CMC(US:CMC)2022-10-12 16:00Part I Business Commercial Metals Company (CMC) is a vertically integrated manufacturer, recycler, and fabricator of steel and metal products, recently expanding into ground and soil stabilization solutions with the acquisition of Tensar Business Developments The company is focused on strategic growth through the acquisition of Tensar and significant capital investments in new, technologically advanced micro mills in the U.S. and an expanded rolling line in Poland to enhance production capabilities and market reach - Completed the acquisition of Tensar for approximately $550 million on April 25, 2022, to broaden its product offerings into ground stabilization and soil reinforcement solutions14 - Announced plans for a fourth micro mill to serve the Northeast, Mid-Atlantic, and Midwestern U.S. markets, with construction expected to take about two years16 - Construction of a third micro mill in Mesa, Arizona, is underway and expected to be commissioned in calendar 2023, capable of producing merchant bar quality products through a continuous process18 Segments The company operates through two reportable segments, North America and Europe, both vertically integrated networks of recycling, steel mill, and fabrication operations, with North America being the larger segment and both including newly acquired Tensar operations - The North America segment's downstream products backlog, representing unfulfilled orders, increased to $1.9 billion at August 31, 2022, from $1.5 billion at August 31, 202129 - The Europe segment's mini mill in Poland is a significant manufacturer of steel products in Central Europe, serving customers primarily in Poland but also exporting to neighboring countries like Germany and the Czech Republic34 Competition CMC competes with a range of domestic and international steel producers, facing challenges from global overcapacity and steel imports, but believes its vertically integrated model, strategic geographic footprint, and sustainable EAF technology provide significant competitive advantages - The company's vertically integrated platform, with recycling and fabrication operations supporting its steel mills, provides a secure supply of low-cost raw materials and a consistent source of demand42 - CMC's use of EAF technology is more energy-efficient and environmentally friendly than traditional blast furnaces, with approximately 98% of raw materials in its finished steel being recycled content in 20224446 Employees and Workforce Culture As of August 31, 2022, the company employed 12,483 people across its segments, emphasizing a culture of safety, ethics, and inclusion, achieving a total recordable incident rate (TRIR) of 1.5, which is below the industry average Employee Headcount by Segment (as of Aug 31, 2022) | Segment | Number of Employees | | :--- | :--- | | North America | 8,950 | | Europe | 3,157 | | Corporate and Other | 376 | | Total | 12,483 | - The company's commitment to safety resulted in a total recordable incident rate (TRIR) of 1.5 in 2022, below the industry average of 2.1 for iron and steel mills in 202056 Risk Factors The company faces material risks related to its business, industry, and the regulatory environment, including volatility in raw material and energy prices, economic downturns, competition, IT security threats, global overcapacity, and significant environmental compliance costs - Business operations are vulnerable to significant price fluctuations and limited availability of scrap metal and other inputs, which can adversely affect profitability6970 - The industry is exposed to global overcapacity, particularly from foreign producers, and the startup of new domestic capacity, which could lower steel prices and negatively impact sales and margins139140 - Compliance with and changes to environmental laws, including those related to climate change and hazardous waste (like EAF dust), could result in substantially increased capital and operating costs149158159 Properties The company's principal properties include numerous recycling facilities, steel mills, and fabrication facilities across North America and Poland, with a detailed table listing their location, size, and production capacity, which are considered adequate for current and future operational needs Annual Production Capacity by Operation | Segment and Operation | Capacity (Millions of Tons) | | :--- | :--- | | North America | | | Recycling facilities | 4.7 | | Steel mills | 5.4 | | Fabrication facilities | 2.3 | | Europe | | | Recycling facilities | 0.6 | | Steel mini mill | 1.7 | | Fabrication facilities | 0.5 | Legal Proceedings The company is involved in various legal and regulatory proceedings in the normal course of business, notably being named a Potentially Responsible Party (PRP) under CERCLA at nine locations where it sold scrap metal for recycling, though management believes adequate provisions have been made and does not expect a material adverse effect - The company has been named a Potentially Responsible Party (PRP) at nine federal and state Superfund sites related to the sale of scrap metal to third-party manufacturers176 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CMC's common stock trades on the NYSE under the symbol 'CMC', with the company increasing its quarterly dividend to $0.14 per share in 2022 and subsequently to $0.16 per share, and repurchasing nearly 3 million shares during the fourth quarter of fiscal 2022 under a $350 million program - Quarterly dividends were increased from $0.12 per share in 2021 to $0.14 per share in 2022, with a further increase to $0.16 per share declared on October 11, 2022181183 Share Repurchases (Quarter Ended Aug 31, 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jun 2022 | 977,309 | $36.40 | | Jul 2022 | 1,814,721 | $34.41 | | Aug 2022 | 203,211 | $40.68 | | Total | 2,995,241 | - | - As of August 31, 2022, approximately $188.1 million remained available for repurchase under the authorized program186 Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 saw a significant increase in financial performance, with net sales rising 32% to $8.9 billion and net earnings growing 195% to $1.2 billion, driven by higher average selling prices, strong margin expansion, and a $273.3 million gain from an asset sale, while maintaining strong liquidity and investing in strategic growth Results of Operations Summary For the fiscal year 2022, net sales increased by 32% to $8.9 billion, and net earnings surged 195% to $1.2 billion compared to 2021, primarily