Commercial Metals Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended May 31, 2015. Comparisons are with the corresponding periods of fiscal 2014. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $1,506.0 | $1,738.6 | $4,577.1 | $4,953.1 |
| Adjusted operating profit (non-GAAP) | $126.0 | $58.1 | $311.5 | $163.9 |
| Continuing-operations earnings | $67.1 | $24.5 | $167.2 | $71.4 |
| Net earnings attributable to CMC | $56.7 | $23.6 | $147.4 | $80.6 |
| Adjusted EBITDA (non-GAAP) | $158.5 | $90.4 | $410.0 | $262.0 |
- Quarterly sales declined 13%; nine-month sales fell 8%. CMC attributed the reductions mainly to lower selling prices and, in several businesses, lower shipments.
- Adjusted operating profit rose substantially, but comparisons were affected by favorable LIFO inventory accounting and a $45.5 million customer-contract termination benefit recorded in net sales. Adjusted operating profit is a company-defined non-GAAP measure.
- Continuing-operations pretax earnings were $105.1 million for Q3 and $251.4 million year to date. Diluted EPS from continuing operations was $0.58 for Q3 and $1.42 for nine months; total diluted EPS was $0.49 and $1.25, respectively.
- Q3 discontinued operations recorded a $10.4 million loss after tax; the nine-month loss was $19.8 million. The results include the Australian steel distribution business being exited and Howell Metal, sold in fiscal 2014.
- Cash dividends were $0.12 per share in Q3 and $0.36 per share for nine months.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $58.8 million, down from $94.3 million. Capital expenditures were $76.0 million; investing cash outflow was $63.5 million; financing cash outflow was $45.3 million. Cash declined $53.9 million from fiscal year-end to $381.0 million.
- At May 31, cash was $381.0 million; current assets were $2,513.6 million and current liabilities $781.4 million. Total assets were $3,579.7 million and stockholders’ equity $1,353.3 million.
- Total debt was approximately $1,289.1 million, including $1,279.4 million long-term debt and $9.8 million current maturities. The company had no borrowings under its $350 million revolving credit facility; reported availability was $326.6 million after standby letters of credit.
- Additional reported availability included $185.0 million under the U.S. receivables-sale facility and $64.1 million under international receivables-sale facilities. These programs provide liquidity through receivables sales and are subject to program terms and cross-default provisions.
- CMC reported covenant ratios of 6.26:1 interest coverage and 0.48:1 debt to capitalization, within required limits of at least 2.50:1 and no more than 0.60:1, respectively. It stated it was in compliance with debt covenants.
Material changes and business drivers
- Americas Mills and Americas Fabrication improved operating profit, supported by lower scrap costs, stronger metal margins and favorable LIFO effects. Fabrication also benefited from improved non-residential construction demand.
- Americas Recycling weakened as lower ferrous and nonferrous prices and reduced shipments pressured results. International Mill sales fell amid import pressure in Poland and adverse currency translation; nine-month operating profit also declined.
- International Marketing and Distribution profit improved, driven in part by the $45.5 million contract-termination benefit and favorable LIFO effects, despite weaker demand in Australia and Asia, lower prices and currency headwinds.
- CMC changed its interim LIFO reserve method effective September 1, 2014, from quarterly valuation to an expected annual valuation. It recorded $37.1 million of LIFO income in Q3 and $115.8 million for nine months. Management noted the annual estimate depends on assumptions and actual year-end inventory costs and quantities may differ significantly.
- Continuing-operations inventory write-downs were $9.5 million in Q3 and $9.8 million year to date. The company also reported a substantial foreign-currency translation loss in other comprehensive income, contributing to accumulated other comprehensive loss of $96.2 million.
Outlook, risks and contingencies
- Management described market indicators as pointing to a strong fiscal fourth quarter. U.S. and Polish finished-steel demand remained high, and weather-delayed U.S. projects were expected to shift into Q4. Elevated imports continued to pressure U.S. and Polish margins; the strong U.S. dollar remained a challenge for International Marketing and Distribution.
- Fiscal 2015 capital expenditures were projected at $110 million to $130 million. Management expected operating cash flow to cover interest and principal payments due within the next 12 months and believed it could refinance or otherwise fund notes at maturity.
- Key risks include cyclical steel demand, imports and competition, metal and energy price volatility, currency movements, customer credit and collections, access to financing, environmental regulation, and operating disruptions. Days sales outstanding increased to 57 days from 49; inventory days increased to 65 from 55.
- CMC is defending indirect-purchaser antitrust class actions and said it could not reasonably estimate a range of loss. A separate direct-purchaser case was settled for approximately $4 million, with court approval in October 2014. Management stated pending proceedings were not expected to have a material adverse effect, while acknowledging outcomes may differ from estimates.
- The company repurchased 2.9 million shares for $41.8 million during the nine months and had $58.2 million remaining under its $100 million authorization at May 31, 2015. Management may change, suspend or terminate the program.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings and operating-profit improvement depended on estimated LIFO income and the $45.5 million contract-termination benefit, and how those effects may reverse or recur.
- Whether the strong Q4 outlook translated into realized shipments, prices and margins, particularly given continued import pressure and currency exposure.
- Cash conversion and working-capital trends, including receivables-sale activity, rising collection and inventory days, and operating cash flow relative to earnings.
- Debt maturities in 2017 and 2018, refinancing plans, covenant headroom and continued availability of receivables-sale and bank facilities.
- Performance and exit progress for the Australian distribution business, remaining discontinued-operation losses, and resolution or potential exposure from indirect-purchaser litigation.