Commercial Metals Reports 4th-Quarter, Full-Year Profits
11/02/2009 - Commercial Metals reported net earnings of $7.2 million on net sales of $1.5 billion for the fourth quarter and net earnings of $20.8 million on net sales of $6.8 billion for the year ended August 31, 2009.
Commercial Metals Co. reported net earnings of $7.2 million on net sales of $1.5 billion for the fourth quarter and net earnings of $20.8 million on net sales of $6.8 billion for the year ended August 31, 2009.
Fourth Quarter Results — Net earnings of $7.2 million ($0.06 per diluted share) compares with net earnings of $63.5 million or $0.55 per diluted share for the year-ago fourth quarter. Net sales of $1.5 billion compares to net sales of $3.1 billion for the year-ago fourth quarter. Results included $24.4 million of after-tax LIFO income ($0.21 per share), which compares with $90.9 million of expense ($0.78 per diluted share) in last year's fourth quarter.
At quarter end, the company’s LIFO reserve totaled $241.7 million.
The fourth quarter's disproportionate tax benefit includes the effect of the reversal of the deferred tax liability recorded in prior periods for U.S. taxes on unremitted foreign earnings. Lower pre-tax income for 2009 and its distribution in relatively high tax rate jurisdictions increases the effects of variances from the U.S. statutory rate. The effective tax rate for the year is 40%. Significant items included in the rate are higher taxes due to losses in low-tax-rate foreign jurisdictions and income subject to state taxes offset by the previously mentioned reversal of the deferred tax liability for prior period U.S. taxes on unremitted foreign earnings to be indefinitely reinvested in foreign operations.
Full-Year Results — Net earnings of $20.8 million ($0.18 per diluted share) compares to net earnings of $232.0 million ($1.97 per diluted share) for the previous year. Net sales of $6.8 billion compares to net sales of $10.4 billion in the previous year. Results included $208 million of after-tax LIFO income ($1.83 per diluted share), which compares with $209 million of after-tax LIFO expense ($1.78 per diluted share) last year.
In response to price declines, demand destruction, and a global liquidity and credit crisis, the company recorded (under selling, general and administrative expenses) $11.0 million of pre-tax costs associated with investment in the global deployment of SAP software, which compares to $10.6 million of such costs in last year's fourth quarter; to date the company has expensed $137.7 million for this project. Other SAP costs of $111.3 million have been capitalized since the inception of the project, of which $5.5 million was capitalized in the current quarter. At August 31, 2009, the company successfully ended the project phase of its SAP deployment, returned significant personnel resources back to its operating units, and combined the SAP expertise with its continuing IT operations. The company plans to continue the deployment of SAP on a more measured pace as well as enhance its supply chain management benefits by optimizing the use of the system.
Management Comments — "Although we saw increases in steel production and sales volumes in the fourth quarter compared to the third quarter, this was more due to restocking than any pick up in real demand,” commented CMC Chairman, President and CEO Murray R. McClean. “We remain concerned about continued sustainability of demand. The stimulus effect was negligible in the U.S.
“Internationally, China continued to benefit from an effective stimulus package and nearby Asian countries also improved,” continued McClean. “Steel volume increases in Poland were met by lower metal margins impacting profitability. Our tubular mill in Croatia continued to struggle with the downturn in energy markets as well as increased Chinese competition in nearby markets. Overall declines in inventory quantities and prices led to net LIFO income, but rising ferrous scrap prices resulted in some segments incurring expense. We continue to address exposures including unplanned inventory and unwarranted customer contractual noncompliance related to U.S. steel imports. In late August, our micro minimill in Arizona successfully rolled its first rebar."
Commenting on the company’s Americas Mills segment, McClean said, "Restocking, seasonal demand and continued public sector projects drove mill capacity utilization rates to 68% for the fourth quarter, up from 58% in the third quarter of this year. These higher volumes, however, were met by lower metal margins as the price increases in ferrous scrap were not matched by price increases in finished goods. General comparisons to the fourth quarter of last year are not favorable as it was the last solid quarter before the recession hit the steel industry full force. Rebar volume in the fourth quarter was strong and merchant volumes, though well off from the prior year, did gain over both the second and third quarters of this year. Import competition, with the exception of Mexico, remains muted.
"Our steel mills earned adjusted operating profit of $28.0 million compared to $45.1 million in the comparable quarter last year; this year's fourth quarter had pre-tax LIFO expense of $5.3 million compared to the $41.5 million pre-tax LIFO expense last year. Our metal margin at $302 per ton was down $88 per ton from the fourth quarter of last year and down $63 per ton from the third quarter of this year. The price of ferrous scrap consumed at the mills during the quarter fell $187 per ton compared to last year's fourth quarter, but our average selling price for finished goods of $563 per ton fell $275 per ton. Sales volumes declined 23% to 486 thousand tons, all attributable to a drop off in merchant bar tons. Rebar accounted for 61% of tonnage shipped in the fourth quarter, the highest percentage of the year. The price premium of merchant bar over reinforcing bar averaged $193 per ton, up $39 per ton from the third quarter. On a fourth quarter-to-quarter basis, tonnage melted was down 24% to 469 thousand tons, while tonnage rolled declined 21% to 429 thousand tons. Lower production rates and price decreases in alloys, natural gas, and electricity resulted in an overall decrease of $35.0 million in these costs for the quarter compared to last year."
