☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2023
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 21, 2023, 116,786,346 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, 2022 (the "2022 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 2022 Form 10-K. The results of operations for the three and nine month periods ended May 31, 2023 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" or "comparable period" relates to the three or nine month period ended May 31, 2022, as applicable. 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
Tensar Acquisition
On April 25, 2022 (the "Tensar Acquisition Date"), the Company completed the acquisition of TAC Acquisition Corp. ("Tensar"). The total cash purchase price, net of $19.6 million cash acquired, was approximately $550 million, and was funded through domestic cash on-hand. The acquired operations in North America are presented within the Company's North America reportable segment, and the remaining acquired operations are presented within the Company's Europe reportable segment.
The table below presents the fair values and measurement period adjustments that were allocated to Tensar's assets and liabilities as of the Tensar Acquisition Date:
(in thousands)
Fair Value as Previously Reported(1)
Cash and cash equivalents
$
19,551
Accounts receivable
37,741
Inventories
39,462
Prepaid and other current assets
12,528
Defined benefit pension plan
14,620
Property, plant and equipment
85,983
Intangible assets
260,500
Goodwill
186,805
Other noncurrent assets
19,660
Accounts payable
(12,134)
Accrued expenses and other payables
(23,725)
Current maturities of long-term debt
(3,277)
Deferred income taxes
(45,055)
Other noncurrent liabilities
(16,347)
Long-term debt
(4,312)
Total assets acquired and liabilities assumed
$
572,000
__________________________________
(1) As previously reported in the 2022 Form 10-K. No measurement period adjustments occurred during the nine months ended May 31, 2023.
Supplemental information on an unaudited pro forma basis is presented below as if the acquisition of Tensar occurred on September 1, 2020. The pro forma financial information is presented for comparative purposes only, based on certain factually supported estimates and assumptions, which the Company believes to be reasonable, but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition had been completed on September 1, 2020. These results were not used as part of management's analysis of the financial results and performance of the Company. The pro forma adjustments do not reflect anticipated synergies, but rather include the nonrecurring impact of additional cost of sales from revalued inventory and the recurring income statement effects of fair value adjustments, such as depreciation and amortization. Further adjustments were made to remove the impact of Tensar's prior management fees, acquisition and integration expenses and interest on debt not assumed in the acquisition. The resulting tax effects of the business combination are also reflected below.
(in thousands)
Three Months Ended May 31, 2022
Nine Months Ended May 31, 2022
Pro forma net sales
$
2,554,295
$
6,657,257
Pro forma net earnings
318,736
942,369
The pro forma results presented above include, but are not limited to, adjustments to remove the impact of $4.5 million and $7.6 million of acquisition and integration expenses from the three and nine months ended May 31, 2022, respectively, and $2.2 million of increased cost of goods sold from both the three and nine months ended May 31, 2022 as a result of the revaluation of inventory. Results also reflect increased amortization expense from revalued intangible assets of $1.9 million and $8.1 million in the three and nine months ended May 31, 2022, respectively.
2023 Acquisitions
On September 15, 2022, the Company completed the acquisition of Advanced Steel Recovery, LLC ("ASR"), a supplier of recycled ferrous metals located in Southern California. ASR's primary operations include processing and brokering capabilities that source material for sale into both the domestic and export markets.
On November 14, 2022, the Company completed the acquisition of a Galveston, Texas area metals recycling facility and related assets (collectively, "Kodiak") from Kodiak Resources, Inc. and Kodiak Properties, L.L.C.
On March 3, 2023, the Company completed the acquisition of all of the assets of Roane Metals Group, LLC ("Roane"), a supplier of recycled metals with two facilities located in eastern Tennessee. The majority of volumes processed by Roane relate to obsolete ferrous scrap metals to be consumed by the Company's steel mill operations.
On March 17, 2023, the Company completed the acquisition of Tendon Systems, LLC ("Tendon"), a leading provider of post-tensioning, barrier cable and concrete restoration solutions to the southeastern U.S.
On May 1, 2023, the Company completed the acquisition of all of the assets of BOSTD America, LLC ("BOSTD"), a geogrid manufacturing facility located in Blackwell, Oklahoma. Prior to the acquisition, BOSTD produced several product lines for the Company's Tensar operations under a contract manufacturing arrangement.
The acquisitions of ASR, Kodiak, Roane, Tendon and BOSTD (the "2023 Acquisitions") are not material individually, or in the aggregate, to the Company's financial position as of May 31, 2023 or results of operations for the three or nine months ended May 31, 2023, and therefore, pro forma operating results and other disclosures for the 2023 Acquisitions are not presented. Operating results for the 2023 Acquisitions are presented within the Company's North America reportable segment.
Facility Disposition
On September 29, 2021, the Company entered into a definitive agreement to sell the assets associated with its Rancho Cucamonga melting operations and an adjacent rebar fabrication facility ("the Rancho Cucamonga facilities"), which were part of the North America segment. 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 was 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 for the purchase of a like-kind asset, resulting in a balance of $31.5 million recorded in restricted cash as of May 31, 2022. In June
2022, the Company used an additional $14.5 million of the restricted cash for the purchase of a like-kind asset before the remaining balance was released from restrictions per the terms of the sale agreement during July 2022.
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, 2023
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, March 1, 2023
$
(192,840)
$
222,411
$
(5,075)
$
24,496
Other comprehensive income (loss) before reclassifications
42,723
(14,686)
(146)
27,891
Reclassification for gain (1)
—
(319)
—
(319)
Income tax benefit
—
2,862
52
2,914
Net other comprehensive income (loss)
42,723
(12,143)
(94)
30,486
Balance, May 31, 2023
$
(150,117)
$
210,268
$
(5,169)
$
54,982
Nine Months Ended May 31, 2023
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, September 1, 2022
$
(245,897)
$
138,242
$
(6,796)
$
(114,451)
Other comprehensive income before reclassifications
95,780
98,542
1,533
195,855
Reclassification for gain (1)
—
(10,055)
—
(10,055)
Income tax (expense) benefit
—
(16,461)
94
(16,367)
Net other comprehensive income
95,780
72,026
1,627
169,433
Balance, May 31, 2023
$
(150,117)
$
210,268
$
(5,169)
$
54,982
Three Months Ended May 31, 2022
(in thousands)
Foreign Currency Translation
Derivatives
Defined Benefit Obligation
Total AOCI
Balance, March 1, 2022
$
(159,829)
$
68,886
$
(933)
$
(91,876)
Other comprehensive income (loss) before reclassifications
(14,668)
32,302
(7)
17,627
Reclassification for gain (1)
—
(6,342)
—
(6,342)
Income tax (expense) benefit
—
(5,140)
1
(5,139)
Net other comprehensive income (loss)
(14,668)
20,820
(6)
6,146
Balance, May 31, 2022
$
(174,497)
$
89,706
$
(939)
$
(85,730)
Nine Months Ended May 31, 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
(68,817)
100,820
(23)
31,980
Reclassification for gain (1)
—
(16,667)
—
(16,667)
Income tax (expense) benefit
—
(16,228)
5
(16,223)
Net other comprehensive income (loss)
(68,817)
67,925
(18)
(910)
Balance, May 31, 2022
$
(174,497)
$
89,706
$
(939)
$
(85,730)
__________________________________
(1) Reclassifications for gains on derivatives included in net earnings are recorded in cost of goods sold in the condensed consolidated statements of earnings.
