☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware
75-0725338
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
6565 N. MacArthur Blvd., Irving, Texas75039
(Address of Principal Executive Offices) (Zip Code)
(214)689-4300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
CMC
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of March 22, 2022, 121,495,868 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the year ended August 31, 2021 (the "2021 Form 10-K") filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission (the "SEC") and include all normal recurring adjustments necessary to present fairly the condensed consolidated balance sheets and the condensed consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the consolidated financial statements and notes included in the 2021 Form 10-K. The results of operations for the three and six month periods are not necessarily indicative of the results to be expected for the full fiscal year. Any reference in this Form 10-Q to the "corresponding period" relates to the relevant three or six month period ended February 28, 2021.
Any reference in this Form 10-Q to a year refers to the fiscal year ended August 31st of that year, unless otherwise noted.
Recently Issued Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard is effective for annual periods beginning after December 15, 2022, including interim periods therein, with early adoption permitted. The guidance will be applied prospectively to acquisitions occurring on or after the effective date. The Company will continue to evaluate the impact of this guidance, which will depend on the contract assets and liabilities acquired in future business combinations.
In November 2021, the Financial Accounting Standards Board issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance. ASU 2021-10 aims to increase the transparency of government assistance through the disclosure of the types of assistance, an entity's accounting for the assistance and the effect of the assistance on an entity's financial statements. This standard is effective for annual periods beginning after December 15, 2021, with early adoption permitted. The Company will continue to evaluate the impact of this guidance based on government assistance received.
NOTE 2. CHANGES IN BUSINESS
Pending Acquisition
On December 3, 2021, the Company signed a definitive agreement to acquire TAC Acquisition Corp. ("Tensar"), a portfolio company of Castle Harlan Inc.’s fund, Castle Harlan Partners V, L.P., and a leading global provider of engineered solutions for subgrade reinforcement and soil stabilization used in road, infrastructure and commercial construction projects. The transaction is expected to close during the third quarter of 2022, and is subject to the satisfaction or waiver of customary closing conditions, including customary regulatory review. Upon closing, the Company will pay a cash purchase price of approximately $550.0 million, subject to customary purchase price adjustments. The transaction is not contingent on any financing arrangements.
Facility Closure and Disposition
In October 2019, the Company closed the melting operations at its Rancho Cucamonga facility, which was part of the North America segment, and in August 2020, the Company announced plans to sell the facility. Additionally, in September 2021, the Company ceased operations at a rebar fabrication facility adjacent to the Rancho Cucamonga facility. Due to these closures, the Company recorded $5.4 million and $13.4 million of expenses in the three and six months ended February 28, 2021 related to asset impairments, severance, pension curtailment, environmental obligations and vendor agreement terminations. Expenses
recorded in the three and six months ended February 28, 2022 were immaterial. The closures did not meet the criteria for discontinued operations.
As of August 31, 2021, the associated assets of the Rancho Cucamonga facility and the adjacent rebar fabrication facility ("the Rancho Cucamonga facilities"), comprised of property, plant and equipment, net, met the criteria for classification as held for sale. As such, the Company classified $24.9 million within assets held for sale in the Company's consolidated balance sheets as of August 31, 2021.
On September 29, 2021, the Company entered into a definitive agreement to sell the assets associated with the Rancho Cucamonga facilities. On December 28, 2021, the sale of the Rancho Cucamonga facilities was completed for gross proceeds of $313.0 million. A portion of the gross proceeds amounting to $39.0 million were set aside in a restricted cash account to facilitate the purchase of like-kind assets. In January 2022, the Company used $7.5 million of the restricted cash on a purchase of a like-kind asset. The remaining balance of $31.5 million was included in restricted cash as of February 28, 2022.
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
Three Months Ended February 28, 2022
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, December 1, 2021
$
(145,368)
$
40,966
$
(927)
$
(105,329)
Other comprehensive income (loss) before reclassifications
(14,461)
41,044
(8)
26,575
Reclassification for gain (1)
—
(6,536)
—
(6,536)
Income tax (expense) benefit
—
(6,588)
2
(6,586)
Net other comprehensive income (loss)
(14,461)
27,920
(6)
13,453
Balance, February 28, 2022
$
(159,829)
$
68,886
$
(933)
$
(91,876)
Six Months Ended February 28, 2022
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, September 1, 2021
$
(105,680)
$
21,781
$
(921)
$
(84,820)
Other comprehensive income (loss) before reclassifications
(54,149)
68,518
(16)
14,353
Reclassification for gain (1)
—
(10,325)
—
(10,325)
Income tax (expense) benefit
—
(11,088)
4
(11,084)
Net other comprehensive income (loss)
(54,149)
47,105
(12)
(7,056)
Balance, February 28, 2022
$
(159,829)
$
68,886
$
(933)
$
(91,876)
Three Months Ended February 28, 2021
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, December 1, 2020
$
(96,321)
$
(10,224)
$
(4,510)
$
(111,055)
Other comprehensive income (loss) before reclassifications
1,465
9,535
(14)
10,986
Reclassification for gain (1)
—
(320)
—
(320)
Income tax expense
—
(1,751)
—
(1,751)
Net other comprehensive income (loss)
1,465
7,464
(14)
8,915
Balance, February 28, 2021
$
(94,856)
$
(2,760)
$
(4,524)
$
(102,140)
Six Months Ended February 28, 2021
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, September 1, 2020
$
(87,933)
$
(11,334)
$
(4,497)
$
(103,764)
Other comprehensive income (loss) before reclassifications
(6,923)
10,972
(34)
4,015
Reclassification for gain (1)
—
(387)
—
(387)
Income tax (expense) benefit
—
(2,011)
7
(2,004)
Net other comprehensive income (loss)
(6,923)
8,574
(27)
1,624
Balance, February 28, 2021
$
(94,856)
$
(2,760)
$
(4,524)
$
(102,140)
_________________
(1) Reclassifications for gains on derivatives included in net earnings are recorded in cost of goods sold in the condensed consolidated statements of earnings.
