Commercial Metals Company — Q1 FY2018 Form 10-Q
Reporting period: Three months ended November 30, 2017; comparative period is the three months ended November 30, 2016. Amounts are in U.S. dollars unless noted. The filing reports continuing operations separately from discontinued operations.
Business context and financial results
CMC manufactures, recycles and markets steel and related products through five reporting segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill, and International Marketing and Distribution. The company is winding down the latter segment.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales, continuing operations | $1,238.5 million | $994.1 million |
| Earnings from continuing operations | $38.5 million | $4.9 million |
| Net earnings, including discontinued operations | $36.8 million | $6.3 million |
| Diluted EPS, continuing operations | $0.32 | $0.04 |
| Diluted net EPS | $0.31 | $0.05 |
| Adjusted operating profit, continuing operations (non-GAAP) | $57.1 million | $20.6 million |
| Adjusted EBITDA, continuing operations (non-GAAP) | $90.3 million | $51.0 million |
| Cash dividends per share | $0.12 | $0.12 |
Sales rose 25%. Gross profit, calculated as sales less cost of goods sold, was approximately $163.6 million (13.2% of sales), versus $123.8 million (12.5%). Adjusted operating profit was approximately 4.6% of sales, compared with 2.1%. The continuing-operations effective tax rate was 23.4%, down from 29.8%.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $34.2 million, compared with negative $1.0 million. Investing cash flow was negative $63.6 million and financing cash flow was negative $24.4 million. Cash declined $122.4 million to $130.2 million.
- Capital expenditures were $59.7 million, versus $43.0 million. Management expected FY2018 capital expenditures of $150–$250 million, primarily for the Durant, Oklahoma micro mill.
- At November 30, cash was $130.2 million; current assets were $1,600.5 million and current liabilities were $500.1 million. Total debt was $832.1 million gross, or $825.0 million after debt issuance costs; $21.2 million was current.
- The $350 million revolving credit facility had no borrowings and $346.8 million available. The company reported $151.987 million available under its $200 million U.S. receivables-sale facility. It also reported a $150 million term loan and $630 million of senior notes.
- Debt covenants were met: interest coverage was 7.06x against a 2.50x minimum, and debt-to-capitalization was 0.37x against a 0.60x maximum. Management expected cash, operating cash flow and available credit to meet anticipated requirements, while noting sustained market deterioration could require additional liquidity.
Material changes and segment performance
- Americas Recycling sales increased 81% to $319.3 million; adjusted operating profit improved to $9.9 million from a $5.1 million loss, reflecting stronger scrap prices, volumes and added capacity from prior-year facility acquisitions.
- Americas Mills sales rose 19% to $413.5 million and adjusted operating profit increased to $40.8 million from $36.9 million, helped by higher selling prices and shipments.
- Americas Fabrication sales declined 2% to $332.8 million; adjusted operating results swung to a $4.8 million loss from $6.7 million profit. Rebar costs rose faster than prices in the project backlog, and low-cost imports affected shipments.
- International Mill sales increased 64% to $220.5 million and adjusted operating profit rose to $23.4 million from $10.0 million, supported by construction demand, pricing, volume and favorable currency translation.
- International Marketing and Distribution adjusted operating profit improved to $10.5 million from a $3.8 million loss, aided by higher-than-expected prices on inventory sold during the wind-down. Segment volume fell 34%.
- Interest expense declined $6.8 million, primarily from prior-year refinancing and increased capitalized interest. Operating cash use reflected working-capital changes, including repayment of $90 million of prior-period receivables-sale advances.
Outlook, risks and notable items
- Management expected seasonally lower Q2 shipments due to winter weather and fewer shipping days, but cited strength in underlying markets, including non-residential construction and original equipment manufacturers.
- Commissioning of the Durant micro mill was progressing smoothly; management expected it to contribute during the second half of FY2018.
- On January 2, 2018, CMC announced an agreement to acquire specified U.S. rebar mill and fabrication assets from Gerdau for $600 million, subject to customary adjustments and closing conditions. Closing was expected before calendar year-end 2018. Funding could include cash, loans, credit facilities or debt securities; the company obtained a commitment for up to $600 million in incremental term loans.
- CMC completed the acquisition of substantially all MMFX Technologies assets in October 2017; it was not material to reported financial results. A $7 million patent asset was recorded.
- The Tax Cuts and Jobs Act was enacted December 22, 2017. CMC was evaluating its impact, including the corporate tax-rate reduction and a one-time toll charge on certain foreign earnings; the filing does not provide a clear quantified impact.
- A mediated settlement of the Odessa, Texas environmental lawsuit called for a $1.1 million payment net of insurance, subject to formal approval. CMC denied wrongdoing and the settlement included no admission of liability. Environmental liabilities totaled $4.3 million; management said pending matters were not expected to have a material adverse effect.
- Key risks identified include steel-industry cyclicality, metal-price changes, import competition and excess capacity, customer liquidity and credit access, environmental matters, currency and energy-price movements, execution and financing of acquisitions, and realization of the micro mill’s expected benefits. Management reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Most important facts for investors to verify
- Whether stronger pricing and volume can persist, particularly in recycling and International Mill, and whether fabrication margins recover from the backlog cost-price lag.
- The durability and cash-conversion quality of reported earnings, given negative operating cash flow and working-capital use; also review the impact of receivables-sale activity.
- Final purchase terms, regulatory approval, funding mix, incremental debt and expected synergies for the proposed $600 million Gerdau acquisition.
- The Durant micro mill’s commissioning, capital costs and timing of its expected contribution.
- The eventual financial and tax effects of the Tax Act, including any toll charge, and the approval and payment status of the Texas settlement.