UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended August 31, 2012 | ||
or | ||
o | 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 No.) | |
6565 MacArthur Blvd, Irving, TX (Address of principal executive offices) | 75039 (Zip Code) | |
Registrant’s telephone number, including area code: (214) 689-4300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
Preferred Stock Purchase Rights | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes o No þ
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 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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the common stock on February 29, 2012, held by non-affiliates of the registrant, based on the closing price per share on February 29, 2012, on the New York Stock Exchange was approximately $1,532,054,401. (For purposes of determination of this amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates.)
The number of shares outstanding of common stock as of October 26, 2012 was 116,355,137.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following document are incorporated by reference into the listed Part of Form 10-K:
Registrant’s definitive proxy statement for the 2013 annual meeting of stockholders — Part III
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
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PART I
ITEM 1. BUSINESS
GENERAL
Commercial Metals Company and its consolidated subsidiaries (collectively, the "Company," "we," "our" or "us") manufacture, recycle and market steel and metal products, related materials and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, a copper tube minimill, metal recycling facilities and marketing and distribution offices in the United States and in strategic international markets. The CMC Americas Division operates utilizing three segments: Americas Recycling, Americas Mills and Americas Fabrication. The CMC International Division operates utilizing two segments: International Mill (comprised of all mill, recycling and fabrication operations located outside of the U.S.) and International Marketing and Distribution, which includes all marketing and distribution operations located outside the U.S. as well as two U.S.-based trading and distribution divisions, CMC Cometals, located in Fort Lee, New Jersey and CMC Cometals — Steel, located in Irving, Texas.
We were incorporated in 1946 in the State of Delaware. Our predecessor company, a metals recycling business, has existed since approximately 1915. We maintain our executive offices at 6565 MacArthur Boulevard in Irving, Texas, telephone number (214) 689-4300. Our fiscal year ends August 31 and any reference in this Form 10-K to any year refers to fiscal year ended August 31 of that year unless otherwise noted. Financial information for the last three fiscal years concerning our five business segments and the geographic areas of our operations is incorporated herein by reference from “Note 20, Business Segments” of the notes to consolidated financial statements which are in Part II, Item 8 of this Form 10-K.
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website,
http://www.cmc.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Except as otherwise stated in these reports, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we file with, or furnish to, the Securities and Exchange Commission.
We structure our business into five segments. Three of these five segments are in the CMC Americas Division: Americas Recycling, Americas Mills and Americas Fabrication. The other two segments, International Mill and International Marketing and Distribution, are in the CMC International Division.
CMC AMERICAS DIVISION OPERATIONS
AMERICAS RECYCLING SEGMENT
The Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. This segment operates 33 scrap metal processing facilities with 16 locations in Texas, eight in Florida, two locations in Missouri and one location in each of Arkansas, Georgia, Kansas, Louisiana, North Carolina, Oklahoma and Tennessee.
We purchase ferrous and nonferrous scrap metals, processed and unprocessed, from a variety of sources in a variety of forms for our metals recycling plants. Sources of metal for recycling include manufacturing and industrial plants, metal fabrication plants, electric utilities, machine shops, factories, railroads, refineries, shipyards, ordinance depots, demolition businesses, automobile salvage firms and wrecking firms. Collectively, small scrap metal collection firms are a major supplier.
In 2012, the Americas Recycling segment’s plants shipped approximately 2,439,000 tons of scrap metal compared to 2,469,000 tons in 2011. Ferrous scrap metals comprised the largest tonnage of metals recycled at approximately 2,196,000 tons, a decrease of approximately 6,000 tons as compared to 2011. In addition, this segment shipped approximately 243,000 tons of nonferrous scrap metals, primarily aluminum, copper and stainless steel, a decrease of approximately 24,000 tons as compared to 2011. With the exception of precious metals, our scrap metal recycling plants recycle and process practically all types of metal.
Our scrap metal recycling plants typically consist of an office and warehouse building equipped with specialized equipment for processing both ferrous and nonferrous metal located on several acres of land that we use for receiving, sorting, processing and storing metals. Several of our scrap metal recycling plants use a small portion of their site or a nearby location to display and sell metal products that may be reused for their original purpose without further processing. We equip our larger plants with scales, shears, baling presses, briquetting machines, conveyors and magnetic separators, which enable these plants to efficiently process large volumes of scrap metals.
