Commercial Metals Company — Q1 FY2012 Form 10-Q
Reporting period: Three months ended November 30, 2011; filed January 9, 2012. Comparisons are with the three months ended November 30, 2010 unless noted. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales from continuing operations | $1,986.8 million | $1,775.1 million | +12% |
| Gross profit / margin | $172.5 million / 8.7% | $160.2 million / 9.0% | Margin down about 0.3 percentage points |
| Earnings from continuing operations | $125.0 million | $14.9 million | Includes major tax benefit in 2011 |
| Net earnings attributable to CMC | $107.7 million | $0.7 million | Basic and diluted EPS: $0.93 vs. $0.01 |
| Adjusted EBITDA, continuing operations | $80.5 million | $78.9 million | +2% |
| Adjusted EBITDA, including discontinued operations | $55.5 million | $66.6 million | -17% |
| Operating cash flow | $38.1 million | $(5.6) million | Improved |
| Cash and cash equivalents | $228.1 million | $222.4 million at Aug. 31, 2011 | Quarter-end balance |
Continuing-operations pretax earnings were $29.7 million, versus $21.6 million. The effective tax rate was an unusual benefit of 320.7%, primarily reflecting a $102 million tax benefit for ordinary worthless-stock and bad-debt deductions associated with the Croatian investment. Discontinued operations generated a $17.3 million after-tax loss, including about $18 million of severance costs related primarily to the Croatian exit.
Balance sheet, debt and liquidity
- At November 30, 2011, total assets were $3.51 billion, total liabilities $2.32 billion and equity $1.18 billion. Current assets of $2.26 billion exceeded current liabilities of $1.07 billion.
- Debt comprised $1.16 billion of long-term debt, including current maturities, and $48.6 million of notes payable. Cash less these borrowings was approximately $977 million of net debt.
- No amounts were outstanding under the $400 million revolving facility at quarter-end. The company reported covenant ratios of 3.27:1 interest coverage against a 2.50:1 minimum and 0.53:1 debt-to-capitalization against a 0.60:1 maximum.
- After quarter-end, the revolving facility was amended to $300 million, extend maturity to December 2016, and allow an increase to $400 million with lender consent. The domestic receivables facility was also amended after quarter-end, increasing capacity from $100 million to $200 million and extending maturity to December 2014.
- Receivables programs provided $47.8 million net cash during the quarter. At November 30, $50 million of domestic receivables had been advanced; the company also reported $180 million of uncollected international receivables sold and removed from the balance sheet.
- Capital expenditures were $29.9 million; the company estimated fiscal 2012 capital spending at about $140 million. Cash dividends were $0.12 per share, or $13.9 million in total.
Material changes and segment results
- Americas Recycling adjusted operating profit rose to $20.8 million from $8.2 million, helped by higher ferrous prices and volumes and a swing to LIFO income.
- Americas Mills profit increased to $57.9 million from $34.1 million, reflecting stronger shipments and metal margins; mill utilization increased to 78% from 72%.
- Americas Fabrication narrowed its adjusted operating loss to $7.4 million from $22.0 million, with improved pricing and margins, although management described the market as weak.
- International Mills profit rose to $9.8 million from $6.4 million, supported by higher shipments and a strong Polish market.
- International Marketing and Distribution moved to a $4.1 million adjusted operating loss from $24.2 million profit, mainly due to losses on iron ore contracts and weaker Australian results.
- Consolidated pretax LIFO income was $23.9 million, versus $5.7 million of expense a year earlier. The company cautioned that LIFO movements materially affected segment comparisons.
- CMC decided to close and sell the assets of its Croatian steel pipe operation, classified as discontinued operations. Production ceased during the quarter; final shipments and inventory liquidation were expected in Q2 FY2012. The company also had previously discontinued its joist and deck business.
Outlook, risks and contingencies
- Management said Q2 is historically the slowest quarter due to weather and holidays. It expected scrap prices to rise, benefiting recycling but potentially compressing mills’ and fabrication’s metal margins temporarily.
- Backlog was described as somewhat higher than in Q4 FY2011, with improved prices. Management cited continued efforts to improve operating costs and cash flow, but gave no numerical earnings guidance.
- Key risks include weak global growth and construction demand, sovereign-debt and credit-market pressures, steel imports and competition, volatile metal, scrap and energy prices, currency and interest-rate movements, customer credit quality, and environmental or litigation matters.
- The company said ordinary-course litigation, administrative proceedings, government investigations and environmental matters were adequately provided for and were not expected to significantly affect results, financial position or cash flows.
- The Australian receivables subsidiary was not in compliance with certain financial covenants at quarter-end; CMC’s guarantee resulted in a waiver. Management said the guarantee would end after two consecutive compliant quarters.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring operating performance from the $102 million Croatian-related tax benefit and the costs and losses of discontinued operations.
- Assess whether segment improvements persist without favorable LIFO effects, and whether iron ore contract losses and metal-margin pressure continue.
- Verify the post-quarter credit and receivables amendments, facility availability, and ongoing compliance with covenants, including the Australian waiver.
- Review the Croatian closure’s remaining cash costs, asset-sale proceeds and completion timing, alongside the joist and deck asset disposition.
- Monitor operating cash conversion and reliance on receivables sales, working-capital movements, and the planned $140 million fiscal-year capital budget.