Commercial Metals Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2012. Comparisons are with the corresponding 2011 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
- Third quarter: Net sales were $2,006.7 million, down 2.7%. Gross profit was $184.2 million, or 9.2% of sales, versus $218.6 million, or 10.6%, a year earlier. Continuing-operations earnings were $39.1 million ($0.34 diluted per share), down from $44.7 million ($0.38). Net earnings attributable to CMC were $40.7 million ($0.35 per diluted share), compared with $36.2 million ($0.31), reflecting a swing in discontinued operations from a loss to income.
- Nine months: Net sales were $5,950.3 million, up 5.9%. Gross profit was $539.5 million (9.1% margin), versus $467.4 million (8.3%). Continuing-operations earnings were $191.9 million ($1.64 diluted per share), versus $25.2 million ($0.22); net earnings attributable to CMC were $177.3 million ($1.52 diluted per share), versus a $9.3 million loss.
- Cash flow: Operating activities generated $134.8 million in the first nine months, compared with $44.1 million used in the prior-year period. Investing activities used $40.7 million, including $82.5 million of capital expenditures; financing activities used $72.4 million. Cash increased by $11.3 million to $233.7 million.
- Liquidity and debt: At May 31, cash was $233.7 million and current assets were $2,267.6 million against current liabilities of $927.4 million. Long-term debt was $1,160.3 million; including current maturities and notes payable, reported borrowings totaled approximately $1,205.2 million. No revolving-facility borrowings were outstanding. Reported unused availability was $273.4 million on the $300 million revolver and $125 million on the domestic receivables facility. Debt-to-capitalization was 0.52:1.00 (maximum 0.60); interest coverage was 4.59:1.00.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $104.3 million for the quarter (down 3%) and $255.1 million for nine months (up 46%). The quarterly dividend was $0.12 per share; dividends totaled $0.36 per share for nine months.
Changes, segments, and unusual items
- Quarterly segment performance was mixed: Americas Recycling operating profit fell to $3.9 million amid weaker nonferrous prices and volumes; Americas Mills profit declined to $59.3 million on margin pressure; Americas Fabrication returned to a small profit ($0.2 million) from a $14.7 million loss, with improved construction demand and backlog. International Mill profit fell to $1.3 million from $22.6 million amid weak European conditions and lower margins. International Marketing and Distribution profit improved to $23.3 million.
- Nine-month continuing earnings benefited substantially from tax items, including a $102 million tax benefit related to investments in the Croatian subsidiary and $11.5 million of research and development credits. The resulting continuing-operations effective tax rate was negative 61.1%; this contributed significantly to the year-over-year earnings increase.
- CMC terminated interest-rate swaps and received approximately $53 million in cash; the gain is deferred and amortized as a reduction of interest expense over the related debt terms. The termination increased quarterly interest expense by $2.1 million.
- CMC ceased Croatian steel-pipe operations and classified them as discontinued. The company completed the sale of the subsidiary on June 1, 2012 for approximately $30.4 million, with $3.1 million contingent on conditions, and sold some excluded assets for $6.7 million on June 13. It expects a pretax gain of $12–$17 million, including an estimated $8 million foreign-currency translation gain; remaining assets were still being marketed.
- Quarterly corporate expenses included $4.0 million of proxy and tender-offer contest costs; management expected another $3.7 million for the balance of fiscal 2012.
Outlook, risks, and contingencies
- Management expected scrap prices to decline further in the fourth quarter due to oversupply and constrained exports, but cited strong domestic and international backlogs and remained optimistic about performance. It expected difficult International Mill conditions, while anticipating stabilization in prices after reducing higher-cost inventory. Fiscal 2012 capital expenditures were expected to be approximately $125 million. No specific earnings guidance was provided.
- Management believed operating cash flow and available credit would fund operations, planned investment, and near-term debt service. It cautioned that credit-market disruption, ratings changes, customer liquidity pressure, commodity and currency volatility, weaker construction or global conditions, and European sovereign-debt issues could affect results and financing access.
- CMC disclosed steel antitrust class actions alleging price-fixing; it considers the claims without merit but said a loss range could not reasonably be estimated. It also faces ordinary-course litigation and environmental matters; management stated provisions were adequate and expected no material impact.
- The Australian receivables subsidiary was out of compliance with financial covenants at May 31; CMC’s guarantee resulted in a waiver. The guarantee ends after two consecutive compliant quarters. The company also reported covenant-based cross-default provisions in its receivables program.
Important facts for investors to verify
- How much of nine-month earnings and cash generation is repeatable after excluding the large Croatian-related tax benefit and other unusual items.
- Whether segment margins and European operating conditions recover, and whether strong fabrication backlogs convert into profitable sales.
- Progress on the Croatian asset sales, receipt of contingent proceeds, remaining disposals, and realization of the estimated gain.
- Compliance with credit-facility covenants as the minimum interest-coverage requirement rises to 3.00:1.00 after November 2012, and availability of short-term and receivables financing.
- Developments in the steel antitrust litigation, tax examinations, and Australian receivables covenant compliance.