☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2021
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 June 23, 2021, 120,586,589 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands, except share data)
2021
2020
2021
2020
Net sales
$
1,845,041
$
1,341,683
$
4,699,114
$
4,067,354
Costs and expenses:
Cost of goods sold
1,533,768
1,116,353
3,936,930
3,385,963
Selling, general and administrative expenses
130,448
115,965
359,492
342,502
Interest expense
11,965
15,409
40,245
47,875
Loss on debt extinguishment
—
—
16,841
—
Asset impairments
277
5,983
4,345
6,513
1,676,458
1,253,710
4,357,853
3,782,853
Earnings from continuing operations before income taxes
168,583
87,973
341,261
284,501
Income taxes
38,175
23,804
80,709
73,981
Earnings from continuing operations
130,408
64,169
260,552
210,520
Earnings from discontinued operations before income taxes
—
745
—
1,941
Income taxes
—
180
—
581
Earnings from discontinued operations
—
565
—
1,360
Net earnings
$
130,408
$
64,734
$
260,552
$
211,880
Basic earnings per share*
Earnings from continuing operations
$
1.08
$
0.54
$
2.17
$
1.77
Earnings from discontinued operations
—
—
—
0.01
Net earnings
$
1.08
$
0.54
$
2.17
$
1.78
Diluted earnings per share*
Earnings from continuing operations
$
1.07
$
0.53
$
2.14
$
1.75
Earnings from discontinued operations
—
—
—
0.01
Net earnings
$
1.07
$
0.54
$
2.14
$
1.76
Average basic shares outstanding
120,613,652
119,192,962
120,241,579
118,828,870
Average diluted shares outstanding
122,193,655
120,278,741
121,852,144
120,277,737
See notes to condensed consolidated financial statements.
_________________
*Earnings Per Share ("EPS") is calculated independently for each component and may not sum to Net EPS due to rounding.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands)
2021
2020
2021
2020
Net earnings
$
130,408
$
64,734
$
260,552
$
211,880
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustment
11,775
(8,035)
4,852
(2,179)
Net unrealized gain (loss) on derivatives:
Unrealized holding gain (loss)
12,145
(5,143)
21,032
(8,075)
Reclassification for gain included in net earnings
(616)
(81)
(929)
(253)
Net unrealized gain (loss) on derivatives
11,529
(5,224)
20,103
(8,328)
Defined benefit obligation:
Amortization of prior services
(14)
(8)
(41)
(24)
Defined benefit obligation
(14)
(8)
(41)
(24)
Other comprehensive income (loss)
23,290
(13,267)
24,914
(10,531)
Comprehensive income
$
153,698
$
51,467
$
285,466
$
201,349
See notes to condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
May 31, 2021
August 31, 2020
Assets
Current assets:
Cash and cash equivalents
$
443,120
$
542,103
Accounts receivable (less allowance for doubtful accounts of $6,688 and $9,597)
1,073,115
880,728
Inventories, net
833,101
625,393
Prepaid and other current assets
169,139
165,879
Total current assets
2,518,475
2,214,103
Property, plant and equipment, net
1,562,503
1,571,067
Goodwill
66,331
64,321
Other noncurrent assets
243,766
232,237
Total assets
$
4,391,075
$
4,081,728
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
340,238
$
266,102
Accrued expenses and other payables
456,394
461,012
Current maturities of long-term debt and short-term borrowings
56,735
18,149
Total current liabilities
853,367
745,263
Deferred income taxes
118,335
130,810
Other noncurrent liabilities
242,647
250,706
Long-term debt
1,020,129
1,065,536
Total liabilities
2,234,478
2,192,315
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 120,585,771 and 119,220,905 shares
1,290
1,290
Additional paid-in capital
361,433
358,912
Accumulated other comprehensive loss
(78,850)
(103,764)
Retained earnings
2,025,083
1,807,826
Less treasury stock 8,474,893 and 9,839,759 shares at cost
(152,590)
(175,063)
Stockholders' equity
2,156,366
1,889,201
Stockholders' equity attributable to noncontrolling interests
231
212
Total stockholders' equity
2,156,597
1,889,413
Total liabilities and stockholders' equity
$
4,391,075
$
4,081,728
See notes to condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended May 31,
(in thousands)
2021
2020
Cash flows from (used by) operating activities:
Net earnings
$
260,552
$
211,880
Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
Depreciation and amortization
125,176
124,104
Stock-based compensation
35,558
21,975
Deferred income taxes and other long-term taxes
(17,175)
47,761
Loss on debt extinguishment
16,841
—
Net gain on disposals of subsidiaries, assets and other
(9,390)
(5,476)
Amortization of acquired unfavorable contract backlog
(4,540)
(18,676)
Asset impairments
4,345
6,513
Other
243
1,933
Changes in operating assets and liabilities
(317,378)
141,819
Net cash flows from operating activities
94,232
531,833
Cash flows from (used by) investing activities:
Capital expenditures
(127,395)
(134,092)
Proceeds from the sale of property, plant and equipment and other
25,890
14,091
Other
(2,500)
974
Acquisitions, net of cash acquired
—
(9,850)
Net cash flows used by investing activities:
(104,005)
(128,877)
Cash flows from (used by) financing activities:
Proceeds from issuance of long-term debt, net
309,187
22,566
Repayments of long-term debt
(361,855)
(110,470)
Debt extinguishment costs
(13,128)
—
Debt issuance costs
(2,830)
—
Proceeds from accounts receivable facilities
145,864
171,133
Repayments under accounts receivable facilities
(118,312)
(171,285)
Dividends
(43,295)
(42,768)
Stock issued under incentive and purchase plans, net of forfeitures
(3,807)
(1,921)
Contribution from noncontrolling interest
19
16
Net cash flows used by financing activities
(88,157)
(132,729)
Effect of exchange rate changes on cash
(423)
210
Increase (decrease) in cash, restricted cash and cash equivalents
(98,353)
270,437
Cash, restricted cash and cash equivalents at beginning of period
544,964
193,729
Cash, restricted cash and cash equivalents at end of period
$
446,611
$
464,166
See notes to condensed consolidated financial statements.
