Commercial Metals Company — Q1 FY2022 Form 10-Q
Business context and reporting period. The quarter ended November 30, 2021, compared with the quarter ended November 30, 2020. CMC manufactures, recycles and fabricates steel and metal products through its North America and Europe segments.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1.982 billion | $1.392 billion | +42% |
| Earnings from continuing operations | $232.9 million | $63.9 million | +264% |
| Diluted EPS from continuing operations | $1.90 | $0.53 | Up $1.37 |
| Adjusted EBITDA, continuing operations | $314.0 million | $143.6 million | +119% |
| Operating cash flow | $25.8 million | $(12.1) million | Improved $37.9 million |
- Cost of goods sold was $1.586 billion; gross profit was approximately $395.4 million, or 20.0% of sales, compared with $217.0 million, or 15.6%, in the prior-year quarter.
- Net earnings were $232.9 million, versus $64.1 million, including $0.2 million from discontinued operations in the prior-year period. The effective tax rate on continuing operations fell to 11.0% from 25.3%, primarily due to recognition of a capital loss on a tax restructuring transaction.
- North America sales were $1.654 billion and adjusted EBITDA was $268.5 million, compared with $1.195 billion and $155.6 million. Europe sales were $329.1 million and adjusted EBITDA was $79.8 million, compared with $194.6 million and $14.5 million.
- Cash and cash equivalents were $415.1 million at November 30, down from $497.7 million at August 31, 2021. Current assets were $2.786 billion and current liabilities were $892.1 million.
- Total debt outstanding, net of issuance costs, was $1.065 billion, including $56.9 million current; long-term debt was $1.008 billion. The $400 million revolving credit facility was undrawn, with $397.0 million available after letters of credit. CMC reported compliance with debt covenants.
- Capital expenditures were $70.2 million. Cash dividends were $17.0 million, and cash used to repurchase treasury stock was $5.3 million. The company repurchased 159,500 shares at an average $33.28 per share.
Material changes and management commentary
- Management attributed higher sales chiefly to rising selling prices across product lines amid strong end-market demand; shipment volumes were relatively flat overall. Higher selling prices outpaced increased scrap and other input costs, expanding metal and raw-material margins.
- North America steel-products shipments declined 7%, partly reflecting the absence of production from the former Rancho Cucamonga mill; downstream shipments rose 8%. Europe steel-products shipments declined 8%, primarily due to scheduled maintenance.
- Europe adjusted EBITDA included a $15.5 million energy credit, with no comparable credit in the prior-year quarter. Europe results also faced an unfavorable $3.0 million foreign-exchange impact.
- Operating cash flow was supported by higher earnings but offset by $252.3 million of cash use from changes in operating assets and liabilities, mainly reflecting rising scrap prices and higher inventory. Management reported operating working-capital days decreased four days year over year.
- SG&A rose $9.0 million, including higher labor costs and $3.2 million of acquisition-related costs. Interest expense declined $3.2 million, largely due to lower-rate debt.
Outlook, risks and unusual items
- CMC estimated FY2022 capital spending of $475 million to $525 million, subject to change. It announced plans in January 2022 to construct a fourth U.S. micro mill; construction is expected to take roughly two years after site selection and required approvals.
- Management said cash, operating cash flows and available liquidity should fund operations, capital expenditures, dividends and opportunistic repurchases for at least the next 12 months. The filing does not provide a specific earnings or sales forecast.
- After quarter-end, CMC completed the sale of the Rancho Cucamonga and adjacent fabrication-facility assets on December 28, 2021, for $313.0 million gross proceeds, subject to customary adjustments. Expenses related to the closures were immaterial in the quarter; the prior-year quarter included $8.0 million of related expenses.
- CMC agreed on December 3, 2021, to acquire Tensar for $550.0 million in cash, subject to customary adjustments and closing conditions, with closing expected in the first half of calendar 2022. The deal was not contingent on financing.
- Key risks identified include steel-industry cyclicality and demand, metal and energy price volatility, supply and input-cost pressures, foreign-exchange movements, environmental and litigation matters, acquisition and new-mill execution, and COVID-19 uncertainty. Management said it could not reasonably estimate COVID-19’s long-term effects. Accrued environmental liabilities were $5.2 million; the company did not believe pending legal proceedings would materially affect its financial condition or results.
Important facts for investors to verify
- Whether elevated steel selling prices and margins persist as scrap, freight, energy and other input costs change.
- How working-capital and inventory needs affect cash conversion despite higher reported earnings.
- Whether the $15.5 million Europe energy credit is nonrecurring and how it affects comparisons.
- Completion, final proceeds and use of proceeds from the Rancho Cucamonga asset sale; and the timing, final cost and financing impact of the Tensar acquisition.
- Execution, cost and expected returns for the Mesa and planned fourth micro mill, alongside the $475 million–$525 million FY2022 capital-spending estimate.
- Share-repurchase pace and capital allocation following the $350 million authorization; $344.7 million remained available at November 30, 2021.