Revenue related to raw materials, steel products and construction-related solutions in the North America and Europe segments and downstream products in the Europe segment is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt. See Note 15, Operating Segments, for further information about disaggregated revenue by the Company's major product lines.
Each downstream 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; these contracts represented 7% of net sales in the North America segment in both the three and nine months ended May 31, 2023, and 7% and 8% of net sales in the North America segment in the three and nine months ended May 31, 2022, respectively. Revenue from contracts where the Company does not provide installation services is recognized over time using an output measure; these contracts represented 10% and 11% of net sales in the North America segment in the three and nine months ended May 31, 2023, respectively, and 8% of net sales in the North America segment in both the three and nine months ended May 31, 2022.
The following table provides information about assets and liabilities from contracts with customers:
(in thousands)
May 31, 2023
August 31, 2022
Contract assets (included in accounts receivable)
$
69,362
$
73,037
Contract liabilities (included in accrued expenses and other payables)
29,293
27,567
The amount of revenue reclassified from August 31, 2022 contract liabilities during the nine months ended May 31, 2023 was approximately $23.4 million.
Remaining Performance Obligations
As of May 31, 2023, revenue totaling $1.0 billion has been allocated to remaining performance obligations in the North America segment related to contracts where revenue is recognized using an input or output measure. Of this amount, the Company estimates that approximately 78% of the remaining performance obligations will be recognized in the twelve months after May 31, 2023, and the remainder will be recognized during the subsequent twelve months. The duration of all other contracts in the North America and Europe segments are typically less than one year.
NOTE 5. INVENTORIES, NET
The majority of the Company's inventories are in the form of semi-finished and finished steel products. Under the Company’s vertically integrated business model, steel products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined as finished goods.
The components of inventories were as follows:
(in thousands)
May 31, 2023
August 31, 2022
Raw materials
$
287,785
$
271,756
Work in process
4,786
9,446
Finished goods
852,905
888,494
Total
$
1,145,476
$
1,169,696
Inventory write-downs were $3.4 million and $8.9 million during the three and nine months ended May 31, 2023, respectively, and were primarily recorded in the Europe segment. Inventory write-downs were immaterial in the corresponding periods.
Goodwill by reportable segment is detailed in the following table:
(in thousands)
North America
Europe
Consolidated
Goodwill, gross
Balance, September 1, 2022
$
216,059
$
43,115
$
259,174
Acquisitions
92,077
—
92,077
Foreign currency translation
—
1,037
1,037
Balance, May 31, 2023
308,136
44,152
352,288
Accumulated impairment
Balance, September 1, 2022
(10,036)
(129)
(10,165)
Foreign currency translation
—
(14)
(14)
Balance, May 31, 2023
(10,036)
(143)
(10,179)
Goodwill, net
Balance, September 1, 2022
206,023
42,986
249,009
Acquisitions
92,077
—
92,077
Foreign currency translation
—
1,023
1,023
Balance, May 31, 2023
$
298,100
$
44,009
$
342,109
Intangible assets subject to amortization are detailed in the following table:
May 31, 2023
August 31, 2022
(in thousands)
Useful Lives in Years
Gross Carrying Amount
Accumulated Amortization
Net
Gross Carrying Amount
Accumulated Amortization
Net
Developed technologies
1 to 15
$
149,009
$
20,529
$
128,480
$
147,040
$
6,485
$
140,555
Customer relationships
5 to 17
62,425
5,704
56,721
53,115
2,116
50,999
Perpetual lease rights
79
5,830
868
4,962
3,584
744
2,840
Patents
5 to 7.5
7,203
5,327
1,876
7,203
4,596
2,607
Trade names
5 to 15
3,253
1,037
2,216
3,212
764
2,448
Non-compete agreements
5 to 7
2,300
1,402
898
3,050
1,135
1,915
Other
15
101
101
—
101
99
2
Total
$
230,121
$
34,968
$
195,153
$
217,305
$
15,939
$
201,366
The acquired assets from the Tendon acquisition included an intangible asset for customer relationships with a fair value of $8.9 million. The fair value of the intangible asset for customer relationships was calculated using an income approach, under the with-and-without method, which considers opportunity costs associated with lost profits in the absence of the existing customer base. The intangible asset for customer relationships was assigned a useful life of five years. See Note 2, Changes in Business, for additional information on the acquisition of Tendon.
Foreign currency translation adjustments for intangible assets subject to amortization were immaterial for all periods presented above.
Other indefinite-lived intangible assets consisted of the following:
The change in the balance of intangible assets with indefinite lives from August 31, 2022 to May 31, 2023 was due to foreign currency translation adjustments.
Amortization expense for intangible assets was $6.6 million and $18.9 million in the three and nine months ended May 31, 2023, respectively, of which $4.7 million and $14.0 million, respectively, was recorded in cost of goods sold and $1.9 million and $4.9 million, respectively, was recorded in selling, general and administrative expenses in the condensed consolidated statements of earnings. The Company recorded immaterial amortization expense for intangible assets in the three and nine months ended May 31, 2022. Estimated amounts of amortization expense for intangible assets for the next five years are as follows:
(in thousands)
Remainder of 2023
$
6,584
2024
25,607
2025
23,991
2026
22,562
2027
22,562
NOTE 7. CREDIT ARRANGEMENTS
Long-term debt was as follows:
(in thousands)
Weighted Average Interest Rate as of May 31, 2023
May 31, 2023
August 31, 2022
2023 Notes
4.875%
$
—
$
330,000
2030 Notes
4.125%
300,000
300,000
2031 Notes
3.875%
300,000
300,000
2032 Notes
4.375%
300,000
300,000
Series 2022 Bonds, due 2047
4.000%
145,060
145,060
Poland Term Loan
—
—
32,439
Short-term borrowings
7.750%
24,571
26,390
Other
4.547%
19,030
21,278
Finance leases
4.793%
81,032
58,536
Total debt
1,169,693
1,513,703
Less unamortized debt issuance costs
(15,282)
(16,496)
Plus unamortized bond premium
4,694
4,838
Total amounts outstanding
1,159,105
1,502,045
Less current maturities of long-term debt and short-term borrowings
(56,222)
(388,796)
Long-term debt
$
1,102,883
$
1,113,249
The Company's credit arrangements require compliance with certain covenants, including an interest coverage ratio and a debt to capitalization ratio. At May 31, 2023, the Company was in compliance with all financial covenants in its credit arrangements.
Capitalized interest, resulting primarily from the construction of the Company's third micro mill, was $6.2 million and $16.2 million during the three and nine months ended May 31, 2023, respectively, compared to $3.6 million and $7.8 million, respectively, during the corresponding periods.
