COMMERCIAL METALS COMPANY In the following discussion, references to "we," "us," "our" or the "Company" meanCommercial Metals Company ("CMC") and its consolidated subsidiaries, unless the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto, which are included in this Quarterly Report on Form 10-Q (the "Form 10-Q"), and our consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the year endedAugust 31, 2019 (the "2019 Form 10-K"). This discussion contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this Form 10-Q is filed with theSecurities and Exchange Commission ("SEC") or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled "Forward-Looking Statements" at the end of this Item 2 of this Form 10-Q and in the section entitled "Risk Factors" in Item 1A of the 2019 Form 10-K and this Form 10-Q. We do not undertake any obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law. Any reference in this Form 10-Q to the "comparable period" or "corresponding period" relates to the relevant three-month or six-month period endedFebruary 28, 2019 . CRITICAL ACCOUNTING POLICIES There have been no material changes to our critical accounting policies as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the 2019 Form 10-K.
RESULTS OF OPERATIONS SUMMARY
Business Overview
As a vertically integrated organization, we manufacture, recycle and market
steel and metal products, related materials and services through a network
including seven electric arc furnace ("EAF") mini mills, two EAF micro mills,
two rerolling mills, steel fabrication and processing plants,
construction-related product warehouses, and metal recycling facilities in the
United States ("U.S.") and Poland . On November 5, 2018 , the Company completed
the acquisition (the "Acquisition") of 33 rebar fabrication facilities in the
U.S. , as well as four EAF mini mills located in Knoxville, Tennessee ;
Jacksonville, Florida ; Sayreville, New Jersey and Rancho Cucamonga, California
from Gerdau S.A., hereinafter collectively referred to as the "Acquired
Businesses." Our operations are conducted through four reportable segments:
Americas Recycling , Americas Mills, Americas Fabrication and International Mill .
Financial Results Overview
The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations.
Three Months Ended Six Months Ended
(in thousands, except per share data)February 29, 2020
$ 1,340,963
63,596 14,928 146,351 34,348
Diluted earnings per share $ 0.53 $ 0.13 $ 1.22 $ 0.29
Net sales for the three and six months ended February 29, 2020 decreased $61.8
million , or 4%, and increased $45.5 million , or 2%, respectively, compared to
the corresponding periods in 2019. For the three months ended February 29, 2020 ,
net sales decreased year-over-year in our Americas Recycling , Americas Mills and
Americas Fabrication segments primarily due to a reduction in the ferrous scrap
pricing environment, a decrease in average selling prices per ton and a decrease
in tons shipped, respectively. These decreases were partially offset by an
increase in year-over-year net sales in our International Mill segment due to an
increase in tons shipped. Year-to-date net sales increased year-over-year in our
Americas Mills and Americas
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Fabrication segments primarily due to an increase in tons shipped in both
segments, coupled with an increase in average selling prices per ton in our
Americas Fabrication segment, as a result of strong demand in our core markets
and two additional months of shipments from the Acquired Businesses. These
increases were partially offset by decreases in year-over-year net sales in our
Americas Recycling segment, due to continued reductions in the ferrous scrap
pricing environment and constrained scrap flow, and in our International Mill
segment due to a decrease in average selling prices per ton.
Earnings from continuing operations for the three and six months ended
February 29, 2020 increased $48.7 million and $112.0 million , respectively, from
the comparable periods in 2019. The increase was primarily driven by
year-over-year expansion in second quarter and year-to-date metal margins in our
Americas Fabrication segment, an increase in second quarter tons shipped in our
Americas Mills segment and an increase in year-to-date tons shipped in our
Americas Fabrication and Americas Mills segments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and six months ended
February 29, 2020 increased $16.8 million and $11.1 million , respectively, from
the comparable periods in 2019. For the three months ended February 29, 2020 ,
the year-over-year increase primarily related to a $24.2 million increase in
employee-related expenses, partially offset by $1.5 million , $1.3 million and
$1.2 million decreases in professional services, rent, and insurance expense,
respectively. The year-to-date increase was driven primarily by a $46.6 million
year-over-year increase in employee-related expenses, partially offset by a
$26.1 million year-over-year decrease in professional fees and legal expenses,
primarily related to the Acquisition. In addition, there was a $4.9 million
increase in gains on the sale of fixed assets in the six months ended
February 29, 2020 , compared to the corresponding period.
