10-K: Commercial Metals Company Reports Decrease in Net Sales and Earnings for Fiscal Year 2024

Commercial Metals Company (CMC) reported a 10% decrease in net sales and a 44% decrease in net earnings for fiscal year 2024 compared to 2023, primarily attributed to compression in steel product metal margins.

Summary

• Commercial Metals Company (CMC) reported a decrease in net sales by $873.6 million, or 10%, to $7,925.972 million for fiscal year 2024 compared to $8,799.533 million in 2023.
• Net earnings for 2024 were $485.5 million, a decrease of $374.3 million, or 44%, compared to $859.8 million in 2023.
• The year-over-year change in net earnings was primarily due to compression in steel products metal margins in both the North America Steel Group and Europe Steel Group segments.
• This was driven by declining steel products average selling prices per ton, while the cost of ferrous scrap utilized per ton decreased at a lesser rate.
• Selling, General and Administrative (SG&A) expenses increased by $21.5 million in 2024 compared to 2023, primarily due to incremental expenses from 2023 acquisitions, increased professional services, benefit restoration plan expenses, and information technology expenses.
• Interest expense increased by $7.8 million in 2024 compared to 2023, mainly due to reduced capitalized interest related to the timing of micro mill construction activities.
• The effective income tax rate for 2024 was 23.6%, relatively consistent with the 23.4% rate for 2023.
• The North America Steel Group segment reported a 6% decrease in net sales to external customers, primarily due to reductions in steel products and downstream products average selling prices.
• The Europe Steel Group segment reported a 36% decrease in net sales to external customers, driven by a 29% reduction in steel products shipment volumes and an 11% reduction in steel products average selling price per ton.
• The Emerging Businesses Group segment reported relatively flat net sales to external customers in 2024 compared to 2023, with a 7% decrease in adjusted EBITDA.
• The company completed several acquisitions in 2023, including Advanced Steel Recovery, LLC, a Galveston, Texas area metals recycling facility, Roane Metals Group, LLC, Tendon Systems, LLC, BOSTD America, LLC, and EDSCO Fasteners, LLC (rebranded as CMC Anchoring Systems).
• CMC placed its third micro mill into service in the fourth quarter of 2023 and expects its fourth micro mill to be operational in late calendar 2025.

Sentiment

Score: 4

Explanation: The sentiment is below average due to the decline in net sales and net earnings, challenges in the Europe Steel Group segment, and increased expenses. However, the company's focus on safety, strategic acquisitions, and investment in future growth provide some positive aspects.

Positives

• CMC achieved the lowest total recordable incident rate (TRIR) in the company
• s history in 2024, demonstrating a strong commitment to employee safety.', 'The company's North America Steel Group segment saw an increase in raw materials tons shipped, partly due to a full year of sales from recycling operations acquired in 2023.', 'The company's Emerging Businesses Group segment experienced growth in net sales to external customers from the acquired CMC Anchoring Systems operations.', 'CMC maintained a strong liquidity position with $857.9 million in cash and cash equivalents as of August 31, 2024.', 'The company increased its quarterly cash dividend to $0.18 per share in March 2024, demonstrating a commitment to returning value to shareholders.', 'CMC has a remaining authorization to repurchase $403.8 million of its common stock as of August 31, 2024.', 'The company is investing in future growth with the construction of its fourth micro mill, expected to be operational in late calendar 2025.'

Negatives

• Net sales decreased by 10% in 2024 compared to 2023.
• Net earnings decreased by 44% in 2024 compared to 2023.
• The company experienced compression in steel products metal margins in both the North America Steel Group and Europe Steel Group segments.
• SG&A expenses increased in 2024 compared to 2023.
• Interest expense increased in 2024 compared to 2023.
• The Europe Steel Group segment experienced a significant decrease in net sales and adjusted EBITDA due to macroeconomic factors and increased competition.
• The company recorded inventory write-downs of $5.1 million in 2024.

Risks

• Fluctuations in scrap and other input prices may adversely affect the company
• s business, results of operations, and financial condition.', 'The company is vulnerable to economic conditions in the regions in which its operations are concentrated.', 'Disruptions in the delivery or substantial increases in energy costs could adversely affect the company's business, results of operations, and financial condition.', 'The company may encounter labor disputes and shortages for skilled labor and/or qualified employees, which could adversely impact operations.', 'The company may have difficulty competing with companies that have a lower cost structure or access to greater financial resources.', 'Operating and startup risks, as well as market risks associated with the commissioning of the company's micro mills, could prevent it from realizing anticipated benefits.', 'The company's mills require continual capital investments that it may not be able to sustain.', 'Unexpected equipment failures may lead to production curtailments or shutdowns.', 'Information technology interruptions and breaches in data security could adversely impact the company's business, results of operations, and financial condition.', 'Increasing attention to ESG matters could result in additional costs or risks or adverse impacts on the company's business.', 'The company is subject to litigation, potential liability claims, and contract disputes.', 'Potential limitations on the company's ability to access credit, or the ability of its customers and suppliers to access credit, may adversely affect its business, results of operations, and financial condition.', 'Geopolitical conditions, including political turmoil and volatility, regional conflicts, terrorism, and war, may negatively impact the company's business and operations.', 'The company may not be able to successfully identify, consummate, or integrate acquisitions, and acquisitions may adversely affect its financial leverage.', 'Goodwill or other indefinite-lived intangible asset impairment charges in the future could have a material adverse effect on the company's business, results of operations, and financial condition.', 'Impairment of long-lived assets in the future could have a material adverse effect on the company's business, results of operations, and financial condition.', 'Competition from other materials may have a material adverse effect on the company's business, results of operations, and financial condition.', 'The company's operations present significant risk of injury or death.', 'The company's business, financial condition, results of operations, cash flows, liquidity, and stock price may be adversely affected by global public health epidemics.', 'Fluctuations in the value of the U.S. dollar relative to other currencies may adversely affect the company's business, results of operations, and financial condition.', 'Operating internationally carries risks and uncertainties which could adversely affect the company's business, results of operations, and financial condition.', 'Hedging transactions may expose the company to losses or limit its potential gains.', 'The company's industry and the industries it serves are vulnerable to global economic conditions.', 'Excess capacity and over-production by foreign producers in the steel industry, as well as the startup of new steelmaking capacity in the U.S., could result in lower domestic steel prices.', 'Rapid and significant changes in the price of metals could adversely impact the company's business, results of operations, and financial condition.', 'Physical impacts of climate change could have a material adverse effect on the company's costs and results of operations.', 'Compliance with and changes in environmental laws and regulations and remediation requirements could result in substantially increased capital obligations and operating costs.', 'Increased regulation associated with climate change could impose significant additional costs on both the company's steelmaking and metals recycling operations.', 'The company is subject to governmental regulatory and compliance risks that expose it to potential litigation and disputes regarding violations.', 'Changes in tax legislation and regulations in the jurisdictions in which the company operates may adversely affect its financial condition or results of operations.'

