Commercial Metals Reports Second Quarter Loss
03/25/2009 - Commercial Metals reports a net loss of $35.3 million on net sales of $1.6 billion for the quarter and net earnings of $26.7 million on net sales of $4.0 billion for the six months ended February 28, 2009.
Commercial Metals Co. reported a net loss of $35.3 million on net sales of $1.6 billion for the quarter and net earnings of $26.7 million on net sales of $4.0 billion for the six months ended February 28, 2009.
Second Quarter Results—The $35.3 million net loss ($0.32 per share) compares with net earnings of $39.8 million ($0.34 per diluted share) for the year-ago second quarter. Net sales of $1.6 billion compare to net sales of $2.3 billion for the year-ago quarter. Results included $80.7 million of after-tax LIFO income ($0.72 per share), which compares with $38.3 million after-tax LIFO expense ($0.32 per diluted share) in last year's second quarter. (Changes in LIFO are not write downs or write offs or market adjustments; they are changes in cost components based on an assumption of physical inventory flows.)
The company recorded the following consolidated expenses during the second quarter, a reflection of ongoing price declines and demand destruction as well as a global liquidity and credit crisis:
· $61.3 million in lower of cost or market inventory adjustments
· $15.6 million in other charges relating to contractual noncompliance exposures, environmental, and discontinued operations
· $14.6 million in bad debt expense
· $6.5 million in severance costs
· $5.1 million in impairment charges
Selling, general and administrative expenses included $14.6 million of costs associated with the investment in the global deployment of SAP software, which compares to $14.7 million in last year's second quarter; to date, $116.0 million has been expensed for this project. Other SAP costs of $100.2 million have been capitalized since inception of the project, of which $6.5 million was capitalized in the current quarter.
Six Month Results—The $26.7 million net earnings ($0.23 per diluted share) compare to net earnings of $108.9 million ($0.91 per diluted share) in the comparable year-ago period. Net sales of $4.0 billion compare to net sales of $4.4 billion last year. Results include $154.6 million in after-tax LIFO income ($1.36 per diluted share), which compares with $35.5 million of LIFO expense ($0.30 per diluted share) last year.
General Conditions—"The deterioration of global steel markets continued during the quarter, reaching Eastern and Central Europe and Australia, our last markets of relative strength,” said CMC Chairman, President and CEO Murray R. McClean. “Volumes, pricing, and margins all declined from the first quarter as destocking continued and demand remained weak. China had a bit of a false start as inventory built at stockists and distributors in anticipation of improving demand after the Chinese New Year, which did not materialize.
“Only our Americas Mills and Americas Fabrication and Distribution segments fared better this quarter than the comparable second quarter of last year,” continued McClean. “Lower prices and lower inventory quantities triggered LIFO income during the quarter which mitigated a substantial amount of inventory revaluation. Our largest commercial exposures continue to be unwarranted contract cancellations, market claims, price renegotiations, and unexpected inventory positions.”
Regarding CMC’s Americas Mills, McClean said, “In an otherwise uninspiring environment, we are proud that our number-one priority for our employees—safety—has been recognized once again.” He noted that the Steel Manufacturer's Association has named CMC Steel Alabama as the safest steel mill in North America in 2008, marking the seventh consecutive year that one of CMC's mills won the award. Each of the company’s mills has won at least once.
“The trend of declining prices and shipments which began in the first quarter continued into the second,” continued McClean. “We adjusted our production and inventory to meet the reduced market demand.” The company’s Americas Mills segment earned adjusted operating profit of $73.1 million in the second quarter, which compares to $55.3 million in the year-ago second quarter. McClean added that the decline in prices and quantities in inventory led to pre-tax LIFO income of $52.6 million, which compares to LIFO expense of $18.2 million (pre-tax) last year.
McClean said the company’s steel mills ran at 55% of capacity in the quarter. Mills with greater rebar capacity ran at higher capacity and those with more merchant-products capacity ran at lower capacity. He said that sales revenues declined over the quarter as both prices and shipments were lower as compared to the second quarter of last year.
“Our steel mills’ adjusted operating profit of $71.1 million was up 40% compared to the prior year second quarter,” continued McClean. “Pre-tax LIFO income was $42.4 million compared to the prior-year second quarter pre-tax LIFO expense of $19 million. Our metal margin, at $450 per ton, was 38% above the second quarter of last year and only 2% down from the first quarter; however, lower production volumes caused conversion costs per ton to rise, eroding some of this positive effect. The price of ferrous scrap consumed at the mills during the quarter fell 29% compared to last year's second quarter.
“Our average selling price of $656 was up $39 per ton, while the average selling price for finished goods was up $19 per ton to $676,” continued McClean. “Sales volumes declined 38% to 391 thousand tons.”
“Continuing the trend in the first quarter, we shipped more rebar than merchant products,” said McClean. “Rebar accounted for 58% of tonnage shipped and merchant products 42%. The price premium of merchant bar over reinforcing bar averaged $257 per ton.”
Rebar added that tonnage melted in the second quarter, 336 thousand tons, was down 42% on a quarter-to-quarter basis, while tonnage rolled declined 37% to 318 thousand tons. He added that lower production rates resulted in overall decreases in electrode, alloys, and energy costs.