Senior Notes Activity
In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 2023 (the "2023 Notes"). As of August 31, 2022, the 2023 Notes were included in current maturities of long-term debt and short-term borrowings in the consolidated balance sheet. In November 2022, the Company repurchased $115.9 million in aggregate principal amount of the 2023 Notes through a cash tender offer and recognized an immaterial loss on debt extinguishment. On May 15, 2023, the Company repaid the remaining $214.1 million outstanding aggregate principal amount of the 2023 Notes, plus interest, at maturity.
In October 2022, the Company entered into a Sixth Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with a revolving credit facility (the "Revolver") of $600.0 million and a maturity date in October 2027, replacing the Fifth Amended and Restated Credit Agreement with a revolving credit facility of $400.0 million and a maturity date in March 2026. The maximum availability under the Revolver can be increased to $850.0 million with bank approval. The Credit Agreement also provides for a delayed draw senior secured term loan facility with a maximum principal amount of $200.0 million (the “Term Loan”). The Term Loan is coterminous with the Revolver. As of May 31, 2023, the Company had no amounts drawn under the Term Loan. The Company's obligations under the Credit Agreement are secured by its North America inventory. The Credit Agreement's capacity includes a $50.0 million sub-limit for the issuance of stand-by letters of credit. The Company had no amounts drawn under the Revolver or the previous revolving credit facility at May 31, 2023 or August 31, 2022. The availability under the Revolver and the previous revolving credit facility, as applicable, was reduced by outstanding stand-by letters of credit of $0.9 million and $1.4 million at May 31, 2023 and August 31, 2022, respectively.
In November 2022, the Company repaid the outstanding principal on its term loan facility (the "Poland Term Loan") through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP"). At May 31, 2023, there was no amount outstanding or available, compared to PLN 152.4 million, or $32.4 million, outstanding and available under the facility as of August 31, 2022.
In May 2023, the Company amended certain terms of its credit facilities in Poland through CMCP, increasing the total credit facilities from PLN 300.0 million, or $63.9 million, at August 31, 2022, to PLN 550.0 million, or $129.9 million, at May 31, 2023. The facilities have expiration dates ranging from August 2024 to April 2026. There were no amounts outstanding under these facilities as of May 31, 2023 or August 31, 2022. 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 $15.9 million and $1.0 million at May 31, 2023 and August 31, 2022, respectively.
Accounts Receivable Facilities
In November 2022, the Company terminated its $150.0 million U.S. trade accounts receivable facility. The Company had no advance payments outstanding under this facility at August 31, 2022.
The Poland accounts receivable facility had a limit of PLN 288.0 million, or $68.0 million and $61.3 million, at May 31, 2023 and August 31, 2022, respectively. The Company had PLN 104.0 million, or $24.6 million, advance payments outstanding under the Poland accounts receivable facility at May 31, 2023, compared to PLN 124.0 million, or $26.4 million, advance payments outstanding at August 31, 2022.
NOTE 8. NEW MARKETS TAX CREDIT TRANSACTIONS
During 2016 and 2017, the Company entered into three New Markets Tax Credit (“NMTC”) transactions with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"). The NMTC transactions related to the construction and equipping of the micro mill in Durant, Oklahoma, as well as a rebar spooler and automated T-post shop located on the same site. As of August 31, 2022, $17.7 million of USBCDC’s contributions were classified as accrued expenses and other payables in the consolidated balance sheet and $9.5 million of USBCDC’s contributions were classified as other noncurrent liabilities in the consolidated balance sheet, in each case representing deferred revenue to the Company. During December 2022, the seven-year recapture period on the first NMTC transaction, the USBCDC Investment Fund 156, ended, and therefore, the corresponding $17.7 million USBCDC capital contribution was recognized in net sales during the nine months ended May 31, 2023. Additionally, the $2.1 million Qualifying Equity Investment for Twain Investment Fund 222, which was classified as long-term debt in the Company's consolidated balance sheet as of August 31, 2022, will mature in March 2024 and was reclassified to current maturities of long-term debt and short-term borrowings as of May 31, 2023. See Note 10, New Markets Tax Credit Transactions, to the consolidated financial statements in the 2022 Form 10-K for discussion related to the Company's NMTC transactions.
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.
The Company considers the total notional value of its futures and forward contracts as the best measure of the volume of derivative transactions. At May 31, 2023, the notional values of the Company's foreign currency and commodity contract commitments were $412.9 million and $450.9 million, respectively. At August 31, 2022, the notional values of the Company's foreign currency and commodity contract commitments were $253.5 million and $205.1 million, respectively.
The following table provides information regarding the Company's commodity contract commitments at May 31, 2023:
Commodity
Position
Total
Aluminum
Long
3,675
MT
Aluminum
Short
1,775
MT
Copper
Long
828
MT
Copper
Short
7,564
MT
Electricity
Long
3,354,000
MW(h)
Natural Gas
Long
4,790,450
MMBtu
__________________________________
MT = Metric Ton
MW(h) = Megawatt hour
MMBtu = Metric Million British thermal unit
The following table summarizes the location and amounts of the fair value of the Company's derivative instruments and hedged items recognized in the condensed consolidated balance sheets:
(in thousands)
Primary Location
May 31, 2023
August 31, 2022
Derivative assets:
Commodity
Prepaid and other current assets
$
17,924
$
26,180
Commodity
Other noncurrent assets
267,224
134,667
Foreign exchange
Prepaid and other current assets
4,275
1,296
Derivative liabilities:
Commodity
Accrued expenses and other payables
$
3,885
$
1,110
Commodity
Other noncurrent liabilities
1,606
150
Foreign exchange
Accrued expenses and other payables
6,730
3,126
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 May 31,
Nine Months Ended May 31,
Gain (Loss) on Derivatives Not Designated as Hedging Instruments (in thousands)
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
Three Months Ended May 31,
Nine Months Ended May 31,
2023
2022
2023
2022
Commodity(1)
$
(11,855)
$
25,920
$
80,134
$
81,285
__________________________________
(1) Amounts presented do not include the effects of foreign currency translation adjustments. See Note 3, Accumulated Other Comprehensive Income (Loss), for separate presentation of foreign currency translation adjustments.
The Company's natural gas derivatives accounted for as cash flow hedging instruments have maturities extending to May 2026. The Company's electricity commodity derivatives accounted for as cash flow hedging instruments have maturities extending to December 2034. Included in the AOCI balance as of May 31, 2023 was an estimated net gain of $9.7 million from cash flow hedging instruments that is expected to be reclassified into net earnings within the twelve months following May 31, 2023. 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 Note 1, Nature of Operations and Summary of Significant Accounting Policies, to the consolidated financial statements in the 2022 Form 10-K.
The following table summarizes 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)
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
As of May 31, 2023:
Assets:
Investment deposit accounts (1)
$
389,688
$
389,688
$
—
$
—
Commodity derivative assets (2)
285,148
4,863
—
280,285
Foreign exchange derivative assets (2)
4,275
—
4,275
—
Liabilities:
Commodity derivative liabilities (2)
5,491
5,491
—
—
Foreign exchange derivative liabilities (2)
6,730
—
6,730
—
As of August 31, 2022:
Assets:
Investment deposit accounts (1)
$
572,384
$
572,384
$
—
$
—
Commodity derivative assets (2)
160,847
17,347
—
143,500
Foreign exchange derivative assets (2)
1,296
—
1,296
—
Liabilities:
Commodity derivative liabilities (2)
1,260
1,260
—
—
Foreign exchange derivative liabilities (2)
3,126
—
3,126
—
__________________________________
(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.