Interest Expense
Interest expense for the three and six months endedFebruary 29, 2020 decreased$2.6 million and$2.7 million , respectively, compared to the corresponding periods in 2019. The year-over-year decreases were the result of a decrease in interest payable on long-term debt due to a decline in the floating LIBOR market, coupled with total prepayments of$200 million on the Term Loan (as defined in Note 8, Credit Arrangements) over the past four quarters.
Income Taxes
Our effective income tax rate from continuing operations for the three and six months endedFebruary 29, 2020 was 26.4% and 25.5%, respectively, compared with 54.9% and 40.9% in the corresponding periods in 2019. The decrease in the effective income tax rate is primarily attributable to discrete tax expense recorded during the second quarter of 2019 as a result of the Tax Cuts and Jobs Act. SEGMENT OPERATING DATA Unless otherwise indicated, all dollar amounts below are from continuing operations and calculated before income taxes. See Note 14, Business Segments. The operational data presented in the tables below is calculated using averages and, therefore, it is not meaningful to quantify the effect that any individual component had on the segment's net sales or adjusted EBITDA. 23 --------------------------------------------------------------------------------
Americas Recycling Three Months Ended Six Months Ended February 29, February 28, February 29, (in thousands) 2020 2019 2020 February 28, 2019 Net sales$ 248,084 $ 287,075 $ 470,345 $ 589,084 Adjusted EBITDA 5,754 10,124 9,171 25,558
Average selling price (per ton)
Ferrous$ 226 $ 266 $ 204 $ 269 Nonferrous 2,044 1,998 2,014 1,990 Tons shipped (in thousands) Ferrous 519 570 1,011 1,149 Nonferrous 58 59 115 122 Total 577 629 1,126 1,271 Net sales for the three and six months endedFebruary 29, 2020 decreased$39.0 million , or 14%, and$118.7 million , or 20%, respectively, as compared to the corresponding periods in 2019. For the three and six months endedFebruary 29, 2020 , the primary drivers for the year-over-year decreases in net sales were lower average ferrous selling prices and ferrous tons shipped due to a declining price environment which also constrained scrap flows as there was less scrap available to purchase while prices were falling. Average ferrous selling prices per ton decreased approximately 15% and 24%, respectively, and ferrous tons shipped decreased approximately 9% and 12%, respectively, for the three and six months endedFebruary 29, 2020 , in relation to the comparable periods. Adjusted EBITDA for the three and six months endedFebruary 29, 2020 decreased$4.4 million and$16.4 million , respectively, as compared to the corresponding periods in 2019, as the declining price environment compressed margins and constrained scrap flows, as discussed above. Conversion costs increased approximately$4 and$7 per ton in the three and six months endedFebruary 29, 2020 , respectively, as compared to the corresponding periods in 2019, due to decreased production levels. Adjusted EBITDA included non-cash stock compensation expense of$0.4 million and$0.8 million for the three and six months endedFebruary 29, 2020 , respectively, and$0.3 million and$0.6 million for the comparable periods. Americas Mills Three Months Ended Six Months Ended February 29, February 28, (in thousands) 2020 2019 February 29, 2020 February 28, 2019 Net sales$ 732,040 $ 774,709 $ 1,500,933 $ 1,376,562 Adjusted EBITDA 125,691 112,396 280,716 226,269 Average price (per ton) Total selling price$ 606 $ 677 $ 608 $ 677 Cost of ferrous scrap utilized 256 303 238 305 Metal margin 350 374 370 372 Tons (in thousands) Melted 1,117 1,126 2,299 2,035 Rolled 1,084 1,045 2,239 1,889 Shipped 1,147 1,095 2,353 1,942 Net sales for the three and six months endedFebruary 29, 2020 decreased$42.7 million , or 6%, and increased$124.4 million , or 9%, respectively, as compared to the corresponding periods in 2019. For the three months endedFebruary 29, 2020 , the decrease in year-over-year net sales was due to a 10% decrease in average selling prices per ton, partially offset by an increase of 52 thousand tons shipped. Despite a 10% decrease in year-over-year average selling prices per ton in the six months endedFebruary 29, 2020 , year-to-date net sales increased due to an increase of 411 thousand tons shipped as a result of continued 24 --------------------------------------------------------------------------------
strength in our core markets and two additional months of shipments from the Acquired Businesses, as well as targeted merchant bar growth opportunities.