McClean added, "Our copper tube mill reported an adjusted operating profit of $1.5 million (including pre-tax LIFO expense of $3.4 million) compared to $4.1 million (including pre-tax LIFO income of $1.3 million) in the fourth quarter of last year. The mill remained profitable with constant pounds sold, but higher metal margins. Demand is mainly from public projects and healthcare."
Commenting on the company’s International Mills segment, McClean continued, "International steel markets, with the exception of the Asia Pacific region, remained weak. Metal margin compression continued at CMC Zawiercie though volumes were encouragingly up on billet exports. CMC Croatia suffered from the global downturn in energy markets. The segment had an adjusted operating loss in the fourth quarter of $18.7 million compared to the all-time quarterly record of $57.1 million profit last year. The two mills' results, compared to the third quarter, headed in opposite directions. CMC Zawiercie's adjusted operating loss for the fourth quarter was $3.4 million compared to $9.2 million loss in the third quarter; CMC Croatia's fourth quarter result was a loss of $15.3 million compared to a loss of $8.5 million in the third quarter.
"CMC Zawiercie's quarterly result, although a loss, was the lowest of the year, attributable to the highest levels of melting, rolling, and shipping for the year. Shipments totaled 398 thousand tonnes (129 thousand tonnes of billets) compared to 424 thousand tonnes (177 thousand tonnes of billets) in the prior-year fourth quarter. Tonnes melted were 412 thousand tonnes compared to 395 thousand tonnes last year, and tonnes rolled were 281 thousand tonnes compared to 266 thousand tonnes in the prior-year fourth quarter. Average selling prices decreased 45% to PLN 1,157 per tonne compared to PLN 2,091 per tonne. The cost of scrap entering production decreased 48%. The average metal margin decreased to PLN 451 per tonne, wholly insufficient to allow for profits.
"CMC Croatia's fourth quarter shipments of 12 thousand tonnes were the lowest of the year. The collapse of energy markets combined with increased Chinese competition in the North Africa / Middle East markets severely impacted revenues. Our caster renovations are complete and will allow us to sell billets when market opportunities arise. Our renovated furnace should be completed in the second quarter of fiscal 2010."
Financial Condition — Commenting on the company’s financial condition, McClean said, "CMC remains financially strong; our balance sheet remains conservative with high quality assets. At August 31, 2009, we had cash and short-term investments of $406 million. Substantial portions of our accounts receivable are backed by letters of credit or are credit insured; we have established an allowance for doubtful accounts of $42 million. Substantially all of our domestic inventories are on LIFO; the reserve at year end was $242 million. The current ratio was 2.4. We had no drawings on our domestic accounts receivable securitization program, and our $400 million revolver was available save for $27.9 million of letters of credit outstanding against it as of August 31, 2009. At year end, goodwill and intangibles totaled $138.9 million, representing only 3.8% of total assets. Our debt maturity profile has no substantial long-term debt payments due until 2013. We met our debt covenant tests."
Outlook — According to McClean, "Domestic market conditions appear to be stabilizing, but at very modest levels. U.S. stimulus programs are likely to be effective from calendar 2010, but at a slow pace. Private nonresidential construction is likely to remain weak. We anticipate prices to trend moderately lower for our first fiscal quarter with shipments at slightly lower levels to fourth quarter fiscal 2009 given seasonal trends. Rebar imports should remain low.
"The Asian markets are the most encouraging right now although off the highs of July/August. The growth of China's GDP is likely to be 8-9% in calendar 2009. China continues to fund steel intensive projects including infrastructure, public housing and energy plants. China may curb new steel production to control excess steel capacity. Steel inventory levels have built in China, in particular, flat products, and prices have declined from August. China may increase exports of higher-value steel products, but we believe this will be mainly to nearby Asian markets. Most markets in Asia are likely to continue to improve including Taiwan, Vietnam and Malaysia. Australia's economic recovery is ahead of the U.S., and in Europe recovery is likely to be mixed. Poland is likely to lead Central Eastern Europe with improving GDP growth."
McClean added, "Our strength remains our people. Fiscal 2009 made extraordinary demands on them; they were asked to sacrifice and they did and maintained CMC's core values throughout. We remain strong and confident because of them. Fiscal 2010 should be a year of sequentially building profitability; the first half will suffer the lingering effects of the economy and winter seasonal downturn. The second half should benefit from an improving economy and a more traditional pick up in the spring construction season. Looking toward our first quarter, we believe that our recycling operations should be profitable for the quarter. Our domestic mills may operate at marginally lower levels than they did in the fourth quarter, between 60% and 65%. Our domestic fabrication operations will be challenged by diminished backlogs and a margin squeeze. Our U.S. steel trading business will continue to liquidate inventories remaining from customer contractual noncompliance; industrial products will, however, remain a bright spot. Internationally, Poland should see modest improvement if metal margin pressure abates; Croatia will continue to incur losses until its capital expenditure program is completed and the energy market improves. Overall, we anticipate first-quarter results to be a small loss."
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.