Supplemental information:
Nine Months Ended May 31,
(in thousands)
2021
2020
Cash paid for income taxes
$
59,041
$
29,566
Cash paid for interest
43,403
49,159
Noncash activities:
Liabilities related to additions of property, plant and equipment
16,601
31,881
Cash and cash equivalents
$
443,120
$
462,110
Restricted cash
3,491
2,056
Total cash, restricted cash and cash equivalents
$
446,611
$
464,166
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended May 31, 2021
Common Stock
Treasury Stock
(in thousands, except share data)
Number of Shares
Amount
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Number of Shares
Amount
Non-controlling Interest
Total
Balance, March 1, 2021
129,060,664
$
1,290
$
354,620
$
(102,140)
$
1,909,443
(8,552,449)
$
(153,952)
$
231
$
2,009,492
Net earnings
130,408
130,408
Other comprehensive income
23,290
23,290
Dividends ($0.12 per share)
(14,768)
(14,768)
Issuance of stock under incentive and purchase plans, net of forfeitures
(633)
77,556
1,362
729
Stock-based compensation
7,446
7,446
Balance, May 31, 2021
129,060,664
$
1,290
$
361,433
$
(78,850)
$
2,025,083
(8,474,893)
$
(152,590)
$
231
$
2,156,597
Nine Months Ended May 31, 2021
Common Stock
Treasury Stock
(in thousands, except share data)
Number of Shares
Amount
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Number of Shares
Amount
Non-controlling Interest
Total
Balance, September 1, 2020
129,060,664
$
1,290
$
358,912
$
(103,764)
$
1,807,826
(9,839,759)
$
(175,063)
$
212
$
1,889,413
Net earnings
260,552
260,552
Other comprehensive income
24,914
24,914
Dividends ($0.36 per share)
(43,295)
(43,295)
Issuance of stock under incentive and purchase plans, net of forfeitures
(26,280)
1,364,866
22,473
(3,807)
Stock-based compensation
23,381
23,381
Contribution of noncontrolling interest
19
19
Reclassification of share-based liability awards
5,420
5,420
Balance, May 31, 2021
129,060,664
$
1,290
$
361,433
$
(78,850)
$
2,025,083
(8,474,893)
$
(152,590)
$
231
$
2,156,597
7
Three Months Ended May 31, 2020
Common Stock
Treasury Stock
(in thousands, except share data)
Number of Shares
Amount
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Number of Shares
Amount
Non-controlling Interest
Total
Balance, March 1, 2020
129,060,664
$
1,290
$
351,481
$
(121,390)
$
1,704,045
(9,998,775)
$
(177,583)
$
212
$
1,758,055
Net earnings
64,734
64,734
Other comprehensive loss
(13,267)
(13,267)
Dividends ($0.12 per share)
(14,288)
(14,288)
Issuance of stock under incentive and purchase plans, net of forfeitures
479
3,244
63
542
Stock-based compensation
4,886
4,886
Balance, May 31, 2020
129,060,664
$
1,290
$
356,846
$
(134,657)
$
1,754,491
(9,995,531)
$
(177,520)
$
212
$
1,800,662
Nine Months Ended May 31, 2020
Common Stock
Treasury Stock
(in thousands, except share data)
Number of Shares
Amount
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Number of Shares
Amount
Non-controlling Interest
Total
Balance, September 1, 2019
129,060,664
$
1,290
$
358,668
$
(124,126)
$
1,585,379
(11,135,726)
$
(197,350)
$
196
$
1,624,057
Net earnings
211,880
211,880
Other comprehensive loss
(10,531)
(10,531)
Dividends ($0.36 per share)
(42,768)
(42,768)
Issuance of stock under incentive and purchase plans, net of forfeitures
(21,751)
1,140,195
19,830
(1,921)
Stock-based compensation
17,419
17,419
Contribution of noncontrolling interest
16
16
Reclassification of share-based liability awards
2,510
2,510
Balance, May 31, 2020
129,060,664
$
1,290
$
356,846
$
(134,657)
$
1,754,491
(9,995,531)
$
(177,520)
$
212
$
1,800,662
See notes to condensed consolidated financial statements.
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
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, 2020 ("2020 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 included in the 2020 Form 10-K. The results of operations for the three and nine 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 nine month period ended May 31, 2020.
