year periods. Management cited improved selling prices, lower scrap costs, and recovering demand in Poland.
- International Marketing and Distribution profit fell to $1.5 million for the quarter and $4.5 million for nine months, from $7.7 million and $51.8 million. Results included unfavorable LIFO changes; the prior-year nine-month comparison also included a $26.1 million gain on the Trinecke investment sale.
- Nine-month working capital used cash, notably a $176.8 million increase in inventories. Inventory days rose to 55 from 46 a year earlier; days sales outstanding rose to 49 from 48.
Outlook, risks, contingencies and unusual items
- Management expected fourth-quarter fiscal 2014 operating results to remain consistent with the third quarter. It anticipated productivity and cost benefits from the newly commissioned Polish electric arc furnace beginning in fiscal 2015.
- Management expected fiscal 2014 capital expenditures of $130 million to $140 million and said operating cash flow and credit facilities should fund operations and planned investment.
- On June 26, 2014, after quarter-end, CMC replaced its revolving facility with a $350 million facility maturing in June 2019, expandable to $500 million. No amount was drawn as of July 1. New covenants include minimum interest coverage of 2.50-to-1 and maximum debt-to-capitalization of 0.60-to-1.
- CMC sold Howell Metal Company in October 2013 for $58.5 million, subject to adjustments, and estimated a $23.8 million pretax gain reported in discontinued operations. Nine-month discontinued-operations earnings were $13.8 million after tax.
- CMC paid approximately $4 million in April 2014 to settle the direct-purchaser steel antitrust class action; final court approval remained pending. Separate indirect-purchaser actions remained unresolved, and CMC said it could not reasonably estimate a loss range.
- Key exposures cited include steel-market cyclicality, construction demand, scrap and energy prices, competition and imports, customer credit, foreign exchange, access to capital, environmental regulation, litigation, and execution risks. Management cautioned that forward-looking statements are subject to these and other risks.
Important facts for investors to verify
- Whether Americas Mills’ shipment and margin gains persist, and whether fabrication and marketing/distribution margins recover.
- How much of operating cash generation depends on working-capital movements and receivables-sale programs; the domestic program expires in December 2014.
- Progress on inventory reduction, receivables collection, and the Polish furnace’s expected fiscal 2015 benefits.
- Compliance with the new credit agreement’s covenants and liquidity requirements as the 2017 and 2018 notes approach maturity.
- Final approval of the direct-purchaser settlement and developments in the remaining indirect-purchaser litigation.