Commercial Metals Company — Form 10-Q Summary
Reporting period: Quarter and six months ended February 29, 2012; comparisons are to the periods ended February 28, 2011. CMC operates in metals recycling, steel and copper mills, fabrication, and international marketing and distribution.
Financial performance
| Metric | Three months ended Feb. 29, 2012 | Three months ended Feb. 28, 2011 | Six months ended Feb. 29, 2012 | Six months ended Feb. 28, 2011 |
|---|---|---|---|---|
| Net sales | $1,956.7 million | $1,781.7 million | $3,943.6 million | $3,556.7 million |
| Continuing-operations earnings (loss) | $27.8 million | $(34.4) million | $152.9 million | $(19.5) million |
| Net earnings (loss) attributable to CMC | $28.9 million | $(46.2) million | $136.6 million | $(45.5) million |
| Diluted EPS | $0.25 | $(0.40) | $1.17 | $(0.40) |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $39.1 million | $(15.4) million |
- Quarterly gross profit was approximately $182.8 million, or 9.3% of sales, versus $88.6 million, or 5.0%, a year earlier. Six-month gross profit was approximately $355.3 million, or 9.0%, versus $248.8 million, or 7.0%.
- Adjusted EBITDA, a non-GAAP measure, was $95.3 million for the quarter versus $0.6 million, and $150.8 million for six months versus $67.2 million. CMC cautions that the measure excludes significant costs; continuing-operations adjusted EBITDA was $93.0 million and $173.5 million, respectively, in 2012.
- Cash and cash equivalents were $216.2 million at February 29, down from $222.4 million at August 31, 2011. Total assets were $3.53 billion and stockholders’ equity was $1.24 billion.
- Debt was approximately $1.22 billion, including $1.16 billion of long-term debt, $48.9 million of notes payable, and $3.9 million of current maturities. The revolving credit facility had no borrowings; reported availability was $273.4 million after standby letters of credit.
- Current assets were $2.25 billion and current liabilities $1.01 billion. CMC reported $39.1 million of operating cash flow, spent $53.4 million on capital expenditures, and paid $27.8 million in dividends during the six-month period. Cash declined by $6.2 million.
Material changes and operating trends
- Sales rose 10% in the quarter and 11% for six months. Sales growth was broad in mills, fabrication, and international marketing and distribution; Americas Recycling quarterly sales fell 7%.
- Quarterly adjusted operating profit improved substantially in Americas Mills ($54.4 million versus $10.9 million), Americas Fabrication (loss of $10.0 million versus loss of $49.6 million), International Mill ($6.6 million versus $4.0 million), and International Marketing and Distribution ($26.6 million versus $12.4 million). Recycling profit declined to $6.4 million from $10.9 million.
- Lower LIFO expense was a major year-over-year benefit: consolidated pre-tax LIFO expense was $2.0 million in the quarter versus $55.7 million; for six months, CMC recorded $21.9 million of LIFO income versus $61.4 million of expense.
- Six-month continuing-operations earnings include a $102 million tax benefit tied to tax deductions on CMC’s investment in its Croatian steel subsidiary. This benefit substantially affects reported earnings and the unusually negative effective tax rate of 110.7% for continuing operations.
- CMC classified its Croatian steel pipe operation as discontinued and decided to exit it. Production orders were completed in the second quarter, remaining inventory was expected to be liquidated in the third quarter, and the related $14.3 million financing balance was expected to be repaid then. The six-month discontinued-operations loss was $16.3 million.
Outlook, risks, and contingencies
- Management said the third quarter is historically its strongest as construction activity increases with milder weather. It expected scrap prices to remain stable and was encouraged by strong domestic backlogs, while making performance conditional on scrap-price stability and a reduction in foreign imports.
- Management cautioned that severe winter weather could delay European construction activity and unfavorable currency movements had compressed International Mill margins. International Marketing and Distribution backlogs were higher than the prior quarter.
- CMC expected approximately $7 million of additional fiscal 2012 costs related to a shareholder activist’s tender offer and proxy contest. Corporate expenses included $7.1 million of related costs in the second quarter.
- Fiscal 2012 capital expenditures were expected to be approximately $130 million. Management expected operating cash flow to cover interest and principal due within 12 months and believed it could refinance or obtain financing for public notes at maturity.
- Credit-facility covenants were met at period-end: interest coverage was 4.75 to 1.00 against a 2.50 minimum then in effect; debt to capitalization was 0.52 to 1.00 against a 0.60 maximum. The minimum interest-coverage threshold rises to 3.00 beginning with the period ending November 30, 2012.
- CMC disclosed steel-industry antitrust class actions seeking damages; it said the claims were without merit, but could not reasonably estimate a loss range. It also reported that its Australian receivables subsidiary was out of covenant compliance; CMC guaranteed its performance, and the covenants were waived at quarter-end.
- Other risks cited include economic and construction conditions, metal and scrap prices, imports and competition, customer credit, credit-market access, foreign exchange and interest rates, weather, regulation, litigation, and execution of cost reductions. Management reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- How much of the six-month earnings improvement is sustainable apart from the $102 million Croatian-related tax benefit and unusually favorable LIFO comparison.
- Whether stronger mill and fabrication margins, higher backlogs, and stable scrap prices persist into subsequent quarters.
- Cash generation and working-capital dependence on receivables sales: domestic and international receivable programs generated $104.5 million of net cash-flow benefit from receivables sold during the six months.
- Progress closing the Croatian operation, liquidating remaining inventory, paying severance, and repaying its financing balance.
- Compliance with the Australian receivables-program covenants and the status or potential exposure of the antitrust litigation.
- Ability to fund planned capital expenditures and manage debt maturities as credit-covenant requirements tighten.