Business context and reporting period
Commercial Metals Company (CMC) filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended November 30, 2023. CMC supplies steel, recycled metals, fabricated products and construction-related solutions, principally in the U.S. and Central Europe. The quarter is compared with the three months ended November 30, 2022.
CMC reorganized its reporting into North America Steel Group, Europe Steel Group and Emerging Businesses Group; prior segment figures were recast. The change did not affect consolidated financial statements. Peter R. Matt became CEO on September 1, 2023, succeeding Barbara R. Smith, who became Executive Chairman.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $2.003 billion | $2.227 billion |
| Net earnings | $176.3 million | $261.8 million |
| Diluted EPS | $1.49 | $2.20 |
| Adjusted EBITDA | $305.6 million | $402.7 million |
| Operating cash flow | $261.1 million | $372.4 million |
| Capital expenditures | $67.0 million | $133.1 million |
Sales fell 10% and net earnings fell 33% year over year. Cost of goods sold was $1.604 billion versus $1.719 billion. Gross margin, calculated as sales less cost of goods sold divided by sales, was approximately 19.9%, versus 22.8%. Adjusted EBITDA margin, calculated on the same sales basis, was approximately 15.3%, versus 18.1%. Interest expense declined to $11.8 million from $13.0 million; the effective tax rate was 21.6%, versus 22.7%.
Segment adjusted EBITDA was $266.8 million in North America Steel Group (down from $349.8 million), $38.9 million in Europe Steel Group (down from $61.2 million), and $30.9 million in Emerging Businesses Group (versus $31.4 million). Corporate and Other reported a $31.0 million loss, compared with a $39.7 million loss.
At November 30, 2023, cash and cash equivalents were $704.6 million, total debt was $1.164 billion, and long-term debt was $1.120 billion. The $600 million revolving credit facility was undrawn, with $599.1 million available; CMC reported compliance with its debt covenants. Total assets were $6.695 billion and stockholders’ equity was $4.230 billion. CMC paid $18.7 million in dividends and repurchased 621,643 shares for $28.4 million during the quarter.
Material changes and management commentary
- North America Steel Group sales declined 4%. Steel-product average selling prices fell 13%, while steel-product shipments increased; steel-product metal margin per ton declined 21%, primarily reflecting lower selling prices and slightly higher scrap costs.
- Europe Steel Group sales fell 42%, reflecting a 20% decline in steel-product prices and a 27% decline in shipments amid weaker demand and delayed construction starts. Metal margin per ton fell 37%; scrap cost per ton was approximately flat.
- CMC recognized $66.3 million of European government assistance, principally addressing energy and related costs, versus $9.5 million in the prior-year quarter. This supported European results despite weaker prices and volumes.
- Emerging Businesses Group sales rose 4%, partly due to $12.7 million of sales from CMC Anchoring Systems, acquired in 2023. Adjusted EBITDA was broadly flat.
- Operating cash flow decreased by $111.3 million year over year, reflecting lower earnings and less cash provided by operating assets and liabilities. Investing cash outflow was lower mainly because the prior-year quarter included acquisitions and higher capital spending.
Outlook, risks and contingencies
CMC estimated fiscal 2024 capital spending of $550 million to $600 million and said current cash, operating cash flows and available liquidity should fund operations, capital expenditures, dividends and opportunistic repurchases for at least the next 12 months. The third Arizona micro mill entered service in the fourth quarter of fiscal 2023; initial rebar production began during commissioning, with merchant-bar production expected to start in early calendar 2024. CMC is also building a fourth micro mill in West Virginia.
Management highlighted risks from cyclical construction and steel demand, import competition, metal-price and margin volatility, energy and raw-material costs, foreign exchange, geopolitical and supply-chain disruptions, project start-up execution, regulation, cybersecurity and acquisition integration. CMC stated the Ukraine invasion had no direct material adverse effect in the quarter, but continued to monitor indirect impacts. It reported no material changes to previously disclosed risk factors and no pending legal proceedings expected to have a material adverse effect. Accrued environmental liabilities were $3.7 million; estimates may change as remediation conditions evolve.
Undiscounted purchase obligations were approximately $740 million due within 12 months and $340 million thereafter. These include normal operating commitments as well as capital projects. CMC noted that results for this quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether European government assistance continues, and how European demand, prices and steel margins develop.
- Whether North American steel selling prices and metal margins stabilize, including the effects of imports and scrap prices.
- Progress, commissioning costs and expected returns for the Arizona and West Virginia micro mills, alongside the $550–$600 million fiscal 2024 capital-spending estimate.
- Cash conversion and working-capital trends, and the company’s capacity to meet purchase, lease and debt obligations while maintaining dividends and repurchases.
- Performance and integration of acquired businesses, particularly CMC Anchoring Systems, and growth and profitability in Emerging Businesses.
- Effects of the reporting-segment reorganization on comparisons; prior segment data was recast, while consolidated results were unchanged.