Each fabricated product contract sold by the North America segment represents a single performance obligation. Revenue from contracts where the Company provides fabricated product and installation services is recognized over time using an input measure, and these contracts represented 8% and 9% of net sales in the North America segment in the three and six months ended February 28, 2022, respectively, and 11% and 12% of net sales in the North America segment in the three and six months ended February 28, 2021, respectively. Revenue from contracts where the Company does not provide installation services is recognized over time using an output measure, and these contracts represented 8% and 9% of net sales in the North America segment in the three and six months ended February 28, 2022, respectively, and 9% of net sales in the North America segment in the three and six months ended February 28, 2021. Remaining net sales in the North America segment were recognized at a point in time concurrent with the transfer of control, or as amounts were billed to the customer under an available practical expedient.
The following table provides information about assets and liabilities from contracts with customers:
(in thousands)
February 28, 2022
August 31, 2021
Contract assets (included in accounts receivable)
$
61,884
$
64,168
Contract liabilities (included in accrued expenses and other payables)
25,302
23,948
The amount of revenue reclassified from August 31, 2021 contract liabilities during the six months ended February 28, 2022 was approximately $16.8 million.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of fabricated product contracts where revenue is recognized using an input or output measure for which work has not yet been performed. As of February 28, 2022, $805.9 million was allocated to remaining performance obligations in the North America segment related to those contracts.
NOTE 5. INVENTORIES, NET
The majority of the Company's inventories are in the form of semi-finished and finished goods. Under the Company’s business model, products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. As such, at February 28, 2022 and August 31, 2021, work in process inventories were immaterial. At February 28, 2022 and August 31, 2021, the Company's raw materials inventories were $319.2 million and $286.1 million, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill by reportable segment at February 28, 2022 is detailed in the following table:
(in thousands)
North America
Europe
Consolidated
Goodwill, gross (1)
$
71,941
$
4,014
$
75,955
Accumulated impairment (1)
(10,036)
(144)
(10,180)
Goodwill, net (1)
$
61,905
$
3,870
$
65,775
_________________
(1) The change in balance from August 31, 2021 was immaterial.
The total gross carrying amounts of the Company's intangible assets subject to amortization were $20.2 million and $21.7 million, and the total net carrying amounts were $8.7 million and $10.1 million at February 28, 2022 and August 31, 2021, respectively. These assets were included in other noncurrent assets on the Company's condensed consolidated balance sheets. Amortization expense from continuing operations related to such intangible assets was immaterial for the three and six months ended February 28, 2022 and 2021. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives at February 28, 2022.
The following table presents the components of the total leased assets and lease liabilities and their classification in the Company's condensed consolidated balance sheets:
(in thousands)
Classification in Condensed Consolidated Balance Sheets
February 28, 2022
August 31, 2021
Assets:
Operating assets
Other noncurrent assets
$
113,446
$
112,202
Finance assets
Property, plant and equipment, net
54,793
55,308
Total leased assets
$
168,239
$
167,510
Liabilities:
Operating lease liabilities:
Current
Accrued expenses and other payables
$
28,229
$
26,433
Long-term
Other noncurrent liabilities
93,272
93,409
Total operating lease liabilities
121,501
119,842
Finance lease liabilities:
Current
Current maturities of long-term debt and short-term borrowings
16,639
16,040
Long-term
Long-term debt
33,762
36,104
Total finance lease liabilities
50,401
52,144
Total lease liabilities
$
171,902
$
171,986
The components of lease expense were as follows:
Three Months Ended February 28,
Six Months Ended February 28,
(in thousands)
2022
2021
2022
2021
Operating lease expense
$
8,748
$
8,651
$
17,332
$
17,373
Finance lease expense:
Amortization of assets
3,219
3,219
6,454
6,458
Interest on lease liabilities
498
563
1,012
1,118
Total finance lease expense
3,717
3,782
7,466
7,576
Variable and short-term lease expense
4,989
4,324
10,151
9,286
Total lease expense
$
17,454
$
16,757
$
34,949
$
34,235
The weighted average remaining lease term and discount rate for operating and finance leases are presented in the following table:
The Company's credit arrangements require compliance with certain non-financial and financial covenants, including an interest coverage ratio and a debt to capitalization ratio. At February 28, 2022, the Company was in compliance with all covenants contained in its credit arrangements.
Senior Notes Activity
In January 2022, the Company issued $300.0 million of 4.125% Senior Notes due January 2030 (the "2030 Notes") and $300.0 million of 4.375% Senior Notes due March 2032 (the "2032 Notes"). Aggregate issuance costs associated with the 2030 Notes and 2032 Notes were approximately $9.4 million. Interest on the 2030 Notes is payable semiannually on January 15 and July 15. Interest on the 2032 Notes is payable semiannually on March 15 and September 15.
In July 2017, the Company issued $300.0 million of 5.375% Senior Notes due July 2027 (the “2027 Notes”). In February 2022, the Company redeemed all of the 2027 Notes and recognized a $16.1 million loss on debt extinguishment.
Series 2022 Bonds
In February 2022, the Company announced the issuance of $145.1 million in original aggregate principal amount of tax-exempt bonds (the “Series 2022 Bonds”) by the Industrial Development Authority of the County of Maricopa (the "MCIDA"). The Series 2022 Bonds were priced to yield 3.5% and provided gross proceeds of $150.0 million. The proceeds were loaned to the Company pursuant to a loan agreement between the Company and the MCIDA, and will be used to fund a portion of the acquisition, construction, equipping and/or operation, as applicable, of the Company’s third micro mill, to be located in Mesa, Arizona. Proceeds from the Series 2022 Bonds are being held in a trust account and will be disbursed as qualified expenditures are made for the construction of the micro mill. As of February 28, 2022, $31.0 million of proceeds were disbursed from the trust account. Remaining proceeds from the Series 2022 Bonds were recorded as restricted cash in the condensed consolidated balance sheet as of February 28, 2022.
