In the following discussion, references to "we," "us," "our" or the "Company" mean
Commercial 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 ended August 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 the Securities 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 sections entitled "Risk Factors" in Part I, Item 1A of our 2020 Form 10-K and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended February 28, 2021. 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” refers to the period of three or nine months ended.
The impact of the COVID-19 pandemic ("COVID-19" or "pandemic") on our operations, including supply chain disturbances, continued to subside during the three months ended
May 31, 2021. Demand for our products in the end-use markets we serve has increased during the three and nine months ended May 31, 2021compared to the corresponding periods. We continue to evaluate the nature and extent of future impacts of the evolving pandemic on our operations and are complying with applicable state and local law and are taking into consideration relevant guidance, including the guidelines of the U.S. Centers for Disease Controland other authorities, to prioritize the health and safety of our employees, families, suppliers, customers and communities. Given the dynamic and uncertain nature and duration of the pandemic, we cannot reasonably estimate the long-term impact of COVID-19 on our business, results of operations and overall financial performance 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 our 2020 Form 10-K.
SUMMARY OF OPERATIONAL RESULTS
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 Americaand 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. 22 --------------------------------------------------------------------------------
Key performance indicators
Adjusted EBITDA from continuing operations ("adjusted EBITDA") is used by management to compare and evaluate the period-over-period underlying business operational 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 a metric used by 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 scrap input costs 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 analysis of our operating results is based on our continuing operations.
Three Months Ended May 31, Nine Months Ended May 31, (in thousands, except per share data) 2021 2020 2021 2020 Net sales
Profit from continuing operations
130,408 64,169 260,552 210,520 Diluted earnings per share $ 1.07
$ 0.53$ 2.14 $ 1.75Net sales for the three and nine months ended May 31, 2021increased $503.4 million, or 38%, and $631.8 million, or 16%, respectively, compared to the corresponding periods. The growth in net sales is largely attributable to increased demand across multiple product lines, which resulted in higher volumes of raw materials in our North Americasegment and higher volumes of steel products in both of our segments compared to the corresponding periods, which were negatively impacted by COVID-19 restrictions. Additionally, net sales for the three and nine months ended May 31, 2021continued to be affected by rising scrap prices, which have favorably impacted quarter-over-quarter and year-over-year average selling prices for raw materials in our North Americasegment and for steel products in both of our segments. In the third quarter of 2021, we achieved earnings from continuing operations of $130.4 million, an increase of $66.2 million, or 103%, compared to the corresponding period, driven largely by increased volumes of raw materials and steel products and expansion of raw materials margin per ton and steel products metal margin per ton. Earnings from continuing operations in the nine months ended May 31, 2021increased $50.0 million, or 24%, year-over-year, due to increased volumes and raw materials margin per ton in our North Americasegment and higher volumes of steel products in both of our segments due to strong demand in our end-use markets.
Selling, general and administrative expenses
Selling, general and administrative expenses increased
$14.5 millionand $17.0 millionfor the three and nine months ended May 31, 2021, respectively, compared to the corresponding periods. The increases were driven primarily by increases in labor-related expenses in the three and nine months ended May 31, 2021, offset by reduced travel-related expenses in the nine months ended May 31, 2021.
Interest expense for the three and nine months ended
May 31, 2021decreased $3.4 millionand $7.6 million, respectively, compared to the corresponding periods. The decreases were driven in part by the lower interest rate on the 2031 Notes, which were outstanding during the three months ended May 31, 2021, compared to the interest rate on the 2026 Notes, which were outstanding during the corresponding period. This decrease was coupled with a reduction in long-term debt, due primarily to the early repayment of the Term Loan (as defined in Note 10, Credit Arrangements, to the consolidated financial statements in our 2020 Form 10-K) in the year ended August 31, 2020. 23 --------------------------------------------------------------------------------
The effective income tax rate from continuing operations for the three and nine months ended
May 31, 2021was 22.6% and 23.7%, respectively, compared with 27.1% and 26.0% in the corresponding periods. The decreases are primarily due to a reduction of state income taxes combined with the effects of higher pre-tax earnings in the current year compared to the corresponding period. 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. North AmericaThree Months Ended May 31, Nine Months Ended May 31, (in thousands) 2021 2020 2021 2020 Net sales $ 1,558,068 $ 1,167,081 $ 4,010,567 $ 3,545,084Adjusted EBITDA 207,330 159,394 534,576 486,957 External tons shipped (in thousands) Raw materials 368 288 1,000 929 Rebar 500 463 1,458 1,399 Merchant and other 289 211 821 685 Steel products 789 674 2,279 2,084 Downstream products 408 427 1,122 1,206 Average selling price (per ton) Steel products $ 794 $ 624$ 702 $ 625Downstream products 963 966 943 976 Cost of ferrous scrap utilized per ton $ 369
Metal margin of steel products per tonne
425 385 375 387 Net sales for the three and nine months ended
