Commercial Metals Company (CMC) — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended May 31, 2022. CMC manufactures, recycles and fabricates steel and related products, with North America and Europe reportable segments. The period includes Tensar from its April 25, 2022 acquisition date.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $2.516 billion | $1.845 billion | $6.506 billion | $4.699 billion |
| Net earnings | $312.4 million | $130.4 million | $928.6 million | $260.6 million |
| Diluted EPS | $2.54 | $1.07 | $7.55 | $2.14 |
| Adjusted EBITDA | $465.3 million | $221.1 million | $1.343 billion | $506.5 million |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $241.7 million | $94.2 million |
Q3 gross margin, calculated as sales less cost of goods sold, was approximately 22.2%, versus 16.9% a year earlier; nine-month gross margin was approximately 20.7%, versus 16.2%. Net margin was approximately 12.4% for Q3 and 14.3% year to date, compared with 7.1% and 5.5%, respectively.
At May 31, cash and cash equivalents were $410.3 million, with an additional $126.3 million of restricted cash. Total debt carrying amounts were approximately $1.539 billion; $423.1 million was classified as current, including $330 million of 2023 notes. The $400 million revolver was undrawn, with $398.6 million available. Stockholders’ equity totaled $3.142 billion.
Changes and key drivers
- Sales increased 36% in Q3 and 38% year to date, mainly reflecting higher selling prices amid strong construction demand. CMC reported substantially higher steel product margins in both segments as selling prices outpaced increases in scrap and other input costs.
- North America Q3 sales rose 30% and adjusted EBITDA rose 83%. Europe sales increased 71% and adjusted EBITDA rose 142%; European shipment volumes and prices both increased.
- Nine-month net earnings included a $273.3 million gain on the Rancho Cucamonga facilities sale. CMC said earnings excluding that gain increased 140% for Q3 and 152% year to date versus the comparable periods.
- Working-capital changes used $660.8 million of cash in the first nine months, contributing to the difference between net earnings and operating cash flow. Inventories rose to $1.346 billion from $935.4 million at August 31, 2021.
Outlook, risks and unusual items
- Management expects cash balances, operating cash flow and available liquidity to support operations, capital spending, current debt maturities, dividends and potential share repurchases for at least the next 12 months. No earnings or sales guidance is provided.
- FY2022 capital spending was estimated at $475 million to $500 million. CMC was constructing a third micro mill in Mesa, Arizona, and planned a fourth U.S. micro mill, subject to site selection, incentives, permitting and approvals; construction was expected to take roughly two years once underway.
- CMC acquired Tensar for approximately $550 million, net of cash acquired. Its preliminary allocation included $260.5 million of identifiable intangible assets and $187.9 million of goodwill. Tensar contributed $28.0 million of sales and $1.7 million of pretax earnings from acquisition through May 31. Integration expenses were $7.6 million year to date.
- The Rancho Cucamonga facilities were sold for $313.0 million gross proceeds; $39.0 million was initially restricted for a like-kind asset purchase. The reported nine-month gain was an unusual contributor to earnings and cash generation.
- Risk factors include steel and scrap price volatility, inflation in freight and energy, cyclical construction demand, currency movements, and possible disruption from the war in Ukraine. CMC reported no direct material adverse impact from the invasion through May 31, and said its Europe segment had found alternative sources for certain materials.
- Environmental liabilities accrued were $3.4 million; management said pending legal proceedings were not expected to materially affect results, cash flows or financial condition. The company reported covenant compliance. Tensar was excluded from the period-end internal-control assessment under the SEC’s acquired-business transition guidance.
Investor verification priorities
- Assess earnings quality by separating the Rancho Cucamonga sale gain from recurring operating performance and reviewing the company’s non-GAAP adjusted EBITDA definition.
- Monitor the $330 million 2023 notes maturity, refinancing or repayment plans, and the effect of debt and acquisition funding on liquidity.
- Track working capital, inventory levels and cash conversion as steel prices and sales volumes change.
- Evaluate whether strong selling prices and margins can persist if scrap, energy and freight costs rise or demand weakens.
- Review Tensar integration, final purchase-price allocation, realized synergies and the risks associated with new international operations.
- Confirm progress, spending and approvals for the Mesa and proposed fourth micro mill projects, and whether the stated capital-spending estimate changes.