Commercial Metals Company — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended February 28, 2017; comparisons are to the corresponding periods ended February 29, 2016. Unaudited consolidated results. CMC operates steel mills, recycling, fabrication, and international marketing and distribution businesses.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $1,149.6 | $1,019.7 | $2,224.7 | $2,174.6 |
| Earnings from continuing operations | $29.6 | $10.8 | $36.8 | $36.5 |
| Net earnings attributable to CMC | $30.3 | $10.5 | $36.6 | $35.6 |
| Diluted EPS | $0.26 | $0.09 | $0.31 | $0.30 |
| Adjusted operating profit (non-GAAP) | $52.3 | $30.0 | $75.6 | $86.0 |
| Adjusted EBITDA (non-GAAP) | $82.7 | $61.1 | $136.5 | $148.8 |
- Margins: Q2 gross margin was approximately 13.8% of sales, versus 13.2% a year earlier. First-half gross margin was approximately 13.1%, versus 13.5%. The filing does not report these percentages directly; they are calculated from sales and cost of goods sold.
- Cash flow: First-half operating cash flow was $12.0 million, down from $332.8 million. Capital expenditures were $90.8 million; investing cash outflow was $93.9 million. Financing cash outflow was $39.3 million. Cash declined $122.0 million to $395.5 million.
- Liquidity: Current assets were $1,987.0 million and current liabilities $840.1 million, a current ratio of about 2.4. CMC reported $395.5 million cash, $347.0 million available under its revolving credit facility, and additional receivables-sale and bank-facility availability. There were no revolving-credit borrowings.
- Debt: Total debt was approximately $1,068.0 million, including $312.2 million current maturities. The $300 million 2017 Notes mature in July 2017; the company also had $399.8 million of 2018 Notes and $330 million of 2023 Notes. Interest coverage was 5.65x and debt-to-capitalization was 0.44x; CMC said it complied with all debt covenants.
- Dividends: $0.12 per share for the quarter and $0.24 for the first half. No shares were repurchased in the first half; $27.6 million remained authorized.
Material changes and operating drivers
- Q2 sales increased 13%, primarily on higher ferrous scrap prices, stronger construction and energy demand, and improved shipments. First-half sales increased 2%.
- Q2 adjusted operating profit improved to $52.3 million, but first-half adjusted operating profit fell from $86.0 million to $75.6 million. First-half adjusted EBITDA also declined, despite higher net earnings.
- Americas Recycling improved materially as selling prices, shipment volumes, and metal margins rose. International Mill profit also increased on higher shipments, improved selling prices, and favorable product mix.
- Americas Mills faced margin pressure as scrap costs rose faster than selling prices amid imports; first-half adjusted operating profit declined to $88.3 million from $109.8 million. Americas Fabrication profit fell sharply as lower selling prices and competitive import pressure compressed margins; first-half adjusted operating profit was $7.2 million versus $36.2 million.
- International Marketing and Distribution returned to profit in both reported periods, supported by improved U.S. steel-trading margins, although raw-material trading and Asia margins were weaker.
- Q2 SG&A rose $13.2 million, principally due to higher benefit-restoration-plan and employee-related costs. Interest expense declined $4.2 million, mainly following prior-year debt repayments.
Outlook, risks and notable items
- Management expected robust demand and higher shipments in Q3 as the U.S. and Polish construction seasons began, supported by strong fabrication bidding, leading indicators, and consumer confidence. It also anticipated further margin pressure because imports could constrain price increases relative to scrap costs.
- CMC viewed announced U.S. trade duties as positive but awaited final determinations. Potential U.S. tax, infrastructure, regulatory, and trade-policy changes were described as possible opportunities, with timing and implementation uncertain.
- Fiscal 2017 capital expenditures were forecast at $250–$300 million, including $95.6 million of remaining commitments for the Oklahoma micro-mill. Management expected cash, operating cash flow, and available facilities to cover requirements, including scheduled debt payments; refinancing or additional financing for the 2017 Notes remains important.
- Material risks include steel-industry cyclicality, imports and excess capacity, scrap and other commodity-price swings, customer credit and liquidity, currency movements, energy availability and cost, environmental obligations, litigation, and access to financing. Management identified no material change to previously disclosed risk factors.
- First-half operating cash flow was unusually weak versus the prior-year period, largely reflecting working-capital movements: inventory used $68.5 million of cash, while prior-year inventory changes provided $111.5 million. Receivables provided only $2.2 million versus $190.6 million previously.
- Acquisitions of Continental Concrete Structures and Associated Steel Workers were completed during the quarter; seven recycling facilities were acquired after quarter-end on March 6, 2017. The acquisitions were described as immaterial individually and collectively to reported results.
- Environmental liabilities totaled $3.2 million; CMC also disclosed ongoing environmental and other legal matters, while management did not expect pending matters to have a material adverse effect. Approximately $9.5 million of uncertain tax benefits could be released within 12 months if audits or statutes are resolved favorably.
Important facts for investors to verify
- How the July 2017 $300 million note maturity will be funded or refinanced, and whether liquidity covenant requirements are met as maturity approaches.
- Whether Q3 shipment growth materializes and whether steel selling prices can keep pace with scrap-cost increases, particularly in Mills and Fabrication.
- Whether working-capital investment—especially inventories—continues to restrain operating cash flow, and how full-year capital spending tracks the $250–$300 million forecast.
- Whether announced trade duties become final and materially improve import competition, pricing, and segment margins.
- Whether the Oklahoma micro-mill commitments, recently acquired businesses, and expected synergies remain within management’s plans.