Commercial Metals Company (CMC) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2024. Dollar amounts are in millions unless otherwise stated. Comparisons are with the corresponding 2023 periods.
Business context
CMC supplies steel, recycled metals, fabricated products and construction-related solutions, principally to the construction sector. It now reports three segments: North America Steel Group, Europe Steel Group and Emerging Businesses Group. Prior-period segment figures were recast. Peter R. Matt became President and CEO on September 1, 2023, succeeding Barbara R. Smith, who became Executive Chairman.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,848.3; down 8% | $3,851.3; down 9% |
| Net earnings | $85.8, versus $179.8 | $262.1, versus $441.6 |
| Diluted EPS | $0.73, versus $1.51 | $2.22, versus $3.71 |
| Adjusted EBITDA, reportable segments | $231.6, versus $312.3 | $568.2, versus $754.7 |
| Operating cash flow | Not presented separately for the quarter | $350.0, versus $558.9 |
| Capital expenditures | Not presented separately for the quarter | $160.8, versus $289.3 |
For the quarter, gross profit was $296.2 million, or approximately 16.0% of sales, versus $396.2 million, or 19.6%. The filing attributes the earnings decline principally to lower steel selling prices and compressed steel-product metal margins, as scrap costs rose. Six-month results included $66.3 million of European government assistance, compared with $9.5 million a year earlier.
- North America Steel Group: Quarterly external sales declined 1% to $1,486.2 million; adjusted EBITDA fell to $222.3 million from $274.2 million. Steel-product metal margin per ton declined 18% as selling prices fell and scrap costs increased. Higher raw-material and steel-product shipments partly offset lower prices.
- Europe Steel Group: Quarterly external sales fell 43% to $192.5 million and adjusted EBITDA was a loss of $8.6 million, versus income of $11.5 million. Weaker demand, lower prices and shipment volumes drove the decline. Six-month adjusted EBITDA benefited from government assistance.
- Emerging Businesses Group: Quarterly external sales rose 2% to $156.0 million, while adjusted EBITDA decreased 32% to $17.9 million. Weather-related project and shipment delays affected Construction Services and Tensar; CMC Anchoring Systems contributed $12.0 million in quarterly sales.
Balance sheet, liquidity and capital allocation
At February 29, 2024, cash and cash equivalents were $638.3 million, total debt outstanding was $1,161.8 million, and net debt was approximately $523.5 million. Current assets were $3,198.1 million and current liabilities $762.5 million. Total stockholders’ equity was $4,222.7 million. The company had no borrowings under its $600 million revolver; approximately $599.1 million was available. CMC reported compliance with its debt covenants.
Six-month free cash flow, calculated as operating cash flow less capital expenditures, was approximately $189.2 million, versus $269.7 million. CMC used $147.8 million in financing activities, including $76.3 million for share repurchases and $37.4 million for dividends. The Board increased the repurchase authorization by $500 million in January 2024; $510.4 million remained available at quarter-end.
Outlook, commentary and risks
- Management expects 2024 capital expenditures of $550–$600 million, subject to reassessment. It expects cash, operating cash flow and available liquidity to fund operations, investment, dividends, potential litigation costs and opportunistic repurchases for at least the next twelve months.
- The Mesa, Arizona micro mill began rebar production during commissioning; merchant-bar production commenced in the second quarter. CMC expects its planned West Virginia micro mill to be commissioned in late calendar 2025.
- Management cited European inflation, higher interest rates and reduced construction and industrial activity, as well as weather-related disruption in parts of the Emerging Businesses Group. It also noted exposure to steel and scrap prices, energy costs, foreign exchange, demand cycles, supply chains and geopolitical developments.
- CMC is defending a Pacific Steel Group antitrust lawsuit. Summary judgment was under consideration and a jury trial was scheduled for July 2024. No liability was recorded because CMC did not consider a loss probable and could not estimate a reasonably possible loss; an unfavorable outcome could materially affect results, financial position or cash flows.
- Environmental liabilities accrued were $4.1 million. CMC reported no material changes to previously disclosed risk factors and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether steel selling prices and metal margins stabilize or recover relative to scrap costs, particularly in North America and Europe.
- How much of six-month European earnings depended on the $66.3 million of government assistance and the outlook for further assistance.
- Whether European demand, shipments and profitability improve after the steep year-over-year declines.
- Execution, spending and ramp-up of the Mesa and West Virginia micro mill projects against the stated timelines and capital budget.
- Developments in the Pacific Steel Group lawsuit and any resulting financial exposure.
- Cash generation and debt levels as CMC funds capital spending, dividends and share repurchases.