Commercial Metals Company Reports Second Quarter Fiscal 2019 Results

IRVING, Texas, March 21, 2019 /PRNewswire/ -- Commercial Metals Company (NYSE: CMC) today announced financial results for its fiscal second quarter ended February 28, 2019.  For the three months ended February 28, 2019, earnings from continuing operations were $14.9 million, or $0.13 per diluted share, on net sales of $1.4 billion, compared to earnings from continuing operations of $9.8 million, or $0.08 per diluted share, on net sales of $1.1 billion for the prior year period.  As a result of the execution of various strategic growth initiatives and favorable market conditions, the Company's revenue increased 33% year-over-year.

Second quarter results included net after tax expenses of $20.0 million related to certain non-operational costs  regarding the acquisition of rebar assets from Gerdau S.A., and adjustments related to the Tax Cuts and Jobs Act.  Excluding these expenses, adjusted earnings from continuing operations were $35.0 million, or $0.29 per diluted share, as detailed in the non-GAAP reconciliation on page 12. This represents a 13% increase compared to adjusted earnings from continuing operations of $31.0 million, or $0.26 per diluted share, for the three months ended February 28, 2018.

Excluding non-recurring integration related costs and acquisition accounting inventory step up charges related to the four steel mills and rebar fabrication assets purchased from Gerdau S.A., that closed on November 5, 2018, the acquired assets contributed revenue of $383.6 million and operating income of $32.9 million to the consolidated results of CMC in the second quarter of fiscal 2019.

Barbara R. Smith, Chairman of the Board, President and Chief Executive Officer, said, "We are very encouraged by our progress of integrating the rebar assets we acquired from Gerdau last year.  We continue to be highly confident they will provide the anticipated benefits and generate attractive returns for our stockholders.   The quarter was impacted by typical seasonality and unprecedented rainfall levels in many of our markets, which impacted construction activity resulting in lower shipments in the quarter.  I am pleased with the results of our ongoing operations and remain very optimistic about our growth in the second half of fiscal 2019."

The Company's liquidity position at February 28, 2019 continued to be strong with cash and cash equivalents of $66.7 million and availability under the Company's credit and accounts receivable sales facilities of $544.1 million.

On March 20, 2019, the board of directors of CMC declared a quarterly dividend of  $0.12 per share of CMC common stock payable to stockholders of record on April 5, 2019.  The dividend will be paid on April 18, 2019.

Business Segments - Fiscal Second Quarter 2019 Review

Our Americas Recycling segment recorded adjusted EBITDA of $10.1 million for the second quarter of fiscal 2019, compared to adjusted EBITDA of $17.2 million for the prior year second quarter, reflecting a decreasing ferrous and nonferrous scrap price environment.  Despite the recent price volatility, we generated positive returns in the quarter due to our low operating cost structure, disciplined buying practices and efficient inventory turnover rates.

Our Americas Mills segment recorded adjusted EBITDA of $112.4 million for the second quarter of fiscal 2019, an increase of 124% compared to adjusted EBITDA of $50.2 million for the second quarter of fiscal 2018.  The current quarter results include a non-cash charge of $10.3 million related to the fair value step up of inventory acquired on closing of the acquisition of the four rebar mills from Gerdau S.A..  Excluding this $10.3 million non-cash charge, the second quarter results include adjusted EBITDA of $33.0 million from the acquired mills on shipments of  391 thousand tons.

Total mill shipment volumes for the existing operations, excluding the incremental shipments from our new micro mill in Durant, OK, were down in comparison to the second quarter of fiscal 2018.  While demand from U.S. non-residential and infrastructure construction activity remains strong; during the quarter, construction activity was impacted adversely by rainfall in many markets that far exceeded historical norms, resulting in lower shipment volumes. Metal margins increased by $91 per ton from the same period of the prior year.  A combination of higher costs associated with the new facilities, reduced production levels and inflationary pressures on certain costs, resulted in increased manufacturing costs of approximately 28% per ton as compared to the prior year.

Our Americas Fabrication segment recorded an adjusted EBITDA loss of $49.6 million for the second quarter of fiscal 2019, compared to an adjusted EBITDA loss of $8.6 million for the second quarter of fiscal 2018.    This year's second quarter results include an adjusted EBITDA loss of $12.7 million related to the acquired fabrication operations on shipments of 162 thousand tons and excludes the benefit of a purchase accounting adjustment of $23.5 million related to amortization of the unfavorable contract backlog reserve that was assumed in the acquisition.  Including this adjustment, the operating income of the acquired fabrication assets was $9.2 million for the quarter.