Adjusted EBITDA for the three and six months endedFebruary 29, 2020 increased$13.3 million and$54.4 million , respectively, as compared to the corresponding periods in 2019. The year-over-year increases in adjusted EBITDA for the three and six months endedFebruary 29, 2020 were due, in part, to increased shipments in both periods year-over-year. Although there were metal margin compressions of 6% and 1% during the three and six months endedFebruary 29, 2020 , respectively, the impact was offset by 6% and 4% year-over-year decreases, respectively, in conversion costs as a result of increased production levels and synergies from the integration of the Acquired Businesses. Adjusted EBITDA included non-cash stock compensation expense of$1.7 million and$3.5 million for the three and six months endedFebruary 29, 2020 , respectively, and$1.1 million and$2.3 million for the comparable periods. Americas Fabrication Three Months Ended Six Months Ended February 29, February 28, (in thousands) 2020 2019 February 29, 2020 February 28, 2019 Net sales$ 511,748 $ 530,836 $ 1,083,595 $ 967,947 Adjusted EBITDA 16,060 (49,578) 33,541 (86,574) Average selling price (excluding stock and buyout sales) (per ton) Rebar and other$ 984 $ 845 $ 979 $ 856 Tons shipped (in thousands) Rebar and other 366 396 779 715 Net sales for the three and six months endedFebruary 29, 2020 decreased$19.1 million , or 4%, and increased$115.6 million , or 12%, respectively, as compared to the corresponding periods in 2019. The year-over-year decrease in net sales for the three months endedFebruary 29, 2020 was driven by an approximately 8% decrease in tons shipped, partially offset by a 16% increase in average selling prices per ton. The year-over-year increase in net sales for the six months endedFebruary 29, 2020 was driven by 9% and 14% year-over-year increases in tons shipped and average selling prices per ton, respectively. Tons shipped increased year-over-year due, in part, to two additional months of shipments related to the Acquired Businesses. Net sales included amortization benefit of$6.0 million and$14.3 million for the three and six months endedFebruary 29, 2020 , respectively, and$23.5 million and$34.8 million for the comparable periods, respectively, related to the unfavorable contract backlog of the Acquired Businesses. Adjusted EBITDA for the three and six months endedFebruary 29, 2020 increased$65.6 million and$120.1 million , respectively, as compared to the corresponding periods in 2019. The primary driver for the year-over-year increases in adjusted EBITDA for the three and six months endedFebruary 29, 2020 was metal margin expansion due to increased average selling prices per ton, as discussed above, and decreased input and conversion costs. Adjusted EBITDA does not include the$6.0 million or$14.3 million benefit of the amortization of the unfavorable contract backlog reserve described above. Adjusted EBITDA included non-cash stock compensation expense of$0.6 million and$1.3 million for the three and six months endedFebruary 29, 2020 , respectively, and$0.4 million and$1.1 million for the comparable periods. 25 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 29, February 28, February 29,
(in thousands) 2020 2019 2020 February 28, 2019
Net sales $ 180,079 $ 175,198 $ 345,468 $ 402,222
Adjusted EBITDA 13,451 20,537 24,810 53,316
Average price (per ton)
Total selling price $ 449 $ 545 $ 455 $ 546
Cost of ferrous scrap utilized 251 301 248 298
Metal margin 198 244 207 248
Tons (in thousands)
Melted 393 375 738 767
Rolled 333 298 675 561
Shipped 380 304 718 696
Net sales for the three and six months ended February 29, 2020 increased $4.9
million , or 3%, and decreased $56.8 million , or 14%, respectively, as compared
to the corresponding periods in 2019. For the three months ended February 29,
2020 , the year-over-year increase in net sales was driven by an approximately
25% year-over-year increase in tons shipped due to strong demand in the Polish
construction sector, partially offset by an approximately 18% year-over-year
decrease in average selling prices per ton primarily due to elevated import
levels. The year-over-year decrease in year-to-date net sales was primarily
driven by an approximately 17% year-over-year decrease in average selling prices
per ton. Net sales for the three and six months ended February 29, 2020 were
also impacted by unfavorable foreign currency translation adjustments of
approximately $4.2 million and $11.5 million , respectively, due to the increase
in the average value of the U.S. dollar relative to the Polish zloty.
