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, 2020 (the "2020 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 was 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 Item 2 of this Form 10-Q and in the section entitled "Risk Factors" in Item 1A of the 2020 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 "corresponding period" relates to the
three or six month period ended
COVID-19 UPDATE
We continue to closely monitor the impact of the COVID-19 pandemic ("COVID-19")
on the Company, employees, customers and supply chain. While COVID-19 may have a
negative impact on our results of operations, cash flows and financial position,
the current level of uncertainty over the economic and operational impacts of
COVID-19, the actions to contain the outbreak or treat its impact, and the
timing of distribution of COVID-19 vaccines and the economic response thereto
means the related financial impact cannot be reasonably estimated at this time.
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 2020 Form 10-K.
RESULTS OF OPERATIONS SUMMARY
Business Overview
As a vertically integrated organization, we manufacture, recycle and fabricate
steel and metal products, related materials and services through a network
including seven electric arc furnace ("EAF") mini mills, two EAF micro mills, a
rerolling mill, steel fabrication and processing plants, construction-related
product warehouses, and metal recycling facilities in the U.S. and Poland . Our
operations are conducted through two reportable segments: North America and
Europe .
When considering our results for the period, we evaluate our operating
performance by comparing net sales, in the aggregate and for both of our
segments, in the current period to net sales in the corresponding period. In
doing so, we focus on changes in average selling price per ton and tons shipped
for each of our product categories as these are the two variables that typically
have the greatest impact on our results of operations. We group our products
into three categories: raw materials, steel products and downstream products.
Raw materials include ferrous and nonferrous scrap, steel products include
rebar, merchant and other steel products, such as billets and wire rod, and
downstream products include fabricated rebar and steel fence post.
We use adjusted EBITDA from continuing operations to compare and evaluate the
financial performance of our segments. Adjusted EBITDA is the sum of the
Company's earnings from continuing operations before interest expense, income
taxes, depreciation and amortization and impairment expense. Although there are
many factors that can impact a segment's adjusted EBITDA and, therefore, our
overall earnings, changes in metal margin of our steel products and downstream
products period-over-period is a consistent area of focus for our Company and
industry. Metal margin is an important metric used by
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management to monitor the results of our vertically integrated organization. For
our steel products, metal margin is the difference between the average selling
price per ton of rebar, merchant and other steel products and the cost of
ferrous scrap per ton utilized by our steel mills to produce these products. An
increase or decrease in input costs can impact profitability of these products
when there is no corresponding change in selling prices due to competitive
pressures on prices. The metal margin for our downstream products is the
difference between the average selling price per ton of fabricated rebar and
steel fence post products and the cost of material utilized by our fabrication
facilities to produce these products. The majority of our downstream products
selling prices per ton are fixed at the beginning of a project and these
projects last one to two years on average. Because the selling price generally
remains fixed over the life of a project, changes in input costs over the life
of the project can significantly impact profitability.
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
February 28 ,
2021 2020 2021 2020
Net sales $ 1,462,270 $
1,340,963
66,233 63,596 130,144 146,351
Diluted earnings per share $ 0.54 $
0.53
Net sales for the three and six months endedFebruary 28, 2021 increased$121.3 million , or 9%, and$128.4 million , or 5%, respectively, compared to the corresponding periods. The increases were primarily due to year-over-year increases in raw materials average selling prices in ourNorth America segment and in steel products average selling prices in both of our segments. Earnings from continuing operations for the three and six months endedFebruary 28, 2021 increased$2.6 million and decreased$16.2 million , respectively, compared to the corresponding periods. Earnings in the three months endedFebruary 28, 2021 were relatively flat while earnings in the six months endedFebruary 28, 2021 were impacted by compressed metal margins in the first quarter of 2021 as a result of rising raw material average selling prices while steel products and downstream products average selling prices decreased or remained flat. In the second quarter of 2021, steel products average selling prices, and therefore metal margins, began to increase to offset the higher raw material prices. Selling, General and Administrative Expenses Selling, general and administrative expenses were relatively flat for the three and six months endedFebruary 28, 2021 compared to the corresponding periods.
