CMC Reports Second Quarter Loss
03/25/2010 - Commercial Metals Co. reported a net loss of $173.3 million on net sales of $1.32 billion for the second quarter and a net loss of $204.5 million on net sales of $2.72 billion for the six months ended February 28, 2010.
Commercial Metals Co. reported a net loss of $173.3 million on net sales of $1.32 billion for the second quarter and a net loss of $204.5 million on net sales of $2.72 billion for the six months ended February 28, 2010.
Second Quarter Results — The net loss of $173.3 million ($1.53 per diluted share) compares with a net loss of $35.3 million ($0.32 per diluted share) for the second quarter last year. Results included a loss of $135.3 million ($1.19 per diluted share) from continuing operations, which compares to a $38.7 million ($0.35 per diluted share) loss from continuing operations for the year-ago second quarter.
Net sales of $1.32 billion compare to net sales of $1.51 billion for the year-ago second quarter.
The company is estimating after-tax costs of approximately $38.1 million associated with its exit from the joist and deck business, net of estimated proceeds upon sale of the businesses. These costs, which include impairment of fixed assets and intangibles, severance, inventory valuation, operating losses, and other closing costs, are reflected as discontinued operations in the second quarter.
Six-Month Results — The net loss of $204.5 million ($1.81 per diluted share) compares to, net earnings of $26.7 million ($0.23 per diluted share) for the same period last year. Results included a $163.9 million ($1.45 per diluted share) loss from continuing operations, which compares to $7.6 million ($0.07 per diluted share) earnings from continuing operations for the same period last year.
Net sales of $2.72 billion compare to net sales of $3.74 billion for the comparable year-ago period.
Management Comments — “Our second fiscal quarter is always our weakest due to seasonal factors,” said CMC Chairman, President and CEO Murray R. McClean, “however, this year it has been compounded by weak end-use demand in the nonresidential construction markets, unusually severe winter conditions in the U.S. and Europe, and rapidly rising ferrous scrap prices which have outpaced finished goods prices. Increases in ferrous scrap pricing are generally good trends, but the extreme volatility in price changes since December is causing short-term margin squeezes at our steel mills and fabricating operations, both domestically and internationally.
“During the quarter, we decided to exit the joist and deck business; the outlook for these products continues to be weak and what volume exists is at shrinking margins. We believe we can more profitably invest this capital in other downstream operations,” continued McClean. “Joist and deck will be accounted for as discontinued operations. The bright spot for the quarter was our International Marketing and Distribution segment, which was profitable.
“Effective December 1, 2009, the company reorganized certain business operations. The most significant changes were moving our domestic steel import and distribution business from Americas Fabrication to International Marketing and Distribution, and our international fabrication from International Marketing and Distribution to International Mills,” said McClean. “This once again combines all of our marketing operations into one segment.”
Commenting on the company’s Americas Mills segment, McClean said, "The rise in ferrous scrap prices continued the pressure on metal margins. Volumes increased 33% over the second quarter of last year; however, the prior year was the low point for shipments as the recession hit full force. The product mix was also not favorable as over half the volume increase was in billets; this allowed our melt shops to run at 72% capacity, only slightly lower than the first quarter. Our mills ran at 58% of capacity, an increase from the 54% of the first quarter during our traditionally slowest period. Imported material remained low.
“Our steel mills had an adjusted operating loss of $16.1 million compared to an adjusted operating profit of $71.1 million in the same quarter last year,” continued McClean. “This year's second quarter had pre-tax LIFO expense of $7.0 million compared to pre-tax LIFO income of $42.4 million in last year's second quarter. Our metal margin at $263 per ton recovered some from the first quarter's $251 per ton, but was well down from the $450 per ton level of a year ago. The price of ferrous scrap consumed at the mills during the quarter increased $71 per ton compared to last year, and average selling prices decreased $116 per ton. Sales volumes were 521,000 tons of which 101,000 tons were billets (compared with 33,000 tons of billets sold in the second quarter of last year). On a second quarter to second quarter basis, tonnage melted was up 45% to 486,000 tons, while tonnage rolled increased 81,000 tons to 399,000 tons."
McClean added, "Our new micromill, CMC Steel Arizona, melted 34,000 tons, rolled 32,000 tons, and shipped 27,000 tons. Our copper tube mill reported adjusted operating profit of $0.6 million (pre-tax LIFO expense of $4.6 million) compared to $2.0 million (pre-tax LIFO income of $10.2 million)."
Commenting on the company’s International Mills segment, McClean said, "Although Poland maintained positive GDP throughout, the rest of Europe is very slow to recover from the recession. Margins tightened as ferrous scrap prices reacted to global demand, yet finished goods prices remain subject to an intensely competitive local market. CMC Croatia nears the completion of its meltshop project, critical to its turnaround strategy. The segment had an adjusted operating loss of $54.4 million in the second quarter compared to a $35.8 million loss for the same period last year.
“CMC Zawiercie's adjusted operating loss of $38.4 million resulted mainly from lower metal margins failing to absorb production costs and reserves on contracted backlog which totaled $20.5 million. Last year's second-quarter loss was $22.7 million. Shipments totaled 282,000 tons (59,000 tons of billets) compared to 237,000 tons (9,000 tons of billets) in the prior year's second quarter. Tons melted were 293,000 tons compared to 244,000 tons last year, and tons rolled were 236,000 tons compared to 226,000 tons in the prior year's second quarter. Average selling prices declined 19% to PLN 1,186 per ton compared to PLN 1,471 per ton for the same period last year. The cost of scrap entering production decreased 8%. The average metal margin per ton decreased to PLN 408 from PLN 629 in last year's second quarter and PLN 438 in the first quarter of this year."
McClean added, "CMC Croatia's adjusted operating loss of $16.0 million compares to the prior year's loss of $13.1 million. Tons shipped at 16,000 tons were equivalent to the prior year, yet prices declined over 37%. As disappointing as the loss was, aggressive cost containment in the face of declining revenues is positioning the business to take advantage of the improved meltshop when our capital expenditure program is completed this spring."
Outlook — In closing, McClean said, “We anticipate our fiscal third quarter results to benefit substantially from a seasonal pickup in demand in the nonresidential construction markets. The private sector of the nonresidential markets remains weak; however, there is some improvement in the public sector. We anticipate the public sector of the nonresidential markets to improve further in the second half of calendar 2010 as projects funded by stimulus dollars are awarded.
“Our third quarter results are likely to be impacted negatively early on by rapidly rising scrap prices, causing a further margin squeeze at the mills and, subsequently, at the fabricators, though our recycling operations will benefit. By quarter end, our mills should recover due to a combination of improving shipments, higher prices, higher capacity utilization and an improvement in metal margins. We estimate mill utilization rates in the third quarter to be 67%."
McClean continued, "Inventory levels in the supply chain remain relatively low, and we would anticipate finished goods prices (e.g., rebar and merchants) to continue to increase as seasonal restocking occurs. Demand in China and most of Asia has strengthened after the Chinese New Year, and we would anticipate the trend of rising raw material and steel prices to continue for the next one or two months. This will be beneficial to our marketing and distribution operations.
“Though we see an improvement in results, volatility in pricing, the effect of LIFO accounting, the timing of economic recovery including stimulus spending, the sale of our joist and deck operations and other factors make estimation of third quarter earnings problematic,” concluded McClean. “Management will issue guidance closer to the end of the 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 international markets.
