IRVING, Texas, Dec. 19 /PRNewswire-FirstCall/ -- Commercial Metals Company (NYSE:CMC) today reported first quarter net earnings of $69.2 million or $0.57 per diluted share on net sales of $2.1 billion for the quarter ended November 30, 2007. This compares with our record first quarter of the prior year with net earnings of $85.4 million or $0.71 per diluted share on net sales of $1.9 billion.
The largest swing in earnings for the quarter was at our International Mills. With lower profitability at our Polish mill and start-up costs in Croatia, adjusting operating profit fell from $25.9 million in last year's first quarter to a slight loss this quarter.
The current year quarter included a pre-tax LIFO income of $4.3 million ($0.02 per diluted share) compared with a LIFO expense of $10.1 million ($0.05 per diluted share) in the prior year quarter. The effective tax rate was 34.0%, lower than the first quarter of last year due to state income taxes, but higher than the fourth quarter of last year as earnings from our European mills were lower.
Selling, general and administrative expenses in the first quarter included $10.3 million of costs associated with the investment in the global deployment of SAP software. The amount in the prior year's quarter was $751 thousand. Other costs of $16.7 million were capitalized during the quarter. We have expensed $45.3 million and capitalized $50.2 million for the project to date.
Our outlook remains positive. As discussed in more detail later in this release, we anticipate second quarter LIFO diluted net earnings per share between $0.50 and $0.60 (no LIFO impact assumed in the quarter) compared to last year's second quarter of $0.54 per diluted share.
CMC President and Chief Executive Officer Murray R. McClean said, "Fabrication and Distribution operations in both our domestic and international groups achieved results exceeding their performance of the prior year's first quarter. The Domestic Fabrication and Distribution segment came out from the margin squeeze of earlier quarters; however, its steel import business declined significantly. The International Fabrication and Distribution segment saw continued strong performance in raw materials and inter-Asian trade. The Domestic Mills segment, though slightly behind last year's quarter, compared favorably with its fourth quarter, a strong performance given seasonal factors. Absent the ongoing residential slump's effect on our copper tube business, we have not yet seen any dramatic impact from the ongoing credit fallout. With relatively steady ferrous scrap prices and high, but volatile, nonferrous pricing, the Recycling segment had results lower than last year. Our International Mills segment was significantly behind last year. CMCZ (Poland) was at the latter stages of a country-wide inventory reduction and CMCS (Croatia) had expected start up and investment costs."
McClean continued, "Adjusted operating profit of $16.9 million was 23% below last year's quarterly results. Within the context of price movements over the last year, ferrous scrap prices were stable with a good domestic balance of supply and demand. Lower ferrous scrap demand from domestic mills was partially offset by growing demand for exports of containerized scrap. With the completion of Chinese customs investigations, nonferrous international demand helped offset the softer demand of domestic markets due to credit concerns and the housing slump. LIFO expense was $1.8 million in the first quarter ($1.2 million expense in last year's first quarter). The average ferrous scrap sales price for the first quarter compared to last year's first quarter increased $44 per short ton to $234, while shipments (including the units that formerly were reported under the Domestic Mills segment) declined 5% to 787 thousand tons. The segment had driven inventory levels low at year end and had less material to market at the beginning of the quarter. Ferrous margins were compressed due to shredder overcapacity impacting the Texas and Louisiana markets. The average nonferrous scrap sales price for the quarter was consistent with last year. Nonferrous shipments fell 16% to 76 thousand tons versus last year's first quarter mainly due to softer domestic markets."
