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CMC > SEC Filings for CMC > Form 10-K on 28-Oct-2013All Recent SEC Filings

Show all filings for COMMERCIAL METALS CO

Form 10-K for COMMERCIAL METALS CO


28-Oct-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the federal securities laws, with respect to the Company's financial condition, results of operations, cash flows and business, and its expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements.

The Company's forward-looking statements are based on its expectations and beliefs as of the time this report is filed with the Securities and Exchange Commission or, with respect to any document incorporated by reference, as of the time such document was prepared. Although the Company believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. These factors include those described in Item 1A of this Annual Report on Form 10-K. Except as required by law, the Company undertakes 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 changes to future results over time or otherwise. Some of the important factors that could cause actual results to differ materially from the Company's expectations include the following:

absence of global economic recovery or possible recession relapse and the pace of overall global economic activity;

solvency of financial institutions and their ability or willingness to lend;

success or failure of governmental efforts to stimulate the economy including restoring credit availability and confidence in a recovery;

continued sovereign debt problems in the Euro-zone;

construction activity or lack thereof;

availability and pricing of raw materials over which we exert little influence, including scrap metal, energy, insurance and supply prices;

increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing;

decisions by governments affecting the level of steel imports;


passage of new, or interpretation of existing, environmental laws and regulations;

customers' inability to obtain credit and non-compliance with contracts;

financial covenants and restrictions on the operation of our business contained in agreements governing our debt;

currency fluctuations;

global factors including political and military uncertainties;

difficulties or delays in the execution of construction contracts, resulting in cost overruns or contract disputes;

ability to retain key executives;

execution of cost reduction strategies;

industry consolidation or changes in production capacity or utilization;

ability to make necessary capital expenditures;

unexpected equipment failures;

competition from other materials;

losses or limited potential gains due to hedging transactions;

litigation claims and settlements, court decisions and regulatory rulings;

risk of injury or death to employees, customers or other visitors to our operations; and

increased costs related to health care reform legislation.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K.

OVERVIEW

Our business is organized into the following five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution.

AMERICAS RECYCLING

Our Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. This segment operates 31 scrap metal processing facilities with 15 locations in Texas, seven in Florida, two locations in Missouri and one location in each of Arkansas, Georgia, Kansas, Louisiana, North Carolina, Oklahoma and Tennessee.

AMERICAS MILLS

Our Americas Mills segment includes the Company's five steel mills, commonly referred to as "minimills," that produce one or more of reinforcing bar, angles, flats, rounds, small beams, fence-post sections and other shapes; two scrap metal shredders and nine processing facilities that directly support the steel minimills; and a railroad salvage company.

During the fourth quarter of 2013, we decided to sell our wholly-owned copper tube manufacturing operation, Howell Metal Company ("Howell"). We determined that the decision to sell this business met the definition of a discontinued operation. As a result, we have included Howell in discontinued operations for all periods presented. Howell was previously an operating segment included in the Americas Mills reporting segment. On October 17, 2013, we sold all of the stock of Howell for $58.5 million, subject to customary purchase price adjustments.

AMERICAS FABRICATION

The Americas Fabrication segment consists of the Company's steel plants that bend, weld, cut and fabricate steel, primarily reinforcing bar; warehouses that sell or rent products for the installation of concrete; plants that produce steel fence posts; and plants that heat-treat steel to strengthen and provide flexibility.

INTERNATIONAL MILL


Our International Mill segment is comprised of all mill, recycling and fabrication operations located in Poland. Our subsidiary, CMC Poland Sp. z.o.o. ("CMCP") (formerly CMC Zawiercie S.A. or "CMCZ"), owns a steel minimill and conducts its mill operations in Zawiercie, Poland. This segment's operations are conducted through: two rolling minimills that produce primarily reinforcing bar and high quality merchant products; a specialty rod finishing mill; our scrap processing facilities that directly support the minimill; and four steel fabrication plants primarily for reinforcing bar and mesh.

INTERNATIONAL MARKETING AND DISTRIBUTION

Our International Marketing and Distribution segment includes international operations for the sales, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products. Additionally, this segment includes the Company's U.S.-based marketing and distribution divisions, CMC Cometals and CMC Cometals Steel, and a recycling facility in Singapore. We buy and sell primary and secondary metals, fabricated metals, semi-finished, long and flat steel products and other industrial products. We market and distribute these products through our global network of offices, processing facilities and joint ventures. Our customers use these products in a variety of industries.

Results of operations The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations.

