Commercial Metals Company (CMC) — FY2020 Form 10-K
Reporting period: Fiscal year ended August 31, 2020. The filing also reports the fiscal fourth quarter ended August 31, 2020; this is not a calendar-year Q4 report. CMC manufactures, recycles and fabricates metal products, principally in the U.S. and Poland. Its reportable segments are North America and Europe.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $5.476 billion | $5.829 billion |
| Earnings from continuing operations | $278.3 million | $198.8 million |
| Diluted EPS from continuing operations | $2.31 | $1.67 |
| Adjusted EBITDA from continuing operations | $576.6 million | $424.1 million |
| Cash flow from operating activities | $791.2 million | $37.0 million |
| Capital expenditures | $187.6 million | $138.8 million |
- Net sales fell 6%; earnings from continuing operations rose 40%. Gross profit was approximately $944.8 million, or 17.3% of sales, versus $803.5 million, or 13.8%, in FY2019.
- At August 31, 2020, cash and cash equivalents were $542.1 million, total debt outstanding was $1.084 billion, total assets were $4.082 billion and stockholders’ equity was $1.889 billion. Cash less debt was approximately $541.6 million.
- The $350 million revolving facility was undrawn, with $347.0 million available. Management said available cash, operating cash flow and liquidity sources were expected to meet requirements for the next 12 months. The company was in compliance with its debt covenants.
- Annual dividends remained $0.48 per share. No shares were repurchased in FY2020.
- Fiscal Q4: Net sales were $1.409 billion, continuing-operations earnings were $67.8 million and diluted continuing-operations EPS was $0.56, compared with $1.543 billion, $85.9 million and $0.72, respectively, in fiscal Q4 2019.
Material changes versus prior period
- North America sales declined 5% to $4.770 billion, while adjusted EBITDA increased to $661.2 million from $456.3 million. The principal earnings driver was wider downstream-products margins: many fabrication projects had fixed selling prices while input costs fell. Steel-products margin per ton declined to $380 from $397.
- Europe sales declined 14% to $699.1 million and adjusted EBITDA fell to $62.0 million from $100.1 million. Lower steel selling prices, margin compression and unfavorable currency translation weighed on results. A $10.7 million carbon credit partly offset the decline.
- Consolidated sales were lower chiefly because of reduced North American raw-material shipments and lower steel selling prices. North America shipped 433,000 fewer tons of raw materials year over year; steel-product shipments increased partly because FY2020 included two additional months of acquired-business shipments.
- FY2019 included only ten months of results from the 2018 Gerdau acquisition; FY2020 included a full year, limiting direct comparability.
- Operating cash flow increased sharply, but the comparison is affected by receivables-program accounting and substantial working-capital movements. FY2020 benefited from lower inventory and receivables balances; FY2019 included $367.5 million of receivables-program collections classified as investing cash flow.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management estimated FY2021 capital spending of $200 million to $225 million.
- CMC announced a new micro mill in Mesa, Arizona, expected to start up in 2023, replacing higher-cost rebar capacity at Rancho Cucamonga, which the company intends to sell. A third rolling mill in Poland was expected to start up in late 2021.
- Management reported limited operational impact from COVID-19 through FY2020, but warned that further effects on demand, pricing, customers, suppliers, projects and liquidity remained uncertain and could not then be reasonably estimated.
- Unusual items included a $32.1 million charge for an acquisition-related working-capital adjustment, recorded after the measurement period; $7.6 million of asset impairments; and $9.8 million of severance, pension-curtailment and vendor-termination costs associated with the Rancho Cucamonga plan. FY2020 revenue also included $29.4 million of acquired unfavorable-contract-backlog amortization benefit; this was excluded from adjusted EBITDA.
- Key risks include steel-industry cyclicality and imports, volatile scrap and energy prices, environmental compliance and remediation, COVID-19 uncertainty, customer credit and contract defaults, currency exposure, equipment outages, and execution of capital projects and integration initiatives.
- CMC reported $3.4 million of accrued environmental liabilities, including $0.7 million related to CERCLA sites, and identified itself as a potentially responsible party at multiple sites. Management stated it had made adequate provisions and did not expect pending proceedings to have a material adverse effect, while noting estimates may change.
- The audited financial statements received an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of August 31, 2020.
Important facts for investors to verify
- Whether the large operating-cash-flow increase is repeatable after the favorable working-capital movements and accounting comparability effects.
- Whether North America’s downstream-products margin benefit persists as fixed-price project backlogs turn over and input prices change.
- Europe’s exposure to steel imports, selling-price pressure, scrap costs and Polish zloty movements.
- Funding, timing and expected returns for the Mesa micro mill and Poland rolling mill, alongside forecast FY2021 capital spending.
- Debt maturities, covenant headroom and liquidity needs under weaker market or COVID-19 scenarios.
- Potential changes in environmental, legal and remediation exposures, which management says are subject to estimation uncertainty.