due to significant margin expansion as selling price increases outpaced rising input costs, supplemented by a $273.3 million gain on the sale of the Rancho Cucamonga facilities Financial Highlights (Year Ended August 31) | (in thousands, except per share data) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $8,913,481 | $6,729,760 | | Net earnings | $1,217,262 | $412,865 | | Diluted earnings per share | $9.95 | $3.38 | - The increase in net earnings included a $273.3 million gain on the sale of the Rancho Cucamonga facilities204 Segments Performance Both segments delivered strong growth in fiscal 2022, with the North America segment's adjusted EBITDA more than doubling to $1.55 billion and the Europe segment's adjusted EBITDA growing 133% to $346.1 million, driven by significant increases in steel products metal margin amid strong market demand and supply disruptions North America Segment Performance (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net sales (in thousands) | $7,298,632 | $5,670,976 | | Adjusted EBITDA (in thousands) | $1,553,858 | $746,594 | | Steel products metal margin per ton | $629 | $397 | Europe Segment Performance (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net sales (in thousands) | $1,621,642 | $1,049,059 | | Adjusted EBITDA (in thousands) | $346,051 | $148,258 | | Steel products metal margin per ton | $433 | $255 | Liquidity and Capital Resources The company's liquidity remains strong, with cash and cash equivalents of $672.6 million and increased net cash from operating activities to $700.3 million in 2022, while projecting capital spending between $450 million and $500 million for fiscal 2023 - Net cash flows from operating activities increased by $471.8 million year-over-year, reaching $700.3 million in 2022225 - Net cash used in investing activities was $684.7 million, primarily due to the $550 million Tensar acquisition and $265.8 million in increased capital expenditures, partially offset by $313.0 million in proceeds from an asset sale226 - Capital spending for fiscal 2023 is estimated to be in the range of $450 million to $500 million224 Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from fluctuations in foreign currency exchange rates, commodity prices, and energy prices, which it mitigates using various derivative instruments like foreign currency forward contracts and commodity futures for metals, natural gas, and electricity, not for speculative purposes - The company uses foreign currency exchange forward contracts to hedge trade commitments denominated in currencies other than the functional currency, primarily involving the Polish Zloty (PLN), U.S. Dollar (USD), and Euro (EUR)274 - Metal commodity futures contracts for copper and aluminum, as well as energy derivatives for electricity and natural gas, are used to mitigate the risk of margin declines due to price volatility277 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended August 31, 2022, and the independent auditor's unqualified report from Deloitte & Touche LLP on both the financial statements and the effectiveness of internal controls over financial reporting, with key notes detailing the Tensar acquisition, segment performance, and debt arrangements Consolidated Financial Statements The consolidated financial statements present the company's financial position and results of operations, reporting net sales of $8.91 billion, net earnings of $1.22 billion, and diluted EPS of $9.95 for fiscal year 2022, with total assets growing to $6.24 billion and total stockholders' equity increasing to $3.29 billion Consolidated Statement of Earnings Highlights (FY 2022) | (in thousands) | Amount | | :--- | :--- | | Net sales | $8,913,481 | | Cost of goods sold | $7,057,085 | | Earnings from continuing operations before income taxes | $1,515,147 | | Net earnings | $1,217,262 | Consolidated Balance Sheet Highlights (As of Aug 31, 2022) | (in thousands) | Amount | | :--- | :--- | | Total current assets | $3,441,468 | | Total assets | $6,237,027 | | Total current liabilities | $1,356,987 | | Total liabilities | $2,950,598 | | Total stockholders' equity | $3,286,429 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the financial statements, including the accounting for the $550 million Tensar acquisition, the $313 million sale of the Rancho Cucamonga facilities, a breakdown of segment performance showing strong growth, and details on the company's $1.11 billion in long-term debt - Note 2: The acquisition of Tensar was completed on April 25, 2022, for a net cash purchase price of approximately $550 million, resulting in $186.8 million of goodwill and $260.5 million of intangible assets354359364 - Note 9: In fiscal 2022, the company redeemed $300.0 million of 5.375% Senior Notes and issued $600.0 million of new senior notes with lower interest rates (4.125% and 4.375%)397398 - Note 16: Under a new $350.0 million share repurchase program, the company repurchased 4,496,628 shares for $161.9 million during fiscal 2022, with $188.1 million remaining authorized for future repurchases479 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of August 31, 2022, with the assessment of internal control over financial reporting excluding the recently acquired Tensar, as permitted by SEC guidance, and the independent auditor issuing an unqualified opinion - The company's management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of August 31, 2022497 - The assessment of internal controls excluded the newly acquired Tensar, which represented 10% of total assets as of the fiscal year-end498502 Part III Directors, Executive Officers, Corporate Governance, and Related Matters This section incorporates by reference information from the company's forthcoming 2023 definitive proxy statement, covering details regarding directors and executive officers, executive compensation, security ownership, certain relationships and related transactions, and principal accountant fees and services - Information required for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders508 Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Annual Report, including the financial statements, the financial statement schedule for Valuation and Qualifying Accounts, and a comprehensive list of exhibits such as merger agreements, corporate governance documents, debt indentures, and material contracts - The report includes the financial statements from Item 8 and the financial statement schedule 'Schedule II — Valuation and Qualifying Accounts'515516517