Interest Expense
Interest expense for the three and six months endedFebruary 28, 2021 decreased$1.9 million and$4.2 million , respectively, compared to the corresponding periods. The decreases were driven by a reduction in long-term debt, primarily due to the early repayment of the Term Loan (as defined in Note 10, Credit Arrangements, to the consolidated financial statements in the 2020 Form 10-K) in the year endedAugust 31, 2020 .
Income Taxes
The effective income tax rate from continuing operations for the three and six months endedFebruary 28, 2021 was 24.0% and 24.6%, respectively, compared with 26.4% and 25.5% in the corresponding periods. SEGMENT OPERATING DATA Unless otherwise indicated, all dollar amounts below are from continuing operations and calculated before income taxes. See Note 14, Business Segments to our condensed consolidated financial statements for more information. The operational data presented in the tables below is calculated using averages and, therefore, it is not meaningful to quantify the effect that any individual component had on the segment's net sales or adjusted EBITDA. 23 --------------------------------------------------------------------------------
North America Three Months Ended Six Months Ended February 28, February 29, February 28, February 29, (in thousands) 2021 2020 2021 2020 Net sales$ 1,257,486 $ 1,161,283 $ 2,452,499 $ 2,378,003 Adjusted EBITDA 171,612 152,831 327,246 327,563 External tons shipped (in thousands) Raw materials 302 321 632 641 Rebar 472 461 958 936 Merchant and other 268 238 532 474 Steel products 740 699 1,490 1,410 Downstream products 343 366 714 779 Average selling price (per ton) Steel products$ 695 $ 625 $ 653 $ 625 Downstream products 929 984 931 979 Cost of ferrous scrap utilized per ton$ 344 $
256
351 369 349 387
Net sales for the three and six months ended February 28, 2021 increased $96.2
million , or 8%, and $74.5 million , or 3%, respectively, compared to the
corresponding periods. The year-over-year increases in net sales were primarily
due to $251 and $162 per ton increases in raw materials average selling prices
and $70 and $28 per ton increases in steel products average selling prices in
the three and six months ended February 28, 2021 , respectively, compared to the
corresponding periods. Heightened demand from steel producers resulted in higher
raw materials average selling prices which drove increases in steel products
average selling prices. The increases in net sales as a result of these higher
average selling prices were partially offset by $55 and $48 per ton
year-over-year decreases in downstream products average selling prices in the
three and six months ended February 28, 2021 , respectively. Net sales included
amortization benefit of $1.5 million and $3.0 million for the three and six
months ended February 28, 2021 , respectively, and $6.0 million and $14.3 million
for the corresponding periods, respectively, related to the acquired unfavorable
contract backlog.
Adjusted EBITDA for the three months ended February 28, 2021 increased $18.8
million and was flat for the six months ended February 28, 2021 , compared to the
corresponding periods. The year-over-year increase in adjusted EBITDA in the
three months ended February 28, 2021 was due in part to a 41 thousand ton
increase in steel products shipped and significant expansion in raw materials
margin. Further, while our steel products metal margin per ton for the three
months ended February 28, 2021 contracted $18 per ton compared to the
corresponding period, this operating statistic does not fully reflect the margin
achieved throughout the period. In times of sharply rising raw material costs
and steel products average selling prices, we benefit from selling lower cost
inventory produced in prior periods. Adjusted EBITDA did not include the $1.5
million or $3.0 million benefit of the amortization of the acquired unfavorable
contract backlog reserve described above. Adjusted EBITDA included non-cash
stock compensation expense of $3.8 million and $7.1 million for the three and
six months ended February 28, 2021 , respectively, and $2.7 million and $5.6
million for the corresponding periods.