Adjusted EBITDA for the three and six months ended February 29, 2020 decreased
$7.1 million and $28.5 million , respectively, as compared to the corresponding
periods in 2019, primarily driven by $46 per ton, or 19%, and $41 per ton, or
17%, year-over-year decreases in metal margins, respectively. Elevated import
levels in the third quarter of calendar 2019 saturated the market, resulting in
lower average selling prices per ton and compressed margins. Adjusted EBITDA
included non-cash stock compensation expense of $0.3 million and $0.8 million
for the three and six months ended February 29, 2020 , respectively, and $0.2
million and $0.3 million for the comparable periods. Foreign currency
translation impact to adjusted EBITDA for the three and six months
ended February 29, 2020 was immaterial.
Corporate and Other
Corporate and Other reported adjusted EBITDA losses of$23.2 million and$50.7 million for the three and six months endedFebruary 29, 2020 , respectively, as compared to adjusted EBITDA losses of$24.1 million and$83.7 million in the corresponding periods. For the three months endedFebruary 29, 2020 , adjusted EBITDA was relatively flat on a year-over-year basis. For the six months endedFebruary 29, 2020 , the decrease in adjusted EBITDA loss was primarily driven by a$27.9 million year-over-year decrease in professional fees and legal expenses incurred primarily due to the Acquisition in 2019. Adjusted EBITDA included non-cash stock compensation expense of$4.6 million and$9.4 million for the three and six months endedFebruary 29, 2020 , respectively, and$3.7 million and$5.7 million for the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, we record allowances as soon as we believe accounts are uncollectible. We use credit insurance inPoland to mitigate the risk of customer insolvency. We estimate that the amount of credit insured receivables (and those covered by export letters of credit) was approximately 13% of total trade receivables atFebruary 29, 2020 . 26 -------------------------------------------------------------------------------- The table below reflects our sources, facilities and available liquidity atFebruary 29, 2020 : (in thousands) Total Facility Availability Cash and cash equivalents$ 232,442 $ 232,442 Notes due from 2023 to 2027 980,000 * Revolver 350,000 346,962 U.S. accounts receivable facility 200,000 169,009 Term Loan 110,125 - Poland credit facilities 70,046 58,005 Poland accounts receivable facility 56,037 42,670
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* We believe we have access to additional financing and refinancing, if needed.
Cash Flows Operating Activities Our cash flows from operating activities result primarily from the sale of steel, nonferrous metals and related products. We have a diverse and generally stable customer base. From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy prices. See Note 9, Derivatives, for further information. Net cash flows from operating activities were$253.4 million for the six months endedFebruary 29, 2020 compared to$352.9 million of net cash flows used by operating activities for the comparable period in 2019. Due to the adoption of Accounting Standards Update 2016-15 onSeptember 1, 2018 as described in Note 7, Accounts Receivable Programs of the 2019 Form 10-K,$367.5 million of cash collections of theU.S. andPoland accounts receivable facilities were reflected in investing activities in 2019. In addition, for the six months endedFebruary 29, 2020 , the Company had a$113.6 million year-over-year increase in net earnings, a$30.4 million year-over-year increase in deferred income taxes and a$65.1 million year-over-year decrease in cash used by operating assets and liabilities ("working capital"). For continuing operations, operating working capital days decreased five days year-over-year. Investing Activities Net cash flows used by investing activities were$91.5 million and$393.1 million for the six months endedFebruary 29, 2020 and the comparable period in 2019, respectively. Cash used by investing activities in the six months endedFebruary 29, 2020 was lower than the comparable period primarily due to cash used for the Acquisition in 2019 of$701.2 million , as described in Note 2, Changes in Business, partially offset by$367.5 million in cash collections of theU.S. andPoland accounts receivable facilities in 2019, as described above. We estimate that our 2020 capital spending will range from$160 million to$185 million . We regularly assess our capital spending based on current and expected results. Financing Activities Net cash flows used by financing activities were$122.1 million for the six months endedFebruary 29, 2020 compared to net cash flows from financing activities of$181.8 million for the comparable period in 2019. During the six months endedFebruary 29, 2020 , we had net debt repayments of$91.2 million , as compared to net borrowings of$212.8 million in the corresponding period which was used to fund the Acquisition. At this time, the coronavirus ("COVID-19") has not had a material impact on our operations, and we anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. 27 -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS Our contractual obligations atFebruary 29, 2020 decreased by approximately$157.8 million fromAugust 31, 2019 , primarily due to decreases in long-term debt, unconditional purchase obligations and interest obligations. Our estimated contractual obligations for the twelve months endingFebruary 28, 2021 are approximately$391.7 million and primarily consist of expenditures incurred in connection with normal business operations.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that governmental agencies, our insurance providers and suppliers request. AtFebruary 29, 2020 , we had committed$27.4 million under these arrangements, of which$3.0 million reduced availability under the Revolver. OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. CONTINGENCIES