May 31, 2021increased $391.0 million, or 34%, and $465.5 million, or 13%, respectively, compared to the corresponding periods. The year-over-year increases in net sales were primarily due to increased demand in our end-use markets for steel products driven by greater construction and industrial activity in the three months ended May 31, 2021compared to the prior year, which was impacted by COVID-19 restrictions. Additionally, rising scrap prices led to sharp per ton increases in raw materials average selling prices in the three and nine months ended May 31, 2021, and $170and $77per ton increases in steel products average selling prices in the three and nine months ended May 31, 2021, respectively, compared to the corresponding periods. Average selling prices for downstream products, however, do not reflect similar per ton increases, as such prices were largely driven by projects that were contracted prior to the steep escalation of input costs. Net sales included amortization benefit of $1.5 millionand $4.5 millionfor the three and nine months ended May 31, 2021, respectively, and $4.4 millionand $18.7 millionfor the corresponding periods, respectively, related to the acquired unfavorable contract backlog. Adjusted EBITDA for the three and nine months ended May 31, 2021increased $47.9 million, or 30%, and $47.6 million, or 10%, respectively, compared to the corresponding periods. The year-over-year increase in adjusted EBITDA in the three months ended May 31, 2021was due primarily to expansion of raw materials margin per ton and steel products metal margin per ton, coupled with an 80 thousand ton increase in raw materials shipped and a 115 thousand ton increase in steel products shipped. During the nine months ended May 31, 2021, shipments of raw materials and steel products increased by 8% and 9%, respectively, and raw materials margin per ton increased by 33% compared to the corresponding period. These increases were partially offset by declines in shipments of downstream products, driven in part by delays in domestic construction activity due to heavy rainfall in several of our key markets during the three and nine months ended May 31, 2021compared to the 24 -------------------------------------------------------------------------------- corresponding periods. Adjusted EBITDA did not include the $1.5 millionor $4.5 millionbenefit of the amortization of the acquired unfavorable contract backlog reserve described above. Adjusted EBITDA included non-cash stock compensation expense of $3.4 millionand $10.5 millionfor the three and nine months ended May 31, 2021, respectively, and $2.9 millionand $8.5 millionfor the corresponding periods. Europe Three Months Ended May 31, Nine Months Ended May 31, (in thousands) 2021 2020 2021 2020 Net sales $ 284,107 $ 173,817 $ 680,769 $ 519,285Adjusted EBITDA 50,005 14,270 80,582 39,080 External tons shipped (in thousands) Rebar 141 122 347 389 Merchant and other 263 252 807 703 Steel products 404 374 1,154 1,092 Average selling price (per ton) Steel products $ 664 $
Cost of ferrous scrap utilized per ton $ 376 $
$ 239 324
Metal margin of steel products per tonne
288 198 228 204 Net sales for the three and nine months ended
May 31, 2021increased $110.3 million, or 63%, and $161.5 million, or 31%, respectively, compared to the corresponding periods. The increases were driven largely by growing demand for steel products from both construction and industrial end markets and a continued upturn in Central European manufacturing activity, along with increases in steel products average selling prices of $227and $103per ton during the three and nine months ended May 31, 2021, respectively, compared to the corresponding periods. Net sales for the three and nine months ended May 31, 2021were also impacted by favorable foreign currency translation adjustments of $22.6 millionand $35.6 million, respectively, due to the decrease in the average value of the U.S.dollar relative to the Polish zloty. Adjusted EBITDA for the three and nine months ended May 31, 2021increased $35.7 million, or 250%, and $41.5 million, or 106%, respectively, as compared to the corresponding periods. The primary driver of the increase in adjusted EBITDA was an expansion in steel products metal margin per ton. During the third quarter of 2021, steel products metal margin per ton increased 45% compared to the third quarter of 2020, contributing to a year-to-date increase in steel products metal margin per ton of 12% during the nine months ended May 31, 2021compared to the corresponding period. Adjusted EBITDA for the three and nine months ended May 31, 2021included favorable foreign currency exchange rate impacts of $4.1 millionand $5.1 million, respectively. Adjusted EBITDA included non-cash stock compensation expense of $0.8 millionand $2.2 millionfor the three and nine months ended May 31, 2021, respectively, and $0.3 millionand $1.1 millionfor the corresponding periods. Corporate and Other Corporate and Other reported adjusted EBITDA loss of $36.2 millionand $108.7 millionfor the three and nine months ended May 31, 2021, respectively, as compared to adjusted EBITDA loss of $26.9 millionand $81.7 millionin the corresponding periods. The primary reason for the increase in the year-to-date adjusted EBITDA loss was the $16.8 millionloss on debt extinguishment incurred in the nine months ended May 31, 2021, with no such cost in the corresponding period. Additionally, adjusted EBITDA included non-cash stock compensation expense of $9.6 millionand $22.9 millionfor the three and nine months ended May 31, 2021, respectively, compared to $3.0 millionand $12.4 millionfor the corresponding periods, respectively. The increase in non-cash stock compensation expense fluctuated in line with the increase in our stock price as of May 31, 2021compared to the corresponding period. 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 15% of total trade receivables at
May 31, 2021. 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 at May 31, 2021. See Note 8, Credit Arrangements, for additional information. (in thousands) Total Facility Availability Cash and cash equivalents $ 443,120 $ 443,120Notes due from 2023 to 2031 930,000 * Revolver 400,000 396,958 U.S. accounts receivable facility 150,000 150,000 Poland credit facilities 68,258 66,314 Poland accounts receivable facility 60,067 25,706 Poland Term Loan 54,606 -
* We believe we have access to additional financing and refinancing, if necessary.