Any reference in this Form 10-Q to a year refers to the fiscal year ended August 31st of that year, unless otherwise noted.
NOTE 2. CHANGES IN BUSINESS
Facility Closure and Disposition
In October 2019, the Company closed the melting operations at its Rancho Cucamonga facility, which is part of the North America segment. In August 2020, the Company announced plans to sell the Rancho Cucamonga site and the Company ceased operations at this facility in January 2021. As a result, the Company recorded $13.4 million of expense in the nine months ended May 31, 2021, all of which was recorded in the first two quarters of 2021, and $0.9 million and $7.2 million of expense in the three and nine months ended May 31, 2020, respectively, related to asset impairments, severance, pension curtailment, environmental obligations and vendor agreement terminations. The disposition does not meet the criteria for discontinued operations, and as of May 31, 2021, does not qualify for held for sale accounting.
9
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
Three Months Ended May 31, 2021
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, March 1, 2021
$
(94,856)
$
(2,760)
$
(4,524)
$
(102,140)
Other comprehensive income (loss) before reclassifications
11,775
14,056
(14)
25,817
Amounts reclassified from AOCI
—
(719)
—
(719)
Income tax benefit
—
(1,808)
—
(1,808)
Net other comprehensive income (loss)
11,775
11,529
(14)
23,290
Balance, May 31, 2021
$
(83,081)
$
8,769
$
(4,538)
$
(78,850)
Nine Months Ended May 31, 2021
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, September 1, 2020
$
(87,933)
$
(11,334)
$
(4,497)
$
(103,764)
Other comprehensive income (loss) before reclassifications
4,852
25,028
(48)
29,832
Amounts reclassified from AOCI
—
(1,106)
—
(1,106)
Income tax expense (benefit)
—
(3,819)
7
(3,812)
Net other comprehensive income (loss)
4,852
20,103
(41)
24,914
Balance, May 31, 2021
$
(83,081)
$
8,769
$
(4,538)
$
(78,850)
Three Months Ended May 31, 2020
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, March 1, 2020
$
(115,642)
$
(1,998)
$
(3,750)
$
(121,390)
Other comprehensive loss before reclassifications
(8,037)
(6,350)
(10)
(14,397)
Amounts reclassified to (from) AOCI
2
(98)
—
(96)
Income tax expense
—
1,224
2
1,226
Net other comprehensive loss
(8,035)
(5,224)
(8)
(13,267)
Balance, May 31, 2020
$
(123,677)
$
(7,222)
$
(3,758)
$
(134,657)
Nine Months Ended May 31, 2020
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, September 1, 2019
$
(121,498)
$
1,106
$
(3,734)
$
(124,126)
Other comprehensive loss before reclassifications
(2,179)
(9,969)
(34)
(12,182)
Amounts reclassified from AOCI
—
(312)
—
(312)
Income tax expense
—
1,953
10
1,963
Net other comprehensive loss
(2,179)
(8,328)
(24)
(10,531)
Balance, May 31, 2020
$
(123,677)
$
(7,222)
$
(3,758)
$
(134,657)
Items reclassified out of AOCI were immaterial for the three and nine months ended May 31, 2021 and May 31, 2020. Thus, the corresponding line items in the condensed consolidated statements of earnings to which the items were reclassified are not presented.
10
NOTE 4. REVENUE RECOGNITION
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 7% and 10% of net sales in the North America segment in the three and nine months ended May 31, 2021, respectively, and 11% and 12% of net sales in the North America segment in the three and nine months ended May 31, 2020, respectively. Revenue from contracts where the Company does not provide installation services is recognized over time using an output measure, and these contracts represented 9% of net sales in the North America segment in both the three and nine months ended May 31, 2021, and 12% and 11% in the three and nine months ended May 31, 2020, respectively. 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)
May 31, 2021
August 31, 2020
Contract assets (included in accounts receivable)
$
67,906
$
53,275
Contract liabilities (included in accrued expenses and other payables)
22,151
25,450
The entire contract liability as of August 31, 2020 was recognized as revenue in the nine months ended May 31, 2021.
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 May 31, 2021, $776.7 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 May 31, 2021 and August 31, 2020, work in process inventories were immaterial. At May 31, 2021 and August 31, 2020, the Company's raw materials inventories were $238.0 million and $123.9 million, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill by reportable segment at May 31, 2021 is detailed in the following table:
(in thousands)
North America
Europe
Consolidated
Goodwill, gross*
$
71,941
$
4,590
$
76,531
Accumulated impairment losses*
(10,036)
(164)
(10,200)
Goodwill, net*
$
61,905
$
4,426
$
66,331
_________________
* The change in balance from August 31, 2020 was immaterial.
The total gross carrying amounts of the Company's intangible assets subject to amortization were $21.9 million and $22.1 million, and the total net carrying amounts were $11.0 million and $12.6 million at May 31, 2021 and August 31, 2020, respectively. These assets were included in other noncurrent assets on the Company's condensed consolidated balance sheets. Intangible amortization expense from continuing operations related to such intangible assets was immaterial for the three and nine months ended May 31, 2021 and 2020. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives at May 31, 2021.
