CMC

Business Context and Reporting Period

Company: Commercial Metals Company (CMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2009 (Second Quarter of Fiscal Year 2009)
Business Overview: CMC operates in five segments: Americas Recycling, Americas Mills, Americas Fabrication and Distribution, International Mills, and International Fabrication and Distribution. The company processes scrap metal, operates steel and copper minimills, and distributes steel and nonferrous products globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 28% year-over-year for the quarter and 9% for the six-month period, driven by a 71% drop in Americas Recycling sales and significant volume reductions in International Mills.
• Profitability Shift: The company reported a net loss of $35.3 million for the quarter compared to a net earnings of $39.8 million in the prior year quarter. However, the six-month period remained profitable at $26.7 million.
• LIFO Impact: A significant quarterly record pre-tax LIFO income of $124.2 million offset deflationary losses, compared to a $59.0 million LIFO expense in the prior year quarter.
• Segment Performance:
  • Americas Recycling: Adjusted operating loss of $36.2 million due to a 44% decline in ferrous scrap prices and 42% volume drop.
  • Americas Mills: Adjusted operating profit increased 32% to $73.1 million, driven by LIFO income despite a 40% sales decline.
  • International Mills: Adjusted operating loss widened to $24.3 million due to deteriorating conditions in Poland and Croatia.
• Working Capital: Accounts receivable decreased by $380.4 million and inventories decreased by $496.5 million compared to August 31, 2008, reflecting lower sales volumes and price deflation.

Guidance, Outlook, and Risks

Outlook: Management expects continued deterioration in global steel markets for the remainder of fiscal 2009. While a seasonal increase in spring construction volumes is anticipated, it is not viewed as a recovery signal. The impact of U.S. stimulus packages is expected to be modest and delayed until late 2009.

Strategic Focus: Efforts are directed at cash generation through working capital management and cost containment. The company intends to maintain a strong balance sheet with revolving credit and securitization programs fully available.

Capital Projects: Major projects including the Arizona micro mill, Poland flexible rolling mill, and Croatia melt shop upgrades are expected to be substantially complete this fiscal year.

Risks and Contingencies:

• Market Risk: Exposure to volatile metal commodity prices, foreign currency exchange rates, and natural gas prices.
• Credit Risk: Uncertainty regarding the solvency of financial institutions and availability of credit in the global market.
• Unusual Items: The quarter included $61.3 million in lower of cost or market inventory adjustments, $14.6 million in bad debt expense, $6.5 million in severance costs, and $5.1 million in asset impairment charges.
• Discontinued Operations: A division involved in nonferrous metals distribution is being liquidated or absorbed, classified as discontinued operations.

Investor Verification Checklist

• LIFO Reserve Accuracy: Verify the sustainability of the $124.2 million LIFO income benefit, which significantly masked operating losses in the quarter.
• Inventory Valuation: Assess the adequacy of the $61.3 million inventory writedown and potential for further adjustments given ongoing price declines.
• International Exposure: Review the financial health of the International Mills segment (Poland/Croatia) given the reported losses and currency devaluation risks.
• Liquidity Position: Confirm the availability of the $400 million commercial paper program and $200 million domestic securitization facility amidst global credit tightening.
• Capital Expenditure Commitments: Monitor the $395 million projected capital spending for 2009 and its impact on cash flow.