CMC Reports Record Third Quarter
06/21/2007 - Boosted by record-setting results in four of its five operating segments, Commercial Metals reports net earnings of $99.4 million on net sales of $2.3 billion for the quarter ended May 31, 2007, ranking it as the strongest third quarter ever reported by the company.
Commercial Metals Co. reported net earnings of $99.4 million on net sales of $2.3 billion for the quarter ended May 31, 2007, ranking it as the strongest third quarter ever reported by the company. For the first nine months, net earnings were a record $250.7 million on net sales of $6.3 billion.
Third Quarter Results—The $99.4 million net earnings ($0.82 per diluted share) compares with net earnings of $78.0 million ($0.62 per diluted share) for last year’s third quarter. Net sales of $2.3 billion compares with net sales of $2.0 billion for the third quarter last year.
Results included after-tax LIFO expense of $20.1 million ($0.16 per diluted share), which compares with expense of $28.6 million ($0.23 per share) in last year's third quarter. At quarter-end, the company’s LIFO reserve totaled $249 million. Selling, general and administrative expenses included $13.7 million of costs associated with the investment in global deployment of SAP software.
Nine Month Results—Net earnings were a record $250.7 million ($2.06 per diluted share), which compares to net earnings of $227.7 million ($1.84 per diluted share) for the first nine months of the previous fiscal year. Net sales of $6.3 billion compare to net sales of $5.3 billion for the same period last year. After-tax LIFO expense was $39.0 million ($0.32 per share), which compares with an expense of $40.0 million ($0.33 per share) last year.
Selling, general and administrative expenses were $24.4 million, primarily associated with the global deployment of SAP software. There were no comparable costs last year. Other costs of $17.2 million, mainly software acquisition, have been capitalized since inception of the project, of which $6.5 million has been capitalized in the current year.
General Conditions—"It was a terrific quarter, a record third quarter for the company with four of our five operating segments setting third quarter records,” said CMC President and CEO Murray R. McClean. “Especially noteworthy were the performances of CMCZ, our Polish operation, and Marketing and Distribution. Both set all-time quarterly earnings records. CMCZ took full advantage of our integrated business model from our mega shredder, through our mill, and into our fabrication plants. Marketing & Distribution took advantage of our worldwide network. Ferrous scrap pricing, and consequently steel finished goods pricing, exhibited intense volatility in the period. This inevitably leads to erratic customer purchasing patterns, particularly among merchant bar buyers. Volumes are distorted over any one quarter, but recover over time. Global metal markets remained vibrant."
Domestic Mills (Steel Minimills and Copper Tube Mill)—"Our Domestic Mills segment's adjusted operating profit at $73.6 million was 6% above last year's third quarter, its previous record,” noted McClean. “LIFO expense was $15.3 million pre-tax in this year's third quarter compared with $14.8 million income last year. Net sales increased 6%."
McClean continued, "Within the segment, adjusted operating profit for our steel minimills was 15% greater than a year earlier on 8% higher net sales. Metal margins expanded over $10 a ton third quarter to third quarter though shipments dropped 4%. Rebar sales remained strong. Merchant bar tonnages were lower as buyers continued the pattern of overbuying in periods of anticipated or actual rising price increases and lowering their activity in periods of anticipated or actual price declines as occurred in this year's third quarter. On a year-to-year basis, tonnage melted for the third quarter increased 7% to 596 thousand tons while tonnage rolled was 534 thousand tons, 7% lower than last year's third quarter as planned outages at CMC Alabama reacted to the weaker merchant market. Shipments were 613 thousand tons. Our average total selling price was up $60 per ton to $575 per ton, while the average selling price for finished goods was up by $71 per ton to $601 per ton. By product line, the price premium of merchant bar over reinforcing bar was $80 per ton, down $3 from last year. The average scrap purchase cost increased by $45 per ton a year ago to $239 per ton. Total utility costs decreased by $1.2 million compared with the third quarter last year with natural gas and electricity both declining. Year-over-year costs for ferroalloys, graphite electrodes and other supplies were up $2.9 million.
"The copper tube mill (CMC Howell Metal) recorded an adjusted operating profit of $3.0 million, 65% below that of last year's third quarter on 4% lower net sales,” said McClean. “Included was a pre-tax LIFO expense of $4.7 million compared with a $3.9 million expense last year. The overhang of a poor residential market coupled with cautious buying and the inability of selling prices to keep up with copper scrap price increases led to the lower profits. The average selling price increased 57 cents to $3.89 per pound, but metal spreads dropped 13 cents to $1.08 per pound as scrap prices rose 70 cents to $2.81. Against the same quarter last year, copper tube production decreased 12% to 14.9 million pounds while shipments were down 18% to 16.7 million pounds."
CMCZ—McClean said, "CMCZ, the Polish steel operation, had an all-time record quarterly adjusted operating profit of $39.8 million, 187% above last year's third quarter. Poland had the highest steel prices in Europe throughout most of the quarter, which led to a jump in imported material and lower prices by quarter end. Shipments were the highest in any third quarter since acquisition, and the meltshop set a monthly record of 154,000 tons in April.