Future Outlook

For at least the next twelve months, the company anticipates its current cash balances, cash flows from operations, and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, invest in the development of its fourth micro mill, pay dividends, and opportunistically repurchase shares. The company also expects its long-term liquidity position will be sufficient to meet its long-term liquidity needs with cash flows from operations and financing arrangements. The company estimates that its 2025 capital spending will range from $630 million to $680 million.

Industry Context

CMC operates within the global steel industry, which is cyclical and highly competitive. The industry faces challenges such as overcapacity, particularly in regions like China, leading to competition from steel imports. Trade enforcement laws and tariffs have been implemented to support domestic production, but import competition remains a significant threat. The demand for CMC's products is closely tied to the construction industry, which is influenced by factors such as infrastructure spending, non-residential and residential construction activity, and overall economic conditions.

Comparison to Industry Standards

• CMC's TRIR is compared to the 2022 average for Steel Product Manufacturing (NAICS code 3311) based on information provided by the U.S. Bureau of Labor Statistics, indicating that CMC's safety performance is better than the industry average.
• CMC states that it produces a significant percentage of the total U.S. output of rebar and merchant bar through its EAF steel mills, and believes it is the largest manufacturer and fabricator of rebar, the largest manufacturer of steel fence posts, and among the largest manufacturers of merchant bar in the U.S.
• In Poland, CMC believes it is the largest producer of rebar and merchant bars for the products it produces and the second largest producer of wire rod.
• CMC's use of EAF technology is more efficient and environmentally friendly than traditional blast furnace technology, using less energy than the industry average and producing significantly less carbon dioxide per ton of steel melted.
• CMC's vertically integrated manufacturing process, which keeps millions of tons of scrap metal out of landfills annually, is a differentiator in the industry.
• CMC's competitors include Nucor Corporation, a major U.S. steel producer known for its mini-mill technology and diversified product portfolio. Nucor reported net sales of $34.71 billion and net earnings of $4.52 billion for its fiscal year ended December 31, 2023. Another competitor, Steel Dynamics, Inc., also a significant player in the U.S. steel market with a focus on EAF steelmaking, reported net sales of $18.4 billion and net earnings of $2.5 billion for its fiscal year ended December 31, 2023. Gerdau S.A., a global steel producer with operations in the Americas, reported net revenue of approximately $14.5 billion and net income of approximately $1.4 billion for its fiscal year ended December 31, 2023. Compared to these competitors, CMC's net sales and net earnings are lower, reflecting its smaller scale but still significant presence in the steel industry.

Management Changes

Legal Proceedings

• On October 30, 2020, PSG filed a suit alleging CMC violated federal and California state antitrust laws and California common law. A jury trial is scheduled for late October 2024.
• On March 13, 2022, PSG filed a second suit alleging CMC violated California state antitrust and unfair competition laws. Fact discovery is substantially complete, and expert discovery is underway.

Stakeholder Impact

• Shareholders: The decrease in net earnings and the decline in share price may negatively impact shareholder value. However, the company's continued payment of dividends and share repurchase program may provide some return to shareholders.
• Employees: The company's focus on safety is positive for employees. However, potential labor disputes and the need for cost management could impact job security and compensation.
• Customers: The company's ability to provide products and services may be impacted by fluctuations in raw material and energy prices, as well as potential supply chain disruptions.
• Suppliers: The company's demand for raw materials and other inputs may be affected by changes in production levels and economic conditions.
• Creditors: The company's ability to meet its debt obligations may be impacted by its financial performance and liquidity position.

Next Steps

• Continue construction of the fourth micro mill in West Virginia, with an expected operational start-up in late calendar 2025.
• Monitor the impact of the Russian invasion of Ukraine on the global economy and the company's operations.
• Continue to evaluate potential acquisitions and investments to support growth.
• Pay the declared quarterly cash dividend on November 14, 2024.
• Continue the share repurchase program, subject to market conditions and other factors.
• Monitor and manage risks associated with fluctuations in raw material and energy prices, as well as geopolitical and economic conditions.

Key Dates

Keywords

steel manufacturing, metal recycling, construction solutions, rebar, merchant bar, fabricated rebar, wire rod, geogrids, geopier foundation systems, electric arc furnace, micro mill, scrap metal, ground stabilization, post-tension cable, steel fence posts, construction products, ground stabilization solutions, performance reinforcing steel