Commercial Metals Company — FY2021 Q2 Form 10-Q
Business context and period: CMC manufactures, recycles and fabricates steel and metal products through its North America and Europe segments. This filing covers the three and six months ended February 28, 2021; comparisons are with the periods ended February 29, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,462.3 | $1,341.0 | $2,854.1 | $2,725.7 |
| Continuing-operations earnings | $66.2 | $63.6 | $130.1 | $146.4 |
| Diluted EPS from continuing operations | $0.54 | $0.53 | $1.07 | $1.22 |
| Adjusted EBITDA, continuing operations | $141.7 | $137.7 | $285.4 | $297.5 |
| Operating cash flow | Not provided by quarter in this filing | $1.2 | $253.4 |
Q2 gross profit was $233.9 million, approximately 16.0% of sales, versus $217.9 million and 16.2% a year earlier. Six-month gross profit was $450.9 million, approximately 15.8% of sales, versus $456.1 million and 16.7%. Q2 net earnings, including discontinued operations, were $66.4 million versus $63.8 million; six-month net earnings were $130.5 million versus $147.1 million.
Q2 segment adjusted EBITDA was $171.6 million in North America and $16.1 million in Europe, offset by a $46.0 million Corporate and Other loss. For six months, North America generated $327.2 million and Europe $30.6 million, with Corporate and Other at a $72.5 million loss.
Balance sheet, debt and liquidity
At February 28, 2021, cash and cash equivalents were $367.3 million, current assets $2,205.6 million and current liabilities $674.1 million. Total assets were $4,064.0 million and equity was $2,009.5 million. Reported debt carrying value was $1,033.8 million, including $22.8 million current and $1,011.0 million long-term; total debt including finance leases before debt issuance costs was $1,042.6 million.
CMC had no borrowings under its $350 million revolving facility; $347.0 million was available after letters of credit. Disclosed available capacity also included $193.3 million under the U.S. receivables facility, $72.6 million under Polish credit facilities, $53.4 million under the Polish receivables facility and $26.7 million under the Poland term loan. Management stated cash, operating cash flows and available liquidity should meet requirements for the next 12 months. The company was in compliance with debt covenants.
Material changes and unusual items
- Q2 sales rose 9% year over year and six-month sales rose 5%, primarily on higher raw-material selling prices in North America and higher steel-product prices in both segments.
- Six-month continuing earnings fell $16.2 million. Management attributed first-quarter pressure to compressed metal margins as raw-material prices rose faster than steel and downstream selling prices; it said steel prices and margins began to improve in Q2.
- Q2 included a $16.8 million loss on extinguishment of debt. CMC issued $300 million of 3.875% notes due 2031 and retired its 5.750% 2026 notes. Interest expense declined year over year.
- Operating cash flow fell sharply to $1.2 million, mainly due to a $238.5 million working-capital cash use, reflecting higher inventory values and receivables. Cash declined $175.6 million from the start of the six-month period.
- Net sales included acquired unfavorable-contract-backlog amortization benefits of $1.5 million in Q2 and $3.0 million year to date, below the respective prior-year benefits of $6.0 million and $14.3 million.
Outlook, risks and contingencies
CMC estimated FY2021 capital spending of $200–$225 million, subject to change. Management said COVID-19 had not materially affected operations to date, but its future financial impact could not be reasonably estimated. The company highlighted risks from cyclical demand, metal-price volatility and margin pressure, COVID-19, imports and industry capacity, energy and raw-material availability, currency movements, and customer credit access. New-project risks include commissioning Poland’s third rolling mill and the Mesa, Arizona micro mill, where cost overruns or start-up problems could impair expected benefits or investment.
Environmental liabilities totaled $6.8 million at February 28, 2021, up from $3.4 million at August 31, 2020. Management said provisions were adequate and pending legal matters were not expected to have a material adverse effect; it cautioned that estimates and ultimate remediation costs may vary. The filing reported no environmental proceedings meeting its $1 million monetary-sanctions disclosure threshold.
Important facts for investors to verify
- Whether steel selling prices continue to catch up with raw-material costs and sustain the Q2 margin improvement.
- Whether working-capital investment reverses and operating cash flow recovers from the six-month low.
- Execution, costs, timing and expected returns for the Poland rolling mill and Mesa micro mill projects.
- Actual FY2021 capital spending versus the $200–$225 million estimate, and liquidity needs if market conditions deteriorate.
- Potential changes in environmental remediation costs, COVID-19 impacts and other disclosed commodity, demand and operating risks.