Commercial Metals Company — Form 10-Q Summary
Business context and period: The filing reports CMC’s unaudited first quarter of fiscal 2015, the three months ended November 30, 2014, compared with the three months ended November 30, 2013. CMC operates steel mills, fabrication, recycling, and marketing and distribution businesses. Results below distinguish continuing operations from discontinued operations where relevant.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales, continuing operations | $1.680 billion | $1.617 billion |
| Gross profit / gross margin | $186.2 million / 11.1% | $176.9 million / 10.9% |
| Earnings from continuing operations | $38.3 million | $33.7 million |
| Adjusted operating profit (non-GAAP) | $73.3 million | $68.7 million |
| Adjusted EBITDA (non-GAAP) | $106.4 million | $102.3 million |
| Net earnings, including discontinued operations | $36.3 million | $45.9 million |
| Diluted EPS, continuing operations / total | $0.32 / $0.30 | $0.29 / $0.39 |
| Operating cash flow | $(79.9) million | $73.5 million |
- Sales increased 4% year over year, while continuing-operations earnings rose about 14%. Total net earnings fell about 21%, principally because the prior-year quarter included a $23.8 million pretax gain on the sale of Howell Metal; discontinued operations recorded a $2.1 million loss this quarter versus $12.2 million earnings in the prior-year quarter.
- Interest expense was $19.1 million, down from $19.4 million. The effective tax rate on continuing operations was 28.7%, compared with 30.9%.
- Cash and cash equivalents were $326.1 million at quarter-end, down from $434.9 million at August 31, 2014. Cash used in investing activities was $18.7 million; cash used in financing activities was $8.3 million. Capital expenditures were $22.5 million.
- At November 30, 2014, total debt was approximately $1.292 billion, including current maturities. Long-term debt was $1.283 billion. No amount was drawn on the $350 million revolving facility; reported availability was $324.7 million after letters of credit.
- Total current assets were $2.512 billion and current liabilities were $838.1 million. Other reported liquidity included $200 million available under the U.S. receivables-sale facility and $54.3 million available under international receivables-sale facilities. Some uncommitted facilities are subject to renewal or availability conditions.
Material changes and operating performance
- Americas Mills improved: sales rose 9% and adjusted operating profit increased 15%, supported by higher shipments, selling prices, and metal margins.
- International Marketing and Distribution sales increased 21% and adjusted operating profit rose to $18.3 million from $2.0 million, reflecting stronger trading shipments and margins.
- Americas Fabrication sales grew 15%, but the segment moved to a $3.0 million adjusted operating loss as input and conversion costs outpaced selling-price increases.
- International Mill sales declined 22% and adjusted operating profit fell to $4.2 million from $15.3 million, reflecting weaker central European demand, lower prices, reduced shipments, and a planned three-week Polish mill outage.
- Americas Recycling sales fell 7%; the segment recorded a $1.1 million adjusted operating loss amid lower ferrous prices and shipments.
- CMC decided to exit and sell its Australian steel distribution business; it was classified as discontinued operations. Assets held for sale were $94.5 million and associated liabilities were $42.9 million at quarter-end.
Outlook, risks, and unusual items
- Management cited improving U.S. employment, manufacturing, and nonresidential construction indicators. It cautioned that the second fiscal quarter is seasonally slower and planned routine maintenance outages and equipment upgrades.
- Fiscal 2015 capital expenditures were forecast at $140 million to $180 million. Management expected operating cash flows to cover interest and principal payments due over the next 12 months and believed refinancing or additional financing would be available at note maturities. The filing provides no specific earnings or revenue guidance.
- CMC reported a $10.6 million favorable year-over-year change in pretax LIFO results. Beginning September 1, 2014, it changed its interim LIFO reserve method to an expected annual estimate; actual year-end inventory costs and quantities may differ materially from interim estimates.
- Management identified cyclical demand, construction activity, steel and scrap prices, competition and imports, customer credit, currency movements, energy and raw-material costs, financing access, and regulatory and litigation matters as risks. The receivables-sale program has cross-default provisions tied to certain credit arrangements.
- CMC was in compliance with debt covenants at quarter-end: interest coverage was 4.71x against a 2.50x minimum, and debt to capitalization was 0.49x against a 0.60x maximum. Its 2017 and 2018 notes carry additional liquidity requirements near maturity.
- The direct-purchaser antitrust class action settlement was approved in October 2014 after CMC paid approximately $4.0 million. Related indirect-purchaser cases remain pending; CMC said it could not reasonably estimate a loss range. Management stated it did not believe pending proceedings would have a material adverse effect.
- The board authorized a new $100 million share-repurchase program. CMC repurchased 560,493 shares for $9.3 million during the quarter, leaving approximately $90.7 million authorized.
Important facts for investors to verify
- Whether stronger U.S. construction demand and improved mill shipments continue, and whether fabrication input-cost pressure eases.
- Whether the Australian distribution business is sold and whether its operating losses or exit costs change.
- How year-end LIFO results compare with the interim estimate, particularly given management’s expectation of declining inventory costs.
- Cash conversion and working-capital trends, including inventory accumulation and use of receivables-sale programs.
- Refinancing and liquidity plans for the $400 million 2017 notes and $500 million 2018 notes, and continued covenant compliance.
- Developments in the pending indirect-purchaser antitrust cases and tax examinations; the filing does not provide a clear potential loss estimate for the lawsuits.