Commercial Metals Company — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2011. Financial amounts are in U.S. dollars; millions are used below unless noted. The filing states that quarterly and year-to-date results are not necessarily indicative of full-year results.
Business context and reporting period
CMC operates in recycling, steel and copper mills, fabrication, and international marketing and distribution. Its five reportable segments are Americas Recycling, Americas Mills, Americas Fabrication, International Mills, and International Marketing and Distribution. The company presented its joist and deck business as discontinued operations following its decision to exit that business.
Financial performance and position
| Metric | Three months ended May 31, 2011 | Prior-year quarter | Nine months ended May 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Net sales | $2,076.6 million | $1,765.2 million | $5,650.8 million | $4,489.9 million |
| Continuing-operations earnings (loss) | $37.1 million | $(10.7) million | $(8.7) million | $(174.7) million |
| Net earnings (loss) attributable to CMC | $36.2 million | $(8.8) million | $(9.3) million | $(213.3) million |
| Diluted EPS attributable to CMC | $0.31 | $(0.08) | $(0.08) | $(1.88) |
| Adjusted EBITDA, non-GAAP | $107.5 million | $55.3 million | $174.7 million | $(54.7) million |
| Cash from (used in) operating activities | Not reported separately for the quarter | $(44.1) million | $17.5 million |
Quarterly sales rose 18%; year-to-date sales rose 26%. Approximate gross margin was 10.4% for the quarter versus 6.8% a year earlier, and 7.9% year to date versus 5.3%. Quarterly SG&A increased $37.1 million, principally due to information technology costs and employee incentive plans; year-to-date SG&A was broadly unchanged. Interest expense was $18.3 million for the quarter and $54.9 million year to date.
At May 31, cash and cash equivalents were $243.6 million, down from $399.3 million at August 31, 2010. Current assets were $2,299.7 million and current liabilities $1,115.0 million. Total debt, including current maturities, notes payable and commercial paper, was approximately $1,212.1 million; no commercial paper or revolving-credit borrowings were outstanding. Long-term debt excluding current maturities was $1,165.5 million. The $400 million revolving facility was fully available, subject to covenant terms.
Year-to-date investing activities provided $1.7 million, including $52.3 million of asset-sale proceeds, while capital expenditures were $51.5 million. Financing activities used $117.9 million, including $41.3 million in dividends. The fiscal 2011 capital budget was approximately $115 million. The quarterly dividend was $0.12 per share.
Material changes versus the prior comparable period
- Quarterly continuing-operations earnings improved to $37.1 million from a $10.7 million loss, and adjusted EBITDA increased to $107.5 million from $55.3 million.
- Americas Mills adjusted operating profit increased to $71.1 million from $14.5 million, reflecting stronger demand, higher finished-goods prices and wider margins. Domestic mill utilization was 73%, unchanged year over year.
- International Mills recorded $15.5 million of adjusted operating profit versus a $10.9 million loss, led by stronger Polish mill results and reduced Croatian losses.
- Americas Fabrication remained loss-making, with a $14.7 million adjusted operating loss, although this improved from $24.5 million. Management cited weak fabricated-steel demand.
- International Marketing and Distribution remained profitable, but adjusted operating profit declined to $17.0 million from $30.9 million, partly due to higher LIFO expense.
- Year-to-date operating cash flow shifted to a $44.1 million outflow from a $17.5 million inflow, principally reflecting increased receivables and inventory as sales, prices and demand improved.
Outlook, commentary, risks and unusual items
- Management expected the fourth quarter of fiscal 2011 to be profitable but seasonally weaker than the third quarter, and said it remained focused on operational efficiency.
- Consolidated pre-tax LIFO expense was $6.0 million in the quarter versus $34.4 million a year earlier. The filing estimates LIFO reduced continuing-operations earnings by approximately $4 million in the quarter and increased the year-to-date continuing-operations loss by approximately $44 million.
- The joist and deck exit generated prior-period impairment, inventory write-down and severance charges. By the second quarter of 2011, all locations had been sold or ceased operations; the discontinued operation recorded a $1.4 million adjusted operating loss in the quarter.
- CMC entered a new two-year domestic receivables-sale program with capacity of up to $100 million, potentially expandable to $200 million with the financier’s consent. No receivables had been sold under it by May 31. International receivables-sale programs were also in use.
- The revolving-credit facility requires minimum interest coverage of 2.50-to-1.00 and maximum debt-to-capitalization of 0.60-to-1.00. CMC reported 3.37-to-1.00 and 0.50-to-1.00, respectively. CMCZ was not compliant with one interest-coverage covenant; the parent guarantee remained effective, with other loan terms, including scheduled payments, continuing.
- On June 3, 2011, after quarter-end, CMC completed the acquisition of G.A.M. Steel Pty. Ltd. for approximately $48 million, subject to final purchase-price adjustment.
- Principal disclosed risks include economic and construction-market weakness, metals and energy price volatility, customer credit, credit-market availability, competition and imports, foreign exchange and interest rates, weather, and environmental, litigation and regulatory matters. Management said it believed contingencies were adequately provided for and would not significantly affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the improved quarterly margins and mill performance persist, especially given seasonality and continued weakness in fabrication markets.
- How working-capital growth affects cash generation, and whether operating cash flow recovers from the year-to-date outflow.
- Whether CMC maintains compliance with credit-facility covenants and whether CMCZ satisfies its interest-coverage covenant so the parent guarantee can end.
- The eventual utilization, costs and cross-default implications of receivables-sale facilities, and the impact of the G.A.M. acquisition.
- The sensitivity of reported earnings to LIFO accounting, metal and scrap prices, currency movements, taxes and discontinued-operation costs.