Issuance costs associated with the Series 2022 Bonds were $3.1 million. The Series 2022 Bonds accrue interest at 4.0%, payable semiannually, and have a maturity date in October 2047.
Credit Facilities
The Company had no amounts drawn under its $400.0 million revolving credit facility (the "Revolver") at February 28, 2022 or August 31, 2021. The availability under the Revolver was reduced by outstanding stand-by letters of credit totaling $1.4 million and $3.0 million at February 28, 2022 and August 31, 2021, respectively.
The Company has a Term Loan facility (the "Poland Term Loan") through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP"). At February 28, 2022, PLN 171.4 million, or $40.9 million, was outstanding, compared to the maximum amount available under the facility, PLN 190.5 million, or $49.7 million, which was outstanding as of August 31, 2021.
The Company also has credit facilities in Poland through its subsidiary, CMCP. At February 28, 2022 and August 31, 2021, CMCP's credit facilities totaled PLN 300.0 million, or $71.6 million and $78.3 million, respectively. There were no amounts outstanding under these facilities as of February 28, 2022 or August 31, 2021. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, guarantees and/or other financial assurance instruments, which totaled $4.1 million and $5.7 million at February 28, 2022 and August 31, 2021, respectively.
Accounts Receivable Facilities
The Company had no advance payments outstanding under its U.S. trade accounts receivable facility at February 28, 2022 or August 31, 2021.
The Poland accounts receivable facility had a limit of PLN 288.0 million, or $68.8 million, at February 28, 2022. The Company had no advance payments outstanding under the Poland accounts receivable facility at February 28, 2022, compared to PLN 101.7 million, or $26.6 million, advance payments outstanding at August 31, 2021.
The Company's global operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy prices. One objective of the Company's risk management program is to mitigate these risks using derivative instruments. The Company enters into (i) metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in net earnings due to price volatility in these commodities, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) natural gas and electricity commodity derivatives to mitigate the risk related to price volatility of these commodities.
At February 28, 2022, the notional values of the Company's foreign currency and commodity contract commitments were $324.5 million and $243.2 million, respectively. At August 31, 2021, the notional values of the Company's foreign currency and commodity contract commitments were $389.5 million and $213.4 million, respectively.
The following table provides information regarding the Company's commodity contract commitments at February 28, 2022:
Commodity
Long/Short
Total
Aluminum
Long
3,675
MT
Aluminum
Short
2,150
MT
Copper
Long
431
MT
Copper
Short
9,662
MT
Electricity
Long
1,767,000
MW(h)
Natural Gas
Long
4,890,200
MMBtu
_________________
MT = Metric Ton
MW(h) = Megawatt hour
MMBtu = Metric Million British thermal unit
The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.
The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the condensed consolidated statements of earnings. All other activity related to the Company's derivative instruments and hedged items was immaterial for the periods presented.
Three Months Ended February 28,
Six Months Ended February 28,
Gain (Loss) on Derivatives Not Designated as Hedging Instruments (in thousands)
Primary Location
2022
2021
2022
2021
Commodity
Cost of goods sold
$
(2,214)
$
(11,025)
$
532
$
(16,614)
Foreign exchange
SG&A expenses
(1,048)
(125)
(9,043)
(1,990)
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Loss (in thousands)
Three Months Ended February 28,
Six Months Ended February 28,
2022
2021
2022
2021
Commodity
$
33,190
$
7,723
$
55,365
$
8,887
The Company's natural gas and electricity commodity derivatives accounted for as cash flow hedging instruments have maturities extending to February 2025 and December 2030, respectively. Included in the AOCI balance as of February 28, 2022 was an estimated net gain of $7.7 million from cash flow hedging instruments that is expected to be reclassified into earnings within the next twelve months. See Note 10, Fair Value, for the fair value of the Company's derivative instruments recorded in the condensed consolidated balance sheets.
The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined within the Nature of Operations and Summary of Significant Accounting Policies footnote in the 2021 Form 10-K.
The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:
Fair Value Measurements at Reporting Date Using
(in thousands)
February 28, 2022
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Investment deposit accounts (1)
$
809,220
$
809,220
$
—
$
—
Commodity derivative assets (2)
82,672
3,793
—
78,879
Foreign exchange derivative assets (2)
1,983
—
1,983
—
Liabilities:
Commodity derivative liabilities (2)
2,043
2,043
—
—
Foreign exchange derivative liabilities (2)
8,104
—
8,104
—
Fair Value Measurements at Reporting Date Using
(in thousands)
August 31, 2021
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Investment deposit accounts (1)
$
441,297
$
441,297
$
—
$
—
Commodity derivative assets (2)
27,323
910
—
26,413
Foreign exchange derivative assets (2)
2,537
—
2,537
—
Liabilities:
Commodity derivative liabilities (2)
1,352
1,352
—
—
Foreign exchange derivative liabilities (2)
1,880
—
1,880
—
_________________
(1) Investment deposit accounts are short-term in nature, and the value is determined by principal plus interest. The investment portfolio mix can change each period based on the Company's assessment of investment options.
(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Derivatives classified as Level 3 are described below. Further discussion regarding the Company's use of derivative instruments is included in Note 9, Derivatives.
The fair value estimate of the Level 3 commodity derivative is based on an internally developed discounted cash flow model primarily utilizing unobservable inputs in which there is little or no market data. The Company forecasts future energy rates using a range of historical prices ("floating rate"). The floating rate is the only significant unobservable input used in the Company's discounted cash flow model. The following table summarizes the floating rate used to measure the fair value of the commodity derivative at February 28, 2022 and 2021:
Floating rate (PLN)
February 28,
Low
High
Average
2022
271.87
815.64
451.69
2021
151.74
264.53
221.74
Below is a reconciliation of the beginning and ending balances of the Level 3 commodity derivative recognized in the condensed consolidated statements of comprehensive income. The fluctuation in energy rates over time causes volatility in the
fair value estimate and is the primary reason for unrealized gains included in other comprehensive income ("OCI") in the three and six months ended February 28, 2022 and 2021.