McClean said, "Our Domestic Mills segment's adjusted operating profit at $69.2 million was down 4% from last year's first quarter. LIFO income of $3.9 million compares to LIFO expense of $4 million last year. Net sales were up 19%. Within the segment, adjusted operating profit for our steel mills was $65.9 million on 20% higher sales. Metal margins declined 3% or $10 per ton to $339 as the price of ferrous scrap consumed rose 18%. Our average selling price was up $28 per ton to $585 per ton, while the average selling price for finished goods was up $44 per ton to $615 per ton. Metal margins were squeezed by the rise in ferrous scrap; total margins were also affected by a 91% increase in alloys and a 21% increase in electrodes. Combined, these two costs accounted for some $8.4 million in increased costs this quarter. Energy costs were marginally lower. Sales volumes increased 13% at 594 thousand tons with rebar shipments up strongly and merchants consistent with the prior year. Job activity returned to more normal levels after the wet summer and a pause caused by the credit crisis. Service centers continued ordering on the basis of declining stocks. On a quarter to quarter basis, tonnage melted for the first quarter was up 6% to 566 thousand tons, while tonnage rolled was 487 thousand tons, 8% lower than last year. The price premium of merchant bar over reinforcing bar was $102, up $26 from last year. We have invested $32.1 million of the expected $155 million total cost of our micro mill project in Arizona."
McClean continued, "The copper tube mill recorded an adjusted operating profit of $3.3 million, 4% lower than last year, on a 15% increase in sales. As residential housing remains weak, we continue to emphasize HVAC products. Pre-tax LIFO income was $1 million with no significant effect in the prior year. The average selling price increased 12 cents to $4.29 per pound, and metal spreads contracted 9 cents to $1.03 as scrap prices increased 21 cents to $3.26 per pound. Copper tube production increased 15% to 11.6 pounds while shipments rose 13% to 11.7 million pounds compared to last year's first quarter."
Domestic Fabrication & Distribution
"On the strength of stronger sales prices and stable steel costs," McClean added, "adjusted operating profit rose 5% to $30.4 million. LIFO expense was $4.3 million pre-tax compared to $2.4 million of income in last year's first quarter. Rebar, structural, construction-related products, and joist and deck all saw improved profitability. Conversely, our post operations were weaker. Also our steel import business was adversely affected by the weak dollar, high ocean shipping costs, and stronger international markets. Total shipments from our fab plants were up 6% to 428 thousand tons. Rebar fab shipments were marginally higher while joist shipments were lower. Our deck operations, acquired in April 2007, shipped 48 thousand tons this quarter. The composite average fab selling price (excluding stock and buyouts) rose 13% to $1,015 per ton."
McClean said, "The combined operations of CMCZ (Poland) and CMCS (Croatia) were disappointing with a slight adjusted operating loss of 577 thousand as compared to last year's record $25.9 million. This quarter hopefully saw the bottoming of long product pricing for CMCZ (Poland). With continuing GDP growth rates of 6%, the economy attracted more than sufficient steel imports which are working their way through the distribution channels. The zloty remains strong, having gained against the Euro and the dollar during the quarter and compelled us to change our normal 60/40 split between domestic and export tonnage to closer to 80/20. Pricing had a downward trend during the quarter for all product lines, but merchants held up relatively better than rebar or wire rod. We shipped 70% more merchant bars this first quarter than the first quarter of last year. With merchants slower rolling speeds, we opted to emphasize margins over volume. For the first quarter, tons melted were 294 thousand, 18% below last year's 358 thousand; rolled tons equaled 242 thousand against 296 thousand last year; and shipments totaled 268 thousand tons (including billets) versus 312 last year. Average selling prices declined 3% to PLN 1,489 (including 12% billets) from PLN 1,529 per ton (including 22% billets). The decline in selling prices was accompanied by a 4% increase in the cost of purchased scrap entering production. The average metal margin declined to PLN 623 from PLN 713. Our mega-shredder processed 101 thousand tons of scrap during the quarter, representing 34% of the mill's scrap requirements.
"This was our first quarter of operations at CMCS (Croatia), acquired September 19, 2007. We inherited a strong workforce and a promising product line, but the mill had suffered such severe liquidity constraints over the last years that it can only be viewed as a turnaround. Our operating loss, representing both operating and start up activities, amounted to $4.5 million. We produced 4,900 tons and sold 8,900 tons during the quarter. The mill has a functional annual capacity of 330,000 tons."
