Commercial Metals Company — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended May 31, 2020. CMC manufactures, recycles and markets steel and metal products through four segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill. Unless noted, dollar amounts are in millions.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $1,341.7 | $1,605.9 | $4,067.4 | $4,286.0 |
| Earnings from continuing operations | $64.2 | $78.6 | $210.5 | $112.9 |
| Net earnings, including discontinued operations | $64.7 | $78.4 | $211.9 | $112.0 |
| Diluted EPS from continuing operations | $0.53 | $0.66 | $1.75 | $0.95 |
| Adjusted EBITDA from continuing operations | $146.8 | $144.0 | $444.3 | $278.8 |
Gross profit, calculated as sales less cost of goods sold, was $225.3 million in Q3 versus $241.6 million, and $681.4 million year to date versus $550.8 million. Calculated gross margin was approximately 16.8% versus 15.0% in Q3 and 16.8% versus 12.9% year to date. Q3 earnings from continuing operations fell year over year despite slightly higher adjusted EBITDA; year-to-date earnings increased.
Q3 segment adjusted EBITDA was $133.2 million for Americas Mills, $31.9 million for Americas Fabrication, $14.3 million for International Mill, a $1.7 million loss for Americas Recycling and a $30.9 million Corporate and Other loss. Fabrication improved substantially from a $23.3 million loss a year earlier; Recycling and International Mill declined.
Cash flow, balance sheet and liquidity
- Operating cash flow: $531.8 million for the first nine months, compared with cash used of $218.5 million in the prior-year period. The comparison is affected by a $367.5 million accounts-receivable-facility cash-flow classification change in 2019; lower inventory and receivables also contributed to 2020 working-capital cash generation.
- Capital expenditures: $134.1 million year to date. Management estimated FY2020 capital spending of $155–$170 million.
- Cash and cash equivalents: $462.1 million at May 31, 2020, up from $192.5 million at August 31, 2019. Total cash, including restricted cash, was $464.2 million.
- Debt: Total debt before debt issuance costs was $1,180.1 million, including finance leases; long-term debt reported on the balance sheet was $1,153.8 million. Debt declined from $1,254.9 million at August 31, 2019. No borrowings were outstanding under the $350 million revolving credit facility; $347.0 million was available after letters of credit.
- Other liquidity: The filing reported $164.5 million available under the U.S. receivables facility, $45.5 million under Polish credit facilities and $47.1 million under the Poland receivables facility. CMC was in compliance with debt covenants.
- Dividends: $42.8 million paid in the first nine months, or $0.36 per share. No shares were repurchased during that period.
Material changes and management commentary
- Q3 sales declined 16% year over year; year-to-date sales declined 5%. Management attributed the pressure primarily to lower prices and volumes amid COVID-19 restrictions and weaker customer demand. Facilities in the U.S. and Poland remained open as critical infrastructure; management said operational impact had been limited to date.
- In Q3, Americas Mills sales fell 15% and adjusted EBITDA fell $24.9 million, mainly from lower selling prices and compressed metal margin. Americas Recycling adjusted EBITDA fell to a loss as prices, shipments and production levels weakened. International Mill results were pressured by lower prices, imports and adverse currency translation.
- Fabrication adjusted EBITDA improved due to wider metal margins: fixed-price project selling prices generally lagged the decline in rebar input costs. Year-to-date results also benefited from two additional months of shipments from the Gerdau acquired businesses compared with 2019. The acquired unfavorable contract backlog added $4.4 million to Q3 sales and $18.7 million year to date; these benefits decline as the liability amortizes.
- CMC acquired Polish steel mesh producer Ecosteel in February 2020. In May, it idled a fabrication facility and recorded $4.8 million of impairment and employee-related expense. It had recorded $6.5 million of asset impairments for the first nine months.
- Management expected existing cash, operating cash flows and available liquidity to meet requirements for the next 12 months, while noting that sustained market deterioration could require additional liquidity. The filing provides no earnings or revenue guidance.
Risks, contingencies and unusual items
- COVID-19 effects on demand, prices, volumes, operations, supply chains, customers and liquidity remained uncertain; management said the future financial impact could not then be reasonably estimated.
- Key exposures include cyclical steel demand, metal-price volatility, imports and excess industry capacity, customer credit, foreign exchange, raw-material and energy costs, and acquisition integration. Derivatives are used to mitigate some commodity, currency and energy exposures.
- Environmental and other legal proceedings include CERCLA matters at multiple sites. Environmental liabilities totaled $3.4 million at May 31, 2020; management believed provisions were adequate and did not expect pending proceedings to have a material adverse effect, but ultimate outcomes may differ from estimates.
- The company adopted lease accounting guidance in fiscal 2020, recognizing $170.7 million of lease liabilities at May 31, 2020. This accounting change did not affect opening retained earnings.
Important facts for investors to verify
- Whether COVID-19-related demand, price and shipment weakness persisted after May 31, particularly in Recycling, Mills and International Mill.
- How much of the year-to-date operating cash flow improvement reflects sustainable earnings versus working-capital movements and the prior-year cash-flow classification change.
- The durability of Fabrication’s margin expansion as fixed-price project backlog turns over and acquired-backlog amortization benefits diminish.
- Remaining liquidity availability, debt covenant headroom and financing needs under a prolonged downturn.
- Potential changes in legal and environmental exposure, impairment charges, and the timing and returns on planned capital spending.