As of August 31, 2022, the Company had one Level 3 commodity derivative. The Company entered into its second and third Level 3 commodity derivatives in September 2022 and January 2023, respectively, with the same counterparty as the first Level 3 commodity derivative. Both the second and third Level 3 commodity derivatives will begin to settle in January 2025.
The fair value estimates of the Level 3 commodity derivatives are based on internally developed discounted cash flow models primarily utilizing unobservable inputs for which there is little or no market data. The Company forecasts future energy rates using a range of historical prices (the "floating rate"). The floating rate is the only significant unobservable input used in the Company's discounted cash flow models. Significantly higher or lower floating rates could have resulted in a material difference in our fair value measurement. The following table summarizes the floating rates used to measure the fair value of the Level 3 commodity derivatives at May 31, 2023 and August 31, 2022, which are applied uniformly across each of our Level 3 commodity derivatives:
Floating rate (PLN)
Low
High
Average
May 31, 2023
479.70
1,298.53
770.93
August 31, 2022
460.11
1,298.53
717.22
Below is a reconciliation of the beginning and ending balances of the Level 3 commodity derivatives recognized in the condensed consolidated statements of comprehensive income. The fluctuation in energy rates over time causes volatility in the fair value estimates and is the primary reason for unrealized gains included in other comprehensive income ("OCI") in the three and nine months ended May 31, 2023 and 2022.
(in thousands)
Three Months Ended May 31, 2023
Balance, March 1, 2023
$
280,842
Total gains, realized and unrealized:
Unrealized holding gain before reclassification (1)
1,526
Reclassification for gain included in net earnings (2)
(2,083)
Balance, May 31, 2023
$
280,285
(in thousands)
Nine Months Ended May 31, 2023
Balance, September 1, 2022
$
143,500
Total gains, realized and unrealized:
Unrealized holding gain before reclassification (1)
145,808
Reclassification for gain included in net earnings (2)
(9,023)
Balance, May 31, 2023
$
280,285
(in thousands)
Three Months Ended May 31, 2022
Balance, March 1, 2022
$
78,879
Total gains, realized and unrealized:
Unrealized holding gain before reclassification (1)
19,201
Reclassification for gain included in net earnings (2)
(4,760)
Balance, May 31, 2022
$
93,320
(in thousands)
Nine Months Ended May 31, 2022
Balance, September 1, 2021
$
26,413
Total gains, realized and unrealized:
Unrealized holding gain before reclassification (1)
81,039
Reclassification for gain included in net earnings (2)
(14,132)
Balance, May 31, 2022
$
93,320
__________________________________
(1) Unrealized holding gains, net of foreign currency translation, less amounts reclassified are included in net unrealized gain (loss) on derivatives 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.
No material, non-recurring fair value remeasurements occurred during the three or nine months ended May 31, 2023 or 2022.
The carrying values of the Company's short-term items, including documentary letters of credit and notes payable, approximate fair value.
The carrying value and fair value of the Company's long-term debt, including current maturities, was $1.0 billion and $905.9 million, respectively, at May 31, 2023, and $1.4 billion and $1.2 billion, respectively at August 31, 2022. The fair value of the Company's long-term debt, including current maturities, was estimated based on Level 2 of the fair value hierarchy using indicated market values. The Company's other borrowings contain variable interest rates, and as a result, their carrying values approximate fair values.
NOTE 11. STOCK-BASED COMPENSATION PLANS
The Company's stock-based compensation plans are described in Note 14, Stock-Based Compensation Plans, to the consolidated financial statements in the 2022 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 nine months ended May 31, 2023 and 2022, the Company granted the following awards under its stock-based compensation plans:
May 31, 2023
May 31, 2022
(in thousands, except per share data)
Shares Granted
Weighted Average Grant Date Fair Value
Shares Granted
Weighted Average Grant Date Fair Value
Equity method
1,439
$
36.88
1,467
$
28.16
Liability method
269
N/A
261
N/A
The Company recorded immaterial mark-to-market adjustments on liability awards for the three and nine months ended May 31, 2023 and 2022. At May 31, 2023, the Company had outstanding 541,202 equivalent shares accounted for under the liability method. The Company expects 514,142 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 in the Company's condensed consolidated statements of earnings:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands)
2023
2022
2023
2022
Stock-based compensation expense
$
10,376
$
11,986
$
44,000
$
37,856
NOTE 12. EMPLOYEES' RETIREMENT PLANS
In October 2022, the Company terminated its U.S. Pension Plan (as defined in Note 15, Employees' Retirement Plans, to the consolidated financial statements in the 2022 Form 10-K). As part of the termination, the Company made a contribution of $4.1 million. Plan assets were liquidated to purchase annuity contracts with an insurance company for all participants. The Company recognized a $4.2 million settlement charge as a result of the termination, including an immaterial non-cash charge for unrecognized losses within accumulated other comprehensive income as of the termination date. The $4.2 million settlement charge was recognized within selling, general and administrative expenses in the condensed consolidated statement of earnings during the nine months ended May 31, 2023. No benefit obligation or plan assets related to the U.S. Pension Plan remain.
See Note 15, Employees' Retirement Plans, to the consolidated financial statements in the 2022 Form 10-K for information on the Company's remaining defined benefit pension plan (the "U.K. Pension Plan," as defined in Note 15, Employees' Retirement Plans, to the consolidated financial statements in the 2022 Form 10-K), defined contribution 401(k) retirement plan and Benefit Restoration Plan ("BRP").
NOTE 13. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based on the weighted average shares of common stock outstanding during the period. 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. 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 were as follows:
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands, except share and per share data)
2023
2022
2023
2022
Net earnings
$
233,971
$
312,429
$
675,594
$
928,632
Average basic shares outstanding
117,066,623
121,247,105
117,192,710
121,277,553
Effect of dilutive securities
1,331,276
1,552,764
1,554,374
1,649,738
Average diluted shares outstanding
118,397,899
122,799,869
118,747,084
122,927,291
Earnings per share:
Basic
$
2.00
$
2.58
$
5.76
$
7.66
Diluted
$
1.98
$
2.54
$
5.69
$
7.55
For all periods presented above, the Company had immaterial anti-dilutive shares, which were not included in the computation of average diluted shares outstanding.
In October 2021, the Company's Board of Directors authorized a share repurchase program under which the Company may repurchase up to $350.0 million of shares of CMC common stock. During the three and nine months ended May 31, 2023, the Company repurchased 352,000 and 1,957,452 shares of CMC common stock, respectively, at an average purchase price of $46.92 and $42.32 per share, respectively. The Company had remaining authorization to repurchase $105.3 million of shares of CMC common stock at May 31, 2023.
