Commercial Metals Company — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended February 28, 2023. Comparisons are with the corresponding periods ended February 28, 2022. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context
CMC manufactures, recycles and fabricates steel and metal products and provides construction-related solutions through its North America and Europe segments. The quarter included the Tensar acquisition, completed in April 2022, and the smaller ASR and Kodiak acquisitions completed in September and November 2022. Roane Metals and Tendon Systems were acquired after quarter-end, in March 2023.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $2,018.0m | $2,008.9m | $4,245.3m | $3,990.7m |
| Net earnings | $179.8m | $383.3m | $441.6m | $616.2m |
| Diluted EPS | $1.51 | $3.12 | $3.71 | $5.02 |
| Adjusted EBITDA | $296.7m | $564.1m | $699.4m | $878.1m |
| Operating cash flow | — | $558.9m | $54.4m |
Quarterly sales were nearly flat year over year; six-month sales rose 6%. The prior-year earnings and Adjusted EBITDA comparisons include a $273.3m gain on the sale of the Rancho Cucamonga facilities, making the reported declines poor indicators of underlying year-over-year operating trends. Management cited stronger North America steel and downstream product margins, partly offset by weaker Europe results. The filing does not provide a separate consolidated gross-margin figure.
North America Q2 Adjusted EBITDA was $299.3m versus $535.5m, including the prior-year facility-sale gain; Europe was $12.9m versus $81.1m. In Europe, lower steel selling prices and higher energy costs pressured results. The six-month period also benefited from Tensar sales of $113.0m, with no Tensar contribution in the prior-year comparable period.
Balance sheet, debt and liquidity
- At February 28, 2023, cash and cash equivalents were $604.0m; total debt outstanding, net of issuance costs and including bond premium, was $1,364.5m. Current maturities and short-term borrowings were $264.8m, including $214.1m of 4.875% notes due May 15, 2023.
- CMC reported $599.1m available on its $600m revolver, no borrowings under the revolver or $200m delayed-draw term facility, and compliance with its credit covenants. Management expects cash, operating cash flow and available liquidity to cover operations, capital spending, debt maturities, dividends and opportunistic repurchases for at least the next 12 months.
- Six-month capital expenditures were $289.3m, compared with $191.6m. Operating cash flow less capital expenditures was approximately $269.7m. Cash and cash equivalents declined from $672.6m at August 31, 2022.
Material changes, outlook and notable items
- Management estimated FY2023 capital spending at $550m–$600m. The third micro mill in Mesa, Arizona, was expected to be commissioned in spring 2023; the planned fourth mill in West Virginia was expected to be commissioned in late calendar 2025. Management cautioned that startup, construction, cost and market risks could prevent expected benefits.
- In December 2022, the end of a seven-year recapture period led CMC to recognize $17.7m of New Markets Tax Credit contributions as revenue. This unusual item improved current-period results.
- CMC recorded a $4.2m charge upon termination of its U.S. pension plan. It repurchased 1.61m shares for $66.3m during the six months and had $121.8m remaining under its $350m authorization at quarter-end.
- Management reported no direct material adverse impact from Russia’s invasion of Ukraine during the periods, but said it would monitor possible indirect effects on energy and materials supply, inflation, currencies, commodity prices, cybersecurity and sanctions.
- Key disclosed risks include steel-industry cyclicality and demand, metal and energy price volatility, foreign exchange exposure, supply disruptions, acquisition integration, and construction and commissioning risks for the new mills. Environmental liabilities accrued were $5.6m; management did not believe pending legal proceedings would materially adversely affect the company.
Important facts for investors to verify
- Separate reported earnings from underlying performance: the prior-year period included the $273.3m facility-sale gain, while the current period included $17.7m of NMTC revenue and a $4.2m pension settlement charge.
- Track Europe’s steel margins and energy costs, and North America’s downstream margins as fixed-price contracts progress.
- Monitor repayment or refinancing of the $214.1m notes due May 2023, liquidity and covenant headroom, and execution of the FY2023 capital-spending plan.
- Assess micro-mill commissioning timelines, costs and operating performance, as well as integration and returns from recent and subsequent acquisitions.