Average selling prices in the Americas Fabrication segment rose 6% compared to the second quarter of fiscal 2018, but were outpaced by steel input costs, which increased by 18% higher labor costs and losses recorded on specific contracts. Rebar fabrication bidding activity remains strong and average selling prices for contracted work during the first half of fiscal 2019 were above $1,000 per ton, which will be profitable when shipped in future quarters using current rebar prices.

Our International Mill segment in Poland recorded adjusted EBITDA of $20.5 million for the second quarter of fiscal 2019, compared to adjusted EBITDA of $32.1 million for the comparable prior year quarter.   While margins remained strong, volumes declined as customers were hesitant to place orders until the European Union tariff rate quota safeguard measures were finalized which occurred in February. These measures, designed to reduce the flood of unfairly priced imports, are expected to be in place until July 2021.

Our Corporate and Other segment recorded an adjusted EBITDA loss of $24.1 million for the second quarter of fiscal 2019 compared to an adjusted EBITDA loss of $26.1 million for the prior year's second quarter.  The current quarter loss includes $5.5 million related to acquisition costs.

Outlook

"Performance from our acquired assets  have exceeded our initial transaction rationale business case.  Looking ahead, we are optimistic that the upcoming construction season will be strong both in the U.S. and Poland," said Ms. Smith.   "The combination of a good mill margin environment, ongoing progress on executing cost reduction opportunities afforded by the acquisition, and completing some of the lower margin rebar fabrication backlog, gives us confidence that we will deliver strong results for the balance of the fiscal year."

Conference Call

CMC invites you to listen to a live broadcast of its second quarter fiscal 2019 conference call today, Thursday, March 21, 2019, at 11:00 a.m. ET.  Barbara Smith, Chairman of the Board of Directors, President, and Chief Executive Officer, and Mary Lindsey, Senior Vice President and Chief Financial Officer, will host the call.  The call is accessible via our website at www.cmc.com.  In the event you are unable to listen to the live broadcast, the call will be archived and available for replay on our website on the next business day.  Financial and statistical information presented in the broadcast are located on CMC's website under "Investors".

About Commercial Metals Company

Commercial Metals Company and its subsidiaries manufacture, recycle and market steel and metal products, related materials and services through a network of facilities that includes eight electric arc furnace ("EAF") mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the U.S. and Poland.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies provided by our recent acquisitions, demand for our products, steel margins, the ability to operate our mills at full capacity, future supplies of raw materials and energy for our operations, share repurchases, legal proceedings, renewing the credit facilities of our Polish subsidiary, the reinvestment of undistributed earnings of our non-U.S. subsidiaries, U.S. non-residential construction activity, international trade, capital expenditures, our liquidity and our ability to satisfy future liquidity requirements, our new Oklahoma micro mill, estimated contractual obligations, the effects of the acquisition of substantially all of the U.S. rebar fabrication facilities and the steel mini-mills located in or around Rancho Cucamonga, California, Jacksonville, Florida, Sayreville, New Jersey and Knoxville, Tennessee previously owned by Gerdau S.A. and certain of its subsidiaries (collectively, the "Acquired Businesses"), and our expectations or beliefs concerning future events.  These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements.

Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially.  Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or any other changes. Important factors that could cause actual results to differ materially from our expectations include those described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended August 31, 2018 as well as the following: changes in economic conditions which affect demand for our products or construction activity generally, and the impact of such changes on the highly cyclical steel industry; rapid and significant changes in the price of metals, potentially impairing our inventory values due to declines in commodity prices or reducing the profitability of our fabrication contracts due to rising commodity pricing; excess capacity in our industry, particularly in China, and product availability from competing steel mills and other steel suppliers including import quantities and pricing; compliance with and changes in environmental laws and regulations, including increased regulation associated with climate change and greenhouse gas emissions; involvement in various environmental matters that may result in fines, penalties or judgments; potential limitations in our or our customers' abilities to access credit and non-compliance by our customers with our contracts; activity in repurchasing shares of our common stock under our repurchase program; financial covenants and restrictions on the operation of our business contained in agreements governing our debt; our ability to successfully identify, consummate, and integrate acquisitions and the effects that acquisitions may have on our financial leverage; risks associated with acquisitions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable antitrust legislation and other regulatory and third party consents and approvals; failure to retain key management and employees of the Acquired Businesses; issues or delays in the successful integration of the Acquired Businesses' operations with those of the Company, including the inability to substantially increase utilization of the Acquired Businesses' steel mini mills, and incurring or experiencing unanticipated costs and/or delays or difficulties; difficulties or delays in the successful transition of the Acquired Businesses to the information technology systems of the Company as well as risks associated with other integration or transition of the operations, systems and personnel of the Acquired Businesses; unfavorable reaction to the acquisition of the Acquired Businesses by customers, competitors, suppliers and employees; lower than expected future levels of revenues and higher than expected future costs; failure or inability to implement growth strategies in a timely manner; impact of goodwill impairment charges; impact of long-lived asset impairment charges; currency fluctuations; global factors, including political uncertainties and military conflicts; availability and pricing of electricity, electrodes and natural gas for mill operations; ability to hire and retain key executives and other employees; competition from other materials or from competitors that have a lower cost structure or access to greater financial resources; information technology interruptions and breaches in security; ability to make necessary capital expenditures; availability and pricing of raw materials and other items over which we exert little influence, including scrap metal, energy and insurance; unexpected equipment failures; ability to realize the anticipated benefits of our investment in our new micro mill in Durant, Oklahoma; losses or limited potential gains due to hedging transactions; litigation claims and settlements, court decisions, regulatory rulings and legal compliance risks; risk of injury or death to employees, customers or other visitors to our operations; impacts of the Tax Cuts and Jobs Act ("TCJA"); and increased costs related to health care reform legislation.

COMMERCIAL METALS COMPANY
NON-GAAP FINANCIAL MEASURES (UNAUDITED)

This press release contains financial measures not derived in accordance with generally accepted accounting principles ("GAAP"). Reconciliations to the most comparable GAAP measures are provided below.

Core EBITDA from Continuing Operations is a non-GAAP financial measure. Core EBITDA from continuing operations is the sum of earnings (loss) from continuing operations before interest expense and income taxes (benefit). It also excludes recurring non-cash charges for depreciation and amortization, asset impairments, and equity compensation. Core EBITDA from continuing operations also excludes certain material acquisition and integration related costs and other legal fees, mill operational start-up costs, CMC Steel Oklahoma incentives, net debt restructuring and extinguishment gains and losses, purchase accounting adjustments to inventory and severance expenses. Core EBITDA from continuing operations should not be considered an alternative to earnings (loss) from continuing operations or net earnings (loss), or as a better measure of liquidity than net cash flows from operating activities, as determined by GAAP. However, we believe that Core EBITDA from continuing operations provides relevant and useful information, which is often used by analysts, creditors and other interested parties in our industry as it allows: (i) comparison of our earnings to those of our competitors; (ii) a supplemental measure of our ongoing core performance; and (iii) the assessment of period-to-period performance trends. Additionally, Core EBITDA from continuing operations is the target benchmark for our annual and long-term cash incentive performance plans for management. Core EBITDA from continuing operations may be inconsistent with similar measures presented by other companies.

A reconciliation of earnings from continuing operations to Core EBITDA from continuing operations is provided below:

Adjusted earnings from continuing operations is a non-GAAP financial measure that is equal to earnings (loss) from continuing operations before certain acquisition and integration related and costs and other legal expenses, mill operational start-up costs, CMC Steel Oklahoma incentives, asset impairments, debt restructuring and extinguishment gains and losses, purchase accounting adjustments to inventory and severance expenses, including the estimated income tax effects thereof. Additionally, we adjust adjusted earnings from continuing operations for the effects of the TCJA as well as the tax benefit associated with an international reorganization. Adjusted earnings from continuing operations should not be considered as an alternative to earnings from continuing operations or any other performance measure derived in accordance with GAAP. However, we believe that adjusted earnings from continuing operations provides relevant and useful information to investors as it allows: (i) a supplemental measure of our ongoing core performance and (ii) the assessment of period-to-period performance trends. Management uses adjusted earnings from continuing operations to evaluate our financial performance. Adjusted earnings from continuing operations may be inconsistent with similar measures presented by other companies. Adjusted earnings from continuing operations per diluted share is defined as adjusted earnings from continuing operations on a diluted per share basis.

A reconciliation of earnings from continuing operations to adjusted earnings from continuing operations is provided below:

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SOURCE Commercial Metals Company