NOTE 14. 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 May 31, 2023 and August 31, 2022, the amounts accrued for cleanup and remediation costs at certain sites in response to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") and analogous state and local statutes were immaterial. Total accrued environmental liabilities, including CERCLA sites, were $5.2 million and $5.3 million at May 31, 2023 and August 31, 2022, respectively, of which $2.1 million and $2.0 million were classified as other noncurrent liabilities as of May 31, 2023 and August 31, 2022, 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 2022 Form 10-K and Note 2, Changes in Business, 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 BRP assets and short-term investments, expenses of the Company's corporate headquarters, interest expense related to long-term debt, other revenue resulting from the Company's NMTC transactions and intercompany eliminations.
The following is a summary of certain financial information by reportable segment and Corporate and Other:
Three Months Ended May 31, 2023
(in thousands)
North America
Europe
Corporate and Other
Total
Net sales
$
1,987,535
$
353,294
$
4,160
$
2,344,989
Adjusted EBITDA
402,175
9,618
(37,715)
374,078
Nine Months Ended May 31, 2023
(in thousands)
North America
Europe
Corporate and Other
Total
Net sales
$
5,445,367
$
1,115,440
$
29,498
$
6,590,305
Adjusted EBITDA
1,079,442
87,072
(93,013)
1,073,501
Total assets at May 31, 2023
4,837,341
1,270,636
412,883
6,520,860
Three Months Ended May 31, 2022
(in thousands)
North America
Europe
Corporate and Other
Total
Net sales
$
2,033,150
$
484,564
$
(1,987)
$
2,515,727
Adjusted EBITDA
379,355
120,974
(35,049)
465,280
Nine Months Ended May 31, 2022
(in thousands)
North America
Europe
Corporate and Other
Total
Net sales
$
5,300,996
$
1,209,378
$
(3,958)
$
6,506,416
Adjusted EBITDA
1,183,342
281,955
(121,876)
1,343,421
Total assets at August 31, 2022
4,467,314
1,056,101
713,612
6,237,027
The following table presents a reconciliation of net earnings to adjusted EBITDA:
The following tables display revenue by reportable segment and Corporate and Other from external customers, disaggregated by major product:
Three Months Ended May 31, 2023
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
385,449
$
5,967
$
—
$
391,416
Steel products
752,153
269,112
—
1,021,265
Downstream products
659,103
46,448
—
705,551
Construction-related solutions
150,348
21,902
—
172,250
Other
38,466
9,265
6,776
54,507
Net sales from external customers
1,985,519
352,694
6,776
2,344,989
Intersegment net sales, eliminated on consolidation
2,016
600
(2,616)
—
Net sales
$
1,987,535
$
353,294
$
4,160
$
2,344,989
Nine Months Ended May 31, 2023
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
993,480
$
15,728
$
—
$
1,009,208
Steel products
2,088,339
853,655
—
2,941,994
Downstream products
1,840,210
156,158
—
1,996,368
Construction-related solutions
415,184
58,728
—
473,912
Other(1)
103,547
29,313
35,963
168,823
Net sales from external customers
5,440,760
1,113,582
35,963
6,590,305
Intersegment net sales, eliminated on consolidation
4,607
1,858
(6,465)
—
Net sales
$
5,445,367
$
1,115,440
$
29,498
$
6,590,305
_______________________________
(1) Other revenue during the nine months ended May 31, 2023 includes $17.7 million derived from the Company's NMTC transactions. See Note 8, New Markets Tax Credit Transactions, for further information.
Intersegment net sales, eliminated on consolidation
8
559
(567)
—
Net sales
$
2,033,150
$
484,564
$
(1,987)
$
2,515,727
Nine Months Ended May 31, 2022
(in thousands)
North America
Europe
Corporate and Other
Total
Major product:
Raw materials
$
1,155,204
$
20,230
$
—
$
1,175,434
Steel products
2,192,851
931,369
—
3,124,220
Downstream products
1,561,717
218,280
—
1,779,997
Construction-related solutions
287,422
9,481
—
296,903
Other
103,794
28,556
(2,488)
129,862
Net sales from external customers
5,300,988
1,207,916
(2,488)
6,506,416
Intersegment net sales, eliminated on consolidation
8
1,462
(1,470)
—
Net sales
$
5,300,996
$
1,209,378
$
(3,958)
$
6,506,416
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, 2022 (the "2022 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 (the "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 2022 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" or "comparable period" relates to the relevant three or nine month period ended May 31, 2022. Any reference in this Form 10-Q to a year refers to the fiscal year ended August 31st of that year, unless otherwise noted.
On April 25, 2022 (the "Tensar Acquisition Date"), we completed the acquisition of TAC Acquisition Corp. ("Tensar") for approximately $550 million, net of $19.6 million cash acquired. Through its patented foundation systems, Tensar produces ground stabilization and soil reinforcement solutions that complement our existing concrete reinforcement product lines and broaden our ability to address multiple early phases of commercial and infrastructure construction, including subgrade, foundation and structures. End customers for these products include commercial, industrial and residential site developers, mining and oil and gas companies, transportation authorities, coastal and waterway authorities and waste management companies. The acquired operations within North America are presented within our North America reportable segment and the remaining acquired operations are presented within our Europe reportable segment. See Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information about the acquisition of Tensar.
2023 Acquisitions
On September 15, 2022, we completed the acquisition of Advanced Steel Recovery, LLC ("ASR"), a supplier of recycled ferrous metals located in Southern California. ASR's primary operations include processing and brokering capabilities that source material for sale into both the domestic and export markets.
On November 14, 2022, we completed the acquisition of a Galveston, Texas area metals recycling facility and related assets (collectively, "Kodiak") from Kodiak Resources, Inc. and Kodiak Properties, L.L.C.
On March 3, 2023, we completed the acquisition of all of the assets of Roane Metals Group, LLC ("Roane"), a supplier of recycled metals with two facilities located in eastern Tennessee. The majority of volumes processed by Roane relate to obsolete ferrous scrap metals to be consumed by our steel mill operations.
On March 17, 2023, we completed the acquisition of Tendon Systems, LLC ("Tendon"), a leading provider of post-tensioning, barrier cable and concrete restoration solutions to the southeastern U.S.
On May 1, 2023, we completed the acquisition of all of the assets of BOSTD America, LLC ("BOSTD"), a geogrid manufacturing facility located in Blackwell, Oklahoma. Prior to the acquisition, BOSTD produced several product lines for our Tensar operations under a contract manufacturing arrangement.
Operating results for the acquired operations of ASR, Kodiak, Roane, Tendon and BOSTD (the "2023 Acquisitions") are presented within our North America reportable segment. See Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information about the 2023 Acquisitions.
Capital Expenditures
In September 2021, we began the construction of a third micro mill. This micro mill will be the first in the world with the capability to produce merchant bar quality products through a continuous production process and will employ the latest technology in electric arc furnace ("EAF") power supply systems which will allow us to directly connect the EAF and the ladle furnace to renewable energy sources such as solar and wind. Operational startup for this micro mill is underway. The new facility, located in Mesa, Arizona, will replace the rebar capacity at our Rancho Cucamonga, California mill, which was sold during fiscal 2022, and will allow us to more efficiently meet West Coast demand for steel products. For further details on the sale of the Rancho Cucamonga, California mill, refer to Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q.
