Commercial Metals Company — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2020; comparisons are with the periods ended February 28, 2019. Amounts below are in millions of dollars except per-share data and percentages. Filed March 25, 2020.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $1,341.0 | $1,402.8 | $2,725.7 | $2,680.1 |
| Gross profit | $217.9 | $150.3 | $456.1 | $309.2 |
| Gross margin | 16.2% | 10.7% | 16.7% | 11.5% |
| Earnings from continuing operations | $63.6 | $14.9 | $146.4 | $34.3 |
| Net earnings | $63.8 | $13.9 | $147.1 | $33.6 |
| Diluted EPS, continuing operations | $0.53 | $0.13 | $1.22 | $0.29 |
| Adjusted EBITDA, continuing operations | $137.7 | $69.3 | $297.5 | $134.9 |
Quarterly sales fell 4%, while continuing-operations earnings rose $48.7 million. Six-month sales increased 2%, and continuing-operations earnings rose $112.0 million. Higher fabrication metal margins and increased mill and fabrication shipments drove the earnings improvement. Gross profit and gross margin above are calculated from reported sales and cost of goods sold.
Cash flow: Operating cash flow was $253.4 million for the six months, versus $352.9 million used in the prior-year period. The comparison is affected by a $367.5 million accounts-receivable-facility cash-flow classification in 2019; management also cited higher earnings and lower working-capital cash use. Investing cash use was $91.5 million, including $96.6 million of capital expenditures. Financing cash use was $122.1 million, including $106.9 million of long-term debt repayments and $28.5 million of dividends.
Balance sheet and liquidity
At February 29, 2020, cash and cash equivalents were $232.4 million, current assets $2,085.0 million, and current liabilities $649.1 million. Total debt was $1,176.7 million, including finance leases; reported long-term debt was $1,144.6 million. Debt declined from $1,254.9 million at August 31, 2019. The company had no borrowings under its $350 million revolving facility, with $347.0 million available after letters of credit. Management reported compliance with debt covenants. Total stockholders’ equity was $1,758.1 million.
Management estimated fiscal 2020 capital spending of $160–$185 million. It stated that existing cash, operating cash flows and available liquidity were expected to meet cash requirements, while noting that sustained market deterioration could require additional liquidity measures.
Segment trends and material changes
- Americas Recycling: Adjusted EBITDA was $5.8 million for the quarter and $9.2 million year to date, down from $10.1 million and $25.6 million. Lower ferrous scrap prices and shipments, constrained scrap flows and higher conversion costs pressured results.
- Americas Mills: Adjusted EBITDA increased to $125.7 million for the quarter and $280.7 million year to date. Six-month sales rose 9%, supported by higher shipments, including two additional months from the acquired businesses; lower conversion costs and integration synergies helped earnings.
- Americas Fabrication: Adjusted EBITDA improved to $16.1 million for the quarter and $33.5 million year to date, compared with losses of $49.6 million and $86.6 million. Improved metal margins and lower input and conversion costs were key drivers. Reported sales include amortization benefits from acquired unfavorable contract backlog of $6.0 million for the quarter and $14.3 million year to date.
- International Mill: Adjusted EBITDA declined to $13.5 million for the quarter and $24.8 million year to date, mainly from compressed metal margins amid elevated imports. Quarter shipments rose on strong Polish construction demand; year-to-date sales were affected by lower selling prices and unfavorable currency translation.
In February 2020, CMC acquired Polish steel-mesh producer Ecosteel. It also closed melting operations at Rancho Cucamonga in October 2019 and recorded $6.3 million of related costs in Q1 FY2020; $3.8 million remained payable at quarter-end. The company adopted lease accounting in September 2019, recognizing operating lease right-of-use assets and liabilities; adoption did not affect opening retained earnings.
Outlook, risks and contingencies
CMC said COVID-19 had not materially affected operations as of the filing, but warned that the outbreak, containment measures and economic effects could disrupt operations, suppliers, customers, shipping or demand. The potential financial impact could not then be reasonably estimated. No earnings or sales guidance was provided. Other identified risks include steel-market cyclicality, metal-price volatility, imports and excess capacity, scrap and energy availability and cost, customer credit, foreign exchange, acquisition integration, environmental regulation and litigation.
Environmental liabilities totaled $3.6 million at quarter-end, including $0.7 million accrued for CERCLA cleanup costs. Management said it believed provisions were adequate and pending legal and environmental matters would not materially adversely affect the company, while noting actual outcomes and costs could differ from estimates. The company reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Most important facts for investors to verify
- Whether margin and earnings gains persist as steel prices, scrap availability, demand and import levels change.
- How COVID-19 affected subsequent operations, customer demand, supply chains, cash generation and liquidity; the filing’s assessment was based on conditions as of March 25, 2020.
- The sustainability of fabrication and mills’ improved segment results, including the contribution of acquisition-related shipments, synergies and backlog amortization.
- Progress against the $160–$185 million fiscal-year capital-spending estimate and the company’s debt-repayment and liquidity plans.
- Developments in environmental and legal matters, acquisition integration, and the recognized lease and other debt obligations.