CMC Reports 4th Quarter, Full Year Results
10/31/2008 - Commercial Metals reports net earnings of $63.5 million on net sales of $3.1 billion for the fourth quarter, and net earnings of $232.0 million on net sales of $10.4 billion for the year ended August 31, 2008.
Commercial Metals Co. reported net earnings of $63.5 million on net sales of $3.1 billion for the fourth quarter, and net earnings of $232.0 million on net sales of $10.4 billion for the year ended August 31, 2008.
Fourth Quarter Results—The $63.5 million net earnings ($0.55 per diluted share) compares with net earnings of $104.7 million ($0.86 per diluted share) for the year-ago fourth quarter. Net sales of $3.1 billion compare to net sales of $2.3 billion for the year-ago fourth quarter.
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LIFO (“last-in, first out”) is an inventory costing method that assumes the most recent inventory purchases or goods manufactured are sold first which in periods of rising prices results in an expense that eliminates inflationary profits from net income.
Changes in LIFO are not write-downs, write-offs or market adjustments. They are changes in cost components based on an assumption of inventory flows.
At year end, CMC’s LIFO reserve totaled $562 million.
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Management had projected an earnings range of $0.90 to $1.00 per diluted share assuming no LIFO effect for the quarter. Actual earnings per diluted share were $0.55 with a LIFO expense of $0.78 per diluted share. Operationally, the company exceeded its projection by a range of $0.33 to $0.43 per diluted share. The LIFO expense arose from fourth-quarter surges in scrap purchase costs. These costs were still in scrap inventories and as a component of finished goods at year end. There were also significant inventories in transit for the company’s domestic steel marketing business.
Selling, general and administrative expenses included $10.6 million of costs associated with the investment in the global deployment of SAP software, which compares to SGA expenses of $9.4 million in last year's fourth quarter. Other SAP costs of $13.9 million were also capitalized in the current quarter.
The effective tax rate was 22.8% compared with last year's fourth-quarter tax rate of 26.6%.
Full Year Results—The $232.0-million net earnings ($1.97 per diluted share) compares to net earnings of $355.4 million ($2.92 per diluted share) last year. Net sales of $10.4 billion compares with net sales of $8.3 billion last year.
Results included a record $209-million ($1.78 per diluted share) after-tax LIFO expense, which compares with after-tax LIFO expense of $33.3 million ($0.27 per diluted share) last year.
Selling, general and administrative expenses included costs associated with the investment in the global deployment of SAP software. The amount expensed for the year was $53.7 million, which compares to $33.8 million expensed last year. To date, the company has expensed $88.7 million for the project. Other SAP costs of $83.1 million have been capitalized since inception of the project, of which $49.9 million has been capitalized in the current year and $13.9 million in the current quarter.
For the year, the effective tax rate was 31.1% compared with fiscal 2007 at 31.9%. The lower rate was due to a geographic shift in earnings (higher profits in Poland which has a lower tax rate).
General Conditions—"The quarter continued the upward volatility in ferrous scrap pricing, and steel finished goods pricing outpaced ferrous scrap pricing resulting in metal margin expansion,” said Murray R. McClean, Chairman, President and CEO. “Management had anticipated a softening of ferrous scrap prices which did occur, but not until the end of the quarter. The increased prices plus in-transit inventories led to yet another enormous LIFO charge. The record LIFO expense of $0.78 per diluted share was the third quarterly record in succession. Though the LIFO charge affords the company a significant tax deferral, it does mask the underlying strong markets.
“The continued upward trend in metal pricing propelled our Americas Recycling segment to an all-time quarterly earnings record,” continued McClean. “For the second quarter in succession, the Americas Mills segment had increases in tons melted, rolled, and shipped. Continually escalating prices waylaid the Americas Fabrication and Distribution operations with a staggering LIFO charge and further margin compression. In the International Mills segment, our mill in Poland was the star performer while we continued the turnaround in Croatia. Our International Fabrication and Distribution segment set an all-time fourth-quarter earnings record."
Steel Segments Performance—"With demand strong and scrap prices rising, our Americas Mills segment's tons melted, rolled, and shipped all exceeded last year's fourth quarter,” said McClean. “Prices increased each month of the quarter (softening only in late August) leading to a pre-tax LIFO expense of $40.2 million compared to income of $135 thousand in the prior year fourth quarter.
"Our steel mills adjusted operating profit of $45.1 million was down 14.7% compared to the prior year fourth quarter on the heels of a $41.5 million pre-tax LIFO expense compared to a negligible amount last year,” continued McClean. “Metal margins were 11% higher at $390 per ton, necessary to keep pace with higher costs for utilities, freight, and alloys. The price of ferrous scrap consumed rose a stunning 87% compared to last year. Our average selling price was up $247 per ton to $838 per ton while the average selling price for finished goods was up $227 per ton to $866 per ton. Margins were affected by a 131% increase in alloys and an 86% increase in energy. Combined, these two additional costs accounted for another $29.8 million in costs this quarter compared to the fourth quarter of last year.
