Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2010 (Second Quarter of Fiscal Year 2010)
Business Overview: CMC operates in five reportable segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mills, and International Marketing and Distribution. The company processes scrap metal, manufactures steel and copper products, and distributes industrial materials globally.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Feb 28, 2010 | Six Months Ended Feb 28, 2010 |
|---|---|---|
| Net Sales | $1,322,443 | $2,724,701 |
| Net Earnings (Loss) Attributable to CMC | $(173,290) | $(204,519) |
| Net Earnings (Loss) from Continuing Ops | $(135,252) | $(163,930) |
| Net Earnings (Loss) from Discontinued Ops | $(38,129) | $(40,674) |
| Adjusted EBITDA | $(124,100) | $(110,000) |
| Cash and Cash Equivalents | $297,153 | $297,153 |
| Total Debt (Current + Long-term) | $1,256,228 | $1,256,228 |
| Net Cash from Operating Activities | N/A | $13,471 |
| Debt to Capitalization Ratio | 0.52 | 0.52 |
Note: Adjusted EBITDA is a non-GAAP measure defined by management as earnings before interest, taxes, depreciation, amortization, and impairment charges.
Material Changes vs. Prior Comparable Period
- Revenue Decline: Net sales decreased 12% for the quarter and 27% for the six-month period compared to the prior year, driven by lower demand and selling prices in the Americas Fabrication and International Mills segments.
- Significant Losses: The company reported a net loss of $173.3 million for the quarter, compared to a loss of $35.3 million in the prior year quarter. The six-month loss was $204.5 million versus a profit of $26.7 million in the prior year.
- Discontinued Operations: The company decided to exit the joist and deck business (Americas Fabrication segment), classifying it as a discontinued operation. This resulted in a $62.4 million adjusted operating loss for the quarter, including $26.8 million in asset impairments and $6.7 million in severance costs.
- LIFO Impact: The company recorded a pre-tax LIFO expense of $7.4 million for the quarter, a reversal from the $124.2 million LIFO income recorded in the same period of the prior year due to declining inventory prices.
- Segment Performance:
- Americas Recycling: Sales increased 127% due to higher scrap prices and volumes, though it still reported an operating loss.
- Americas Mills: Sales increased 12%, but operating results declined $88.6 million due to margin compression from high scrap prices and LIFO expense.
- Americas Fabrication: Sales dropped 42% with a $107 million decline in operating results due to weak construction demand and contract loss reserves.
Guidance, Outlook, and Risks
- Outlook: Management anticipates fiscal third-quarter results will benefit from seasonal demand increases in nonresidential construction, particularly in the public sector. However, early results may be negatively impacted by rapidly rising scrap prices squeezing margins at mills and fabrication operations.
- Mill Utilization: Estimated mill utilization rates for the third quarter are approximately 67%.
- Liquidity: The company maintains a liquidity position of approximately $300 million (cash, short-term investments, and securitization capacity), meeting covenant requirements through May 31, 2010. The debt-to-capitalization ratio is 0.52, well below the 0.60 covenant limit.
- Risks and Contingencies:
- Covenant Compliance: While currently compliant, volatility in metal prices and LIFO adjustments could impact the ability to meet the interest coverage ratio in the third quarter.
- Subsidiary Covenants: CMCZ (Poland) and an Australian subsidiary were not in compliance with certain financial covenants; however, parent guarantees were provided to waive these requirements temporarily.
- Market Risks: Exposure to fluctuations in metal commodity prices, foreign currency exchange rates, and natural gas prices. The company uses derivative instruments to hedge these risks.
Investor Verification Checklist
- Discontinued Operations: Verify the final sale price and timeline for the joist and deck business exit to assess the accuracy of the $62.4 million loss provision.
- LIFO Reserves: Monitor the LIFO inventory reserve levels ($231.9 million) and the impact of future scrap price volatility on earnings.
- Covenant Compliance: Track the interest coverage ratio for the quarter ending May 31, 2010, to ensure compliance with the amended credit facility.
- Subsidiary Guarantees: Confirm the duration of the parent guarantees for CMCZ and the Australian subsidiary and the timeline for their return to covenant compliance.
- Capital Expenditures: Review progress on the $140 million capital budget, specifically the melt shop upgrade at CMCS and the flexible rolling mill at CMCZ.