Commercial Metals Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2021. Comparisons are with the corresponding periods ended May 31, 2020, except balance-sheet comparisons, which are with August 31, 2020. CMC operates North America and Europe segments, manufacturing, recycling and fabricating steel and metal products.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1.845 billion, up 38% | $4.699 billion, up 16% |
| Earnings from continuing operations | $130.4 million, up from $64.2 million | $260.6 million, up from $210.5 million |
| Diluted EPS from continuing operations | $1.07, versus $0.53 | $2.14, versus $1.75 |
| Adjusted EBITDA | $221.1 million, versus $146.8 million | $506.5 million, versus $444.3 million |
| Operating cash flow | Not separately stated for the quarter | $94.2 million, versus $531.8 million |
Gross profit was approximately $311.3 million for the quarter (16.9% of sales), versus $225.3 million (16.8%). For the nine months, gross profit was approximately $762.2 million (16.2% of sales), versus $681.4 million (16.8%). Adjusted EBITDA margin was approximately 12.0% for the quarter, versus 10.9%; for the nine months it was 10.8%, versus 10.9%.
- Quarterly North America adjusted EBITDA rose to $207.3 million from $159.4 million; Europe rose to $50.0 million from $14.3 million.
- Quarterly results benefited from higher shipment volumes and stronger raw-material margins and steel-product metal margins. Europe also benefited from higher steel prices and favorable currency translation.
- Nine-month operating cash flow fell mainly because working capital consumed substantially more cash, amid higher scrap prices, inventories and receivables. The working-capital cash-flow change was a $317.4 million use, compared with a $141.8 million source in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $443.1 million at May 31, 2021, down from $542.1 million at August 31, 2020. Total cash, restricted cash and cash equivalents were $446.6 million.
- Total debt, including finance leases and short-term borrowings, was $1.085 billion; long-term debt on the balance sheet was $1.020 billion. Cash less total debt was approximately $642 million of net debt.
- Total assets were $4.391 billion; stockholders’ equity was $2.157 billion.
- The company reported $397.0 million available under its $400 million revolving facility, $150 million under its U.S. receivables facility, and $66.3 million under Poland credit facilities. Availability under the Poland receivables facility was $25.7 million. Management said cash, operating cash flows and available liquidity should meet requirements for the next 12 months, while noting sustained market deterioration could require additional liquidity.
- CMC was in compliance with its debt covenants at quarter-end. It reported no amounts drawn on the revolver.
Material changes and unusual items
- In February 2021, CMC issued $300 million of 3.875% notes due 2031 and retired its 5.750% 2026 notes. The retirement resulted in a $16.8 million extinguishment loss and $13.1 million of related cash costs during the nine-month period.
- In March, CMC replaced its $350 million revolving credit facility with a $400 million facility maturing in March 2026. It also amended Poland facilities, extending their expiration to March 2024. The U.S. receivables facility was reduced from $200 million to $150 million and extended to March 2023.
- Quarterly selling, general and administrative expense increased $14.5 million year over year, primarily due to labor costs. Interest expense decreased $3.4 million, in part because of lower-rate refinancing and reduced debt.
- The company recorded $13.4 million of Rancho Cucamonga facility closure and disposition-related expenses during the nine months, all in the first two quarters. The site was not classified as held for sale at May 31, 2021.
Outlook, risks and contingencies
- CMC estimated fiscal 2021 capital spending of $200 million to $225 million; the estimate is subject to change. The filing does not provide specific revenue or earnings guidance.
- Management said COVID-19 impacts and supply-chain disruptions had continued to subside, while demand in the company’s end markets had increased. It said the pandemic’s longer-term effects remained uncertain and could not be reasonably estimated.
- Risks highlighted include cyclical steel demand, volatility in scrap and other metal prices, rising input costs on fixed-price downstream projects, energy and raw-material availability and pricing, competition and imports, currency movements, COVID-19 effects, and environmental, legal and regulatory matters.
- CMC had $6.1 million in accrued environmental liabilities. Management stated that provisions were adequate and pending matters were not expected to have a material adverse effect; actual remediation costs could differ from estimates.
- There were no material changes to previously disclosed risk factors, no disclosed environmental proceedings meeting the company’s $1 million monetary-sanction threshold, and no material off-balance-sheet arrangements. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether improved demand, shipment volumes and segment margins persist, particularly as scrap and other input costs fluctuate.
- How working-capital requirements affect operating cash flow as prices and inventories change.
- Capital spending against the $200 million–$225 million estimate and the expected returns from that spending.
- Debt maturities, facility availability, covenant compliance and liquidity if market conditions weaken.
- Potential costs from environmental matters, facility disposition, commodity and currency hedges, and fixed-price downstream contracts.