Commercial Metals Company — Q1 FY2019 Form 10-Q
Reporting period: Three months ended November 30, 2018. Unaudited results; comparative period is the three months ended November 30, 2017. CMC manufactures, recycles and markets steel and metal products through its Americas Recycling, Americas Mills, Americas Fabrication and International Mill segments.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales from continuing operations | $1,277.3 million | $1,076.5 million |
| Earnings from continuing operations | $19.4 million | $31.9 million |
| Net earnings, including discontinued operations | $19.7 million | $36.8 million |
| Diluted EPS from continuing operations | $0.16 | $0.27 |
| Adjusted EBITDA from continuing operations | $65.5 million | $79.3 million |
| Cash dividends per share | $0.12 | $0.12 |
Sales rose 19%, largely reflecting the November 5 acquisition of Gerdau’s U.S. businesses and shipments from CMC’s Durant, Oklahoma micro mill. Continuing earnings fell about 39%. Cost of goods sold was $1,118.4 million, implying gross profit of $158.9 million, or approximately 12.4% of sales, versus $143.0 million, or 13.3%, a year earlier. SG&A increased to $117.2 million from $96.1 million, while interest expense increased to $16.7 million from $6.6 million. The effective tax rate was 22.4%, compared with 20.9%.
Cash flow, debt and liquidity
- Operating cash flow was negative $357.6 million versus negative $120.2 million. The comparison is significantly affected by accounting classification of receivables-program cash collections; $367.5 million of collections was classified as investing cash flow in Q1 FY2019.
- Investing cash flow was negative $357.4 million, including $694.8 million of net acquisition spending and $37.9 million of capital expenditures. Financing cash flow was positive $140.3 million, including $180.0 million of term-loan proceeds.
- Cash and cash equivalents were $52.4 million at November 30, down from $622.5 million at August 31, 2018. Total cash, restricted cash and cash equivalents were $57.5 million.
- Total debt was $1,348.4 million before $11.5 million of debt issuance costs; balance-sheet long-term debt was $1,307.8 million, with $29.1 million current maturities. No revolving-credit borrowings were outstanding. Revolver availability was $346.7 million; the U.S. receivables facility had $169.4 million available.
- CMC reported compliance with debt covenants. Its interest coverage ratio was 6.55x against a 2.50x minimum, and debt-to-capitalization was 0.48x against a 0.60x maximum.
- Current assets were $2,028.9 million and current liabilities $758.5 million. The company said cash, operating cash flows and available liquidity were expected to meet requirements, while noting sustained market deterioration could require additional liquidity.
Material changes and segment performance
- CMC acquired 33 U.S. rebar fabrication facilities and four EAF mini mills from Gerdau for a cash purchase price of approximately $701.2 million, funded with cash and borrowings. Acquired operations contributed $121.5 million in sales and $8.4 million in pretax earnings from the acquisition date through quarter-end. Purchase accounting included a $133.6 million unfavorable contract backlog liability; $11.3 million was amortized during the quarter and recorded as an increase to sales.
- Americas Mills adjusted EBITDA increased to $113.9 million from $55.2 million, aided by wider metal margins, the acquisition and Durant micro mill shipments.
- Americas Fabrication reported an adjusted EBITDA loss of $37.0 million versus income of $2.0 million. Management cited fabrication pricing that lagged rising input and conversion costs; average rebar fabrication metal margin declined 38% year over year. New contract bookings indicated pricing was beginning to reflect higher costs.
- Americas Recycling adjusted EBITDA was broadly flat at $15.4 million. Lower nonferrous prices and shipments weighed on sales, partly offset by improved scrap margins.
- International Mill adjusted EBITDA rose to $32.8 million from $30.9 million, mainly due to higher metal margins, partly offset by planned maintenance downtime and unfavorable currency translation.
- Corporate and Other adjusted EBITDA loss widened to $59.6 million from $23.9 million, primarily reflecting a $24.1 million increase in professional fees and legal expenses.
Outlook, risks and unusual items
- CMC estimated fiscal 2019 capital expenditures of $175 million to $225 million. No earnings or sales guidance was provided in the filing.
- Management highlighted continued global steel demand and improved margins in Americas Recycling, Americas Mills and International Mill. It cautioned that fabrication pricing had lagged costs, though new bookings suggested improvement.
- Key disclosed risks include steel-industry cyclicality, metal-price volatility, customer credit and liquidity, input and energy costs, foreign-exchange movements, and the ability to integrate the acquired businesses and realize expected benefits. The acquisition integration risk was added as a specific risk factor.
- Receivables programs were amended effective September 1, 2018, so new advances are recorded as debt rather than treated as off-balance-sheet sales. This, together with cash-flow presentation changes, affects comparability of reported cash flows.
- CMC adopted ASC 606 using the modified retrospective method, recording a $2.7 million reduction to opening retained earnings. For this quarter, the new standard reduced reported sales by $2.2 million and net earnings by $1.7 million versus prior guidance.
- Environmental liabilities for CERCLA sites totaled $4.0 million, including $0.7 million accrued for estimated cleanup and remediation costs. Management said pending legal and environmental matters were not expected to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Whether the acquired mills and fabrication operations integrate successfully and deliver anticipated utilization, synergies and returns.
- Whether fabrication pricing catches up with raw-material and production costs, and whether segment margins recover.
- Debt, interest costs and liquidity following the acquisition, including covenant headroom and receivables-program availability.
- Cash-flow trends adjusted for the receivables accounting and presentation changes, and working-capital requirements.
- Progress against the $175 million to $225 million fiscal 2019 capital-spending estimate and the status of disclosed legal and environmental exposures.