Commercial Metals Company — Form 10-Q Summary
Business context and reporting period. CMC operates steel and recycling, fabrication, and international marketing and distribution businesses. This unaudited filing covers the three and six months ended February 28, 2011, compared with the corresponding 2010 periods. Fiscal Q2 results reflect recovery in several markets, while commercial construction remained weak.
Financial performance and position
| Metric | Three months ended Feb. 28, 2011 | Six months ended Feb. 28, 2011 |
|---|---|---|
| Net sales | $1,791.8 million; up 35% | $3,574.2 million; up 31% |
| Net loss attributable to CMC | $46.2 million; loss of $0.40 per share | $45.5 million; loss of $0.40 per share |
| Adjusted EBITDA, non-GAAP | $0.6 million | $67.2 million |
| Operating cash flow | Not separately stated for the quarter | Used $15.4 million |
- Gross profit was $81.2 million for Q2 (about 4.5% of sales), versus $8.6 million (about 0.7%) a year earlier. Six-month gross profit was $230.2 million (about 6.4% of sales), versus $116.4 million (about 4.3%).
- Q2 continuing-operations pretax loss was $58.7 million; interest expense was $18.3 million. For six months, pretax loss was $51.6 million and interest expense was $36.6 million.
- At February 28, cash and equivalents were $265.0 million, current assets $2.172 billion, and current liabilities $1.041 billion. Total assets were $3.622 billion and total equity $1.258 billion.
- Long-term debt, including current maturities, was $1.196 billion; notes payable and commercial paper added $17.1 million. The $400 million revolving facility had no borrowings, with $390 million available after commercial paper outstanding. The reported covenant ratios were 2.65x interest coverage against a 2.50x minimum, and 0.52x debt-to-capitalization against a 0.60x maximum.
- Investing activities provided $30.6 million in the first six months, including $51.9 million of proceeds from asset sales; capital expenditures were $23.1 million. Financing activities used $152.5 million. Cash declined $134.3 million to $265.0 million. Fiscal 2011 capital spending was expected to be about $125 million.
- CMC paid dividends of $0.12 per share in Q2 and $0.24 per share for the six-month period, unchanged from the prior-year periods.
Material changes versus the prior comparable periods
- Sales and operating performance improved substantially, but CMC remained loss-making. Q2 net loss narrowed to $46.2 million from $173.3 million; six-month net loss narrowed to $45.4 million from $204.6 million. The prior-year comparison included large joist-and-deck exit charges and discontinued-operation losses.
- Management attributed the improvement to stronger demand, higher prices and shipments, operating-cost reductions, and improved mill margins. SG&A fell 18% in Q2 and 13% for six months.
- Q2 pretax LIFO expense rose to $55.7 million from $7.4 million a year earlier; it reduced continuing-operations results by approximately $36 million in Q2. Six-month LIFO expense was $61.4 million versus LIFO income of $9.8 million in 2010.
- Americas Recycling and Americas Mills returned to adjusted operating profit in Q2. International Mills’ adjusted operating loss narrowed substantially, principally on stronger Polish mill results, but Croatia continued to lose money. Americas Fabrication remained loss-making amid weak commercial construction. International Marketing and Distribution remained profitable.
- Operating cash flow turned negative from a $13.5 million inflow in the prior-year six-month period, mainly reflecting higher inventory and receivables as demand and sales improved; tax refunds of about $76 million partly offset working-capital uses.
Outlook, risks and unusual items
- Management expected third-quarter fiscal 2011 EPS of $0.15–$0.25, excluding LIFO effects. It anticipated improving metal margins and results in Americas Recycling and Mills, some relief but continued losses in Fabrication, and higher earnings from Polish operations. It expected Croatian losses to decline under a revised operating strategy and cost reductions.
- Management stated that its operating plan did not require impairment charges, while noting it would continue to assess for impairment indicators. Results remain exposed to metal and scrap prices, demand and construction activity, energy and raw-material costs, currency and interest-rate movements, competition, credit availability, and customer credit quality.
- The revolving-credit interest-coverage cushion was limited. Management noted market and accounting factors could affect the ability to meet the covenant in the following quarter. CMCZ was not compliant with an interest-coverage covenant; the parent guarantee remained effective, and the loan’s payment schedule continued.
- The domestic receivables securitization expired January 31, 2011. On April 5, 2011, CMC entered a new two-year receivables program with a $100 million maximum, potentially expandable to $200 million subject to conditions.
- CMC recorded a $1.9 million gain on the sale of most joist assets and a roughly $0.5 million loss on the sale of heavy forming and shoring equipment. The filing says litigation, environmental and other contingencies are provided for, but outcomes could materially affect an individual quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the forecast $0.15–$0.25 third-quarter EPS range, expressly excluding LIFO, was achieved; assess actual LIFO charges separately.
- Whether gross-margin improvement and stronger shipments persisted as scrap and other input costs changed, especially given the large Q2 LIFO expense.
- Progress in Americas Fabrication and the Croatian mill, and whether the Polish mill’s improvement was sustainable.
- Compliance with the revolving-credit interest-coverage covenant and the status of CMCZ’s covenant and parent guarantee.
- Working-capital needs, cash generation, and availability and terms of the post-quarter receivables program.
- Potential outcomes and financial effects of environmental, litigation, tax, and other contingencies; the filing does not provide a clear estimate of ultimate exposure for all such matters.