International Fabrication & Distribution
McClean said, "International Fab had its best first quarter ever achieving adjusted operating profit of $26.6 million, an increase of 156% over the prior year of $10.4 million. None of the operating divisions in this segment are on LIFO. Our steel import business is now included in our Domestic Fab segment and our aluminum, copper, and stainless steel semis business is classified as a discontinued operation. Our raw materials division had a phenomenal quarter with record sales and profitability. High freight rates kept Chinese material near home and Inter-Asian trade flows remained strong. Australia was profitable, but at lower levels. European operations were profitable having weathered a strong Euro which attracted imports. The combined operations of our two fabrication shops had a slight adjusted operating loss."
Corporate and Other
McClean added, "The largest change in Corporate and Eliminations between the first quarter of this year and last is the $9.6 million in additional SAP deployment expense. Included in earnings from discontinued operations is LIFO pre-tax income of $6.5 million compared to $7.4 million of expense in last year's first quarter. The Company has reorganized its five segments within two geographic areas -- CMC Americas and CMC International. We will be filing an 8K to reflect historical segment data based on the new alignment."
McClean reported, "Our financial position is strong. At quarter end, long-term debt as a percentage of total capitalization was 30%. Our working capital was $1.3 billion, and the current ratio was 2.2. Our coverage ratios were strong."
McClean concluded, "Our second quarter (winter quarter) is likely to be our slowest quarter for fiscal 2008. In the U.S., our recycling business should benefit from higher ferrous scrap prices although flows are typically lower at this time of year. The nonferrous scrap business should be steady with respect to shipments with prices remaining volatile. Our steel mills in the U.S. should benefit from both higher shipments and higher selling prices although rapidly increasing ferrous scrap prices may cause a temporary margin squeeze. Our copper tube mill may be impacted by a period of destocking after Wolverine's announced plant closures. However, this situation should be short lived.
"Our fabrication and distribution businesses in the U.S. are likely to have mixed results. While backlogs remain very good, fab shipments are likely to slow (seasonal factors), and there may be a subsequent margin squeeze due to rising steel prices. Our steel import distribution business should further decline."
"Internationally, we forecast improving market conditions in Poland as steel prices increase and the destocking period ends," McClean added. "However, the very strong Polish zloty should continue to limit export opportunities. In Croatia, we anticipate a gradual improvement with an operating loss of $2 to $3 million. Our raw materials business should remain strong. Our steel distribution businesses in Asia, Europe and Australia should also be good.
"We anticipate global infrastructure and nonresidential construction growth rates to remain strong. U.S. nonresidential construction activity should remain similar to 2007. Rising iron ore and ferrous scrap prices should result in significant steel price increases. In global markets, pricing should be mainly demand driven whereas in the U.S., supply driven due to low levels of both steel inventory and steel imports. As well, high bulk freight rates and a weak U.S. dollar are likely to continue to be barriers to U.S. steel imports. We believe higher international steel prices are likely to be sustainable due to China's recent significant reduction in steel exports which should continue throughout 2008."
CMC invites you to listen to a live broadcast of its first quarter 2008 conference call on Wednesday, December 19, at 11:00 a.m. ET. The call will be hosted by Stan Rabin, Chairman, Murray McClean, President and CEO, and Bill Larson, Senior Vice President and CFO, and can be accessed via our website at http://www.cmc.com or at http://www.streetevents.com. In the event you are unable to listen to the live broadcast, the call will be archived and available for replay within two hours of the web cast. Financial and statistical information presented in the broadcast can be found on CMC's website under "Investor Relations."
Commercial Metals Company 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.