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. See Note 13, Commitments and Contingencies, for more information. FORWARD-LOOKING STATEMENTS This Form 10-Q contains or incorporates by reference a number of "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies provided by our recent acquisitions, demand for our products, steel margins, the effect of COVID-19 and related governmental and economic responses thereto, the ability to operate our mills at full capacity, future supplies of raw materials and energy for our operations, share repurchases, legal proceedings, the undistributed earnings of our non-U.S. subsidiaries,U.S. non-residential construction activity, international trade, capital expenditures, our liquidity and our ability to satisfy future liquidity requirements, estimated contractual obligations and our expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements. Our forward-looking statements are based on management's expectations and beliefs as of the time this Form 10-Q is filed with theSEC or, with respect to any document incorporated by reference, as of the time such document was prepared. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or any other changes. Important factors that could cause actual results to differ materially from our expectations include those described in Part I, Item 1A, Risk Factors, of the 2019 Form 10-K as well as the following:
•changes in economic conditions which affect demand for our products or construction activity generally, and the impact of such changes on the highly cyclical steel industry;
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•rapid and significant changes in the price of metals, potentially impairing our
inventory values due to declines in commodity prices or reducing the
profitability of our fabrication contracts due to rising commodity pricing;
•impacts from COVID-19 on the economy, demand for our products or our
operations, including the responses of governmental authorities to contain
COVID-19;
•excess capacity in our industry, particularly in China , and product
availability from competing steel mills and other steel suppliers including
import quantities and pricing;
•compliance with and changes in environmental laws and regulations, including
increased regulation associated with climate change and greenhouse gas
emissions;
•involvement in various environmental matters that may result in fines,
penalties or judgments;
•potential limitations in our or our customers' abilities to access credit and
non-compliance by our customers with our contracts;
•activity in repurchasing shares of our common stock under our repurchase
program;
•financial covenants and restrictions on the operation of our business contained
in agreements governing our debt;
•our ability to successfully identify, consummate and integrate acquisitions and
the effects that acquisitions may have on our financial leverage;
•risks associated with acquisitions generally, such as the inability to obtain,
or delays in obtaining, required approvals under applicable antitrust
legislation and other regulatory and third party consents and approvals;
•lower than expected future levels of revenues and higher than expected future
costs;
•failure or inability to implement growth strategies in a timely manner;
•impact of goodwill impairment charges;
•impact of long-lived asset impairment charges;
•currency fluctuations;
•global factors, including trade measures, political uncertainties and military
conflicts;
•availability and pricing of electricity, electrodes and natural gas for mill
operations;
•ability to hire and retain key executives and other employees;
•competition from other materials or from competitors that have a lower cost
structure or access to greater financial resources;
•information technology interruptions and breaches in security;
•ability to make necessary capital expenditures;
•availability and pricing of raw materials and other items over which we exert
little influence, including scrap metal, energy and insurance;
•unexpected equipment failures;
•losses or limited potential gains due to hedging transactions;
•litigation claims and settlements, court decisions, regulatory rulings and
legal compliance risks;
•risk of injury or death to employees, customers or other visitors to our
operations;
•new and clarifying guidance with regard to interpretation of certain provisions
of the Tax Cuts and Jobs Act that could impact our assessment; and
•increased costs related to health care reform legislation.
You should refer to the "Risk Factors" disclosed in our periodic and current
reports filed with the SEC for specific risks which would cause actual results
to be significantly different from those expressed or implied by these
forward-looking statements. It is not possible to identify all of the risks,
uncertainties and other factors that may affect future results. In light of
these risks and uncertainties, the forward-looking events and circumstances
discussed herein may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements. Accordingly,
readers of this Form 10-Q are cautioned not to place undue reliance on the
forward-looking statements.
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