Business Context and Reporting Period
Company: Commercial Metals Company (CMC)
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2010
Business Overview: CMC recycles, manufactures, fabricates, and distributes steel and metal products through a network of over 220 locations in the U.S. and internationally. Operations are organized into five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mills, and International Marketing and Distribution. The company implemented a new organizational structure effective December 1, 2009.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $6,306 million | $6,409 million |
| Net Earnings (Loss) Attributable to CMC | ($205 million) | $21 million |
| Diluted EPS (Loss) | ($1.81) | $0.18 |
| Adjusted EBITDA | $15 million | $275 million |
| Total Assets | $3,706 million | $3,688 million |
| Long-Term Debt | $1,197 million | $1,182 million |
| Cash and Cash Equivalents | $399 million | $406 million |
| Operating Cash Flow | $45 million | $807 million |
Note: Net sales exclude discontinued operations. The company recorded a net loss primarily due to inventory adjustments, severance costs, and the exit of the joist and deck business.
Material Changes vs. Prior Period
- Profitability Decline: The company shifted from a net profit of $21 million in 2009 to a net loss of $205 million in 2010. Adjusted EBITDA dropped significantly from $275 million to $15 million.
- Segment Performance:
- Americas Recycling: Net sales increased 81% to $1,424 million, and adjusted operating profit improved to $15.2 million from a loss of $89.6 million, driven by higher scrap prices and volumes.
- Americas Mills: Net sales increased 11% to $1,395 million, but adjusted operating profit fell 87% to $33.3 million due to margin compression (scrap costs rose faster than selling prices) and LIFO expenses.
- Americas Fabrication: Net sales decreased 29% to $1,140 million, resulting in an adjusted operating loss of $107.8 million compared to a profit of $145.7 million in 2009.
- International Mills: Sales remained flat, but the adjusted operating loss narrowed 23% to $73.5 million.
- Discontinued Operations: The company exited the joist and deck business, incurring $31.3 million in asset impairments and $11.7 million in severance costs. This division is now reported as discontinued operations.
- LIFO Impact: The company recorded LIFO income of $7.4 million in 2010, a significant decrease from $208.4 million in 2009, reflecting changing inventory costs.
Guidance, Outlook, and Risks
Outlook: Management anticipates a long-delayed recovery in U.S. non-residential construction by August 31, 2011. Public non-residential construction is viewed as the most consistent domestic market. The company expects Americas Recycling and Mills to improve as industrial manufacturing recovers. International opportunities include Poland's growth ahead of the 2012 Euro Cup and Croatia's EU accession.
Key Risks and Contingencies:
- Economic Conditions: Results are highly dependent on global economic conditions, particularly in the U.S. and EU. A continued recession could decrease demand and increase bad debts.
- Commodity Prices: Rapid fluctuations in metal prices (scrap, steel, copper) and energy costs (electricity, natural gas) significantly impact margins.
- Environmental Liability: The company is named a potentially responsible party (PRP) at ten Superfund sites. While $1.1 million is accrued for eight sites, the ultimate cost for two sites cannot be reasonably estimated.
- Legal Proceedings: The company is defending a class-action antitrust lawsuit alleging price-fixing in the steel industry.
- Liquidity Covenants: The company maintains a minimum interest coverage ratio of 2.50 to 1.00 and liquidity of at least $300 million. As of August 31, 2010, the interest coverage ratio was 3.49 to 1.00, and liquidity was $499.3 million.
Investor Verification Checklist
- Inventory Valuation: Verify the impact of LIFO liquidations and lower-of-cost-or-market adjustments ($45.8 million in 2010) on reported earnings.
- Discontinued Operations: Confirm the final sale proceeds and timing for the joist and deck assets to assess the full financial impact of the exit.
- Environmental Accruals: Monitor updates on the two Superfund sites where costs are currently unestimable.
- Debt Covenants: Track the interest coverage ratio and liquidity levels in upcoming quarters to ensure continued compliance with credit facility requirements.
- Antitrust Litigation: Review developments in the class-action price-fixing lawsuit for potential settlement costs or judgments.