Paragraph five and the Outlook section of this news release contain forward-looking statements regarding the outlook for the Company's financial results including net earnings, product pricing and demand, production rates, inventory levels, impact of acquisitions, credit conditions and general market conditions. These forward-looking statements generally can be identified by phrases such as the company or its management "expect," "anticipates," "believe," "ought," "should," "likely," "appears," "projected," "forecast," "outlook," "will" or other words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from management's current opinion. Developments that could impact the Company's expectations include construction activity, difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes, metals pricing over which the Company exerts little influence, interest rate changes, increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing, court decisions, industry consolidation or changes in production capacity or utilization, the ability to integrate acquisitions into operations; global factors including political and military uncertainties, credit availability, currency fluctuations, energy and supply prices and decisions by governments impacting the level of steel imports and pace of overall economic activity, particularly China.
Three months ended (Short Tons in Thousands) 11/30/07 11/30/06 Domestic Steel Mill Rebar Shipments 285 218 Domestic Steel Mill Structural and Other Shipments 309 308 CMCZ Shipments 268 312 Total Mill Tons Shipped 862 838 Average FOB Mill Domestic Selling Price (Total Sales) $585 $557 Average Cost Domestic Mill Ferrous Scrap Utilized $246 $208 Domestic Mill Metal Margin $339 $349 Average Domestic Ferrous Scrap Purchase Price $231 $183 Average FOB Mill CMCZ Selling Price (Total Sales) $570 $496 Average Cost CMCZ Ferrous Scrap Utilized $332 $264 CMCZ Mill Metal Margin $238 $232 Average CMCZ Ferrous Scrap Purchase Price $288 $235 Fab Plant Rebar Shipments 262 284 Fab Plant Structural, Post, Joist and Deck Shipments 166 120 Total Fabrication Tons Shipped 428 404 Average Fab Selling Price (Excluding Stock & Buyout Sales) $1,015 $898 Domestic Scrap Metal Tons Processed and Shipped 787 832 BUSINESS SEGMENTS (in thousands) Three months ended 11/30/07 11/30/06 Net Sales Recycling $425,365 $425,367 Domestic Mills 402,810 337,393 Domestic Fabrication & Distribution 646,863 615,316 International Mills 168,178 162,127 International Fabrication and Distribution 757,392 614,487 Corporate and Eliminations (197,741) (168,146) Discontinued Operations (86,863) (93,825) Total Net Sales $2,116,004 $1,892,719 Adjusted Operating Profit (Loss): Recycling $16,877 $21,984 Domestic Mills 69,213 72,213 Domestic Fabrication & Distribution 30,436 28,899 International Mills (577) 25,887 International Fabrication and Distribution 26,559 10,412 Corporate and Eliminations (22,711) (10,461) COMMERCIAL METALS COMPANY Condensed Consolidated Statements of Earnings (Unaudited) Three months ended (in thousands except share data) 11/30/07 11/30/06 Net sales $2,116,004 $1,892,719 Costs and expenses: Cost of goods sold 1,855,380 1,605,182 Selling, general and administrative expenses 149,999 131,419 Interest expense 12,425 8,059 2,017,804 1,744,660 Earnings from continuing operations before income taxes and minority interests 98,200 148,059 Income taxes 33,357 52,712 Earnings from continuing operations before minority interests 64,843 95,347 Minority interests (128) 4,628 Net earnings from continuing operations 64,971 90,719 Earnings (loss) from discontinued operations before taxes 6,450 (8,312) Income taxes (benefit) 2,257 (2,943) Net earnings (loss) from discontinued operations 4,193 (5,369) Net earnings $69,164 $85,350 Basic earnings per share Earnings from continuing operations $0.55 $0.77 Earnings (loss) from discontinued operations 0.04 (0.04) Net earnings 0.59 0.73 Diluted earnings per share Earnings from continuing operations $0.54 $0.75 Earnings (loss) from discontinued operations 0.03 (0.04) Net earnings 0.57 0.71 Cash dividends per share $0.09 $0.06 Average basic shares outstanding 117,568,366 117,430,858 Average diluted shares outstanding 120,372,272 121,037,332 COMMERCIAL METALS COMPANY Condensed Consolidated Balance Sheets (Unaudited) November 30, August 31, (in thousands) 2007 2007 Assets: C
Source: Commercial Metals Company