Commercial Metals Company — Q1 FY2023 10-Q
Reporting period: Three months ended November 30, 2022; comparative period is the three months ended November 30, 2021. CMC operates North America and Europe steel, recycling, fabrication and construction-solutions businesses. Results are unaudited.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $2.227 billion | $1.982 billion | +12% |
| Net earnings | $261.8 million | $232.9 million | +12% |
| Diluted EPS | $2.20 | $1.90 | +16% |
| Adjusted EBITDA | $402.7 million | $314.0 million | +28% |
| Operating cash flow | $372.4 million | $25.8 million | Up $346.6 million |
- Gross profit, calculated as sales less cost of goods sold, was $507.9 million, or 22.8% of sales, versus $395.4 million, or 20.0%, a year earlier.
- North America sales rose 10% to $1.817 billion and adjusted EBITDA rose 41% to $378.0 million. Higher selling prices and lower scrap costs expanded steel margins; volumes were broadly steady. Tensar contributed $42.1 million of sales and $8.1 million of adjusted EBITDA.
- Europe sales increased 24% to $406.5 million, supported by 30% higher steel shipments and Tensar sales. Adjusted EBITDA declined 19% to $64.5 million amid lower selling prices, a modestly narrower steel margin, foreign-exchange headwinds and reduced energy credits. The segment received a $9.5 million energy credit.
- Cash flow from operations was supported by working-capital movements, including lower inventories as scrap prices fell. Investing used $195.6 million, including $133.1 million in capital expenditures and $63.7 million for acquisitions. Financing used $273.8 million, including debt repayments, share repurchases and dividends.
Liquidity, debt and capital allocation
- At November 30, cash and cash equivalents were $582.1 million; total cash, restricted cash and equivalents were $587.4 million. Current assets were $3.224 billion and current liabilities $1.078 billion.
- Total debt before unamortized issuance costs and bond premium was $1.344 billion; balance-sheet debt was $1.333 billion. CMC repurchased $115.9 million principal of its 4.875% notes due May 2023; $214.1 million remained current. It reported no borrowings on its $600 million revolver and approximately $598.6 million available. The new revolver matures in October 2027; CMC was in compliance with its financial covenants.
- CMC paid $18.8 million in dividends ($0.16 per share) and repurchased 1.275 million shares for $49.1 million during the quarter. $139.0 million remained under its share-repurchase authorization at quarter-end.
Material changes, outlook and risks
- CMC attributed earnings growth primarily to expanded North America steel-product margins from higher selling prices and lower scrap costs. The effective tax rate rose to 22.7% from 11.0%; the prior-year rate benefited from a tax restructuring benefit that did not recur.
- SG&A increased $33.8 million, including $22.0 million from Tensar operations, $7.0 million higher stock compensation and a $4.2 million U.S. pension-plan settlement charge. CMC terminated that pension plan during the quarter.
- CMC completed acquisitions of Advanced Steel Recovery and Kodiak in September and November 2022, respectively; both were described as not material to quarter-end financial position or results. The prior Tensar acquisition contributed $61.6 million in current-quarter sales.
- Management estimated FY2023 capital spending of $500–$550 million and expected cash, operating cash flow and available liquidity to cover operations, capital spending, the 2023 notes maturity, dividends and potential repurchases for at least 12 months. It gave no earnings or revenue forecast. The Mesa, Arizona micro mill was expected to be commissioned in spring 2023; the planned fourth micro mill in West Virginia was expected to take about two years to construct and commission.
- Management said the Russia-Ukraine invasion had no direct material adverse impact in the quarter, but it continues to monitor energy and materials supply, inflation, currency, commodity and cybersecurity risks. Key disclosed risks include cyclical demand, metal-price volatility, input and energy costs, project start-up and acquisition integration, customer credit, regulation, foreign exchange and litigation/environmental matters. Accrued environmental liabilities were $5.1 million; management did not believe pending legal proceedings would have a material adverse effect.
Important facts for investors to verify
- Whether North America margin strength and construction demand persist, and how lower European steel prices and currency effects develop.
- Funding and repayment plans for the remaining $214.1 million of 2023 notes, alongside the stated capital-spending range and other purchase commitments.
- Execution, costs and commissioning timing for the Mesa and West Virginia micro mills, and integration and returns from recent acquisitions.
- Cash-flow sustainability: the quarter’s strong operating cash flow included favorable working-capital movements, which may not recur.
- Potential effects of commodity, energy, foreign-exchange and environmental exposures, including the substantial Level 3 energy-derivative valuation sensitivity described in the filing.