Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended May 31, 2007
Business Overview: CMC operates in five reportable segments: Domestic Mills, CMCZ (Poland), Domestic Fabrication, Recycling, and Marketing and Distribution. The company manufactures steel, copper tubes, and fabricates steel products, while also recycling and distributing metals globally.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended May 31, 2007 | 3 Months Ended May 31, 2006 | 9 Months Ended May 31, 2007 | 9 Months Ended May 31, 2006 |
|---|---|---|---|---|
| Net Sales | $2,345,703 | $2,021,299 | $6,348,023 | $5,306,484 |
| Net Earnings | $99,441 | $77,960 | $250,712 | $227,687 |
| Diluted EPS | $0.82 | $0.62 | $2.06 | $1.84 |
| EBITDA (Non-GAAP) | $181,400 | $152,800 | $486,400 | $439,000 |
| Cash from Operations (9mo) | $122,362 | $96,748 | ||
| Cash & Equivalents (May 31, 2007) | $73,125 | |||
| Total Debt (Current + Long-term) | $510,307 | |||
| Working Capital | $998,087 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% for the quarter and 20% for the nine-month period, driven by higher average selling prices and volume growth in international markets.
- Profitability: Net earnings rose 27% for the quarter and 10% for the nine-month period. EBITDA increased 19% and 11%, respectively.
- Segment Performance:
- CMCZ (Poland): Adjusted operating profit surged 187% (quarter) and 516% (nine months) due to record steel prices in Poland and increased shipments.
- Marketing & Distribution: Adjusted operating profit increased 66% (quarter) driven by sales growth and LIFO income.
- Domestic Fabrication: Adjusted operating profit declined 37% (quarter) due to margin compression from volatile steel prices and delayed projects.
- Domestic Mills: Adjusted operating profit increased 6% (quarter) despite a 4% drop in shipments, as higher selling prices offset volume declines.
- LIFO Impact: Pre-tax LIFO expense was $31.0 million for the quarter, a decrease from $44.1 million in the prior year, improving reported earnings.
- Acquisitions: Completed acquisitions of Nicholas J. Bouras, Inc. (steel deck/joist) and Bruhler Stahlhandel GmbH (Germany) for approximately $159.2 million total purchase price.
Guidance, Outlook, and Risks
- Outlook: Management anticipates the fourth quarter to be the second-best ever, with diluted net earnings per share estimated between $0.85 and $0.95. This assumes an estimated pre-tax LIFO expense of $10 million.
- Market Conditions: The company expects the U.S. nonresidential construction market to remain strong. Ferrous scrap prices are expected to stabilize, supporting rebar and merchant bar prices. Imports of rebar and merchant bar are anticipated to decline.
- Capital Expenditures: Total capital spending for fiscal 2007 is approved at approximately $220 million, including $20 million for a new micro mill in Phoenix, Arizona, and $20 million for a wire block mill in Poland. An additional $28 million is allocated for a 5-year ERP implementation.
- Risks & Contingencies:
- Commodity Volatility: Exposure to fluctuations in metals commodity prices and foreign currency exchange rates, mitigated by hedging programs.
- Environmental & Legal: Ongoing litigation and environmental matters exist, though management believes provisions are adequate and outcomes will not significantly impact long-term results.
- Guarantees: Maximum exposure under guarantee agreements for suppliers is approximately $12.3 million.
Investor Verification Checklist
- LIFO Reserve Impact: Verify the sensitivity of net earnings to changes in the LIFO inventory reserve, which reduced pre-tax earnings by $31.0 million in the quarter.
- CMCZ Profitability: Confirm the sustainability of the 187% profit increase in the Polish segment, which was driven by temporary high steel prices in Europe.
- Debt Structure: Review the $146.9 million in commercial paper outstanding and the $400 million revolving credit facility availability.
- Acquisition Integration: Monitor the operational integration and financial contribution of the Bouras and Bruhler Stahlhandel acquisitions.
- Capital Spending: Track progress on the $220 million capital expenditure plan, specifically the new Phoenix micro mill and Poland wire block mill.