Commercial Metals Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended November 30, 2020, compared with the three months ended November 30, 2019. CMC manufactures, recycles and fabricates steel and metal products through its North America and Europe segments. Results are unaudited and the company cautions that one quarter is not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $1.392 billion | $1.385 billion |
| Earnings from continuing operations | $63.9 million | $82.8 million |
| Net earnings | $64.1 million | $83.3 million |
| Diluted EPS, continuing operations | $0.53 | $0.69 |
| Adjusted EBITDA, continuing operations | $143.6 million | $159.8 million |
| Net cash from (used by) operating activities | $(12.1) million | $146.4 million |
Sales increased 0.5%, while continuing-operations earnings fell 23%. Calculated gross margin was approximately 15.6%, down from 17.2%; continuing-operations earnings margin was approximately 4.6%, versus 6.0%. Adjusted EBITDA margin was approximately 10.3%, versus 11.5%.
Capital expenditures were $37.2 million, compared with $45.6 million. Investing cash outflow was $36.5 million. Financing cash outflow was $28.6 million, including $14.4 million of dividends; the quarterly dividend was $0.12 per share.
Balance sheet and liquidity
- At November 30, cash and cash equivalents were $465.2 million, down from $542.1 million at August 31. Cash, restricted cash and cash equivalents totaled $467.5 million.
- Total assets were $4.017 billion and stockholders’ equity was $1.935 billion.
- Debt outstanding was $1.094 billion before debt issuance costs; reported current maturities and short-term borrowings were $20.7 million, and long-term debt was $1.065 billion. The $350 million revolving facility had no borrowings; availability after letters of credit was approximately $347.0 million.
- Management said existing cash, operating cash flows and available liquidity were expected to cover requirements for the next 12 months, while noting that sustained market deterioration could require additional liquidity measures. CMC was in compliance with its debt covenants.
Material changes and operating drivers
- North America: Sales declined 2% to $1.195 billion and adjusted EBITDA fell to $155.6 million from $174.7 million. Shipments of downstream products decreased, and selling prices declined for steel and downstream products. Ferrous scrap cost per ton rose to $266 from $226, compressing steel metal margin.
- Europe: Sales rose 18% to $194.6 million and adjusted EBITDA increased to $14.5 million from $11.4 million. Steel shipments increased 59,000 tons, supported by Polish construction demand and stronger Central European manufacturing activity. Higher scrap costs compressed metal margin despite increased shipments.
- Management attributed the overall earnings decline primarily to compressed metal margins in both segments: raw-material prices rose while steel and downstream selling prices declined or remained flat.
- Operating cash flow deteriorated mainly because working capital used $140.8 million, reflecting higher inventory volumes and pricing and payments of accrued liabilities, including a working-capital adjustment related to the fiscal 2019 Gerdau acquisition.
Outlook, risks and unusual items
- Estimated FY2021 capital spending was $200 million to $225 million, subject to reassessment.
- COVID-19 had lowered demand, delayed contract awards and reduced backlog. Management could not specifically quantify its impact or reasonably estimate the future financial effect; it said the pandemic had not materially affected operations to date.
- CMC recorded $3.6 million of asset impairment expense in the quarter. Separately, it disclosed $8.0 million of expenses associated with the Rancho Cucamonga site in the quarter, relating to impairment, severance, pension curtailment and vendor terminations. The site disposition did not qualify for discontinued-operations or held-for-sale accounting as of November 30.
- Key exposures include cyclical steel demand, volatile scrap and other commodity prices, fixed-price downstream projects exposed to input-cost changes, COVID-19 uncertainty, currency movements and environmental or legal matters. Environmental liabilities totaled $3.2 million; management stated that pending litigation and proceedings were not expected to have a material adverse effect.
- Commodity derivatives not designated as accounting hedges generated a $5.6 million pretax loss recorded in cost of goods sold, compared with a $1.3 million loss a year earlier. Management cautioned that hedging outcomes may be limited or adverse.
Important facts for investors to verify
- Whether demand, contract awards and backlog recover as pandemic-related uncertainty changes.
- Whether steel and downstream selling prices catch up with scrap and other input-cost movements, improving segment metal margins.
- Whether inventory and payable movements normalize and operating cash flow rebounds after the quarter’s working-capital outflow.
- Progress and costs related to the Rancho Cucamonga closure and planned site sale, and any changes in environmental or litigation exposures.
- Actual FY2021 capital spending and liquidity needs relative to management’s $200–$225 million spending estimate and stated 12-month liquidity expectation.