In December 2022, we announced that our planned fourth micro mill will be located in Berkeley County, West Virginia. This new micro mill will be geographically situated to serve the Northeast, Mid-Atlantic and Mid-Western U.S. markets and will enhance our steel production capabilities by achieving synergies within the existing network of mills and downstream fabrication plants. We expect this micro mill to be commissioned in late calendar 2025.
Senior Notes Activity
In November 2022, we repurchased $115.9 million in aggregate principal amount of the 4.875% Senior Notes due 2023 (the “2023 Notes”) through a cash tender offer. In May 2023, we repaid the remaining $214.1 million outstanding aggregate
principal amount of the 2023 Notes, plus interest, at maturity.
Russian Invasion of Ukraine
The Russian invasion of Ukraine did not have a direct material adverse impact on our business, financial condition or results of operations during the three or nine months ended May 31, 2023 or 2022. Our Europe segment has not had an interruption in energy supply and was able to identify alternate sources for a limited number of materials previously procured through Russia. However, we will continue to monitor disruptions in supply of energy and materials and the indirect effects on our operations of inflationary pressures, foreign exchange rate fluctuations, commodity pricing, potential cybersecurity risks and sanctions resulting from the invasion.
See Part I, Item 1A, Risk Factors, of our 2022 Form 10-K and Part II, Item 1A, Risk Factors, of this Form 10-Q, for further discussion related to the above business conditions and developments.
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 2022 Form 10-K.
RESULTS OF OPERATIONS SUMMARY
Business Overview
Our vertically integrated steel-related operations manufacture, recycle and fabricate steel and metal products and provide related materials and services through a network of facilities that includes seven 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. Through our Tensar operations, CMC is a leading global provider of innovative ground and soil stabilization solutions selling into more than 80 national markets through two major product lines: Tensar® geogrids and Geopier® foundation systems. Our operations are conducted through two reportable segments: North America and Europe.
Key Performance Indicators
When evaluating our results for the period, we compare 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 compared to the prior period for each of our vertically integrated product categories (raw materials, steel products and downstream products) as these are the two variables that typically have the greatest impact on our net sales. 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 posts.
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 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 margins 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. 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.
Net sales decreased $170.7 million, or 7%, for the three months ended May 31, 2023, compared to the corresponding period, and remained relatively flat for the nine months ended May 31, 2023, compared to the corresponding period. See discussions below, labeled North America and Europe within our Segment Operating Data section, for further information on our period-over-period net sales results.
During the three and nine months ended May 31, 2023, we achieved net earnings of $234.0 million and $675.6 million, respectively, compared to net earnings of $312.4 million and $928.6 million, respectively, during the corresponding periods. The change in net earnings in the three and nine months ended May 31, 2023, compared to the corresponding period, was due to compression in steel products metal margins in our Europe segment, contrasted by significant expansion in downstream products margin over scrap in our North America segment. Included in net earnings during the nine months ended May 31, 2022 was a $273.3 million gain on the sale of the Rancho Cucamonga facilities. See Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information on the sale of the Rancho Cucamonga facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $23.4 million and $78.4 million during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods. Contributing to the period-over-period increases were $11.5 million and $55.4 million of incremental selling, general and administrative expenses from Tensar operations' commercial and engineering support in the three and nine months ended May 31, 2023, respectively, compared to the expenses recorded in the corresponding periods following the Tensar Acquisition Date. Additionally, we incurred $3.2 million and $7.6 million of selling, general and administrative expenses from the acquired operations of the 2023 Acquisitions during the three and nine months ended May 31, 2023, respectively, with no corresponding expenses in the comparable periods. While the remaining fluctuations in selling, general and administrative expenses during the three months ended May 31, 2023 were due to individually immaterial factors, the nine months ended May 31, 2023 included a $8.2 million increase in professional services expenses and a $7.3 million increase in expenses for our benefit restoration plan, compared to the prior period, along with a $4.2 million pension plan settlement charge, with no such settlement charge in the corresponding period. These fluctuations were partially offset by a $17.6 million decrease in labor-related expenses during the nine months ended May 31, 2023, compared to the corresponding period. See Note 12, Employees' Retirement Plans, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information on the pension plan termination activity.
Interest Expense
Interest expense decreased by $4.6 million during both the three and nine months ended May 31, 2023, compared to the corresponding periods. Contributing to the decreases in interest expense were $2.6 million and $8.4 million of additional capitalized interest during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods, resulting primarily from the construction of our third micro mill. Partially offsetting the additional capitalized interest during the nine months ended May 31, 2023 was a $2.4 million increase in long-term debt interest expense due to a higher average balance of long-term debt outstanding during the nine months ended May 31, 2023, compared to the corresponding period.
Income Taxes
The effective income tax rates for the three and nine months ended May 31, 2023 were 24.5% and 23.6%, respectively, compared to 22.9% and 21.1%, respectively, in the corresponding periods. The increase in the effective income tax rate for the three months ended May 31, 2023, compared with the corresponding period, is due to multiple factors of which no single item was material. The increase in the effective income tax rate for the nine months ended May 31, 2023, compared with the corresponding period, is primarily due to the recognition of a tax benefit on a tax restructuring transaction during the first quarter of 2022 that did not recur in 2023.
The operational data by product category presented in the tables below reflects activity from sales of raw materials, steel products and downstream products, as applicable, which comprise the majority of sales in North America and Europe. The data is calculated using averages, and therefore, it is not meaningful to quantify the effect that any individual metric had on the segment's net sales or adjusted EBITDA. See Note 15, Operating Segments, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information on our reportable segments.
North America
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands, except per ton amounts)
2023
2022
2023
2022
Net sales
$
1,987,535
$
2,033,150
$
5,445,367
$
5,300,996
Adjusted EBITDA
402,175
379,355
1,079,442
1,183,342
External tons shipped
Raw materials
409
353
1,046
1,016
Rebar
539
505
1,425
1,354
Merchant and other
248
274
727
776
Steel products
787
779
2,152
2,130
Downstream products
382
399
1,075
1,126
Average selling price (per ton)
Raw materials
$
833
$
1,207
$
841
$
1,116
Steel products
979
1,110
994
1,045
Downstream products
1,452
1,244
1,424
1,168
Cost of raw materials per ton
$
619
$
908
$
617
$
837
Cost of ferrous scrap utilized per ton
384
472
352
446
Steel products metal margin per ton
595
638
642
599
Net sales in our North America segment remained relatively flat for the three and nine months ended May 31, 2023, compared to the corresponding periods, with a decrease of 2% and an increase of 3%, respectively. While downstream products average selling prices experienced significant increases of $208 per ton, or 17%, and $256 per ton, or 22%, during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods, total North America net sales across these periods remained flat due to decreases in steel products average selling prices and growing shipments of raw materials in a falling scrap price environment. These increases in average selling prices for downstream products, many of which are fixed at the beginning of the project, reflected the increased input costs from rising scrap and energy prices during 2022 when we entered into the contracts. The acquired Tensar operations also contributed an incremental $32.1 million and $108.2 million of net sales during the three and nine months ended May 31, 2023, respectively, compared to the net sales in the corresponding periods following the Tensar Acquisition Date.