Cash Flows Operating Activities Net cash flows from operating activities were
$94.2 millionfor the nine months ended May 31, 2021compared to $531.8 millionfor the nine months ended May 31, 2020. Net earnings increased by $48.7 millionyear-over-year, offset by a $459.2 millionyear-over-year net increase in cash used by operating assets and liabilities ("working capital"). Rising scrap prices and greater inventory levels drove increases in both inventory and, to a lesser extent, accounts payable in the nine months ended May 31, 2021compared to the corresponding period, and higher average selling prices increased accounts receivable in the nine months ended May 31, 2021compared to the corresponding period. The increases in working capital were partially offset by an eleven day decrease in continuing operations operating working capital days year-over-year. Investing Activities Net cash flows used by investing activities were $104.0 millionand $128.9 millionfor the nine months ended May 31, 2021and 2020, respectively. The $24.9 milliondecrease in net cash flows used by investing activities was primarily caused by changes in acquisition and disposition activity, which resulted in a $9.9 millionyear-over-year decline in acquisitions and an $11.8 millionyear-over-year increase in cash proceeds from the sale of property, plant and equipment and other in the nine months ended May 31, 2021compared to the corresponding period. We estimate that our 2021 capital spending will range from $200 millionto $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 $88.2 millionand $132.7 millionfor the nine months ended May 31, 2021and 2020, respectively. Net cash flows used by financing activities decreased as a result of net proceeds from accounts receivable facilities of $27.6 millionin the nine months ended May 31, 2021, compared to no such proceeds in the corresponding period, along with a reduction in net long-term debt repayments, which totaled $52.7 millionin the nine months ended May 31, 2021compared to $87.9 millionin the corresponding period. Partially offsetting these reductions in net cash flows used by financing activities, we paid $13.1 millionof debt extinguishment costs related to our early retirement of the 2026 Notes in the nine months ended May 31, 2021. 26 -------------------------------------------------------------------------------- Our cash and cash equivalents position remains strong at $443.1 millionas of May 31, 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, 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 at May 31, 2021increased by approximately $72.5 millionfrom August 31, 2020, primarily due to an increase in purchase obligations and advance payments outstanding under the Polandaccounts receivable facility, offset by a decrease in long-term debt and interest payable. Our estimated contractual obligations for the twelve months ending May 31, 2022are approximately $614.5 millionand 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. At
May 31, 2021, we had committed $24.8 millionunder these arrangements, of which $3.0 millionreduced availability under the Revolver. OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that could have a significant current or future impact 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. 27 --------------------------------------------------------------------------------
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 availability and cost of 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. The statements in this report that are not historical statements, are forward-looking statements. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "future," "intends," "may," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases, as well as by discussions of strategy, plans, or intentions. Our forward-looking statements are based on management's expectations and beliefs as of the time this Form 10-Q is filed with the SECor, 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 our 2020 Form 10-K and Part II, Item 1A, Risk Factors of our Quarterly Report on Form 10-Q for the period ended February 28, 2021, 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, global supply chain 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 in China, 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; 28
•global factors, such as trade measures, military conflicts and political uncertainties, including the impact of the Biden administration on current trade regulations, such as Section 232 trade tariffs, tax legislation and other regulations which might adversely impact our business; •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 the
SECfor specific risks which would cause actual results to be significantly different from those expressed or implied by these forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. Accordingly, readers of this Form 10-Q are cautioned not to place undue reliance on any forward-looking statements.
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