Commercial Metals Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended November 30, 2015. The financial statements are unaudited; comparisons are with the three months ended November 30, 2014, as retrospectively adjusted for the inventory accounting change. CMC operates recycling, steel mill, fabrication, and international marketing and distribution businesses. Its Australian steel distribution business is reported as discontinued operations.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $1,154.9 million | $1,680.0 million |
| Gross profit / gross margin | $157.6 million / 13.6% | $179.9 million / 10.7% |
| Adjusted operating profit (non-GAAP) | $56.1 million | $67.0 million |
| Adjusted EBITDA (non-GAAP) | $87.7 million | $100.1 million |
| Earnings from continuing operations | $25.6 million | $34.3 million |
| Net earnings attributable to CMC | $25.1 million | $32.2 million |
| Diluted EPS | $0.21 | $0.27 |
| Cash dividends per share | $0.12 | $0.12 |
Sales fell 31%; adjusted operating profit declined 16%. Gross margin improved on lower input costs, but the filing attributes the sales decline to lower shipments and selling prices across segments, a strong U.S. dollar, import pressure, and global steel overcapacity. The continuing-operations tax rate was 31.5%, up from 27.8%, largely due to a one-time foreign withholding tax.
Cash flow, debt, and liquidity
- Operating cash flow was $219.6 million, versus cash used of $79.9 million a year earlier. Working-capital movements, including collections and reduced inventories, contributed significantly; cash flow should not be viewed as solely earnings-driven.
- Capital expenditures were $11.2 million in the quarter. Management expected full-year fiscal 2016 capital expenditures of $220–$230 million.
- Cash and cash equivalents were $637.2 million at November 30, 2015, up from $485.3 million at August 31, 2015. Current assets were $2.259 billion and current liabilities $515.0 million.
- Total debt was approximately $1.286 billion, including $10.5 million of current maturities. No amounts were drawn under the revolving credit facility. Reported covenant ratios were 4.41x interest coverage and 0.48x debt to capitalization; the company reported compliance with its debt covenants.
- Reported availability included $326.6 million under the revolving facility, $154.9 million under the U.S. receivables sale facility, and $40.0 million under international receivables facilities. Receivables-sale programs are an alternative liquidity source and include cross-default provisions in the U.S.
Material changes and segment results
- Americas Recycling sales fell 43% to $179.2 million; its adjusted operating loss widened to $6.5 million as metal-price declines and lower volumes compressed margins.
- Americas Mills sales fell 27% to $384.5 million and adjusted operating profit fell 19% to $59.1 million, mainly on lower shipments and selling prices; lower scrap costs partly offset those effects.
- Americas Fabrication sales fell 7% to $382.3 million, but the segment swung from a $4.2 million adjusted operating loss to $21.3 million profit as input costs declined faster than selling prices.
- International Mill sales fell 32% to $120.4 million and adjusted operating profit fell 34% to $2.8 million, reflecting lower prices, volumes, and unfavorable currency translation.
- International Marketing and Distribution sales fell 47% to $283.0 million. The segment moved from $16.7 million adjusted operating profit to a $2.2 million loss, reflecting weaker global energy markets, China-related demand and commodity-price weakness, and a 42% decline in average metal margin.
Outlook, accounting changes, and risks
- Management expected the second fiscal quarter to be seasonally slower due to holidays and winter weather, and did not anticipate near-term material market improvement amid U.S. steel import pressure and weak scrap markets. It expected recent U.S. infrastructure legislation to support demand over time, but not to translate into steel orders for at least 12 months.
- Effective September 1, 2015, CMC changed U.S. inventory accounting from LIFO to weighted-average cost or specific identification, applied retrospectively. It also changed certain international inventories from FIFO to specific identification. Under the new methods, Q1 FY2016 earnings from continuing operations were $12.5 million lower than they would have been under LIFO; the comparative Q1 FY2015 earnings were also retrospectively adjusted. The filing states the cumulative effect of the retrospective change increased retained earnings at September 1, 2014 by $124.2 million.
- Inventory was written down by $2.7 million in the quarter. The Australian steel distribution exit remained in progress; discontinued operations recorded an after-tax loss of $0.6 million, versus $2.1 million a year earlier.
- Management cited cyclical construction demand, metal-price volatility, industry overcapacity and imports, currency movements, customer credit risk, raw-material and energy availability, debt covenants, litigation, and environmental compliance as risks. Environmental liabilities totaled $3.8 million; management did not expect pending proceedings to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Management stated that cash from operations should cover interest and principal payments due within 12 months and that it expected to refinance or obtain financing for notes at maturity. The $400 million notes mature in 2017 and $500 million notes in 2018. Disclosure controls were reported effective; the company also converted to a new financial consolidation and reporting system during the quarter.
Important facts for investors to verify
- How much of future earnings and cash flow reflects operating performance versus working-capital movements and receivables-sale activity.
- The impact of the retrospective inventory accounting change on period-to-period earnings and reported inventory values.
- Whether weak steel pricing, imports, global overcapacity, and reduced metal margins persist, particularly in International Marketing and Distribution and Americas Recycling.
- Progress on the Australian business sale, planned capital spending, and refinancing or repayment plans for the 2017 and 2018 notes.
- Potential changes in customer credit quality, tax exposures, environmental and litigation contingencies, and compliance headroom under debt covenants.