Commercial Metals Company — Form 10-Q Summary
Business context and period: Fiscal first quarter ended November 30, 2019, compared with the three months ended November 30, 2018. CMC manufactures, recycles and markets steel and metal products through four reporting segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill. The prior-year comparison includes only one month of the acquired Gerdau businesses, while the current quarter includes the full quarter.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $1,384.7 million | $1,277.3 million |
| Continuing-operations earnings | $82.8 million | $19.4 million |
| Net earnings, including discontinued operations | $83.3 million | $19.7 million |
| Diluted EPS | $0.69 | $0.16 |
| Adjusted EBITDA from continuing operations | $159.8 million | $65.5 million |
| Cash flow from operations | $146.4 million provided | $357.6 million used |
- Sales increased 8%. Continuing-operations earnings rose by $63.3 million. Approximate continuing-operations earnings margin increased to 6.0% from 1.5%; adjusted EBITDA margin increased to 11.5% from 5.1%.
- Cost of goods sold was $1,146.5 million, equivalent to an approximate gross margin of 17.2% versus 12.4% a year earlier. SG&A was $111.5 million, down $5.7 million; interest expense was $16.6 million, roughly flat.
- Cash and cash equivalents were $224.8 million at November 30, 2019. Total current assets were $2,014.6 million and current liabilities $602.0 million. Long-term debt was $1,179.4 million; current maturities and short-term borrowings were $13.7 million. Total debt before debt issuance costs was $1,203.0 million. The $350 million revolver had no borrowings, with $347.0 million available after letters of credit.
- Capital expenditures were $45.6 million; operating cash flow less capital expenditures was approximately $100.9 million. CMC paid $14.2 million in dividends, or $0.12 per share, and repaid $53.3 million of long-term debt.
Material changes and segment trends
- Americas Mills: Sales rose 28% to $768.9 million and adjusted EBITDA increased to $155.0 million from $113.9 million. Higher shipments—partly reflecting the acquired mills—and 3% metal-margin expansion supported results; average selling price per ton fell about 10%.
- Americas Fabrication: Sales rose 31% to $571.8 million; adjusted EBITDA improved to $17.5 million from a $37.0 million loss. Increased shipments and selling prices, together with lower input costs, drove the improvement. Current-quarter results included $8.3 million of acquired unfavorable-contract-backlog amortization in sales.
- Americas Recycling: Sales fell 26% to $222.3 million and adjusted EBITDA declined to $3.4 million from $15.4 million, amid lower ferrous scrap prices and shipments and higher conversion costs per ton.
- International Mill: Sales fell 27% to $165.4 million and adjusted EBITDA declined to $11.4 million from $32.8 million. Lower selling prices, shipments and metal margins, increased EU imports, and approximately $7.3 million of unfavorable currency translation affected sales.
- Corporate and Other adjusted EBITDA loss narrowed to $27.5 million from $59.6 million, mainly due to lower acquisition-related professional and legal fees.
Outlook, commentary and risks
- Management estimated fiscal 2020 capital spending of $160 million to $185 million. It expected cash, operating cash flows and available liquidity to cover scheduled debt payments, capital needs and other planned uses; sustained market deterioration could require additional liquidity measures. No earnings or revenue guidance was provided.
- In October 2019, CMC decided to close melting operations at its Rancho Cucamonga facility. It recorded $6.3 million of severance, pension-curtailment and vendor-termination expense; $3.9 million remained accrued at quarter-end.
- SG&A benefited from a $6.2 million pre-tax land-sale gain. Employee-related expense increased $22.4 million, offset by a $24.7 million decrease in professional and legal fees, primarily related to the acquisition.
- CMC cited cyclical steel demand, metal-price volatility, imports and excess capacity, scrap and energy availability and pricing, customer credit access, currency movements, environmental matters, and acquisition integration and mill utilization as risks. Management said pending legal and environmental matters were not expected to have a material adverse effect; environmental liabilities totaled $3.5 million. The company reported compliance with debt covenants and effective disclosure controls.
- Cash from operations improved substantially year over year, but the comparison is affected by prior-year classification of $367.5 million of accounts-receivable-facility collections in investing activities under an accounting-standard adoption, and by the prior-year $694.8 million acquisition outlay.
Important facts for investors to verify
- How much of the sales and earnings growth reflects the acquired businesses and how much reflects underlying shipment volumes, pricing and margins.
- Whether Americas Mills and Fabrication performance can be sustained as acquisition-related comparisons normalize, and whether acquired mill utilization improves.
- Whether recycling and International Mill margins recover given weaker scrap flows, imports, pricing and currency effects.
- Actual fiscal 2020 capital spending, debt reduction and liquidity needs relative to management’s estimates and the company’s market outlook.
- The continuing costs, timing and operational effects of the Rancho Cucamonga melting-operations closure and the ultimate exposure from environmental and other legal contingencies.