Commercial Metals Company — Q1 FY2011 Form 10-Q
Reporting period: Three months ended November 30, 2010; filed January 7, 2011. Financial statements are unaudited. Comparisons are with the three months ended November 30, 2009 unless noted.
Financial performance and position
- Revenue: Net sales were $1.782 billion, up 27% from $1.402 billion.
- Profit and margins: Gross profit was approximately $149.0 million, or 8.4% of sales, versus $107.8 million, or 7.7%. Continuing-operations pretax earnings were $7.1 million versus a $44.9 million loss. Continuing-operations earnings attributable to CMC were $0.2 million versus a $28.7 million loss; total net earnings attributable to CMC were $0.7 million versus a $31.2 million loss. Diluted EPS was $0.01 versus a loss of $0.28. The continuing-operations effective tax rate was 95.3%.
- Non-GAAP measures: Adjusted operating profit from continuing operations was $26.6 million, compared with a $24.6 million loss. Adjusted EBITDA from continuing operations was $65.9 million versus $16.3 million; including discontinued operations, adjusted EBITDA was $66.6 million versus $14.1 million.
- Cash flow: Operating activities used $5.6 million, compared with generating $31.9 million. Investing activities generated $38.1 million, including approximately $51 million of proceeds from asset sales; capital expenditures were $11.9 million. Financing activities used $50.1 million. Cash declined $16.5 million to $382.8 million.
- Liquidity: Current assets were $2.173 billion and current liabilities $1.035 billion. The company reported covenant-defined liquidity of $482.8 million at quarter-end. Its $400 million revolving facility had no borrowings and $340 million available after commercial paper outstanding.
- Debt: Long-term debt, including current maturities, was $1.212 billion; commercial paper was $60 million and notes payable $35.8 million. The revolving-credit debt-to-capitalization ratio was 0.53 against a maximum of 0.60; interest coverage was 3.54 against a minimum of 2.50.
- Dividend: Cash dividends were $0.12 per share, unchanged year over year.
Material changes and business drivers
- Results improved substantially as sales volumes, prices and metal margins recovered. Americas Recycling sales rose 42%; Americas Mills sales rose 42%, with adjusted operating profit improving to $34.1 million from near breakeven. Domestic steel-mill shipments increased 15%, and mill utilization rose to 72% from 63%.
- International Mills sales increased 27% and its adjusted operating loss narrowed to $7.7 million from $19.1 million, primarily on stronger Polish demand and pricing. Croatia continued to lose money: CMCS’s adjusted operating loss widened to $14.1 million from $7.5 million.
- Americas Fabrication remained weak: sales rose 10%, but its adjusted operating loss widened to $22.0 million from $8.9 million, amid weak commercial construction demand and rising steel costs.
- International Marketing and Distribution sales rose 13% and adjusted operating profit increased to $24.2 million from $20.1 million. Results included approximately $7 million of recoveries on prior-year inventory contract claims.
- Consolidated pretax LIFO expense was $5.7 million, compared with $17.3 million of LIFO income a year earlier. Management said LIFO reduced continuing-operations earnings by $3.9 million year over year.
- SG&A declined $9.6 million, or 7%, primarily due to cost-containment initiatives and lower IT costs. Interest expense fell $1.1 million to $18.3 million, including a $3.3 million favorable effect from interest-rate swaps.
Outlook, risks and unusual items
- Management expects Q2 FY2011, historically its weakest quarter, to produce an overall small loss excluding LIFO effects. Scrap prices appeared to be rising early in the quarter, with a possible spring pullback; rebar price increases were in effect. Fabrication backlogs could rise at higher prices, while volumes remain weather-sensitive.
- Management cited continued uncertainty in construction demand, metal and energy prices, credit availability, customer liquidity, foreign exchange and interest rates. Severe weather, particularly in Poland, and competition or changes in steel import policy are also identified risks.
- The joist and deck business was classified as discontinued operations and sold or ceased operations. The joist-asset sale generated a $1.9 million gain; the sale of heavy forming and shoring equipment generated approximately $35 million in proceeds and a roughly $0.5 million loss. Overall asset-sale proceeds during the quarter were approximately $51 million.
- CMC’s domestic receivables securitization facility was extended to January 31, 2011, and management was evaluating alternatives. The facility has cross-default provisions. Adoption of new transfer-accounting guidance means future U.S. securitization transfers will be recorded as secured borrowings; the company reported no U.S. program sales in the quarter.
- CMCZ was out of compliance with debt-to-EBITDA and interest-coverage covenants; CMC’s guarantee therefore remained effective. The loan payment schedule remained in force. Management also warned that market and accounting factors could affect compliance with the parent-level interest-coverage covenant in Q2.
- The elevated tax rate reflected foreign losses, predominantly in Croatia, for which tax benefits were not recognized because use within the carryforward period was uncertain. The company reported $20.4 million of unrecognized tax benefits.
- Management said litigation, environmental and other contingencies were adequately provided for and were not expected to significantly affect long-term results or financial position, but could materially affect an individual quarter. No material changes to previously disclosed risk factors were reported.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the January 31, 2011 domestic receivables facility was renewed or replaced, and the resulting borrowing capacity and terms.
- CMCZ’s progress toward covenant compliance and the conditions for release of CMC’s guarantee.
- Q2 results against management’s small-loss outlook, particularly the impact of LIFO, steel and scrap prices, and construction demand.
- Whether the reported $7 million inventory-claim recoveries are nonrecurring and how segment profitability performs without them.
- Cash conversion and working-capital requirements as sales recover, alongside the planned approximately $150 million FY2011 capital budget.
- Potential effects of Croatia’s operating losses and unrecognized tax benefits, customer credit deterioration, and the disclosed litigation and environmental matters.