At May 31, 2021 and August 31, 2020, the net carrying amount of the acquired unfavorable contract backlog liability was $1.5 million and $6.0 million, respectively. Amortization of the acquired unfavorable contract backlog was $1.5 million and $4.5 million for the three and nine months ended May 31, 2021, respectively, and $4.4 million and $18.7 million for the corresponding periods, and was recorded as an increase to net sales in the Company’s condensed consolidated statements of earnings.
11
NOTE 7. LEASES
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
May 31, 2021
August 31, 2020
Assets:
Operating assets
Other noncurrent assets
$
114,774
$
114,905
Finance assets
Property, plant and equipment, net
54,501
50,642
Total leased assets
$
169,275
$
165,547
Liabilities:
Operating lease liabilities:
Current
Accrued expenses and other payables
$
26,799
$
27,604
Long-term
Other noncurrent liabilities
96,063
95,810
Total operating lease liabilities
122,862
123,414
Finance lease liabilities:
Current
Current maturities of long-term debt and short-term borrowings
15,613
14,373
Long-term
Long-term debt
36,757
35,851
Total finance lease liabilities
52,370
50,224
Total lease liabilities
$
175,232
$
173,638
The components of lease cost were as follows:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands)
2021
2020
2021
2020
Operating lease expense
$
8,377
$
9,129
$
25,750
$
26,734
Finance lease expense:
Amortization of assets
3,270
3,343
9,729
8,228
Interest on lease liabilities
555
456
1,673
1,322
Total finance lease expense
3,825
3,799
11,402
9,550
Variable and short-term lease expense
4,584
4,233
13,871
12,547
Total lease expense
$
16,786
$
17,161
$
51,023
$
48,831
The weighted average remaining lease term and discount rate for operating and finance leases are presented in the following table:
May 31, 2021
August 31, 2020
Weighted average remaining lease term (years)
Operating leases
6.4
6.3
Finance leases
3.7
3.8
Weighted average discount rate
Operating leases
4.476
%
4.283
%
Finance leases
4.194
%
4.270
%
12
Cash flow and other information related to leases is included in the following table:
Nine Months Ended May 31,
(in thousands)
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
25,862
$
27,003
Operating cash outflows from finance leases
1,665
1,243
Financing cash outflows from finance leases
11,706
9,607
Right of use assets obtained in exchange for lease obligations:
Operating leases
$
23,019
$
38,363
Finance leases
14,002
16,277
Future maturities of lease liabilities at May 31, 2021 are presented in the following table:
(in thousands)
Operating Leases
Finance Leases
Year 1
$
32,255
$
17,495
Year 2
26,992
15,228
Year 3
21,553
12,637
Year 4
16,576
8,229
Year 5
12,303
2,238
Thereafter
32,922
758
Total lease payments
142,601
56,585
Less imputed interest
19,739
4,215
Present value of lease liabilities
$
122,862
$
52,370
NOTE 8. CREDIT ARRANGEMENTS
Long-term debt was as follows:
(in thousands)
Weighted Average Interest Rate as of May 31, 2021
May 31, 2021
August 31, 2020
2031 Notes
3.875%
$
300,000
$
—
2027 Notes
5.375%
300,000
300,000
2026 Notes
5.750%
—
350,000
2023 Notes
4.875%
330,000
330,000
Poland Term Loan
1.710%
54,606
40,713
Short-term borrowings
1.000%
28,900
—
Other
5.100%
19,492
21,329
Finance leases
52,370
50,224
Total debt
1,085,368
1,092,266
Less debt issuance costs
8,504
8,581
Total amounts outstanding
1,076,864
1,083,685
Less current maturities of long-term debt and short-term borrowings
56,735
18,149
Long-term debt
$
1,020,129
$
1,065,536
In February 2021, the Company issued $300.0 million of 3.875% Senior Notes due February 2031 (the "2031 Notes"). Issuance costs associated with the 2031 Notes were approximately $4.9 million in the nine month period ended May 31, 2021. Interest on the 2031 Notes is payable semiannually.
13
In May 2018, the Company issued $350.0 million of 5.750% Senior Notes due April 2026 (the "2026 Notes"). In February 2021, the Company accepted for purchase approximately $77.8 million of the outstanding principal amount of the 2026 Notes through a cash tender offer. Following the expiration of the cash tender offer on February 18, 2021, the Company redeemed the remaining outstanding principal amount of the 2026 Notes. In the nine months ended May 31, 2021, the Company recognized a $16.8 million loss on debt extinguishment related to the retirement of the 2026 Notes.
In March 2021, the Company entered into a Fifth Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with a revolving credit facility (the "Revolver") of $400.0 million and a maturity date in March 2026, replacing the Fourth Amended and Restated Credit Agreement with a revolving credit facility of $350.0 million and a maturity date in June 2022. The Company had no amounts drawn under the Revolver or the previous revolving credit facility at May 31, 2021 or August 31, 2020. The availability under the Revolver and the previous revolving credit facility was reduced by outstanding stand-by letters of credit totaling $3.0 million at May 31, 2021 and August 31, 2020.
The Company has a Term Loan facility (the "Poland Term Loan") through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP"), upon which an incremental principal amount of PLN 50.0 million, or $13.7 million, was drawn in March 2021. At May 31, 2021, the maximum amount available under the facility, PLN 200.0 million, or $54.6 million, was outstanding, compared to PLN 150.0 million, or $40.7 million, outstanding as of August 31, 2020.
