Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2010 (Third Quarter of Fiscal Year 2010)
Business Overview: CMC operates in five reportable segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mills, and International Marketing and Distribution. The company processes scrap metal, manufactures steel and copper products, and distributes industrial materials globally.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended May 31, 2010 | Nine Months Ended May 31, 2010 |
|---|---|---|
| Net Sales | $1,765,154 | $4,489,855 |
| Net Loss (Attributable to CMC) | $(8,826) | $(213,345) |
| Loss from Continuing Operations | $(10,741) | $(174,671) |
| Adjusted EBITDA | $55,300 | $(54,700) |
| Cash and Cash Equivalents | $289,630 | $289,630 (Ending Balance) |
| Total Debt (Current + Long-term) | $1,267,594 | $1,267,594 (Ending Balance) |
| Net Cash from Operating Activities | N/A | $17,495 |
Note: Adjusted EBITDA is a non-GAAP measure defined by the company as earnings before interest, taxes, depreciation, amortization, and impairment charges.
Material Changes vs. Prior Period
- Revenue: Net sales increased 40% in the third quarter compared to the prior year ($1.77B vs. $1.26B), driven by higher volumes and prices in the Americas Recycling and International Marketing segments. However, for the nine-month period, sales decreased 10% ($4.49B vs. $5.00B).
- Profitability: The company reported a net loss of $8.8 million for the quarter, an improvement from the $13.1 million loss in the prior year quarter. For the nine months, the loss widened significantly to $213.3 million compared to a net income of $13.6 million in the prior year.
- Discontinued Operations: The company exited the joist and deck business (classified as discontinued operations), recording significant impairment charges ($26.8M on PP&E, $4.5M on intangibles) and severance costs ($6.7M) in the second quarter, impacting the nine-month results.
- LIFO Impact: A pre-tax LIFO expense of $34.4 million was recorded in the third quarter of 2010, compared to LIFO income of $45.3 million in the same period of 2009, due to rising scrap prices.
- Segment Performance: Americas Recycling returned to profitability with a $15.8M operating profit. Americas Mills and Americas Fabrication saw significant declines in operating profit due to margin compression and LIFO expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects to be moderately profitable in the fourth quarter of 2010, anticipating improvement from the third quarter due to seasonal factors. However, global economic fragility, particularly regarding sovereign debt in the Euro zone, remains a risk.
- Market Risks: Scrap and steel prices have declined in major international markets since the end of the third quarter. Further declines could impact future results. The nonresidential construction market in the U.S. is expected to remain weak in the private sector.
- Liquidity and Covenants: The company maintains a $400 million revolving credit facility and a $100 million accounts receivable securitization program. As of May 31, 2010, the interest coverage ratio was 3.04 (covenant minimum 2.50) and the debt-to-capitalization ratio was 0.54 (covenant maximum 0.60).
- Contingencies: The company faces potential litigation and environmental liabilities, though management believes provisions are adequate. There is uncertainty regarding the realization of deferred tax assets for the Croatian subsidiary, leading to a $29.6 million valuation allowance.
Investor Verification Checklist
- LIFO Reserve Impact: Verify the sensitivity of earnings to fluctuations in scrap metal prices, given the significant LIFO expense ($34.4M in Q3) that turned a potential profit into a loss.
- Discontinued Operations: Confirm the final sale price and timeline for the joist and deck business to assess the total cost of exit versus the impairment charges already taken.
- Working Capital Trends: Monitor accounts receivable days sales outstanding (DSO) and inventory levels, as the company noted higher defaults and customer liquidity issues in the current economic climate.
- International Covenants: Review the status of the CMCZ (Poland) subsidiary, which was not in compliance with certain financial covenants, relying on a parent company guarantee to void the requirements.
- Capital Expenditures: Track the execution of the $125 million capital budget for fiscal 2010, specifically the melt shop upgrade in Croatia and the flexible rolling mill in Poland, to ensure they deliver expected efficiency gains.