24
--------------------------------------------------------------------------------Europe Three Months Ended Six Months Ended February 28, February 29, February 28, February 29, (in thousands) 2021 2020 2021 2020 Net sales$ 202,066 $ 180,079 $ 396,662 $ 345,468 Adjusted EBITDA 16,107 13,451 30,577 24,810 External tons shipped (in thousands) Rebar 78 145 206 267 Merchant and other 275 235 544 451 Steel products 353 380 750 718 Average selling price (per ton) Steel products$ 532 $
449
Cost of ferrous scrap utilized per ton$ 328 $ 251 $ 296 $ 248 Steel products metal margin per ton 204 198 199 207 Net sales for the three and six months endedFebruary 28, 2021 increased$22.0 million , or 12%, and$51.2 million , or 15%, respectively, compared to the corresponding periods. For the three months endedFebruary 28, 2021 , the year-over-year increase in net sales was driven by a$83 per ton increase in steel products average selling prices, partially offset by a 27 thousand ton decrease in steel products shipped. The year-to-date increase in net sales was driven by a 32 thousand ton year-over-year increase in steel products shipments, as demand increased in the first quarter of 2021 due to a resilient Polish construction sector and an upturn in Central European manufacturing activity, coupled with a$40 per ton year-over-year increase in steel products average selling prices. Net sales for the three and six months endedFebruary 28, 2021 were also impacted by favorable foreign currency translation adjustments of$8.3 million and$13.0 million , respectively, due to the decrease in the average value of theU.S. dollar relative to the Polish zloty. Adjusted EBITDA for the three and six months endedFebruary 28, 2021 increased$2.7 million and$5.8 million , respectively, as compared to the corresponding periods. For the three months endedFebruary 28, 2021 , the year-over-year increase in adjusted EBITDA was due, in part, to a$6 per ton increase in steel products metal margin compared to the corresponding period. Similar to theNorth America segment, we benefited from selling lower cost inventory during the majority of the three month period endedFebruary 28, 2021 in an environment of rising prices, which contributed to the increase in adjusted EBITDA compared to the corresponding period. For the six months endedFebruary 28, 2021 , the increase in adjusted EBITDA was primarily due to a 32 thousand ton increase in steel products sold in comparison to the corresponding period. The impact of foreign currency translation to adjusted EBITDA in the three and six months endedFebruary 28, 2021 was immaterial. Adjusted EBITDA included non-cash stock compensation expense of$0.7 million and$1.4 million for the three and six months endedFebruary 28, 2021 , respectively, and$0.3 million and$0.8 million for the corresponding periods.
Corporate and Other
Corporate and Other reported adjusted EBITDA loss of$46.0 million and$72.5 million for the three and six months endedFebruary 28, 2021 , respectively, as compared to adjusted EBITDA loss of$28.6 million and$54.8 million in the corresponding periods. The primary reason for the increases in adjusted EBITDA loss year-over-year was the$16.8 million loss on debt extinguishment incurred in the three and six months endedFebruary 28, 2021 , with no such costs in the corresponding periods. Adjusted EBITDA included non-cash stock compensation expense of$8.2 million and$13.3 million for the three and six months endedFebruary 28, 2021 , respectively, and$4.6 million and$9.4 million for the corresponding periods, respectively. 25 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
Our cash flows from operating activities result primarily from the sale of steel, nonferrous metals and related products. We have a diverse and generally stable customer base, and regularly maintain a substantial amount of accounts receivable. We record allowances for the accounts receivable we estimate will not be collected based on market conditions, customers' financial condition, and other factors. Historically, these allowances have not been material. We use credit insurance internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit-insured receivables (and those covered by export letters of credit) was approximately 14% of total trade receivables atFebruary 28, 2021 . From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy prices. See Note 9, Derivatives, for further information. The table below reflects our sources, facilities and available liquidity atFebruary 28, 2021 . See Note 8, Credit Arrangements, for additional information. (in thousands) Total Facility Availability Cash and cash equivalents$ 367,347 $ 367,347 Notes due from 2023 to 2031 930,000 * Revolver 350,000 346,958 U.S. accounts receivable facility 200,000 193,291 Poland credit facilities 73,459 72,601 Poland accounts receivable facility 58,767 53,425 Poland Term Loan 66,781 26,712
_________________
* We believe we have access to additional financing and refinancing, if needed.