During the three and nine months ended May 31, 2023, we achieved adjusted EBITDA of $402.2 million and $1.1 billion, respectively, compared to adjusted EBITDA of $379.4 million and $1.2 billion, respectively, during the corresponding periods. Adjusted EBITDA during the three and nine months ended May 31, 2023, compared to the corresponding periods, included significant expansion in downstream products margin over scrap per ton, driven by a combination of the high downstream products average selling prices mentioned above and sharp decreases in the cost of ferrous scrap utilized per ton over both comparable periods. Additionally, the acquired Tensar operations provided incremental adjusted EBITDA of $9.6 million and $25.1 million during the three and nine months ended May 31, 2023, respectively, compared to adjusted EBITDA in the corresponding periods following the Tensar Acquisition Date. These increases in adjusted EBITDA during the nine months ended May 31, 2023, compared to the corresponding period, were partially muted by a $273.3 million non-recurring gain on the sale of the Rancho Cucamonga facilities recorded during the nine months ended May 31, 2022. See Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information about the sale of the Rancho Cucamonga facilities.
Net sales in our Europe segment decreased $131.3 million, or 27%, and $93.9 million, or 8%, during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods. The decreases in net sales were primarily due to decreases in steel products average selling prices per ton of 22% and 14% during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods. Net sales were also impacted, to a lesser extent, by a 10% decrease in steel products shipment volumes during the three months ended May 31, 2023, compared to the corresponding period, contrasted by a 4% increase in steel products shipment volumes during the nine months ended May 31, 2023, compared to the corresponding period. The decreases in steel products average selling prices in both periods and quarter-over-quarter slowdown in demand were driven by the indirect impacts of macroeconomic factors affecting the overall global business climate, such as inflation and rising interest rates, which resulted in consumer uncertainties and delayed construction starts across our end markets. The acquired Tensar operations provided $12.5 million and $49.4 million of incremental net sales during the three and nine months ended May 31, 2023, respectively, compared to the net sales in the corresponding periods following the Tensar Acquisition Date. The three months ended May 31, 2023 were impacted by favorable foreign currency translation adjustments of $4.2 million; however, the nine months ended May 31, 2023 were impacted by unfavorable foreign currency translation adjustments of $105.9 million, due primarily to the increase 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, 2023 decreased $111.4 million, or 92%, and $194.9 million, or 69%, respectively, compared to the corresponding periods. Steel products metal margin per ton decreased $111 and $53 during the three and nine months ended May 31, 2023, respectively, compared to the corresponding periods, due to the declines in steel products average selling prices described above, which outpaced the decreases in cost of ferrous scrap utilized. In addition to the change in steel products metal margin per ton, the cost of energy increased $57 per ton during both the three and nine months ended May 31, 2023, compared to the corresponding periods, further contributing to the decrease in adjusted EBITDA. Results during the three and nine months ended May 31, 2023 benefited from $4.3 million and $13.8 million in energy credits, respectively, compared to a $15.5 million energy credit received in the first quarter of 2022. The three and nine months ended May 31, 2023 also included $2.9 million and $7.6 million of incremental adjusted EBITDA provided by the acquired Tensar operations, respectively, compared to the adjusted EBITDA in the corresponding periods following the Tensar Acquisition Date. Adjusted EBITDA for the three months ended May 31, 2023 included immaterial foreign currency translation adjustments, while adjusted EBITDA during the nine months ended May 31, 2023 was impacted by unfavorable foreign currency translation adjustments of $14.7 million.
Corporate and Other reported adjusted EBITDA losses of $37.7 million and $93.0 million for the three and nine months ended May 31, 2023, respectively, compared to adjusted EBITDA losses of $35.0 million and $121.9 million in the corresponding periods, respectively. Contributing to the decrease in adjusted EBITDA loss during the nine months ended May 31, 2023 was $17.7 million in other revenue from our New Markets Tax Credit (“NMTC”) transactions, with no such activity in the corresponding period, along with $16.1 million in debt extinguishment costs incurred during the nine months ended May 31, 2022, compared to immaterial activity in the nine months ended May 31, 2023. See Note 8, New Markets Tax Credit Transactions, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information on the NMTC transactions. In contrast to these reductions to adjusted EBITDA loss, during the nine months ended May 31, 2023 we recognized a $4.2 million pension plan settlement charge, with no such settlement charge in the corresponding period. See Note 12, Employees' Retirement Plans, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information on the pension plan termination activity.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
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 2022 Form 10-K and Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q.
We have a diverse and generally stable customer base, and regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, record allowances when we believe accounts are uncollectible. We use credit insurance internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit-insured or financially assured receivables was approximately 15% of total trade receivables at May 31, 2023.
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, in Part I, Item 1, Financial Statements, of this Form 10-Q, for further information.
The table below reflects our sources, facilities and availability of liquidity at May 31, 2023. See Note 7, Credit Arrangements, in Part I, Item 1, Financial Statements, of this Form 10-Q, for additional information.
(in thousands)
Liquidity Sources and Facilities
Availability
Cash and cash equivalents
$
475,489
$
475,489
Notes due from 2030 to 2032
900,000
(1)
Revolver
600,000
599,087
Term Loan
200,000
200,000
Series 2022 Bonds, due 2047
145,060
—
Poland credit facilities
129,882
113,937
Poland accounts receivable facility
68,011
43,440
Other
4,058
1,244
__________________________________
(1) 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.
We continually review our capital resources to determine whether we can meet our short and long-term goals. 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, 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 will be sufficient.
We estimate that our 2023 capital spending will range from $575 million to $600 million. We regularly assess our capital spending based on current and expected results and the amount is subject to change.
Our credit arrangements require compliance with certain non-financial and financial covenants, including an interest coverage ratio and a debt to capitalization ratio. At May 31, 2023, we believe we were in compliance with all covenants contained in our credit arrangements.
As of May 31, 2023 and August 31, 2022, 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 $934.7 million and $241.7 million for the nine months ended May 31, 2023 and 2022, respectively. The $686.1 million year-over-year net decrease in cash used by operating assets and liabilities was largely due to a decreased scrap price environment during the nine months ended May 31, 2023, compared to increased scrap prices in the nine months ended May 31, 2022, which reduced cash used by inventory purchases by $451.5 million year-over-year. Additionally, cash provided by accounts receivable increased by$369.9 million year-over-year, due in part to the decrease in accounts receivable from the reduction in steel products average selling prices during the nine months ended May 31, 2023, compared to the corresponding period. These cash flows from operating assets and liabilities were partially offset by a year-over-year increase in cash used by accounts payable, accrued expenses and other payables of $171.7 million due, in part, to the declining scrap price environment and a reduction in accrued labor-related expenses during the nine months ended May 31, 2023, compared to the corresponding period. Additional offsets to the increase in cash flows from operating activities were a $29.4 million decrease in deferred income taxes and other long-term taxes and a $15.9 million reduction in loss on debt extinguishment during the nine months ended May 31, 2023, compared to the corresponding period. Additionally, we recorded $17.7 million of non-cash other revenue from the settlement of NMTC transactions during the nine months ended May 31, 2023, with no such transactions in the corresponding period. See Note 8, New Markets Tax Credit Transactions, in Part I, Item 1, Financial Statements, of this Form 10-Q, for further information on the Company's NMTC transactions.