During the third quarter of 2021, the Company amended certain terms of the credit facilities in Poland through its subsidiary, CMCP, reducing the total credit facilities from PLN 275.0 million to PLN 250.0 million, or $68.3 million, as of May 31, 2021, and extending the expiration date from March 2022 to March 2024. No amounts were outstanding under these facilities as of May 31, 2021 or August 31, 2020. 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 $0.9 million and $0.8 million at May 31, 2021 and August 31, 2020, respectively.
The Company's debt agreements require compliance with certain non-financial and financial covenants, including an interest coverage ratio and a debt to capitalization ratio. At May 31, 2021, the Company was in compliance with all covenants contained in its debt agreements.
Accounts Receivable Facilities
In April 2021, the Company amended certain terms of the U.S. trade accounts receivable facility (the "U.S. Facility"), reducing the maximum facility from $200 million to $150 million and extending the expiration date from November 2021 to March 2023. The Company had no advance payments outstanding under the U.S. Facility at May 31, 2021 or August 31, 2020.
The Poland accounts receivable facility has a limit of PLN 220.0 million, or $60.1 million, at May 31, 2021. The Company had PLN 105.9 million, or $28.9 million, advance payments outstanding under the Poland accounts receivable facility at May 31, 2021 and none at August 31, 2020.
NOTE 9. DERIVATIVES
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 gross margin 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) energy derivatives to mitigate the risk related to price volatility of electricity and natural gas.
14
At May 31, 2021, the notional values of the Company's foreign currency and commodity commitments were $274.1 million and $239.4 million, respectively. At August 31, 2020, the notional values of the Company's foreign currency and commodity contract commitments were $138.5 million and $195.8 million, respectively.
The following table provides information regarding the Company's commodity contract commitments at May 31, 2021:
Commodity
Long/Short
Total
Aluminum
Long
4,150
MT
Aluminum
Short
1,750
MT
Copper
Long
624
MT
Copper
Short
8,981
MT
Electricity
Long
1,917,000
MW(h)
_________________
MT = Metric Ton
MW(h) = Megawatt hour
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.
Commodity derivatives not designated as hedging instruments resulted in a loss, before income taxes, of $7.9 million and $24.5 million, in the three and nine months ended May 31, 2021, respectively, and a gain, before income taxes, of $1.5 million and $1.9 million in the three and nine months ended May 31, 2020, respectively, primarily recorded in cost of goods sold within the condensed consolidated statements of earnings. Commodity derivatives accounted for as cash flow hedging instruments resulted in a net gain of $12.2 million and $21.0 million, in the three and nine months ended May 31, 2021, respectively, and a net loss of $5.2 million and $8.1 million, in the three and nine months ended May 31, 2020, respectively, recognized in the condensed consolidated statements of comprehensive income. See Note 10, Fair Value, for the fair value of the Company's derivative instruments recorded in the condensed consolidated balance sheets.
NOTE 10. FAIR VALUE
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 Summary of Significant Accounting Policies footnote in the 2020 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)
May 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)
$
415,850
$
415,850
$
—
$
—
Commodity derivative assets (2)
11,193
712
—
10,481
Foreign exchange derivative assets (2)
5,482
—
5,482
—
Liabilities:
Commodity derivative liabilities (2)
6,325
6,325
—
—
Foreign exchange derivative liabilities (2)
1,236
—
1,236
—
15
Fair Value Measurements at Reporting Date Using
(in thousands)
August 31, 2020
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)
$
449,824
$
449,824
$
—
$
—
Commodity derivative assets (2)
202
202
—
—
Foreign exchange derivative assets (2)
1,484
—
1,484
—
Liabilities:
Commodity derivative liabilities (2)
19,000
3,993
—
15,007
Foreign exchange derivative liabilities (2)
459
—
459
—
_________________
(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.
May 31, 2021
Unobservable Inputs
Low
High
Average
Floating rate (PLN)
217.38
296.36
251.10
May 31, 2020
Unobservable Inputs
Low
High
Average
Floating rate (PLN)
151.74
265.00
207.50
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 may cause volatility in the fair value estimate and is the primary reason for unrealized gains and losses included in other comprehensive income ("OCI") in the three and nine months ended May 31, 2021 and 2020.
16
(in thousands)
Three Months Ended May 31, 2021
Balance, March 1, 2021
$
(4,285)
Total gains, realized and unrealized
Unrealized holding gain(1)
15,459
Reclassification for gain included in net earnings(2)
(693)
Balance, May 31, 2021
$
10,481
(in thousands)
Nine Months Ended May 31, 2021
Balance, September 1, 2020
$
(15,007)
Total gains, realized and unrealized
Unrealized holding gain(1)
26,434
Reclassification for gain included in net earnings(2)
(946)
Balance, May 31, 2021
$
10,481
(in thousands)
Three Months Ended May 31, 2020
Balance, March 1, 2020
$
(3,586)
Total losses, realized and unrealized
Unrealized holding loss(1)
(6,443)
Reclassification for loss included in net earnings(2)
—
Balance, May 31, 2020
$
(10,029)
(in thousands)
Nine Months Ended May 31, 2020
Balance, September 1, 2019
$
—
New commodity contract
1,083
Total losses, realized and unrealized
Unrealized holding loss(1)
(11,112)
Reclassification for loss included in net earnings(2)
—
Balance, May 31, 2020
$
(10,029)
________________
(1) Unrealized holding gains/(losses) are included in OCI in the condensed consolidated statements of comprehensive income.