(in thousands)
Three Months Ended February 28, 2022
Balance, December 1, 2021
$
47,892
Total gains, realized and unrealized
Unrealized holding gain before reclassification (1)
36,630
Reclassification for gain included in net earnings (2)
(5,643)
Balance, February 28, 2022
$
78,879
(in thousands)
Six Months Ended February 28, 2022
Balance, September 1, 2021
$
26,413
Total gains, realized and unrealized
Unrealized holding gain before reclassification (1)
61,838
Reclassification for gain included in net earnings (2)
(9,372)
Balance, February 28, 2022
$
78,879
(in thousands)
Three Months Ended February 28, 2021
Balance, December 1, 2020
$
(13,614)
Total gains, realized and unrealized
Unrealized holding gain before reclassification (1)
9,582
Reclassification for gain included in net earnings (2)
(253)
Balance, February 28, 2021
$
(4,285)
(in thousands)
Six Months Ended February 28, 2021
Balance, September 1, 2020
$
(15,007)
Total losses, realized and unrealized
Unrealized holding gain before reclassification (1)
10,975
Reclassification for gain included in net earnings (2)
(253)
Balance, February 28, 2021
$
(4,285)
________________
(1) Unrealized holding gains, less amounts reclassified, are included in OCI in the condensed consolidated statements of comprehensive income.
(2) Gains included in net earnings are recorded in cost of goods sold in the condensed consolidated statements of earnings.
There were no material non-recurring fair value remeasurements during the three and six months ended February 28, 2022 or 2021.
The carrying values of the Company's short-term items, including documentary letters of credit and notes payable, approximate fair value.
The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the condensed consolidated balance sheets were as follows:
February 28, 2022
August 31, 2021
(in thousands)
Fair Value Hierarchy
Carrying Value
Fair Value
Carrying Value
Fair Value
2032 Notes (1)
Level 2
$
300,000
$
289,962
$
—
$
—
2031 Notes (1)
Level 2
300,000
282,312
300,000
306,279
2030 Notes (1)
Level 2
300,000
291,018
—
—
2027 Notes (1)
Level 2
—
—
300,000
316,839
2023 Notes (1)
Level 2
330,000
337,055
330,000
348,071
Series 2022 Bonds, due 2047 (1)
Level 2
145,060
150,430
—
—
Poland Term Loan (2)
Level 2
40,923
40,923
49,726
49,726
Short-term borrowings (2)
Level 2
—
—
26,560
26,560
_________________
(1) The fair values of the notes and the Series 2022 Bonds were determined based on indicated market values.
(2) The Poland Term Loan and short-term borrowings contain variable interest rates, and as a result, the carrying values approximate fair value.
NOTE 11. STOCK-BASED COMPENSATION PLANS
The Company's stock-based compensation plans are described in Note 13, Stock-Based Compensation Plans, to the consolidated financial statements in the 2021 Form 10-K. In general, restricted stock units vest ratably over a period of three years. Subject to the achievement of performance targets established by the Compensation Committee of CMC's Board of Directors, performance stock units vest after a period of three years.
During the six months ended February 28, 2022 and 2021, the Company granted the following awards under its stock-based compensation plans:
February 28, 2022
February 28, 2021
(in thousands, except share and per share data)
Shares Granted
Weighted Average Grant Date Fair Value
Shares Granted
Weighted Average Grant Date Fair Value
Equity method
1,440
$
27.95
1,512
$
20.51
Liability method
261
N/A
324
N/A
The Company recorded immaterial mark-to-market adjustments on liability awards for the three and six months ended February 28, 2022 and 2021. At February 28, 2022, the Company had outstanding 591,483 equivalent shares accounted for under the liability method. The Company expects 561,908 equivalent shares to vest.
The following table summarizes total stock-based compensation expense, including fair value remeasurements, which was primarily included in selling, general and administrative expenses on the Company's condensed consolidated statements of earnings:
NOTE 12. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Basic EPS is computed based on the weighted average shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average shares of common stock plus the effect of dilutive securities outstanding during the period using the treasury stock method. The effect of dilutive securities includes the impact of outstanding stock-based incentive awards and shares purchased by employees through participation in the Company's employee stock purchase plan.
The calculations of basic and diluted EPS from continuing operations were as follows:
Three Months Ended February 28,
Six Months Ended February 28,
(in thousands, except share and per share data)
2022
2021
2022
2021
Earnings from continuing operations
$
383,314
$
66,233
$
616,203
$
130,144
Average basic shares outstanding
121,458,196
120,345,432
121,293,030
120,052,459
Effect of dilutive securities
1,394,214
1,406,427
1,454,951
1,619,735
Average diluted shares outstanding
122,852,410
121,751,859
122,747,981
121,672,194
Earnings per share from continuing operations:
Basic
$
3.16
$
0.55
$
5.08
$
1.08
Diluted
$
3.12
$
0.54
$
5.02
$
1.07
Anti-dilutive shares not included above were immaterial for all periods presented.
Restricted stock is included in the number of shares of common stock issued and outstanding, but omitted from the basic EPS calculation until the shares vest.
In October 2021, CMC's Board of Directors authorized a share repurchase program under which CMC may repurchase up to $350.0 million of shares of common stock. During the three and six months ended February 28, 2022, the Company repurchased 335,500 and 495,000 shares of CMC common stock, respectively, at an average purchase price of $34.85 and $34.34 per share, respectively. CMC had remaining authorization to repurchase $333.0 million of shares of common stock at February 28, 2022.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. At February 28, 2022 and August 31, 2021, the amounts accrued for cleanup and remediation costs at certain sites in response to statutes enforced by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") were immaterial. Total accrued environmental liabilities, including CERCLA sites, were $4.3 million and $7.1 million at February 28, 2022 and August 31, 2021, respectively, of which $2.2 million and $2.3 million were classified as other long-term liabilities at February 28, 2022 and August 31, 2021, respectively. These amounts have not been discounted to their present values. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent uncertainties of the estimation process and other factors, amounts accrued could vary significantly from amounts paid.
