Business context and reporting period
Commercial Metals Company (CMC) filed this unaudited Form 10-Q for the third quarter and nine months of fiscal 2013, ended May 31, 2013. CMC operates recycling, steel and copper mills, fabrication, and international marketing and distribution businesses.
Key financial metrics
| Metric | Three months ended May 31, 2013 | Nine months ended May 31, 2013 |
|---|---|---|
| Net sales | $1.794 billion, down 11% year over year | $5.313 billion, down 11% |
| Earnings from continuing operations | $19.0 million, down 51% | $73.0 million, down 62% |
| Net earnings attributable to CMC | $19.0 million; diluted EPS $0.16 | $73.3 million; diluted EPS $0.62 |
| Adjusted EBITDA | $89.3 million, down 14% | $275.5 million, up 8% |
| Operating cash flow | Not separately reported for the quarter | $17.5 million, versus $134.8 million |
Quarterly cost of goods sold was $1.617 billion; the resulting gross margin was approximately 9.9%, compared with approximately 9.2% a year earlier. Interest expense was $18.0 million for the quarter and $51.6 million year to date. The effective tax rate on continuing operations was 48.3% for the quarter and 38.1% year to date.
At May 31, cash and cash equivalents were $453.3 million, total assets $3.588 billion, and total equity $1.282 billion. Current assets were $2.427 billion versus current liabilities of $863.7 million. Debt was approximately $1.422 billion, including $144.2 million of current maturities. Nine-month capital expenditures were $63.0 million; cash dividends were $42.0 million.
Material changes versus the prior comparable period
- Sales declined across most segments. International Marketing and Distribution sales fell 13%, and adjusted operating profit declined to $7.7 million from $23.3 million, amid weaker raw-material revenues and margins and losses in Australia.
- International Mill shifted to a $3.8 million adjusted operating loss from $1.3 million profit. Shipments fell 13%, and the mill operated at 68% utilization versus 82%.
- Americas Fabrication adjusted operating profit improved to $13.5 million from $0.2 million, primarily as lower raw-material costs supported margins, despite shipments declining 7%.
- Americas Mills adjusted operating profit fell to $47.5 million from $59.3 million, reflecting lower billet shipments and weaker merchant-product margins, partly offset by improved rebar margins.
- YTD continuing-operations earnings comparisons were affected by prior-year tax benefits: a $102.1 million benefit relating to the former Croatian subsidiary and $11.5 million in research and development credits. In fiscal 2013, CMC also recorded a $26.1 million pretax gain from selling its Trinecke investment.
- Quarterly LIFO income was $16.5 million, compared with $4.6 million of LIFO expense a year earlier; YTD LIFO income was $40.2 million versus $17.4 million. This affected reported segment comparisons.
Outlook, liquidity, risks and unusual items
- Management expected fiscal fourth-quarter operating results to be similar to the May quarter. U.S. non-residential construction showed regional improvement but no broad recovery; European recovery was expected to lag, while International Marketing and Distribution remained challenged pending sustained global market improvement.
- CMC issued $330 million of 4.875% senior notes due 2023 in May, receiving $325 million net of discounts and issuance costs. It accepted approximately $60 million of 2013 notes in a tender offer during May; on June 19, 2013, it redeemed the remaining approximately $140 million. The post-quarter redemption incurred approximately $3.1 million of expenses.
- Available liquidity at May 31 included $453.3 million in cash, $268.1 million of revolving-credit availability, $165.0 million under the domestic receivables facility, $60.7 million under international receivables facilities, and $105.4 million of uncommitted bank facilities. Management said cash flows and facilities were adequate for operations and planned capital spending. Fiscal 2013 capital expenditures were revised to $100–$120 million.
- CMC reported compliance with debt covenants. Its interest-coverage ratio was 5.57, against a 3.00 minimum; debt-to-capitalization was 0.55, against a 0.60 maximum. It expected operating cash flow to cover principal and interest due within twelve months.
- Operating cash flow weakened substantially year over year, with working-capital pressures including higher inventory and payments in accounts payable and accrued liabilities. Days’ sales outstanding rose to 48 from 41 a year earlier; inventory days rose to 46 from 43.
- CMC identified global economic weakness, European sovereign-debt issues, construction activity, steel imports and competition, commodity and raw-material prices, currency and interest-rate movements, customer credit, and litigation and environmental matters as risks. The company could not reasonably estimate a loss range for the disclosed steel antitrust litigation and said it intended to defend the cases.
- An Australian receivables-program subsidiary was not in covenant compliance at May 31; CMC’s guarantee resulted in a waiver. CMC had $27.4 million of reserves for unrecognized tax benefits. No material developments in previously disclosed legal proceedings were reported for the quarter.
- Management stated disclosure controls were effective. Implementation of a new recycling-business information system was ongoing; management said procedures were in place to maintain effective internal control.
Important facts for investors to verify
- Whether fourth-quarter results matched management’s expectation of performance similar to the May quarter, particularly in International Mill and International Marketing and Distribution.
- How much cash conversion and working-capital performance recover, given the sharp year-to-date decline in operating cash flow.
- The final debt and liquidity position after the June redemption of the remaining 2013 notes, including the associated costs.
- Whether U.S. construction activity, European demand, steel import pressure, and metal-price movements improve segment volumes and margins.
- Any developments in the antitrust cases, tax examinations, or the Australian subsidiary’s covenant status.