Commercial Metals Company — Q1 FY2014 Form 10-Q
Reporting period: Three months ended November 30, 2013; comparative period is the three months ended November 30, 2012. CMC operates recycling, steel mill, fabrication, and international marketing and distribution businesses.
Financial performance
- Revenue: $1.683 billion, down 4% from $1.750 billion. Cost of goods sold was $1.502 billion; implied gross margin was approximately 10.8%, versus 10.7% in the prior-year quarter.
- Profit: Continuing-operations earnings were $32.0 million, down 35%; net earnings attributable to CMC were $45.9 million versus $49.7 million. Diluted EPS was $0.39 versus $0.42. Continuing-operations adjusted operating profit was $67.2 million versus $89.4 million, and adjusted EBITDA was $101.2 million versus $124.2 million.
- Discontinued operations: Earnings were $14.0 million versus $0.8 million, including a $23.8 million pretax gain on the October 2013 sale of Howell Metal Company. The sale price was $58.5 million, including $4.2 million held in escrow.
- Cash flow: Operating activities provided $73.5 million, compared with $34.3 million used in the prior-year quarter. Investing activities provided $42.3 million, including $54.3 million of Howell sale proceeds; capital expenditures were $14.1 million. Cash increased $136.7 million to $515.5 million.
- Balance sheet and liquidity: At November 30, cash was $515.5 million and current assets were $2.416 billion, against current liabilities of $762.9 million. Long-term debt was $1.277 billion, with $6.2 million of current maturities and $8.0 million of notes payable. The $300 million revolving facility had $264.8 million available. CMC reported covenant ratios of 4.96x interest coverage and 0.50x debt to capitalization, and stated it was in compliance.
- Dividends: $0.12 per share; cash dividends paid were $14.1 million.
Changes and drivers versus prior year
- Americas Mills adjusted operating profit rose to $65.8 million from $51.7 million, and International Mill improved to $15.3 million from $0.9 million. Management attributed both improvements principally to a shift toward higher-margin products.
- International Marketing and Distribution profit fell to $0.5 million from $40.2 million, reflecting weaker European and Australian trading and distribution, a $26.1 million prior-year gain on the Trinecke investment sale, and an unfavorable LIFO comparison.
- Americas Fabrication profit declined to $2.2 million from $10.2 million. Consolidated pretax LIFO expense was $4.4 million, versus $23.2 million of LIFO income in the prior-year quarter.
- Interest expense increased $2.6 million to $19.6 million. The effective tax rate on continuing operations was 32.1%, compared with 31.2%.
Outlook, risks and contingencies
- Management expected the second fiscal quarter to be seasonally slower due to holidays and winter weather, with planned maintenance outages and equipment upgrades. It cited generally encouraging U.S. economic and construction indicators, while noting that modest improvement in Europe and Australia had not yet translated into higher steel shipments.
- Fiscal 2014 capital expenditures were expected to be $140 million–$150 million. Management expected operating cash flow to cover obligations due within the next 12 months and believed it could refinance or obtain financing when notes mature.
- Key risks include steel-industry cyclicality, construction demand, scrap and energy prices, competition and imports, customer credit, currency movements, financing access, and regulatory and environmental matters. CMC uses derivatives to manage commodity, currency, natural-gas and other exposures.
- CMC disclosed ongoing steel-price antitrust litigation, including direct and indirect purchaser actions; it considers the claims without merit but cannot reasonably estimate a loss range. The filing also describes ordinary-course legal and environmental contingencies. Management said recorded tax liabilities adequately reflect anticipated examination outcomes; approximately $17.9 million of unrecognized tax benefits could potentially lapse or be resolved over the following year, with an immaterial income-tax provision effect expected.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved mill results and product mix can persist, particularly given the large year-over-year decline in International Marketing and Distribution.
- How much reported net earnings and cash generation depended on the Howell sale and other discontinued-operation items.
- Whether working-capital needs, receivables-sale arrangements and the availability of credit facilities remain supportive of liquidity.
- Developments in the antitrust litigation, tax examinations, covenant headroom and execution of the stated capital-spending plan.