Commercial Metals Company — Q3 FY2023 Form 10-Q
Business and period: CMC manufactures, recycles and fabricates steel and metal products and provides construction-related solutions through its North America and Europe segments. This unaudited quarterly report covers the three and nine months ended May 31, 2023; comparisons are to the corresponding 2022 periods unless noted.
Financial results and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $2.345 billion | $2.516 billion | $6.590 billion | $6.506 billion |
| Net earnings | $234.0 million | $312.4 million | $675.6 million | $928.6 million |
| Diluted EPS | $1.98 | $2.54 | $5.69 | $7.55 |
| Adjusted EBITDA | $374.1 million | $465.3 million | $1.074 billion | $1.343 billion |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $934.7 million | $241.7 million |
Margins: Q3 gross profit, calculated as net sales less cost of goods sold, was approximately $482.7 million, or 20.6% of sales, versus $559.3 million, or 22.2%, a year earlier. The filing does not present consolidated operating margin as a headline metric.
Balance sheet at May 31, 2023: Cash and cash equivalents were $475.5 million; total debt was $1.170 billion before unamortized issuance costs and bond premium, and reported long-term debt was $1.103 billion. Total liabilities were $2.497 billion and stockholders’ equity was $4.024 billion. Current assets of $3.142 billion exceeded current liabilities of $852.9 million. CMC reported no borrowings under its $600 million revolving credit facility and approximately $599.1 million available; it was in compliance with its credit covenants.
Cash uses and capital: Nine-month capital expenditures were $439.7 million, acquisitions net of cash acquired were $167.1 million, and dividends were $56.3 million. Debt repayments were $380.7 million. Cash, restricted cash and cash equivalents declined by $200.6 million to $478.7 million.
Changes versus prior comparable periods
- Q3 sales fell 7%, net earnings fell 25%, and adjusted EBITDA fell 20%. For the nine months, sales increased about 1%, while net earnings and adjusted EBITDA declined about 27% and 20%, respectively.
- North America Q3 adjusted EBITDA increased to $402.2 million from $379.4 million, supported by wider downstream-products margins as scrap costs fell while contract selling prices remained elevated. Nine-month North America adjusted EBITDA was lower, in part because the prior-year period included a $273.3 million gain on the Rancho Cucamonga facility sale.
- Europe Q3 sales fell 27% and adjusted EBITDA fell 92%, to $9.6 million. Lower steel selling prices, weaker demand and higher energy costs compressed margins. Nine-month European adjusted EBITDA fell 69%.
- Operating cash flow improved substantially year over year, reflecting more favorable working-capital movements, including lower cash tied up in inventory and increased cash provided by receivables.
Outlook, commentary and risks
- Management said existing cash, operating cash flow and available liquidity should fund operations, capital expenditures, dividends and opportunistic repurchases for at least the next 12 months. No specific earnings or sales guidance was provided.
- CMC estimated FY2023 capital spending of $575 million to $600 million. Startup of its third micro mill in Mesa, Arizona, was underway; its fourth micro mill in West Virginia was expected to be commissioned in late calendar 2025. The filing highlights construction, startup, cost-overrun, supply-chain and market risks to these projects.
- Management cited macroeconomic uncertainty, inflation, rising interest rates, construction delays, steel and scrap price volatility, energy costs, foreign exchange movements, supply disruptions, competition, and regulatory and environmental matters as risks. The Ukraine invasion had no direct material adverse impact in the reported periods, but related indirect risks remained under monitoring.
- Q3 and nine-month results included inventory write-downs of $3.4 million and $8.9 million, primarily in Europe. Nine-month results also included $17.7 million of NMTC-related revenue following the end of a recapture period and a $4.2 million pension settlement charge. The prior-year nine-month comparison included the $273.3 million facility-sale gain.
- Environmental liabilities accrued totaled $5.2 million at May 31, 2023; the company said amounts could vary materially given estimation uncertainties. Management did not believe pending legal proceedings would materially adversely affect results, cash flows or financial condition. No environmental proceedings meeting the company’s stated disclosure threshold were reported.
Important facts for investors to verify
- Whether North America’s downstream margin strength can persist as contract prices reset and scrap and steel markets change.
- Europe’s demand, selling prices, energy costs and margins, including the effect of foreign exchange movements.
- Third- and fourth-micro-mill spending, commissioning schedules, startup performance and potential cost overruns.
- Working-capital cash flow sustainability, planned capital spending, debt maturities and availability under credit facilities.
- The recurring earnings contribution from acquisitions and the nonrecurring nature of NMTC revenue and the prior-year asset-sale gain.