Commercial Metals Company — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended February 28, 2013. Comparisons are with the corresponding periods ended February 29, 2012. Amounts are in U.S. dollars unless noted.
Business context and results
CMC operates steel and copper mills, recycling, fabrication, and international marketing and distribution businesses. Second-quarter sales fell across most segments amid weaker volumes and margins, particularly in Europe and international distribution.
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $1.730 billion | $1.957 billion | $3.519 billion | $3.944 billion |
| Continuing-operations earnings | $4.6 million | $27.8 million | $54.1 million | $152.9 million |
| Net earnings attributable to CMC | $4.6 million | $28.9 million | $54.3 million | $136.6 million |
| Diluted EPS | $0.04 | $0.25 | $0.46 | $1.17 |
| Adjusted EBITDA, company-defined non-GAAP | $60.1 million | $95.3 million | $186.2 million | $150.8 million |
Gross margin, calculated as sales less cost of goods sold, was approximately 8.2% in Q2 versus 9.3% a year earlier; for the six-month periods it was approximately 9.4% versus 9.0%. Adjusted operating profit from continuing operations was $26.7 million in Q2 versus $60.7 million, and $116.9 million for six months versus $108.4 million. Quarterly interest expense was $16.5 million, slightly higher year over year. The quarterly continuing-operations effective tax rate was 50.6%; the six-month rate was 33.5%.
Segment performance and changes
- Americas Recycling: Q2 adjusted operating profit declined to $2.2 million from $6.4 million. Ferrous selling prices fell 7% and ferrous shipments fell 6% year over year.
- Americas Mills: Q2 adjusted operating profit was $48.8 million versus $54.4 million. Steel-mill shipments fell 7% and average finished-goods selling prices fell 7%; utilization held at 82%.
- Americas Fabrication: Q2 adjusted operating loss narrowed to $3.8 million from $10.0 million, supported by higher shipments, improved backlog margins, and stable input pricing.
- International Mill: Q2 shifted to a $4.2 million adjusted operating loss from $6.6 million profit. Shipments fell 16% and utilization declined to 58% from 83%, reflecting challenging Eurozone conditions.
- International Marketing and Distribution: Q2 adjusted operating profit dropped to $3.9 million from $26.6 million as volumes and margins weakened, particularly in raw materials and Australia.
For the six-month comparison, reported continuing-operations earnings were lower largely because the prior-year period included a $102.1 million tax benefit related to the former Croatian subsidiary. Current-period results also included a $26.1 million pretax gain from selling CMC’s 11% interest in Trinecke; that gain was recorded in the first quarter. The Croatian steel-pipe operation is presented as discontinued operations; remaining assets were sold in Q1 FY2013 for $3.9 million with no income-statement impact.
Cash flow, liquidity, and debt
- Operating cash flow was negative $76.7 million in the first half, compared with positive $39.1 million a year earlier. Working-capital use included an $84.8 million inventory increase and cash outflows from payables and accrued expenses; receivables sold or repurchased also used $37.3 million net.
- Investing activities used $6.0 million, including $41.8 million of capital expenditures, partly offset by proceeds from the Trinecke sale and other asset sales. Financing activities used $11.4 million, including $28.0 million of dividends, partly offset by net short-term borrowing.
- Cash declined to $170.1 million at February 28, 2013 from $262.4 million at August 31, 2012. Current assets were $2.223 billion and current liabilities $1.024 billion.
- Reported borrowings totaled approximately $1.202 billion, including $47.4 million of notes payable, $204.1 million of current maturities, and $950.4 million of long-term debt. The increase in current maturities principally reflects the approaching November 2013 maturity of $200 million of notes, not an equivalent new borrowing.
- The $300 million revolving facility had $270.7 million available after outstanding letters of credit; the company reported additional receivables-sale and bank facilities. Revolver covenants were met: interest coverage was 5.64x against a 3.00x minimum, and debt-to-capitalization was 0.50x against a 0.60x maximum.
Outlook, risks, and contingencies
Management expected the third quarter to benefit seasonally as construction activity ramps up, citing an improving Architecture Billings Index. It anticipated modest seasonal improvement at the International Mill but no appreciable near-term Eurozone recovery, and expected continued global weakness to weigh on International Marketing and Distribution. Fiscal 2013 capital expenditures were reduced to a projected $130–$140 million. Management said operating cash flow and credit facilities should fund operations and planned capital spending, and expected to meet near-term debt service; it was considering alternatives for the $200 million notes due November 2013.
Key risks include economic and construction weakness, Eurozone sovereign-debt issues, steel imports and competition, volatile metal and raw-material prices, customer credit deterioration, currency and interest-rate changes, access to credit, and regulatory or litigation outcomes. The filing reports a pending steel antitrust class action and related purchaser claims; CMC denies the allegations and says a loss range cannot reasonably be estimated. It also disclosed a $4.0 million maximum guarantee exposure for a supplier credit facility. The Australian receivables-program subsidiary was out of compliance with financial covenants, but CMC’s guarantee resulted in a waiver at quarter-end. CMC reported effective disclosure controls; implementation of a recycling enterprise system continues.
Important facts for investors to verify
- Progress on refinancing or otherwise addressing the $200 million notes due November 2013, and renewal of CMC Poland’s uncommitted bank facilities.
- Whether the first-half operating cash outflow and inventory buildup reverse as sales and working capital change.
- Demand, pricing, and margins in the International Mill and International Marketing and Distribution segments, as well as domestic construction activity.
- Customer receivable quality and the continuing availability and covenant status of receivables-sale programs; approximately 57% of receivables were insured or supported by export letters of credit.
- Developments in the antitrust litigation, tax examinations and uncertain tax positions, and any material environmental or other contingencies.