Consolidated Results of Operations

                                                              Year Ended August 31,
(in thousands except per share data)                  2013            2012            2011
Net sales*                                        $ 6,889,575     $ 7,656,375     $ 7,666,773
Earnings from continuing operations                    74,957         210,549          11,539
Per diluted share                                 $      0.64     $      1.80     $      0.09
Adjusted EBITDA*                                      353,542         368,710         271,199
International net sales*                            2,782,344       3,152,589       3,499,813
As % of total sales                                        40 %            41 %            46 %
LIFO income (expense)** effect on net earnings
(loss) attributable to CMC*                            34,393          27,149         (46,712 )
Per diluted share                                        0.29            0.23           (0.40 )


_________________________


* Excludes divisions classified as discontinued operations. ** Last-in, first-out inventory valuation method.

In the table above, we have included a financial statement measure that was not derived in accordance with United States generally accepted accounting principles ("GAAP"). We use adjusted EBITDA (earnings before interest expense, income taxes, depreciation, amortization, impairment charges and net earnings attributable to noncontrolling interests) as a non-GAAP financial measure. In calculating adjusted EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization, as well as impairment charges. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. We also exclude interest cost in our calculation of adjusted EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments, our ability to pay our current debt obligations as they mature and as a tool to calculate possible future levels of leverage capacity. Adjusted EBITDA is also the target benchmark for our annual and long-term cash incentive performance plans for management and part of a debt compliance test in certain of our debt agreements. Adjusted EBITDA may be inconsistent with similar measures presented by other companies.


Reconciliations of net earnings from continuing operations to adjusted EBITDA are provided below:

                                                                      Year Ended August 31,
(in thousands)                                                  2013          2012          2011
Earnings from continuing operations                          $  74,957     $ 210,549     $  11,539
Less net earnings attributable to noncontrolling interests           4             6           213
Interest expense                                                69,608        69,487        69,814
Income taxes (benefit)                                          57,979       (45,762 )      14,592
Depreciation, amortization and impairment charges              151,002       134,442       175,467
Adjusted EBITDA                                              $ 353,542     $ 368,710     $ 271,199

Our adjusted EBITDA does not include interest expense, income taxes, depreciation, amortization and impairment charges or net earnings attributable to noncontrolling interests. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Impairment charges, when necessary, accelerate the write-off of fixed assets that otherwise would have been accomplished by periodic depreciation charges. Additionally, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings
(loss) determined in accordance with GAAP, as well as adjusted EBITDA, to evaluate our performance. Further, we separately analyze any significant fluctuations in interest expense, depreciation, amortization, impairment charges and income taxes.

The following are the significant factors that impacted our financial performance during 2013 compared with 2012:

Our Americas Recycling segment was negatively impacted by declining ferrous and non-ferrous volumes and margins, when compared to the prior fiscal year.

Our Americas Fabrication segment showed the most progress when compared to the prior year, recording adjusted operating profit of $28.0 million, compared with an adjusted operating loss of $15.7 million in fiscal 2012. In our rebar and structural fabrication businesses, selling prices increased while raw material input prices for steel declined, enabling margin expansion for this segment.

Our International Mill segment recorded a significant decline in adjusted operating profit in fiscal 2013 when compared to the prior year. The decline in profitability was primarily a result of 17% lower shipments when compared to fiscal 2012, as business conditions in the Eurozone remain challenged.

We recorded impairments related to long-lived assets of $17.3 million. Of this amount, approximately $12.7 million related to our Australian operations, as market conditions in Australia continued to show weakness in general and specifically in the steel construction market.

Our year-to-date effective tax rate was negatively impacted by the recognition of a full valuation allowance on the deferred tax assets related to our Australian operations as well as lower earnings by our foreign subsidiaries.

Pre-tax LIFO income was $52.9 million, $11.1 million more than LIFO income of $41.8 million in 2012.

During the first quarter of fiscal 2013, we completed the sale of our 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. This gain was recorded in our International Marketing and Distribution segment.

Segments

Unless otherwise indicated, all dollar amounts below are calculated before income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 21, Business Segments, to the consolidated financial statements included in this report.

We use adjusted operating profit (loss) to measure the financial performance of our segments. Adjusted operating profit (loss) is the sum of our earnings (loss) before income taxes and financing costs.


