Commercial Metals Company — FY2013 Form 10-K
Reporting period: Fiscal year ended August 31, 2013. The filing also reports fourth-quarter results for the three months ended August 31, 2013. CMC recycles scrap, manufactures and fabricates steel, and markets and distributes metals through five segments across the Americas and international markets.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales from continuing operations | $6.890 billion | $7.656 billion |
| Gross profit from continuing operations | $662.3 million | $716.6 million |
| Gross margin | 9.6% | 9.4% |
| Continuing-operations earnings | $75.0 million | $210.5 million |
| Net earnings attributable to CMC, including discontinued operations | $77.3 million | $207.5 million |
| Diluted EPS, continuing operations | $0.64 | $1.80 |
| Adjusted EBITDA (non-GAAP) | $353.5 million | $368.7 million |
| Operating cash flow | $147.7 million | $196.0 million |
| Capital expenditures | $89.0 million | $113.9 million |
FY2013 diluted EPS including discontinued operations was $0.66. Fourth-quarter net sales were $1.699 billion, gross profit was $160.8 million, and net earnings attributable to CMC were $4.1 million, or $0.03 diluted EPS.
At August 31, 2013, cash and cash equivalents were $378.8 million, current assets $2.366 billion, and current liabilities $781.1 million. Long-term debt was $1.279 billion, with $5.2 million of current maturities; total debt including those maturities was approximately $1.284 billion. The $300 million revolving facility had $271.7 million available. CMC reported covenant compliance, with interest coverage of 5.17x against a 3.00x minimum and debt-to-capitalization of 0.51x against a 0.60x maximum. The quarterly dividend was $0.12 per share, or $0.48 for the year.
Changes versus the prior year
- Continuing-operations sales fell 10.0%; continuing earnings declined substantially, while gross margin improved modestly. The effective tax rate rose to 43.6% from a benefit rate of 27.8% in FY2012, which had included a $102.1 million tax benefit related to the Croatian subsidiary disposition.
- Adjusted operating profit fell to $206.4 million from $240.7 million. Americas Mills remained the largest profit contributor but declined to $204.3 million from $235.9 million; Americas Recycling fell sharply to $3.2 million from $39.4 million.
- Americas Fabrication improved to $28.0 million operating profit from a $15.7 million loss, helped by higher selling prices and lower steel input costs. International Mill profit declined to $0.9 million from $23.0 million as shipments fell 17% and European conditions remained weak. International Marketing and Distribution profit fell to $35.6 million from $47.3 million.
- Operating cash flow decreased by $48.3 million. Cash at year-end rose to $378.8 million, supported in part by financing activity. Capital spending was lower than in FY2012.
Outlook, management commentary, risks and unusual items
- Management cited encouraging U.S. nonresidential construction indicators, including an August Architecture Billings Index of 53.8, and expected Polish legislation addressing VAT circumvention to support International Mill margins. No quantified earnings or revenue guidance was provided.
- Management set a FY2014 capital budget range of $120 million to $160 million and said operating cash flow and credit facilities should support ongoing operations and planned investment.
- CMC issued $330 million of 4.875% senior notes due 2023, using $205.3 million of proceeds to repurchase its $200 million 5.625% notes due 2013. The early debt extinguishment resulted in a $4.8 million expense.
- CMC recorded $17.3 million of long-lived asset impairments; approximately $12.7 million related to Australia, including $6.4 million of goodwill impairment and $6.3 million of fixed-asset impairment. Management cited weak Australian market conditions and construction-steel demand.
- FY2013 included $52.9 million of pre-tax LIFO income, versus $41.8 million in FY2012, and a $26.1 million pre-tax gain on the sale of CMC’s 11% interest in Trinecke. These items affected comparability.
- CMC classified Howell Metal as discontinued operations and sold it on October 17, 2013, for $58.5 million, subject to purchase-price adjustments. FY2013 discontinued-operations earnings were $2.4 million after tax.
- Key risks include economic and construction cyclicality, steel imports and excess capacity, scrap and metal price volatility, energy costs and reliability, customer credit and contract defaults, foreign exchange and international exposure, environmental compliance and remediation, and access to credit. CMC reported $989.7 million of accounts receivable; approximately 49% of receivables were credit-insured or covered by letters of credit.
- CMC was a potentially responsible party at multiple environmental sites and had $9.0 million of accrued environmental liabilities. A steel-industry antitrust class action and related indirect-purchaser cases remained pending; the company said it could not reasonably estimate a loss range. Management stated it did not expect pending proceedings to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Reconcile the earnings decline with the FY2012 tax benefit, FY2013 tax valuation allowances, LIFO income, asset impairments, and the Trinecke gain.
- Track segment shipment volumes, margins, and backlog, especially Americas Recycling, International Mill, and Australian operations.
- Assess debt maturities, covenant headroom, credit-facility availability, and the company’s ability to fund the $120–$160 million FY2014 capital budget while maintaining dividends.
- Review cash conversion, rising days sales outstanding (52 days versus 44), and reliance on receivables-sale programs and customer credit protection.
- Monitor the Howell sale’s final purchase-price adjustments, environmental exposures, and developments in the antitrust litigation.