“Sales volumes increased 15.1% to 631 thousand tons,” said McClean. “Rebar shipments rose 29%, and merchant tonnage rose 6%. Included in the sales volumes were 120 thousand tons of billets of which 22 thousand tons were exported. Total export tonnage was 33 thousand tons. The price premium of merchant bar over reinforcing bar averaged $158 per ton.
“On a quarter-to- quarter basis, tonnage melted for the fourth quarter was up 34% to 618 thousand tons, while tonnage rolled was 546 thousand tons, an increase of 45%. During the quarter we received the last required environmental permits that allowed us to begin construction of our micro mill project in Arizona and to date have invested $63 million of the expected $165 million total cost. Hot commissioning is expected in September 2009.
According to McClean, the International Mills segment “was our star performer for the quarter. Adjusted operating profit of $57.1 million was an all-time quarterly record and dwarfed last year's fourth quarter profit of $21.7 million. CMCZ (Poland) benefited from strong domestic and regional markets that allowed it to maximize profits with substantial billet export sales without significant finished goods import competition. CMCZ achieved a fourth-quarter (and all-time quarterly record) adjusted operating profit of $63.0 million.
“For the fourth quarter, tons melted [for the International Mills segment] were 395 thousand, 20% above last year's 330 thousand; rolled tons equaled 266 thousand against 240 thousand last year; and shipments totaled 424 thousand tons (an all-time quarterly record) including 177 thousand tons of billets versus 58 thousand tons last year,” said McClean. “Average selling prices increased 29% to PLN 2,091 per ton (including 42% billets) from PLN 1,620 per ton (including 18% billets). The cost of purchased scrap entering production increased 51%. The average metal margin increased by PLN 13 from PLN 727.
"The turnaround at CMCS (Croatia) continues with improvements in quality and productivity, added McClean. “Average sales prices were higher in the fourth quarter versus the third quarter of this year, and tonnage was up slightly. Sales of seamless tube continue to improve and our backlog is building. We rolled 21 thousand tons and sold 20 thousand tons for the quarter. Our adjusted operating loss was $5.9 million."
Financial Condition—"Our financial position remains strong,” noted McClean. “In August, we issued $500 million of ten year notes due in 2018. The notes have a coupon rate of 7.35%; the effective interest rate is 7.29% after netting interest rate hedges. We had a current ratio of 1.9, contractual borrowing capacity of $372 million under our revolver, and $200 million unused capacity under our domestic accounts receivable securitization program at August 31, 2008. Our coverage ratios remain strong, both on domestic borrowings as well as the separate borrowings of CMCZ. Long-term debt as a percentage of total capitalization was 41.5% without consideration of cash or cash equivalents."
Outlook—"The turmoil in global financial markets, the uncertainty of the effects of government intervention, the imminent change in the U.S. administration and a loss of confidence by both consumers and investors clouds our outlook,” commented McClean. “In the short term, we will face headwinds until such time as confidence and credit/liquidity issues are stabilized. Long-term, we continue to see strong demand for steel and related products as the emerging economies urbanize/industrialize. Global infrastructure projects should continue to be a key driver of demand.
"Fiscal 2009 will be a challenge to many businesses, including CMC; it is a call to execution; execute our capital plan to lay the groundwork for future growth; execute our cash flow plan; execute our contracts and demand our counterparties do likewise. CMC is organized to withstand the downturns well and to emerge a stronger company able to take advantage of the inevitable opportunities such volatile times provide."
McClean added, "Four major projects already underway will comprise most of our capital spending for fiscal 2009. Our micro mill in Arizona will be substantially completed this fiscal year; we will continue the development of our new flexible rolling mill in Poland scheduled for completion in January 2010; we will upgrade our meltshop and caster in Croatia; and we will continue the rollout of SAP. These projects, combined with normal maintenance capital expenditures, should total less than $450 million for the fiscal year.
"We anticipate first quarter LIFO diluted net earnings per share between $0.35 to $0.45. We foresee substantial LIFO income as prices dramatically decrease, a minimum of $50 million pre-tax income effect for the quarter. In periods of declining prices, customers typically withhold orders waiting to see signals that the market has bottomed. This will translate into lower volumes in most segments. We will adjust our production to meet demand, manage inventories, and maintain metal margins; downtime will be devoted to maintenance and upgrades. There are bright spots — fabrication operations will benefit from lower finished goods prices, easing their margin compression. Forward order books for certain Distribution operations should result in good profitability. Overall, our dedicated employees, vertical integration, and geographic dispersion will see us through this difficult time."
Commercial Metals Company and subsidiaries manufacture, recycle and market steel and metal products, related materials and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, a copper tube mill, metal recycling facilities and marketing and distribution offices in the United States and in strategic international markets.