The Company structures its business into two reportable segments: North America and Europe. See Note 1, Nature of Operations and Summary of Significant Accounting Policies, to the consolidated financial statements in the 2021 Form 10-K for more information about the reportable segments, including the types of products and services from which each reportable segment derives its net sales. Corporate and Other contains earnings or losses on assets and liabilities related to the Company's Benefit Restoration Plan assets and short-term investments, expenses of the Company's corporate headquarters, interest expense related to its long-term debt and intercompany eliminations.
The following is a summary of certain financial information from continuing operations by reportable segment and Corporate and Other:
Three Months Ended February 28, 2022
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
1,614,224
$
395,758
$
(1,094)
$
2,008,888
Adjusted EBITDA
535,463
81,149
(52,493)
564,119
Six Months Ended February 28, 2022
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
3,267,846
$
724,814
$
(1,971)
$
3,990,689
Adjusted EBITDA
803,987
160,981
(86,827)
878,141
Total assets at February 28, 2022
3,553,719
823,127
1,127,374
5,504,220
Three Months Ended February 28, 2021
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
1,257,486
$
202,066
$
2,718
$
1,462,270
Adjusted EBITDA
171,612
16,107
(45,986)
141,733
Six Months Ended February 28, 2021
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
2,452,499
$
396,662
$
4,912
$
2,854,073
Adjusted EBITDA
327,246
30,577
(72,457)
285,366
Total assets at August 31, 2021
3,221,465
729,766
687,440
4,638,671
The following table presents a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations:
Three Months Ended February 28,
Six Months Ended February 28,
(in thousands)
2022
2021
2022
2021
Earnings from continuing operations
$
383,314
$
66,233
$
616,203
$
130,144
Interest expense
12,011
14,021
23,046
28,280
Income taxes
126,432
20,941
155,304
42,534
Depreciation and amortization
41,134
41,573
82,360
83,372
Asset impairments
1,228
474
1,228
4,068
Amortization of acquired unfavorable contract backlog
—
(1,509)
—
(3,032)
Adjusted EBITDA from continuing operations
$
564,119
$
141,733
$
878,141
$
285,366
Disaggregation of Revenue
The following tables display revenue by reportable segment and Corporate and Other from external customers, disaggregated by major product:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 (this "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, 2021 (the "2021 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 2021 Form 10-K and Part II, Item 1A of 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 relevant three or six month period ended February 28, 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Form 10-K.
RESULTS OF OPERATIONS SUMMARY
Business Overview
As a vertically integrated organization, we manufacture, recycle and fabricate steel and metal products and provide related materials and services through a network of facilities that includes seven electric arc furnace ("EAF") mini mills, two EAF micro mills, one rerolling mill, steel fabrication and processing plants, construction-related product warehouses and metal recycling facilities in the United States 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.
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 steel products metal margin and downstream products margin over scrap costs period-over-period are consistent areas of focus for our Company and industry. Steel products metal margin and downstream products margin over scrap costs are metrics used by management to monitor the results of our vertically integrated organization. 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.
Downstream products margin over scrap costs 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.
Impact of COVID-19
The impact of the COVID-19 pandemic ("COVID-19" or "pandemic") on our operations was limited during the six months ended February 28, 2022 and 2021. We continue to evaluate the nature and extent of future impacts of the evolving pandemic on our operations and are complying with applicable federal, state and local law and considering relevant guidance, including the guidelines of the U.S. Centers for Disease Control and 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.
Financial Results Overview
The following discussion of our results of operations is based on our continuing operations.
Three Months Ended February 28,
Six Months Ended February 28,
(in thousands, except per share data)
2022
2021
2022
2021
Net sales
$
2,008,888
$
1,462,270
$
3,990,689
$
2,854,073
Earnings from continuing operations
383,314
66,233
616,203
130,144
Diluted earnings per share
$
3.12
$
0.54
$
5.02
$
1.07
Net sales for the three and six months ended February 28, 2022 increased $546.6 million, or 37%, and $1.1 billion, or 40%, respectively, compared to the corresponding periods. The growth in net sales is largely attributable to rising selling prices across all major product lines in both of our segments for the three and six months ended February 28, 2022, compared to the corresponding periods. Continued strong demand from robust construction activity in all of our North America and Europe end-use markets was the primary driver for the increase in average selling prices.
During the three and six months ended February 28, 2022, we achieved earnings from continuing operations of $383.3 million and $616.2 million, respectively. Included in earnings from continuing operations during the three and six months ended February 28, 2022 was a $273.3 million gain on the sale of the Rancho Cucamonga facilities. See Note 2, Changes in Business, for more information on the sale of the Rancho Cucamonga facilities. Earnings from continuing operations, less the gain on the sale of the Rancho Cucamonga facilities, increased 66% and 163% during the three and six months ended February 28, 2022, respectively, compared to the corresponding periods. These increases were driven by the significant expansion of steel products metal margin per ton in both of our segments and raw materials margin over purchase cost per ton in our North America segment. Selling prices for steel products and raw materials outpaced the rising input costs of ferrous scrap utilized in our steel mill operations and the price paid to purchase ferrous and nonferrous scrap in our scrap metal recycling operations, as well as increases in the cost of freight, energy and other steelmaking inputs.
Selling, general and administrative expenses increased $7.2 million and $17.0 million for the three and six months ended February 28, 2022, respectively, compared to the corresponding periods. The increases were driven in part by increases in expenses related to labor, professional services and travel of $1.5 million, $2.2 million and $1.0 million during the three months ended February 28, 2022, respectively, and $5.1 million, $4.9 million and $2.3 million during the six months ended February 28, 2022, respectively, compared to the corresponding periods. Contributing to the year-over-year increase in professional services expenses during the six months ended February 28, 2022 were $3.2 million of acquisition-related costs incurred during the first quarter of 2022, with no such costs in the corresponding period.
