Commercial Metals sees declines in 1Q of fiscal 2016

Irving, Texas-based Commercial Metals Co. (CMC) has announced financial results for its first quarter of fiscal 2016, ended Nov. 30, 2015. Net earnings attributable to CMC for period were $25.1 million (21 cents per diluted share) on net sales of $1.2 billion. This compares with net earnings of $32.2 million (27 cents per diluted share) on net sales of $1.7 billion for the first quarter of fiscal 2015.

Earnings from continuing operations for 1Q of fiscal 2016 were $25.6 million (22 cents per diluted share) compared with earnings from continuing operations of $34.3 million (29 cents per diluted share) for the 1Q of fiscal 2015.

Joe Alvarado, chairman of the board, president and CEO of CMC, says, “Our results for the first quarter of fiscal 2016 were generally consistent with our outlook from last quarter.”

Alvarado continues, “Our Americas Fabrication segment achieved a $25.5 million improvement in adjusted operating profit during the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015, benefiting from lower steel input prices and solid construction demand. In addition, compared to the same quarter in the prior year, our Americas Mills segment was able to expand metal margins as finished steel prices declined at a slower rate than ferrous scrap prices.

“However,” he says, “our remaining segments continued to be adversely impacted by steel import activity into the U.S., weakness in scrap markets and decreased global demand and pricing for all major commodities.”

Alvarado adds, “We are very pleased with our financial strength and our strong cash flow of $219.6 million during the quarter.”

CMC says it elected to change the accounting method it uses to value its inventories from the last-in, first-out method to the weighted average cost method for its Americas Mills, Americas Recycling and Americas Fabrication segments and to the specific identification method for the steel trading division headquartered in the U.S. in its International Marketing and Distribution segment in the first quarter of fiscal 2016. The company says it applied this change in accounting principle retrospectively to all prior periods presented.

Also during the first quarter of fiscal 2016, CMC says it elected to change the accounting method it uses to value its inventories in its International Marketing and Distribution segment, except for the steel trading division headquartered in the U.S., from the first-in, first-out method to the specific identification method. Because this change in accounting principle was immaterial in all prior periods, it was not applied retrospectively, the company adds.

Adjusted operating profit from continuing operations for the quarter was $56.1 million. This compares with adjusted operating profit from continuing operations of $67 million for the first quarter of fiscal 2015. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from continuing operations was $87.7 million for the quarter compared with adjusted EBITDA from continuing operations of $100.1 million with the first quarter of the prior fiscal year.

The company says its financial position as of Nov. 30, 2015, was strong, with cash and cash equivalents of $637.2 million compared with $485.3 million at Aug. 31, 2015, and approximately $1.2 billion in total liquidity. CMC also described cash flow from operations as “strong” at $219.6 million.

Pursuant to the share repurchase program that was approved in the first quarter of fiscal 2015, CMC bought approximately 316 thousand shares of its common stock for $4.6 million during 1Q of fiscal 2016.

The company’s Americas Recycling segment recorded adjusted operating loss of $6.5 million for the first quarter of fiscal 2016 compared with adjusted operating loss of $2 million for the first quarter of fiscal 2015. During the 1Q of fiscal 2016, ferrous volumes declined 21 percent, and a decrease in average ferrous selling prices outweighed a decline in average ferrous material costs, which compressed average ferrous metal margins by 19 percent relative to the corresponding period in fiscal 2015.

Additionally, during the first quarter of fiscal 2016, average nonferrous volumes declined 12 percent, and average nonferrous metal margins were compressed by 22 percent relative to the corresponding period in fiscal 2015.

The Americas Mills segment recorded adjusted operating profit of $59.1 million for the quarter compared with adjusted operating profit of $72.6 million for the corresponding period in the prior fiscal year. During the first quarter of fiscal 2016, shipments of CMC’s higher margin finished products, including reinforcement bar ("rebar") and merchants, decreased 8 percent primarily as a result of continued import pressures in the U.S., the company says. However, this segment was able to expand average metal margins for the first quarter of fiscal 2016 by 3 percent compared with the first quarter of fiscal 2015 as a result of the $138 per short ton decrease in the average cost of ferrous scrap consumed outpacing a decline in average selling prices.

On the cost side, freight expense decreased 6 percent per short ton, utilities expense decreased 9 percent per short ton and repairs and maintenance expenses decreased $3 million compared with the first quarter of fiscal 2015.

The Americas Fabrication segment recorded adjusted operating profit of $21.3 million for the first quarter of fiscal 2016 compared with adjusted operating loss of $4.2 million for the first quarter of fiscal 2015. The $25.5 million increase in adjusted operating profit was primarily in light off a 26 percent expansion in average metal margin compared with the first quarter of fiscal 2015, CMC says. Additionally, freight expenses decreased 14 percent per short ton compared with the first quarter of fiscal 2015. Further contributing to the increase in adjusted operating profit, this segment benefited from a $2.4 million gain on a property sale in the first quarter of fiscal 2016, according to the company.

The International Mill segment recorded adjusted operating profit of $2.8 million for 1Q of fiscal 2016 compared with adjusted operating profit of $4.2 million for the same period in fiscal 2015. For the first quarter of fiscal 2016, average metal margins contracted 13 percent, and shipments, excluding billets, decreased 1 percent relative to the first quarter of fiscal 2015.

The International Marketing and Distribution segment recorded adjusted operating loss of $2.2 million for the first quarter of fiscal 2016 compared with adjusted operating profit of $16.7 million for the same period in fiscal 2015. The $18.8 million decrease in adjusted operating profit in the 1Q of fiscal 2016 was the result of a 33 percent decrease in volumes coupled with a 42 percent decrease in average margin relative to the first quarter of fiscal 2015.

CMC says its International Marketing and Distribution segment’s results “continued to be pressured by the strong U.S. dollar, global steel overcapacity, weakening global energy markets and reduction in demand from service centers as inventory levels increased compared with the first quarter of fiscal 2015.”

This segment also recorded a $2.7 million inventory write-down in 1Q of fiscal 2016 and a $2.1 million increase in bad debt expense compared with the first quarter of fiscal 2015.

Alvarado says, "The recent passage of comprehensive infrastructure spending legislation, Fixing America's Surface Transportation Act, or FAST, marked a significant achievement for the future infrastructure in the U.S. We expect that FAST will provide a guaranteed and predictable funding stream for state and local governments to plan and construct road, bridge, transit, freight and passenger rail projects for the next five years.”

He adds, “Although we expect the new legislation to provide meaningful upside from a demand perspective, we do not anticipate the new spending provision will translate into steel orders for 12 months or more.

Alvarado continues, “Our second fiscal quarter has historically been seasonally slower as a result of holiday slowdowns and winter weather conditions, which reduce construction activities. We anticipate that market conditions will not improve materially over the short term, due to ongoing pressure from steel import activity into the U.S. and continued weakness in the scrap markets.”