(2) (Gains)/losses 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 nine months ended May 31, 2021 or 2020.
The carrying values of the Company's short-term items 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:
17
May 31, 2021
August 31, 2020
(in thousands)
Fair Value Hierarchy
Carrying Value
Fair Value
Carrying Value
Fair Value
2031 Notes (1)
Level 2
$
300,000
$
298,455
$
—
$
—
2027 Notes (1)
Level 2
300,000
318,003
300,000
319,377
2023 Notes (1)
Level 2
330,000
347,912
330,000
345,335
Poland Term Loan(2)
Level 2
54,606
54,606
40,713
40,713
Short-term borrowings (2)
Level 2
28,900
28,900
—
—
2026 Notes (1)
Level 2
—
—
350,000
367,374
_________________
(1) The fair values of the Notes 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 15, Stock-Based Compensation Plans, to the consolidated financial statements in the 2020 Form 10-K. In general, restricted stock units granted in 2021 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 granted in 2021 vest after a period of three years.
During the nine months ended May 31, 2021 and 2020, the Company granted the following awards under its stock-based compensation plans:
May 31, 2021
May 31, 2020
(in thousands, except per share data)
Shares Granted
Weighted Average Grant Date Fair Value
Shares Granted
Weighted Average Grant Date Fair Value
Equity method
1,512
$
20.51
1,521
$
18.32
Liability method
324
N/A
426
N/A
During the three and nine months ended May 31, 2021, the Company recorded expense of $3.2 million and $5.0 million, respectively, for mark-to-market adjustments on liability awards, and recorded immaterial mark-to-market adjustments on liability awards for the three and nine months ended May 31, 2020. At May 31, 2021, the Company had outstanding 711,148 equivalent shares accounted for under the liability method. The Company expects 675,590 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:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands)
2021
2020
2021
2020
Stock-based compensation expense
$
13,800
$
6,170
$
35,558
$
21,975
18
NOTE 12. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The calculations of basic and diluted earnings per share from continuing operations were as follows:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands, except share data)
2021
2020
2021
2020
Earnings from continuing operations
$
130,408
$
64,169
$
260,552
$
210,520
Basic earnings per share:
Shares outstanding for basic earnings per share
120,613,652
119,192,962
120,241,579
118,828,870
Basic earnings per share from continuing operations
$
1.08
$
0.54
$
2.17
$
1.77
Diluted earnings per share:
Shares outstanding for basic earnings per share
120,613,652
119,192,962
120,241,579
118,828,870
Effect of dilutive securities:
Stock-based incentive/purchase plans
1,580,003
1,085,779
1,610,565
1,448,867
Shares outstanding for diluted earnings per share
122,193,655
120,278,741
121,852,144
120,277,737
Diluted earnings per share from continuing operations
$
1.07
$
0.53
$
2.14
$
1.75
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 earnings per share calculation until the shares vest.
During the first quarter of 2015, CMC's Board of Directors authorized a share repurchase program under which CMC may repurchase up to $100.0 million of shares of common stock. During the nine months ended May 31, 2021, CMC did not repurchase any shares of common stock. CMC had remaining authorization to repurchase $27.6 million of common stock at May 31, 2021.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal and Environmental Matters
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters.
The Company has received notices from the U.S. Environmental Protection Agency ("EPA") or state agencies with similar responsibility that it is considered a potentially responsible party at several sites, none of which are owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or similar state statutes to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. At May 31, 2021 and August 31, 2020, the amounts accrued for cleanup and remediation costs in connection with CERCLA sites were immaterial. The estimation process is based on currently available information which is, in many cases, preliminary and incomplete. Total accrued environmental liabilities, including CERCLA sites, were $6.1 million and $3.4 million at May 31, 2021 and August 31, 2020, respectively, of which $2.5 million and $2.7 million were classified as other long-term liabilities at May 31, 2021 and August 31, 2020, 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. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material.
Management believes that adequate provisions have been made in the Company's condensed consolidated financial statements for the potential impact of these contingencies, and that the outcomes of the suits and proceedings described above, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on the business, results of operations or financial condition of the Company.
19
NOTE 14. BUSINESS SEGMENTS
The Company structures its business into two reportable segments: North America and Europe. See Note 1, Nature of Operations, in the 2020 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:
Three Months Ended May 31, 2021
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
1,558,068
$
284,107
$
2,866
$
1,845,041
Adjusted EBITDA
207,330
50,005
(36,214)
221,121
Nine Months Ended May 31, 2021
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
4,010,567
$
680,769
$
7,778
$
4,699,114
Adjusted EBITDA
534,576
80,582
(108,671)
506,487
Total assets at May 31, 2021
3,089,579
675,880
625,616
4,391,075
Three Months Ended May 31, 2020
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
1,167,081
$
173,817
$
785
$
1,341,683
Adjusted EBITDA
159,394
14,270
(26,882)
146,782
Nine Months Ended May 31, 2020
(in thousands)
North America
Europe
Corporate and Other
Continuing Operations
Net sales
$
3,545,084
$
519,285
$
2,985
$
4,067,354
Adjusted EBITDA
486,957
39,080
(81,729)
444,308
Total assets at August 31, 2020*
2,862,805
532,850
686,073
4,081,728
_________________
*Total assets listed in Corporate and Other at August 31, 2020 includes assets from discontinued operations.