Interest Expense
Interest expense decreased $2.0 million and $5.2 million during the three and six months ended February 28, 2022, respectively, compared to the corresponding periods. The decreases were driven in part by the lower interest expense on the $300.0 million of 3.875% Senior Notes due 2031, which were outstanding during the three and six months ended February 28, 2022, compared to the interest expense on the $350.0 million of 5.750% Senior Notes due 2026, which were outstanding during the corresponding periods before their redemption in February 2021. Additionally, total capitalized interest of $2.6 million and $4.2 million was recorded during the three and six months ended February 28, 2022, respectively. Total capitalized interest increased $1.9 million and $3.0 million during the three and six months ended February 28, 2022, compared to the corresponding periods, due to the construction of the third micro mill, to be located in Mesa, Arizona.
Income Taxes
The effective income tax rates from continuing operations for the three and six months ended February 28, 2022 were 24.8% and 20.1%, respectively, compared to 24.0% and 24.6% in the corresponding periods. The effective income tax rate from continuing operations remained relatively flat for the three months ended February 28, 2022 when compared with the corresponding period ending February 28, 2021. The decrease for the six months ended February 28, 2022 is primarily due to the recognition of a capital loss on a tax restructuring transaction during the first quarter of fiscal 2022.
Unless otherwise indicated, all dollar amounts below are from continuing operations and calculated before income taxes. See Note 14, Business Segments, 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 America
Three Months Ended February 28,
Six Months Ended February 28,
(in thousands)
2022
2021
2022
2021
Net sales
$
1,614,224
$
1,257,486
$
3,267,846
$
2,452,499
Adjusted EBITDA
535,463
171,612
803,987
327,246
External tons shipped (in thousands)
Raw materials
329
302
663
632
Rebar
407
472
849
958
Merchant and other
245
268
502
532
Steel products
652
740
1,351
1,490
Downstream products
327
343
727
714
Average selling price (per ton)
Steel products
$
1,041
$
695
$
1,007
$
653
Downstream products
1,169
929
1,126
931
Cost of ferrous scrap utilized per ton
$
436
$
344
$
432
$
304
Steel products metal margin per ton
605
351
575
349
Net sales for the three and six months ended February 28, 2022 increased $356.7 million, or 28%, and $815.3 million, or 33%, respectively, compared to the corresponding periods. The increase in net sales during the three months ended February 28, 2022 was primarily due to average selling price increases of 30% for raw materials, 50% for steel products and 26% for downstream products compared to the corresponding period. Similarly, during the six months ended February 28, 2022, we experienced average selling price increases of 46% for raw materials, 54% for steel products and 21% for downstream products compared to the corresponding period. The rise in average selling prices is supported by strengthened demand in our end-use markets due to greater construction and industrial activity compared to the corresponding periods. While shipment volumes of raw materials and downstream products remained relatively flat during the three and six months ended February 28, 2022, compared to the corresponding periods, shipments of steel products declined 12% and 9%, respectively. The decreases in shipments in the three and six months ended February 28, 2022 was a result of planned maintenance activities during the second quarter of 2022, coupled with stronger than normal shipment levels during the corresponding periods.
Adjusted EBITDA for the three and six months ended February 28, 2022 increased $363.9 million and $476.7 million respectively, compared to the corresponding periods. Included in adjusted EBITDA during the three and six months ended February 28, 2022 was a $273.3 million gain on the sale of the Rancho Cucamonga facilities. The remaining growth in adjusted EBITDA during the three and six months ended February 28, 2022 was primarily due to expansion of steel products metal margin per ton and raw materials margin over purchase cost per ton, compared to the corresponding periods. Although ferrous and nonferrous scrap prices increased and inflationary pressures caused an increase in the cost of freight, energy and other steelmaking inputs, the average selling price for steel products and raw materials increased at a greater rate year-over-year. Adjusted EBITDA included non-cash stock compensation expense of $4.0 million and $6.7 million for the three and six months ended February 28, 2022, respectively, and $3.8 million and $7.1 million for the corresponding periods.
Net sales for the three and six months ended February 28, 2022 increased $193.7 million, or 96%, and $328.2 million, or 83%, respectively, compared to the corresponding periods. The increases were driven largely by the increases in steel products average selling prices of $319 per ton, or 60%, and $364 per ton, or 74%, during the three and six months ended February 28, 2022, respectively, compared to the corresponding periods. Increased demand for steel products from both construction and industrial end markets supported the increases in average selling prices. Additionally, shipments of steel products increased 27% and 9% during the three and six months ended February 28, 2022, respectively, compared to the corresponding periods. The growth in shipments of steel products during the three and six months ended February 28, 2022 was due in part to the absence of a maintenance program that was completed during the second quarter of 2021, reducing shipments during the corresponding periods, coupled with the increased demand for steel products described above. Net sales for the three and six months ended February 28, 2022 were impacted by unfavorable foreign currency translation adjustments of $35.2 million and $48.7 million, respectively, due to the increase in the average value of the U.S. dollar relative to the Polish zloty, compared to favorable foreign currency translation adjustments of $8.3 million and $13.0 million, respectively, during the corresponding periods.
Adjusted EBITDA for the three and six months ended February 28, 2022 increased $65.0 million, or 404%, and $130.4 million, or 426%, compared to the corresponding periods. The primary driver of the increases in adjusted EBITDA was an expansion in steel products metal margin per ton, which increased 100% during the three months ended February 28, 2022, compared to the corresponding period, and increased 111% during the six months ended February 28, 2022, compared to the corresponding period. During the three and six months ended February 28, 2022, the cost of ferrous scrap utilized per ton increased 35% and 48%, respectively, compared to the corresponding periods, and inflationary pressures caused increases to the cost of freight, energy and other steelmaking inputs. However, the growth in average selling prices for steel products outpaced these increased costs in each period. Also offsetting the increased cost of energy were realized gains of $5.6 million and $9.4 million during the three and six months ended February 28, 2022, respectively, from a commodity derivative designated as a cash flow hedging instrument, compared to immaterial gains recorded in the corresponding periods. Additionally, in the first quarter of 2022, we received a $15.5 million energy credit that was recorded as a reduction to cost of goods sold, with no similar credit received in the corresponding period. Adjusted EBITDA for the three and six months ended February 28, 2022 included unfavorable foreign currency exchange rate impacts of $7.3 million and $10.3 million, respectively, compared to immaterial foreign currency translation adjustments during the corresponding periods. Adjusted EBITDA included non-cash stock compensation expense of $1.1 million and $2.6 million for the three and six months ended February 28, 2022, respectively, and $0.7 million and $1.4 million for the corresponding periods.