The following table shows net sales and adjusted operating profit (loss) by business segment:

                                                       Year Ended August 31,
(in thousands)                                 2013            2012            2011
Net sales:
Americas Recycling                         $ 1,391,749     $ 1,606,161     $ 1,829,537
Americas Mills                               1,819,520       1,983,721       1,839,718
Americas Fabrication                         1,442,691       1,381,638       1,225,722
International Mill                             826,044       1,033,357       1,046,233
International Marketing and Distribution     2,355,572       2,727,319       2,650,899
Corporate                                       11,832           8,033           6,882
Eliminations                                  (957,833 )    (1,083,854 )      (932,218 )
Net sales                                  $ 6,889,575        $7,656,375      $7,666,773

Adjusted operating profit (loss):
Americas Recycling                         $     3,170     $    39,446     $    43,059
Americas Mills                                 204,333         235,918         149,213
Americas Fabrication                            28,033         (15,697 )      (129,141 )
International Mill                                 890          23,044          47,594
International Marketing and Distribution        35,617          47,287          76,337
Corporate                                      (66,453 )       (83,035 )       (84,729 )
Eliminations                                       848          (6,251 )        (1,275 )
Adjusted operating profit                  $   206,438     $   240,712     $   101,058

LIFO Impact on Adjusted Operating Profit (Loss) LIFO is an inventory costing method that assumes the most recent inventory purchases or goods manufactured are sold first. Therefore, current sales prices are offset against current inventory costs. In periods of rising prices, the LIFO inventory costing method has the effect of eliminating inflationary profits from operations. In periods of declining prices, this method has the effect of eliminating deflationary losses from operations. In either case the goal is to reflect economic profit of current market conditions. The table below reflects LIFO income or (expense) representing decreases or (increases) in the LIFO inventory reserve.

The International Mill segment exclusively uses the FIFO inventory valuation method and thus is not included in this table:

                                                  Year Ended August 31,
(in thousands)                               2013        2012         2011
Americas Recycling                         $  7,423    $  7,007    $ (12,980 )
Americas Mills                                7,166      16,629      (48,023 )
Americas Fabrication                         12,177      15,248       (6,644 )
International Marketing and Distribution     26,146       2,884       (4,217 )
Pre-tax LIFO income (expense)              $ 52,912    $ 41,768    $ (71,864 )

Fiscal Year 2013 Compared to Fiscal Year 2012

Americas Recycling This segment recorded an adjusted operating profit of $3.2 million for fiscal 2013, compared with adjusted operating profit of $39.4 million for 2012. The decline in profitability in 2013 was due to a decrease in both ferrous and nonferrous volumes and average selling prices. Additionally, in 2013 this segment was impacted by nonferrous margin compression of approximately 15% when compared to 2012. We exported 6% of our ferrous scrap tonnage and 27% of our nonferrous scrap tonnage during 2013.


The following table reflects our Americas Recycling segment's average selling prices per ton and tons shipped (in thousands) for the years ended August 31:

                                                            Increase (Decrease)
                                     2013       2012        Amount           %
Average ferrous selling price      $   327    $   345    $     (18 )       (5 )%
Average nonferrous selling price   $ 2,729    $ 2,823    $     (94 )       (3 )%
Ferrous tons shipped                 2,078      2,196         (118 )       (5 )%
Nonferrous tons shipped                234        243           (9 )       (4 )%

Americas Mills We include our five domestic steel minimills and the scrap locations which directly support the steel minimills in our Americas Mills segment.

This segment recorded an adjusted operating profit of $204.3 million for 2013, compared with adjusted operating profit of $235.9 million for 2012. The decline in profitability was partially due to a decrease in pre-tax LIFO income of $9.5 million from 2012 to 2013. Additionally, both volumes and selling prices within this segment were 5% lower in 2013 when compared to 2012. Rebar accounted for 57% of tonnage shipped, an increase over the prior year. Lower electrical and alloy rates resulted in an overall decrease of $12.2 million in electrode, alloys and energy costs. Shipments included 242 thousand tons of billets in 2013 as compared to 410 thousand tons of billets in 2012.

The table below reflects our domestic steel minimills' operating statistics (in thousands) and average prices per short ton for the years ended August 31:

                                                                     Increase (Decrease)
                                               2013      2012        Amount           %
Tons melted                                    2,407     2,568         (161 )         (6 )%
Tons rolled                                    2,295     2,206           89            4  %
Tons shipped                                   2,561     2,682         (121 )         (5 )%
Average mill selling price (finished goods)   $  683    $  730    $     (47 )         (6 )%
Average mill selling price (total sales)         669       706          (37 )         (5 )%
Average cost of ferrous scrap consumed           343       379          (36 )         (9 )%
Average metal margin                             326       327           (1 )          -  %
Average ferrous scrap purchase price             299       339          (40 )        (12 )%

Americas Fabrication This segment recorded an adjusted operating profit of $28.0 million for 2013, marking a significant improvement over the adjusted operating loss in 2012 of $15.7 million. The segment continued to experience margin expansion as input pricing declined while transactional selling prices improved when compared to 2012. At August 31, 2013, the composite average fabrication selling price was $943 per ton, up from $906 per ton at August 31, 2012. Additionally, pre-tax LIFO income for 2013 was $12.2 million, compared with pre-tax LIFO income of $15.2 million for 2012.