Regarding the company’s International Mills, McClean said, "Continuing deteriorating international financial conditions evidenced by declining prices and volumes in Poland, a strengthening U.S. dollar, a harsh winter and our continued losses in Croatia resulted in an adjusted operating loss of $24.3 million for this segment compared to a $9.7 million profit in the second quarter of last year. Central and Eastern Europe were one of the last areas to feel the full brunt of the global economic meltdown, but they have now been clearly affected. The region was impacted by huge currency movements; the Polish zloty lost 23% to the Euro and 26% to the U.S. dollar in the second quarter. This would normally lead to export opportunities such as our profitable billet sales last year, but international steel markets are not currently open to imports. CMC Poland had an adjusted operating loss of $11.2 million. Shipments totaled 237 thousand tons (9 thousand tons of billets) compared to 403 thousand tons (81 thousand tons of billets). For the second quarter, tons melted were 244 thousand tons compared to 385 thousand tons last year, and tons rolled were 226 thousand tons compared to 308 thousand tons in the prior year. Average selling prices increased 4% to PLN 1,471 per ton compared to PLN 1,414. The cost of purchased scrap entering production decreased 16%. The average metal margin increased to PLN 629 from PLN 589.
"Our adjusted operating loss in Croatia for the second quarter was $13.1 million. This included lower of cost or market adjustments to inventory and an impairment charge as we decided to exit the cold processing business. After the end of the quarter, we successfully trialed new sizes and shapes of billets from our melt shop improvement project. This is the first phase to be followed by the installation of a newer furnace scheduled to be online by the end of the calendar year. During the quarter, we melted 7 thousand tons (production was lower due to construction and natural gas curtailment), rolled 13 thousand tons, and shipped 15 thousand tons."
Regarding the company’s financial condition, McClean acknowledged that, "As the global liquidity crisis prolongs, balance sheet quality and strength, liquidity, and headroom on debt covenants carry heightened importance.
“Our inventories are conservatively valued on LIFO (at February 28, 2009 the reserve was $324.5 million) and a substantial amount of our accounts receivable are credit insured or backed by letters of credit,” continued McClean. “Nonetheless, in this period of economic volatility, increased measures of caution are warranted, and we increased our allowance for doubtful accounts during the quarter.
“CMC has as low a percentage of goodwill and intangible assets to total assets as any domestic competitor,” continued McClean. “At February 28, 2009, goodwill and intangibles totaled $147.3 million, representing only 4% of total assets. We have substantially all our $400-million revolver available in the form of either commercial paper or bank borrowings (only $26.9 million of letters of credit outstanding against it at February 28, 2009). No amounts were outstanding against our $200-million accounts receivable securitization program at February 28, 2009.
“CMC has as low a percentage of goodwill and intangible assets to total assets as any domestic competitor,” continued McClean. “At February 28, 2009, goodwill and intangibles totaled $147.3 million, representing only 4% of total assets. We have substantially all our $400-million revolver available in the form of either commercial paper or bank borrowings (only $26.9 million of letters of credit outstanding against it at February 28, 2009). No amounts were outstanding against our $200-million accounts receivable securitization program at February 28, 2009.
“We retired $100 million of long-term debt during the quarter and at quarter end had short-term cash investments of $81.2 million. No long-term debt payments are now due until 2013. We have two debt covenants: a debt/capital ratio test and an EBITDA to interest coverage test. The maximum debt/capital ratio is 60%; at February 28, 2009, CMC was 44%. We are required to keep a twelve-month rolling-average EBITDA-to-interest coverage of 2.5 times; for the twelve months ended February 28, 2009, we had coverage of 6.0 times.
"The effective tax rate for the quarter and six-month period varies significantly from the statutory rate due to lower tax rate jurisdictions (predominantly international) incurring losses, profits earned in states with income taxes, and the effect of permanent differences having a greater effect at lower levels of pre-tax income."
Outlook—"It will be rough going for the balance of our fiscal year and likely for the remainder of calendar 2009,” said McClean. “There are no sustainable catalysts absent solving the global liquidity crisis. The spring construction season will bring an up-tick in volumes, but this will be clearly seasonal and not an indication of recovery. The effects of the U.S. stimulus package will not be felt until late in calendar 2009 and even then expected to be modest. Other countries' efforts are likely to be mixed; we are most encouraged by the focus of the Chinese programs on infrastructure,” he added.
McClean said that the company’s efforts would be directed at cash generation through working capital management and cost containment. “We intend to maintain our strong balance sheet and leave our revolving credit and accounts receivable securitization programs unused and fully available. Our major capital projects—Arizona micro mill, Polish flexible mill, Croatian meltshop, and SAP—will be substantially complete this fiscal year.
"We wish we could be more hopeful and encouraging in the short term, but there remains a lack of confidence among most of our end-use markets,” added McClean. “Backlogs continue to decrease, and it is likely that metal margins will contract in the third quarter, though still at historically good levels. LIFO will continue to act as a buffer if prices deteriorate.
“We estimate that our Americas steel mills will likely operate at 50% to 60% of capacity with highway markets in the five-state Texas region still decent, but weakness on both coasts,” said McClean. He added that it is becoming “increasingly difficult to project results in a global economic environment lacking confidence, with dysfunctional credit markets, and the uncertain impact of government stimulus programs. With less certainty in our ability to estimate than in the past, we would anticipate a third quarter loss, but at lower levels than the second 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.