Investing Activities
Net cash flows used by investing activities were$605.2 million and $528.7 million for the nine months ended May 31, 2023 and 2022, respectively. The fluctuation in net cash flows used by investing activities was largely driven by $145.4 million of additional capital expenditures in the nine months ended May 31, 2023, compared to the corresponding period, primarily for the construction of our third and fourth micro mills, along with the proceeds from the sale of the Rancho Cucamonga facilities during the nine months ended May 31, 2022, compared to immaterial proceeds from the sale of assets in the nine months ended May 31, 2023. These fluctuations in cash flows used by investing activities were offset in part by a $385.4 million decrease in acquisitions during the nine months ended May 31, 2023, compared to the corresponding period. See Note 2, Changes in Business, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information about the sale of the Rancho Cucamonga facilities and our acquisitions completed in 2023 and 2022.
Financing Activities
Net cash flows used by financing activities were$537.0 million for the nine months ended May 31, 2023, compared to net cash flows from financing activities of $324.3 million for the nine months ended May 31, 2022. The $861.3 million increase in net cash flows used by financing activities was largely driven by net repayments of long-term debt of$380.7 million during the nine months ended May 31, 2023, compared to net proceeds from issuance of long-term debt of $420.7 million during the nine months ended May 31, 2022. Additionally, there was a $27.2 million increase in treasury stock acquired under the share repurchase program during the nine months ended May 31, 2023, compared to the corresponding period, along with decreased net proceeds from our Polish accounts receivable facilities of $38.7 million during the nine months ended May 31, 2023, compared to the corresponding period. See Note 7, Credit Arrangements, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information regarding our credit arrangements and accounts receivable facilities and Note 13, Stockholders' Equity and Earnings per Share, in Part I, Item 1, Financial Statements, of this Form 10-Q, 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 7, Credit Arrangements, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information regarding scheduled maturities of our long-term debt.
Our undiscounted purchase obligations due in the twelve months following May 31, 2023 were approximately $810 million and approximately $290 million due thereafter. Of the purchase obligations due in the twelve months following May 31, 2023, approximately 24% were for consumable production inputs, such as alloys, 21% were for capital expenditures in connection with normal business operations, 18% were for commodities and 16% were for the construction of our third and fourth micro mills. Of the purchase obligations due thereafter, 73% were for commodities and 9% were for the construction of our fourth micro mill.
Operating lease obligations in the twelve months following May 31, 2023 were approximately $38.8 million and $133.6 million due thereafter. Finance lease obligations in the twelve months following May 31, 2023 were approximately $27.9 million and $61.5 million due thereafter. Additionally, leases that have not yet commenced, primarily for vehicles, with aggregate fixed payments over their terms, were approximately $12.8 million, with $7.2 million to commence in 2023 and $5.6 million to commence in 2024.
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, 2023, we had committed $21.9 million under these arrangements, of which $0.9 million reduced availability under the Revolver (as defined in Note 7, Credit Arrangements, in Part I, Item 1, Financial Statements, of this Form 10-Q).
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 14, Commitments and Contingencies, in Part I, Item 1, Financial Statements, of this Form 10-Q, for more information.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains or incorporates by reference a number of "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies and organic growth provided by acquisitions and strategic investments, demand for our products, shipment volumes, metal margins, 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, construction activity, international trade, the impact of the Russian invasion of Ukraine, capital expenditures, tax credits, our liquidity and our ability to satisfy future liquidity requirements, 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 was 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, among others, include 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;
•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, inflation, energy supplies and raw materials;
•increased attention to environmental, social and governance ("ESG") matters, including any targets or other ESG or environmental justice initiatives;
•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;
•impacts from global public health crises, including the COVID-19 pandemic, on the economy, demand for our products, global supply chain and on our 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 with their contractual obligations, including payment obligations;
•activity in repurchasing shares of our common stock under our share repurchase program;
•financial and non-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 realize any or all of the anticipated synergies or other benefits of acquisitions;
•the effects that acquisitions may have on our financial leverage;
•risks associated with acquisitions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable antitrust legislation and other regulatory and third party consents and approvals;
•lower than expected future levels of revenues and higher than expected future costs;
•failure or inability to implement growth strategies in a timely manner;
•the impact of goodwill or other indefinite lived intangible asset impairment charges;
•the 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;
•our 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;
•our 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.
Refer to the "Risk Factors" disclosed in the sections entitled "Risk Factors" in Part I, Item 1A of our 2022 Form 10-K and Part II, Item 1A of this Form 10-Q for specific information regarding additional risks that would cause actual results to differ 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
As of May 31, 2023, the U.S. dollar equivalent of the Company's total gross foreign currency exchange contract commitments increased $159.4 million, or 63%, compared to August 31, 2022. This increase was primarily due to forward contracts denominated in Polish zloty with a U.S. dollar functional currency, which increased $155.3 million as of May 31, 2023, compared to August 31, 2022.
As of May 31, 2023, the Company's total commodity contract commitments increased $245.8 million, or 120%, compared to August 31, 2022, due to a $254.4 million increase related to electricity commodity commitments, partially offset by a $8.4 million decrease to copper commodity commitments.
There were no other material changes to the information set forth in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our 2022 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended May 31, 2023 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 14, Commitments and Contingencies, 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 2022 Form 10-K.
Operating and startup risks, as well as market risks associated with the commissioning of our third and fourth micro mills could prevent us from realizing anticipated benefits and could result in a loss of all or a substantial part of our investments.
Operational startup for our third micro mill is underway, and our fourth micro mill is expected to be commissioned in late calendar 2025. Although we have successfully commissioned and operated similar facilities, there are technological, operational, market and start-up risks associated with the construction and commissioning of our third and fourth micro mills. Construction of our micro mills is subject to changing market conditions, delays, inflation and cost overruns, work stoppages, labor shortages, weather interferences, supply chain delays, changes required by governmental authorities, delays or the inability to acquire required permits or licenses, any of which could have an adverse impact on our operational and financial results. Further, although we believe these facilities should each be capable of consistently producing high-quality products in sufficient quantities and at costs that will compare favorably with other similar steel manufacturing facilities, there can be no assurance that these expectations will be achieved. If we encounter cost overruns, system or process difficulties during or after startup or quality control restrictions with either or both facilities, our capital costs could increase materially, the expected benefits from the development of the applicable facilities could be diminished or lost, and we could lose all or a substantial portion of our investments. We could also encounter commodity market risk if, during a sustained period, the cost to manufacture is greater than projected.
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 made by the Company or any affiliated purchasers during the quarter ended May 31, 2023.
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
March 1, 2023 - March 31, 2023
126,500
$
48.49
126,500
$
115,671,851
April 1, 2023 - April 30, 2023
104,500
47.56
104,500
110,702,007
May 1, 2023 - May 31, 2023
121,000
44.73
121,000
105,289,392
352,000
352,000
__________________________________
(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 13, Stockholders' Equity and Earnings per Share, 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
June 22, 2023
/s/ Paul J. Lawrence
Paul J. Lawrence
Senior Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer of the registrant)
