Business context and reporting period
Commercial Metals Company (CMC) filed this Form 10-K for the fiscal year ended August 31, 2018. CMC manufactures, recycles and markets steel and metal products in the U.S. and Poland through four segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill. Fiscal 2018 included stronger steel and scrap demand and rising selling prices; construction seasonality typically supports higher sales in the third and fourth fiscal quarters.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $4.644 billion | $3.844 billion |
| Earnings from continuing operations | $135.2 million | $50.2 million |
| Net earnings | $138.5 million | $46.3 million |
| Diluted EPS from continuing operations | $1.14 | $0.43 |
| Adjusted EBITDA from continuing operations | $352.2 million | $235.8 million |
| Cash from operating activities | $158.7 million | $174.5 million |
| Capital expenditures | $174.7 million | $213.1 million |
Revenue rose 21% and continuing-operations earnings increased 170%. Gross profit was $622.2 million, about 13.4% of sales; continuing-operations earnings were about 2.9% of sales. Adjusted EBITDA was about 7.6% of sales. Operating cash flow was below capital expenditures by approximately $16.0 million.
At year-end, cash and cash equivalents were $622.5 million and total debt, including current maturities, was $1.158 billion (net debt approximately $535.9 million). The $350 million revolving facility had $346.7 million available; the U.S. receivables facility had $169.4 million available. CMC said cash, operating cash flow and available credit were expected to cover requirements for the next 12 months. Its credit-agreement debt-to-capitalization ratio was 0.44 against a maximum 0.60, and interest coverage was 8.70 against a minimum 2.50.
CMC paid $0.48 per share in dividends during the year. No shares were repurchased in FY2018. Management’s FY2019 capital expenditure estimate was approximately $150 million to $200 million.
Material changes versus the prior comparable period
- Higher demand, selling prices and shipments improved results in Recycling, Mills and International Mill. Americas Recycling adjusted EBITDA rose to $68.7 million from $33.5 million; Americas Mills to $301.8 million from $224.2 million; International Mill to $131.7 million from $76.1 million.
- Americas Fabrication weakened materially: adjusted EBITDA was a loss of $39.4 million versus income of $27.3 million. Existing fixed-price project backlog did not reprice quickly enough to cover higher material, freight and labor costs. Management said new contract bookings were beginning to reflect higher input costs.
- Operating cash flow declined $15.8 million despite higher earnings, primarily because of working-capital increases and net repayments under receivables programs. Cash rose to $622.5 million, in part alongside $350 million of new 2026 notes issued to help fund the planned Gerdau acquisition.
- Debt increased from $824.8 million to $1.158 billion. Interest expense nevertheless declined to $41.0 million from $44.2 million.
- The effective tax rate on continuing operations fell to 18.2% from 23.3%, reflecting the Tax Cuts and Jobs Act and other discrete tax benefits, partly offset by $11.0 million of additional tax expense related to the Act.
- Quarter four reported sales of $1.308 billion, gross profit of $183.4 million, net earnings of $51.6 million and diluted EPS of $0.44. Compared with Q4 FY2017, sales were $1.084 billion, gross profit $119.3 million and net earnings a loss of $29.5 million.
Outlook, risks, contingencies and unusual items
- CMC had agreed to acquire specified U.S. Gerdau rebar mills and fabrication assets for $600 million, subject to customary closing conditions and regulatory review. At filing, management expected closing before the end of calendar 2018; funding was expected from cash, the 2026 notes and a planned term loan. The company identified closing and integration risks, including potential additional costs and failure to achieve anticipated benefits.
- The Durant, Oklahoma micro mill was commissioned during FY2018. The mills segment recorded $13.5 million in startup costs, partly offset by $3.0 million of incentives. Management cautioned that the new mill had operated for less than a year and might not achieve expected production, quality or cost performance.
- CMC recorded $13.7 million of impairment charges related to the sale of structural steel fabrication assets. It also completed the wind-down of its International Marketing and Distribution segment; discontinued operations reported $3.3 million of earnings in FY2018.
- On September 1, 2018, amendments to U.S. and Polish receivables programs changed future advances from sale accounting to financing and debt presentation. This affects reported cash-flow classification and balance-sheet debt.
- Key risks include cyclical construction and steel demand, volatile scrap and energy prices, imports and trade policy, environmental compliance and remediation, foreign exchange exposure, customer credit and contract performance, and equipment or operational disruptions. The filing notes a 25% U.S. steel import tariff enacted in March 2018 but says its detailed impact was not yet clear.
- CMC paid $1.1 million, net of insurance, to settle Texas allegations concerning its Odessa recycling facility; it denied wrongdoing, and the settlement included no admission of liability. Environmental liabilities totaled $4.0 million at year-end, including $0.7 million accrued for CERCLA sites. Management did not expect pending proceedings to have a material adverse effect, while acknowledging estimation uncertainty.
Important facts for investors to verify
- Whether the Gerdau transaction closed as expected, its final purchase-price adjustments and financing, and subsequent integration results.
- Whether fabrication margins recovered as new contracts incorporated higher costs, and whether existing backlog continued to pressure profitability.
- Durant micro mill utilization, operating costs and production performance after startup.
- Post-amendment receivables-program balances and the resulting effect on reported debt, liquidity and cash flows.
- Actual FY2019 capital expenditures, cash generation and leverage, particularly if market conditions or working-capital needs change.
- Final tax accounting under the Tax Cuts and Jobs Act, and developments in environmental matters, trade measures and related contingencies.