Commercial Metals Co.: A Tough Metal Racket

"Complete collapse" of ferrous scrap pricing blamed for company's 10% earnings drop.

The recent drop in commodities prices is a welcomed change for quite a few manufacturers as they start the new year, but it's probably less so for those companies doing the selling. Commercial Metals Co. (CMC) recently felt the impact when it reported that earnings for the first quarter of 2009 had dropped 10% from the first quarter of 2008.

The IW 50 Best Manufacturer for 2008 posted earnings of $62 million on net sales of $2.4 billion, compared with $69.2 million in earnings from $2.1 billion in net sales a year earlier. Among a variety of economic factors, the drop was attributed in part to what Murray McClean, chairman, president and CEO of Commercial Metals, called the "complete collapse of ferrous scrap pricing." The global liquidity crisis, he added, has frozen the metal markets and caused a downward spiral of confidence.

"[We] anticipated the downward direction of ferrous scrap pricing, but not the accelerated fall," McClean explained in the company's Dec. 17 earnings statement. "Decreasing prices coupled with concerted efforts to lower inventory quantities resulted in the reversal of previous LIFO charges, but to a greater degree than estimated."

The company's LIFO practices mitigated some of its inventory losses as prices plummeted, but not all of them, according to McClean. The good news was that CMC's mills segment recorded all-time record quarterly earnings, while lower pricing benefited the fabrication and distribution business as lower cost material enabled margin expansion. International fabrication and distribution continued to be profitable, but at lower levels.

At the same time, Commercial Metals saw its recycling segment incur significant losses as it lowered inventories, while falling prices and continued investment in Croatia led to losses in its international mills operations. However, despite the pricing challenges sweeping the metals market, McClean believes the company's financial position remains strong, but is still "sober" about near-term prospects.

"Global liquidity remains a real concern, confidence among suppliers, customers, and investors is low, and there is uncertainty about the efficiency and effectiveness of stimulus programs announced worldwide," he explains. "We will be against the tide for at least the next six months. [In the] long-term, the historic pattern of use for steel and related products in emerging economies, as well as global infrastructure, will drive strong demand."

Commercial Metals Co.
At A Glance


Commercial Metals Co.
Irving, Texas
Primary Industry: Primary metals
Number of Employees: 15,276
2007 In Review
Revenue: $10.4 billion
Profit Margin: 4.27%
Sales Turnover: 2.40
Inventory Turnover: 8.76
Revenue Growth: 10.23%
Return On Assets: 12.26%
Return On Equity: 29.13%

CMC anticipates that downward adjustments to market and inventory will probably continue, while its U.S. steel mills will likely operate at only 55% to 65% of capacity. However, McClean says that while these conditions are difficult and exacerbated by a worldwide recession, they are also a "call to execution."

"We must execute our working capital plans to exit this downturn stronger than when we entered," he says. "We are reducing costs and will accelerate our cost reduction programs. There will be opportunities for us as we remain vigilant to our financial strength."

Last summer, those opportunities took the form of more acquisitions, as Commercial Metals continued its practice of buying when the iron is hot. The company finalized the acquisition of Reinforcing Post-Tensioning Services Inc. in August, following a similar move less than two months earlier in which it purchased ABC Coating Company of Texas Inc. and its affiliates.


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