The tables below show our average fabrication selling prices per short ton and total fabrication plant shipments for the year ended August 31:

Increase (Decrease) Average selling price (excluding stock and

buyout sales)                                         2013         2012         Amount             %
Rebar                                              $    901     $    864     $      37              4  %
Structural                                            2,580        2,342           238             10  %

Post                                                    914          949           (35 )           (4 )%


                                                Increase (Decrease)
Tons shipped (in thousands)   2013    2012     Amount           %
Rebar                          902     911       (9 )            (1 )%
Structural                      53      60       (7 )           (12 )%
Post                            99      90        9              10  %


International Mill This segment recorded an adjusted operating profit of $0.9 million for 2013, compared with an adjusted operating profit of $23.0 million in 2012. Volumes declined 17%, or approximately 266 thousand tons, primarily related to our merchant and wire rod products. International Mill selling prices also declined $12 per ton to $589 per ton during 2013. Included in the 2012 results was a loss of $3.8 million on the sale of a rebar fabrication shop in Rosslau, Germany. The lack of meaningful market improvements across Europe continued to challenge this segment. Shipments in 2013 included 75 thousand tons of billets compared to 205 thousand tons of billets in 2012.

The table below reflects our International Mill's operating statistics (in thousands) and average prices per short ton:

                                                                  Increase (Decrease)
                                            2013      2012        Amount           %
Tons melted                                 1,386     1,638         (252 )        (15 )%
Tons rolled                                 1,244     1,395         (151 )        (11 )%
Tons shipped                                1,318     1,584         (266 )        (17 )%
Average mill selling price (total sales)   $  589    $  601    $     (12 )         (2 )%
Average cost of ferrous scrap consumed        360       385          (25 )         (6 )%
Average metal margin                          229       216           13            6  %
Average ferrous scrap purchase price          289       315          (26 )         (8 )%

International Marketing and Distribution This segment recorded an adjusted operating profit of $35.6 million for 2013, compared with an adjusted operating profit of $47.3 million in 2012. The reduced profitability is primarily due to $12.7 million of goodwill and other asset impairment charges related to our Australia operations, as well as other one-time costs for exiting unprofitable locations. Decreased revenues and margins in our raw materials business and losses from our Australian operations also adversely affected this segment's results. Additionally, overall weakness in global markets we serve continue to negatively impact this segment's results. Within this segment, our U.S.-based trading divisions recorded pre-tax LIFO income of $26.1 million for 2013, an increase of $23.3 million over 2012.

During the first quarter of fiscal 2013, we completed the sale of our 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million.

Corporate Our corporate expenses decreased by $16.6 million in 2013 to $66.5 million primarily as a result of our continued cost containment initiatives when compared to the prior year.

CONTINUING OPERATIONS DATA

Consolidated Data The LIFO method of inventory valuation increased our net earnings from continuing operations by $34.4 million for 2013, compared with an increase in our net earnings of $27.1 million for 2012.

Selling, General and Administrative ("SG&A") Expenses Consolidated SG&A expenses decreased $13.1 million, or 3%, for 2013 as compared to 2012. The costs were down as a result of our cost containment initiatives.

Interest Expense Our interest expense increased by $0.1 million to $69.6 million during 2013 as compared to 2012 due to an increase in interest expense as a result of the increase in our long term debt in 2013, offset by the settlement of our interest rate swap transactions in 2012. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches.

Income Taxes Our effective tax rate from continuing operations for the year ended August 31, 2013 was 43.6% as compared to (27.8)% in 2012. The increase in the effective tax rate to 43.6% for the year ended August 31, 2013 over the statutory tax rate of 35% is due to the mix and amount of pre-tax income in the jurisdictions in which we operate and the recognition of valuation allowances on deferred tax assets in various jurisdictions that are not more likely than not to be realized. Our effective tax rates can be impacted by state and local taxes as well as by earnings or losses from foreign jurisdictions. State and local taxes are generally consistent while the composition of domestic and foreign earnings can create larger fluctuations in the rate.

During the year ended August 31, 2012, the Company recognized a tax loss in the amount of $291.0 million related to its investments in its Croatian subsidiary. As a result, a tax benefit of $102.1 million was recorded from these losses in continuing operations for

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