The following table presents a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands)
2021
2020
2021
2020
Earnings from continuing operations
$
130,408
$
64,169
$
260,552
$
210,520
Interest expense
11,965
15,409
40,245
47,875
Income taxes
38,175
23,804
80,709
73,981
Depreciation and amortization
41,804
41,765
125,176
124,095
Amortization of acquired unfavorable contract backlog
(1,508)
(4,348)
(4,540)
(18,676)
Asset impairments
277
5,983
4,345
6,513
Adjusted EBITDA
$
221,121
$
146,782
$
506,487
$
444,308
Disaggregation of Revenue
The following tables display revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
20
Three Months Ended May 31, 2021
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
346,614
$
5,904
$
—
$
352,518
Steel products
626,084
215,088
—
841,172
Downstream products
475,714
56,444
—
532,158
Other
109,656
6,277
3,260
119,193
Net sales-unaffiliated customers
1,558,068
283,713
3,260
1,845,041
Intersegment net sales, eliminated on consolidation
—
394
(394)
—
Net sales
$
1,558,068
$
284,107
$
2,866
$
1,845,041
Nine Months Ended May 31, 2021
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
811,863
$
13,509
$
—
$
825,372
Steel products
1,597,942
524,025
—
2,121,967
Downstream products
1,313,140
124,679
—
1,437,819
Other
287,622
17,244
9,090
313,956
Net sales-unaffiliated customers
4,010,567
679,457
9,090
4,699,114
Intersegment net sales, eliminated on consolidation
—
1,312
(1,312)
—
Net sales
$
4,010,567
$
680,769
$
7,778
$
4,699,114
Three Months Ended May 31, 2020
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
159,174
$
2,499
$
—
$
161,673
Steel products
420,169
132,741
—
552,910
Downstream products
494,519
32,885
—
527,404
Other
93,219
5,340
1,137
99,696
Net sales-unaffiliated customers
1,167,081
173,465
1,137
1,341,683
Intersegment net sales, eliminated on consolidation
—
352
(352)
—
Net sales
$
1,167,081
$
173,817
$
785
$
1,341,683
Nine Months Ended May 31, 2020
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
534,109
$
7,112
$
—
$
541,221
Steel products
1,298,980
410,010
—
1,708,990
Downstream products
1,436,011
84,843
—
1,520,854
Other
275,984
16,196
4,109
296,289
Net sales-unaffiliated customers
3,545,084
518,161
4,109
4,067,354
Intersegment net sales, eliminated on consolidation
—
1,124
(1,124)
—
Net sales
$
3,545,084
$
519,285
$
2,985
$
4,067,354
21
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 (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" relates to the three or nine month period ended May 31, 2020.
COVID-19 UPDATE
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, 2021 compared 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 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.
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.
RESULTS OF OPERATIONS SUMMARY
Business Overview
As a vertically integrated organization, we manufacture, recycle and fabricate steel and metal products, related materials and services through a network including seven electric arc furnace ("EAF") mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the U.S. and Poland. Our operations are conducted through two reportable segments: North America and Europe.
When considering our results for the period, we evaluate our operating performance by comparing net sales, in the aggregate and for both of our segments, in the current period to net sales in the corresponding period. In doing so, we focus on changes in average selling price per ton and tons shipped for each of our product categories as these are the two variables that typically have the greatest impact on our results of operations. We group our products into three categories: raw materials, steel products and downstream products. Raw materials include ferrous and nonferrous scrap, steel products include rebar, merchant and other steel products, such as billets and wire rod, and downstream products include fabricated rebar and steel fence post.
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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 discussion of our results of operations 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
$
1,845,041
$
1,341,683
$
4,699,114
$
4,067,354
Earnings from continuing operations
130,408
64,169
260,552
210,520
Diluted earnings per share
$
1.07
$
0.53
$
2.14
$
1.75
Net sales for the three and nine months ended May 31, 2021 increased $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 America segment 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, 2021 continued 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 America segment 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, 2021 increased $50.0 million, or 24%, year-over-year, due to increased volumes and raw materials margin per ton in our North America segment 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 million and $17.0 million for 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
Interest expense for the three and nine months ended May 31, 2021 decreased $3.4 million and $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.
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Income Taxes
The effective income tax rate from continuing operations for the three and nine months ended May 31, 2021 was 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 America
Three 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
$
3,545,084
Adjusted 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
$
625
Downstream products
963
966
943
976
Cost of ferrous scrap utilized per ton
$
369
$
239
$
327
$
238
Steel products metal margin per ton
425
385
375
387
Net sales for the three and nine months ended May 31, 2021 increased $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, 2021 compared 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 $170 and $77 per 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 million and $4.5 million for the three and nine months ended May 31, 2021, respectively, and $4.4 million and $18.7 million for the corresponding periods, respectively, related to the acquired unfavorable contract backlog.
