Commercial Metals Company — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended February 28, 2022. CMC manufactures, recycles and fabricates steel and metal products through its North America and Europe segments.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $2.009 billion | $1.462 billion | $3.991 billion | $2.854 billion |
| Earnings from continuing operations | $383.3 million | $66.2 million | $616.2 million | $130.1 million |
| Diluted EPS from continuing operations | $3.12 | $0.54 | $5.02 | $1.07 |
| Adjusted EBITDA | $564.1 million | $141.7 million | $878.1 million | $285.4 million |
| Operating cash flow | Not presented separately | Not presented separately | $54.4 million | $1.2 million |
Sales rose 37% for the quarter and 40% for the six-month period. Management attributed growth primarily to higher selling prices amid strong construction demand. Earnings included a $273.3 million gain on the December sale of the Rancho Cucamonga facilities; excluding that gain, continuing-operations earnings increased 66% for the quarter and 163% for the six months, according to management.
Adjusted EBITDA includes the Rancho Cucamonga gain. Segment performance also benefited from wider steel-product metal margins as selling prices outpaced increases in scrap, freight, energy and other input costs. North America steel-products metal margin per ton was $605 versus $351 in Q2 and $575 versus $349 for six months. Europe’s corresponding margin was $407 versus $204 in Q2 and $420 versus $199 for six months. North America steel-product shipments declined 12% in Q2, partly due to planned maintenance; Europe shipments increased 27%.
Balance sheet, debt and liquidity
- At February 28, 2022, cash and cash equivalents were $846.6 million; restricted cash was $153.1 million. Total assets were $5.504 billion.
- Total debt outstanding, including current maturities, was approximately $1.473 billion, compared with $1.070 billion at August 31, 2021. Long-term debt was $1.446 billion. The company reported compliance with its debt covenants.
- CMC issued $300 million of 2030 notes and $300 million of 2032 notes, redeemed its $300 million 2027 notes, and issued $145.1 million of Series 2022 bonds to support its Mesa, Arizona micro mill. A $16.1 million debt-extinguishment loss was recorded.
- The $400 million revolver was undrawn, with $398.6 million available after letters of credit. Management said existing cash, operating cash flow and available liquidity should fund operations, capital spending, the Tensar acquisition, dividends and opportunistic repurchases for at least twelve months.
- Operating cash flow was $54.4 million despite strong earnings, as working capital used $449.1 million, reflecting higher receivables and inventory. Investing cash flow was $121.1 million, including sale proceeds; financing cash flow was $324.4 million.
Material changes, outlook and risks
- The Rancho Cucamonga facilities were sold for gross proceeds of $313 million, generating the substantial reported gain. $31.5 million of sale proceeds remained restricted for a like-kind asset purchase.
- CMC expected its approximately $550 million cash acquisition of Tensar to close in Q3 FY2022, subject to customary conditions. The transaction was not contingent on financing.
- FY2022 capital spending was estimated at $475–$525 million. CMC also planned a fourth U.S. micro mill; construction was expected to take roughly two years following site selection and necessary approvals.
- Management cited inflation in scrap, energy, freight and other inputs, steel-industry cyclicality, currency fluctuations, supply and demand uncertainty, and potential effects of Russia’s invasion of Ukraine on energy, raw materials and CMC’s Polish operations. COVID-19 impacts were described as limited to date but uncertain.
- Environmental and legal matters are part of normal operations. Accrued environmental liabilities were $4.3 million; management did not believe pending legal proceedings would materially affect the company, while noting that estimates and eventual outcomes can differ.
Important facts for investors to verify
- How much of earnings and adjusted EBITDA growth is recurring after excluding the Rancho Cucamonga sale gain?
- Whether steel margins remain resilient as scrap, energy and other input costs change, and how shipment volumes develop after maintenance.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside the funding needs of planned capital projects.
- Closing, purchase-price adjustments, integration and financing effects of the Tensar acquisition.
- Potential operational and cost impacts from Ukraine-related disruption, foreign exchange, energy prices and environmental contingencies.