“For the quarter,” continued McClean, “tons melted equaled 392 thousand versus 375 thousand last year; rolled tons equaled 302 thousand against 300 thousand last year; and shipments totaled 376 thousand tons (including billets) compared with 330 thousand last year. Meanwhile, the average selling price rose substantially to PLN 1,663 ($582) per ton (including 28% billets) from PLN 1,393 ($445) per ton (including 11% billets). The sales gain exceeded the increase in the cost of purchased scrap utilized. Accordingly, the average metal margin increased to PLN 703 ($246) per ton from PLN 640 ($204) per ton. During May 2007, our scrap mega-shredder had a record month of over 48,000 tons processed leading to meltshop yields of 89%, a 3% improvement over last year."
Domestic Fabrication—"Net sales were up 6% from a year ago,” said McClean, “but reported adjusted operating profit fell to $11.1 million, a 37% decrease compared with last year's $17.5 million profit. Both quarters absorbed large LIFO expenses, $12.3 million pre-tax this quarter versus an expense of $14.7 million the prior year. Increased material costs continued to squeeze margins on older backlog work. Compared with the prior year's third quarter, total shipments from our fab plants decreased 9% to 395 thousand tons, the fall coming in rebar fab tonnage as projects were delayed (particularly in Texas) by drought ending rainfall. The composite average fab selling price (excluding stock and buyouts) rose 16% to $998 per ton, with realized selling prices up for all products. The Bouras acquisition, now known as CMC Joist & Deck, contributed $37 million in sales and 19,000 tons shipped (12,000 of deck); operationally it broke even with absorption of start-up costs, but the remainder of the joist operations exceeded last year's profits."
Recycling—According to McClean, "The Recycling segment achieved a record third quarter with net sales up 22% compared with one year ago, a quarter marked by huge swings in ferrous scrap pricing and nonferrous terminal market volatility. The adjusted operating profit of $24.7 million was up 10% from last year's third quarter. LIFO expense was about even at $10.7 million pre- tax this quarter versus an expense of $10.1 million the prior year.
“The ferrous scrap market hit all-time highs in March only to drop by almost $100 a ton by quarter end, though ending prices of $260 a long ton for shredded were still historically strong. Versus last year, the average ferrous scrap sales price for the quarter increased by 20% to $251 per short ton while stock shipments of ferrous scrap rose 9% to 630 thousand short tons. The average nonferrous scrap sales price for the quarter increased 14% compared with a year ago, while nonferrous stock shipments were 4% higher. The total volume of scrap processed, including all our domestic processing plants, equaled 1,058 thousand tons against 976 thousand tons last year."
Marketing and Distribution—"Adjusted operating profit for the Marketing and Distribution segment of $33.0 million was an all-time third quarter record, 66% better than last year's third quarter on 11% higher net sales," McClean said. "This segment recorded pre-tax LIFO income of $7.4 million compared with an expense of $4.6 million the year before. U.S. steel import volumes and operating profits remained strong although varied by product line. International steel markets remained vibrant with increased pricing from the prior year. Australian steel import markets were solid, but conversely there was some weakness in our domestic sourced distribution operations. German and U. \K. markets improved significantly from last year. Industrial products including fluorspar, coke, ferroalloys, and iron ore achieved excellent results. Results from semi-finished nonferrous imports were about even with last year with stronger results in stainless products offset by weaker aluminum and copper product lines."
Financial Condition—McClean said, "Our financial position remains excellent. At May 31, 2007, our stockholders' equity approached $1.5 billion. At quarter end, our working capital was $998 million and the current ratio was 1.8. 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 17%."
Outlook—McClean continued, "Our fiscal fourth quarter should be our strongest quarter of the year. Global economic conditions remain favorable. International steel prices are off their peaks, but should remain relatively stable. China's export tax on many steel products is a positive. However, China needs to curb excessive capacity growth and steel exports through environmental and energy regulations. In the U.S., the nonresidential construction market should continue to be strong. Merchant bar shipments should improve as service center destocking winds down. Rebar shipments should be robust during the peak of the construction season. The level of imports of both rebar and merchant bar are anticipated to decline significantly by the end of the fiscal fourth quarter. Ferrous scrap prices will likely remain relatively stable which would result in stable rebar and merchant bar prices during the fourth quarter. Recycling should benefit from good flows and good ferrous scrap prices as well as high demand and high prices for nonferrous scrap. Our U.S. steel mills should have better shipments of both rebar and merchant products at relatively stable prices.
“Copper tube performance should be good, but not at last year's record fourth quarter rate,” continued McClean. “Our domestic fabrication segment, with a strong backlog, is anticipated to benefit from the stable steel price environment and have stronger shipments. CMCZ (Poland) likely will benefit from the strong construction market in Central and Eastern Europe; however, results may be lower than our third quarter due to reduced prices and shipments.
“Our Marketing and Distribution segment looks forward to a very good quarter, though lower than the record third quarter just achieved. In summary,” concluded McClean, “we anticipate our second-best-ever fourth quarter."
Commercial Metals Co. 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 overseas markets.