Adjusted EBITDA for the three and nine months ended May 31, 2021 increased $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, 2021 was 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, 2021 compared to the
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corresponding periods. Adjusted EBITDA did not include the $1.5 million or $4.5 million benefit of the amortization of the acquired unfavorable contract backlog reserve described above. Adjusted EBITDA included non-cash stock compensation expense of $3.4 million and $10.5 million for the three and nine months ended May 31, 2021, respectively, and $2.9 million and $8.5 million for 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
$
519,285
Adjusted 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
$
437
$
552
$
449
Cost of ferrous scrap utilized per ton
$
376
$
239
$
324
$
245
Steel products metal margin per ton
288
198
228
204
Net sales for the three and nine months ended May 31, 2021 increased $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 $227 and $103 per 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, 2021 were also impacted by favorable foreign currency translation adjustments of $22.6 million and $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, 2021 increased $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, 2021 compared to the corresponding period. Adjusted EBITDA for the three and nine months ended May 31, 2021 included favorable foreign currency exchange rate impacts of $4.1 million and $5.1 million, respectively. Adjusted EBITDA included non-cash stock compensation expense of $0.8 million and $2.2 million for the three and nine months ended May 31, 2021, respectively, and $0.3 million and $1.1 million for the corresponding periods.
Corporate and Other
Corporate and Other reported adjusted EBITDA loss of $36.2 million and $108.7 million for the three and nine months ended May 31, 2021, respectively, as compared to adjusted EBITDA loss of $26.9 million and $81.7 million in the corresponding periods. The primary reason for the increase in the year-to-date adjusted EBITDA loss was the $16.8 million loss 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 million and $22.9 million for the three and nine months ended May 31, 2021, respectively, compared to $3.0 million and $12.4 million for 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, 2021 compared to the corresponding period.
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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
$
443,120
Notes 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 needed.
Cash Flows
Operating Activities
Net cash flows from operating activities were $94.2 million for the nine months ended May 31, 2021 compared to $531.8 million for the nine months ended May 31, 2020. Net earnings increased by $48.7 million year-over-year, offset by a $459.2 million year-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, 2021 compared to the corresponding period, and higher average selling prices increased accounts receivable in the nine months ended May 31, 2021 compared 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 million and $128.9 million for the nine months ended May 31, 2021 and 2020, respectively. The $24.9 million decrease in net cash flows used by investing activities was primarily caused by changes in acquisition and disposition activity, which resulted in a $9.9 million year-over-year decline in acquisitions and an $11.8 million year-over-year increase in cash proceeds from the sale of property, plant and equipment and other in the nine months ended May 31, 2021 compared to the corresponding period.
We estimate that our 2021 capital spending will range from $200 million to $225 million. We regularly assess our capital spending based on current and expected results and the amount is subject to change.
Financing Activities
Net cash flows used by financing activities were $88.2 million and $132.7 million for the nine months ended May 31, 2021 and 2020, respectively. Net cash flows used by financing activities decreased as a result of net proceeds from accounts receivable facilities of $27.6 million in 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 million in the nine months ended May 31, 2021 compared to $87.9 million in the corresponding period. Partially offsetting these reductions in net cash flows used by financing activities, we paid $13.1 million of debt extinguishment costs related to our early retirement of the 2026 Notes in the nine months ended May 31, 2021.
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Our cash and cash equivalents position remains strong at $443.1 million as 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, 2021 increased by approximately $72.5 million from August 31, 2020, primarily due to an increase in purchase obligations and advance payments outstanding under the Poland accounts receivable facility, offset by a decrease in long-term debt and interest payable. Our estimated contractual obligations for the twelve months ending May 31, 2022 are approximately $614.5 million and primarily consist of expenditures incurred in connection with normal business operations.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that governmental agencies, our insurance providers and suppliers request. At May 31, 2021, we had committed $24.8 million under these arrangements, of which $3.0 million reduced availability under the Revolver.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CONTINGENCIES
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. See Note 13, Commitments and Contingencies, for more information.
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FORWARD-LOOKING STATEMENTS
This Form 10-Q contains or incorporates by reference a number of "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies and organic growth provided by acquisitions and strategic investments, demand for our products, metal margins, the effect of COVID-19 and related governmental and economic responses thereto, the ability to operate our steel mills at full capacity, future 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 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 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;
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•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 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 nine months ended May 31, 2021, the U.S. dollar equivalent of the Company's total gross foreign currency exchange contract commitments increased $135.6 million, or 98%, compared to August 31, 2020. This increase was primarily due to forward contracts denominated in euro with a Polish zloty functional currency, which increased $133.9 million compared to August 31, 2020.
During the nine months ended May 31, 2021, the Company's total commodity contract commitments increased $43.6 million, or 22%. This increase was primarily due to the significant increase in copper prices as of May 31, 2021 as compared to August 31, 2020.
There were no other material changes to the information set forth in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our 2020 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
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 our 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 May 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding our legal proceedings, refer to "Legal and Environmental Matters" in Note 13 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 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
There were no material changes to the risk factors previously disclosed 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended May 31, 2021.
Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101)
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SIGNATURE
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
June 24, 2021
/s/ Paul J. Lawrence
Paul J. Lawrence
Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer of the registrant)