Corporate and Other reported adjusted EBITDA loss of $52.5 million and $86.8 million for the three and six months ended February 28, 2022, respectively, compared to adjusted EBITDA loss of $46.0 million and $72.5 million in the corresponding periods. Contributing to the increases in the adjusted EBITDA loss were $5.7 million and $9.9 million increases in labor-related expenses during the three and six months ended February 28, 2022, respectively, compared to the corresponding periods, and $3.2 million of acquisition-related costs incurred in the first quarter of 2022, with no such costs in the corresponding period. Additionally, adjusted EBITDA included non-cash stock compensation expense of $11.2 million and $16.6 million for the three and six months ended February 28, 2022, respectively, compared to $8.2 million and $13.3 million for the corresponding periods.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
Our cash flows from operating activities are our principal sources of liquidity and result primarily from sales of raw materials, steel products, downstream products and related materials and services, as described in Part I, Item 1, Business, of our 2021 Form 10-K. 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 18% of total trade receivables at February 28, 2022.
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 availability of liquidity at February 28, 2022. See Note 8, Credit Arrangements, for additional information.
(in thousands)
Liquidity Sources and Facilities
Availability
Cash and cash equivalents
$
846,587
$
846,587
Notes due from 2023 to 2032
1,230,000
*
Revolver
400,000
398,604
U.S. accounts receivable facility
150,000
150,000
Series 2022 Bonds, due 2047 **
145,060
—
Poland credit facilities
71,614
67,560
Poland accounts receivable facility
68,750
68,750
Poland Term Loan
40,923
—
_________________
*We believe we have access to additional financing and refinancing, if needed, although we can make no assurances as to the form or terms of such financing.
**See Note 8, Credit Arrangements, for additional information regarding the restrictions on the proceeds from the Series 2022 Bonds.
We are continually reviewing our capital resources to determine whether we can meet our short and long-term goals. Our cash and cash equivalents position remains strong at $846.6 million as of February 28, 2022. We anticipate our current cash balances, cash flows from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, acquire Tensar during the third quarter of 2022, pay dividends and opportunistically repurchase shares for at least the next twelve months. Additionally, we expect our long-term liquidity position will be sufficient to meet our long-term liquidity needs with cash flows from operations and financing arrangements. However, in the event of changes in business conditions or other developments, including a sustained market deterioration, unanticipated regulatory developments, significant acquisitions, competitive pressures, or to the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, we may need additional liquidity. To the extent we elect to finance our long-term liquidity needs, we believe that the potential financing capital available to us in the future is sufficient to fund such long-term liquidity needs.
As of February 28, 2022 and August 31, 2021, we had 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.
Cash Flows
Operating Activities
Net cash flows from operating activities were $54.4 million for the six months ended February 28, 2022, compared to net cash flows from operating activities of $1.2 million for the six months ended February 28, 2021. Net earnings increased by $485.8 million year-over-year, including an increase in net gain on disposals of assets and other of $268.6 million, offset by a $210.5 million year-over-year net increase in cash used by operating assets and liabilities ("working capital"). The increase in cash used by working capital was due in part to rising scrap prices and greater inventory levels, which corresponded with an increase in accounts payable, accrued expenses and other payables in the six months ended February 28, 2022, compared to the corresponding period. Additionally, the growth in sales period-over-period led to a rise in accounts receivable during the six months ended February 28, 2022, compared to the corresponding period. Operating working capital days, which represents the number of days to convert accounts receivable and inventory, less accounts payable, into net sales, were consistent year-over-year.
Investing Activities
Net cash flows from investing activities were $121.1 million for the six months ended February 28, 2022, compared to net cash flows used by investing activities of $67.4 million for the six months ended February 28, 2021. The $188.4 million increase in net cash flows from investing activities was primarily caused by the proceeds from the sale of the Rancho Cucamonga facilities, offset by an increase in capital expenditures as a result of the construction of our third micro mill located in Mesa, Arizona. See Note 2, Changes in Business, for more information on the sale of the Rancho Cucamonga facilities.
We estimate that our 2022 capital spending will range from $475 million to $525 million. We regularly assess our capital spending based on current and expected results and the amount is subject to change.
In December 2021, we announced the signing of a definitive agreement to acquire TAC Acquisition Corp. (“Tensar”), a portfolio company of Castle Harlan Inc.’s fund, Castle Harlan Partners V, L.P., for a cash purchase price of approximately $550.0 million, subject to customary purchase price adjustments. We anticipate that the transaction will close during the third quarter of 2022. See Note 2, Changes in Business, for more information about the pending acquisition.
In addition, in January 2022, we announced the plan to construct a fourth micro mill geographically situated primarily to serve the Northeast, Mid-Atlantic, and Mid-Western United States markets. Following the site selection and receipt of state and local incentives, permitting, and other necessary approvals, the construction of the planned mill is expected to take roughly two years.
Financing Activities
Net cash flows from financing activities were $324.4 million for the six months ended February 28, 2022, compared to net cash flows used by financing activities of $109.1 million for the six months ended February 28, 2021. The $433.5 million increase in net cash flows from financing activities was a result of many actions, including net proceeds from long-term debt of $427.2 million during the six months ended February 28, 2022, compared to net long-term debt repayments of $61.5 million during the six months ended February 28, 2021. Offsetting the cash flows from long-term debt, net repayments under our accounts receivable facilities increased $24.5 million during the six months ended February 28, 2022, compared to the corresponding period. See Note 8, Credit Arrangements, for more information regarding our credit arrangements. Additionally, compared to the corresponding period, we increased dividend payments by $5.2 million, increased stock issued under incentive and purchase plans, net of forfeitures, by $6.2 million and acquired $17.0 million of treasury stock under the share repurchase program which was authorized in October 2021. See Note 12, Stockholders' Equity and Earnings per Share, for more information on the share repurchase program.
Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, leases for properties and equipment and purchase obligations as part of normal operations. See Note 8, Credit Arrangements, for more information regarding scheduled maturities of our long-term debt. See Note 7, Leases, for additional information on leases.
Our undiscounted purchase obligations due in the twelve months following February 28, 2022 and August 31, 2021 were $854.8 million and $638.5 million, respectively, with $196.4 million and $228.0 million due thereafter, respectively. The increase in short-term purchase obligations was primarily due to construction of our third micro mill in Mesa, Arizona, purchases of inventory and other planned maintenance and capital expenditures in connection with normal business operations. The decrease in long-term purchase obligations is a result of a decrease in commitments for commodities used in operations, such as electrodes and natural gas, and certain capital expenditure obligations for the construction of our third micro mill which were fulfilled during the six months ended February 28, 2022.
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 February 28, 2022, we had committed $24.4 million under these arrangements, of which $1.4 million reduced availability under the Revolver.
CONTINGENCIES
We may incur settlements, fines, penalties or judgments due to our involvement in litigation, administrative proceedings and governmental investigations, including environmental 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 we believe a material 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 materially affect, individually or in the aggregate, our results of operations, cash flows or financial condition. See Note 13, Commitments and Contingencies, for more information.
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 impact of the Russian invasion of Ukraine, 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, the proposed Tensar acquisition and the timing thereof, estimated contractual obligations, the expected capabilities and benefits of new facilities, the timeline for execution of our growth plan, 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 SEC 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 our 2021 Form 10-K and Part II, Item 1A, Risk Factors of this Form 10-Q, 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 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;
•the impact of the Russian invasion of Ukraine on the global economy, energy supplies and raw materials, which is uncertain, but may prove to negatively impact our business and operations;
•compliance with and changes in existing and future 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;
•evolving remediation technology, changing regulations, possible third-party contributions, the inherent uncertainties of the estimation process and other factors that may impact amounts accrued for environmental liabilities;
•potential limitations in our or our customers' abilities to access credit and non-compliance of their contractual obligations, including payment obligations;
•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 startup 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 investments;
•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 changes to current trade regulations, such as Section 232 trade tariffs and quotas, 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 SEC for 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the six months ended February 28, 2022, the U.S. dollar equivalent of the Company's total gross foreign currency exchange contract commitments decreased $65.0 million, or 17%, compared to August 31, 2021. This decrease was primarily due to forward contracts denominated in Polish zloty with a U.S. dollar functional currency, which decreased $95.0 million, partially offset by forward contracts denominated in euros with a Polish zloty functional currency, which increased $28.5 million compared to August 31, 2021.
There were no other material changes to the information set forth in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our 2021 Form 10-K.
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods, and includes controls and procedures designed to ensure that such information is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q, and they have concluded that as of that date, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our quarter ended February 28, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For information regarding our legal proceedings, refer to Note 13, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1, Financial Statements, of this Form 10-Q.
With respect to administrative or judicial proceedings arising under any federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment, we have determined that we will disclose any such proceeding to which a governmental authority is a party if we reasonably believe such proceeding could result in monetary sanctions, exclusive of interest and costs, of at least $1.0 million. We believe that this threshold is reasonably designed to result in disclosure of environmental proceedings that are material to our business or financial condition. Applying this threshold, there were no environmental matters to disclose for this period.
ITEM 1A. RISK FACTORS
Except as set forth below, there were no material changes to the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of our 2021 Form 10-K:
The impact of the Russian invasion of Ukraine on the global economy, energy supplies and raw materials is uncertain, but may prove to negatively impact our business and operations.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. We continue to monitor any adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the United States and several European and Asian countries may have on the global economy in general, on our business and operations and on the businesses and operations of our suppliers and customers. For example, a prolonged conflict may result in increased inflation, escalating energy prices and constrained availability, and thus increasing costs, of raw materials. Further, if the conflict intensifies or expands beyond Ukraine, it could have an adverse impact on our operations in Poland. We will continue to monitor this fluid situation and develop contingency plans as necessary to address any disruptions to our business operations as they develop. To the extent the war in Ukraine may adversely affect our business as discussed above, it may also have the effect of heightening many of the other risks described in Part I, Item 1A of our 2021 Form 10-K, such as those relating to data security, supply chain, volatility in prices of scrap and other inputs, and market conditions, any of which could negatively affect our business and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act, as amended, made by the Company or any affiliated purchasers during the quarter ended February 28, 2022.
Issuer Purchases of Equity Securities(1)
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs As of the End of Period
December 1, 2021 - December 31, 2021
121,000
$
33.34
121,000
$
340,658,218
January 1, 2022 - January 31, 2022
110,000
36.05
110,000
336,692,716
February 1, 2022 - February 28, 2022
104,500
35.35
104,500
332,998,974
335,500
335,500
_________________
(1) On October 13, 2021, the Company announced that the Board of Directors authorized a share repurchase program under which the Company may repurchase up to $350.0 million of the Company's outstanding common stock. The share repurchase program does not require the Company to purchase any dollar amount or number of shares of CMC common stock and may be modified, suspended, extended or terminated by the Company at any time without prior notice. See Note
12, Stockholders' Equity and Earnings per Share, to our condensed consolidated financial statements included in Part I, Item 1, Financial Statements, of this Form 10-Q for more information on the share repurchase program.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, certain long-term debt instruments are omitted because the total amount of securities authorized thereunder does not exceed 10% of the total assets of Commercial Metals Company and its subsidiaries on a consolidated basis. Commercial Metals Company agrees to furnish copies of such instruments to the SEC upon its request.
Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101).
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5), and Commercial Metals Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMERCIAL METALS COMPANY
March 23, 2022
/s/ Paul J. Lawrence
Paul J. Lawrence
Senior Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer of the registrant)