Cash Flows Operating Activities Net cash flows from operating activities were$1.2 million for the six months endedFebruary 28, 2021 compared to$253.4 million for the six months endedFebruary 29, 2020 . We had a$16.7 million year-over-year decrease in net earnings and a$222.9 million year-over-year increase in cash used by operating assets and liabilities ("working capital"). The increase in cash used by working capital was primarily due to increases in inventory value in the six months endedFebruary 28, 2021 compared to the corresponding period, coupled with an increase in accounts receivable which reflects the higher average selling prices in the six months endedFebruary 28, 2021 , compared to a decrease in accounts receivable in the corresponding period. For continuing operations, operating working capital days decreased ten days year-over-year. Investing Activities Net cash flows used by investing activities were$67.4 million and$91.5 million for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The$24.1 million decrease in net cash flows used by investing activities was due to an$8.9 million year-over-year decline in capital expenditures, a$9.9 million year-over-year decline in acquisitions and a$6.3 million year-over-year increase in cash proceeds from the sale of property, plant and equipment and other in the six months endedFebruary 28, 2021 compared to the corresponding period. We estimate that our 2021 capital spending will range from$200 million to$225 million . We regularly assess our capital spending based on current and expected results and the amount is subject to change. Financing Activities Net cash flows used by financing activities were$109.1 million and$122.1 million for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. We had net debt repayments of$61.5 million in the six months endedFebruary 28, 2021 , compared to net debt repayments of$91.2 million in the corresponding period. In addition, we paid$13.1 million of debt extinguishment costs related to our early retirement of the 2026 Notes in the six months endedFebruary 28, 2021 . 26 -------------------------------------------------------------------------------- COVID-19 has not had a material impact on our operations to date, and our cash and cash equivalents position remains strong at$367.3 million as ofFebruary 28, 2021 . We anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements for the next twelve months. 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. CONTRACTUAL OBLIGATIONS Our contractual obligations atFebruary 28, 2021 decreased by approximately$20.5 million fromAugust 31, 2020 , primarily due to a decrease in long-term debt and interest payable, offset by an increase in purchase obligations. Our estimated contractual obligations for the twelve months endingFebruary 28, 2022 are approximately$512.0 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 28, 2021 , we had committed$23.7 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.
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--------------------------------------------------------------------------------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 and organic growth provided by acquisitions and strategic investments, demand for our products, metal margins, the effect of COVID-19 and related governmental and economic responses thereto, the ability to operate our steel 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 2020 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; •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 downstream contracts due to rising commodity pricing; •impacts from COVID-19 on the economy, demand for our products and on our operations, including the responses of governmental authorities to contain COVID-19 and the impact from the distribution of various COVID-19 vaccines; •excess capacity in our industry, particularly inChina , and product availability from competing steel mills and other steel suppliers including import quantities and pricing; •compliance with and changes in existing and future government laws, regulations and other legal requirements and judicial decisions that govern our business, including increased environmental regulations 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; •operating and start-up risks, as well as market risks associated with the commissioning of new projects could prevent us from realizing anticipated benefits and could result in a loss of all or a substantial part of our investment; •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, such as trade measures, military conflicts and political uncertainties, including the impact of the 2020 U.S. election on current trade regulations, such as Section 232 trade tariffs, tax legislation and other regulations which might adversely impact our business; 28
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•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; and •civil unrest, protests and riots. You should refer to the "Risk Factors" disclosed in our periodic and current reports filed with theSEC 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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