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Two of our plants have extensive equipment that segregates metallic content from large quantities of insulated wire. To facilitate processing, shipping and receiving, we equip our ferrous metal processing centers with presses, shredders or hydraulic shears to prepare and compress scrap metal for easier handling. We use cranes to handle scrap metals for processing and to load material for shipment. Many facilities have rail access, as we primarily transport processed ferrous scrap to consumers by open gondola railcar or barge when water access is available.
Americas Recycling operates five large shredding machines, three in Texas, one in Florida, and one in Oklahoma capable of pulverizing obsolete automobiles or other sources of scrap metal. We have four additional shredders, two operated by our Americas Mills segment and two by our International Mill segment.
We sell scrap metals to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers and other consumers. Ferrous scrap metal is the primary raw material for electric arc furnaces such as those operated by our Americas Mills segment and other minimills. Some minimills periodically supplement purchases of ferrous scrap metal with direct reduced iron and pig iron for certain product lines. Our Irving office coordinates the sales of scrap metals from our scrap metal processing plants to our customers. We negotiate export sales through our network of foreign offices as well as our Irving office.
We are not materially dependent on any single source for the scrap metal we purchase. One customer represents 17% of our Americas Recycling segment’s revenues. Our recycling business competes with other scrap metals processors and primary nonferrous metals producers, both domestic and foreign, for sales of nonferrous materials. Consumers of nonferrous scrap metals frequently can utilize primary or “virgin” ingot processed by mining companies instead of nonferrous scrap metals. The prices of nonferrous scrap metals are closely related to, but generally are less than, the prices of primary or “virgin” ingot.
AMERICAS MILLS SEGMENT
The Americas Mills segment includes the Company's domestic steel mills, including scrap metal shredders and processing facilities that directly support these mills and the domestic copper tube minimill. We conduct our Americas Mills operations through a network of:
• | 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 processing facilities that directly support the steel minimills; |
• | a railroad salvage company; and |
• | a copper tube minimill. |
We operate five steel minimills, which are located in Texas, Alabama, South Carolina, Arizona and Arkansas. We utilize a fleet of trucks that we own as well as private haulers to transport finished products from the mills to our customers and our fabricating shops. To minimize the cost of our products, to the extent feasibly consistent with market conditions and working capital demands, we prefer to operate all mills near full capacity. Market conditions such as increases in quantities of competing imported steel, production rates at domestic competitors, customer inventory levels or a decrease in construction activity may reduce demand for our products and limit our ability to operate the mills at full capacity. Through our operations and capital improvements, we strive to increase productivity and capacity at the mills and enhance our product mix. Since the steel mill business is capital intensive, we make substantial capital expenditures on a regular basis to remain competitive with other low cost producers. Over the past three fiscal years we have spent approximately $97 million, or 31% of our total capital expenditures, on projects within our Americas Mills segment.
The following table compares the amount of steel (in short tons) melted, rolled and shipped by our five steel mills in the past three fiscal years:
2012 | 2011 | 2010 | |||||||
Tons melted | 2,568,000 | 2,470,000 | 2,077,000 | ||||||
Tons rolled | 2,206,000 | 2,088,000 | 1,734,000 | ||||||
Tons shipped | 2,682,000 | 2,518,000 | 2,156,000 | ||||||
We acquired our largest steel minimill, located in Seguin, Texas, in 1963. We acquired our minimills in Birmingham, Alabama and Cayce, South Carolina in 1983 and 1994, respectively, and we have operated our smallest steel minimill, located near Magnolia, Arkansas, since 1987. In September 2009, we opened our newest minimill in Mesa, Arizona.
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Our Texas, Alabama and South Carolina minimills each consist of:
• | a melt shop with an electric arc furnace that melts ferrous scrap metal; |
• | continuous casting equipment that shapes the molten metal into billets; |
• | a reheating furnace that prepares billets for rolling; |
• | a rolling mill that forms products from heated billets; |
• | a mechanical cooling bed that receives hot product from the rolling mill; |
• | finishing facilities that cut, straighten, bundle and prepare products for shipping; and |
• | supporting facilities such as maintenance, warehouse and office areas. |
Descriptions of minimill capacity, particularly rolling capacity, are highly dependent on the specific product mix manufactured. Our minimills roll many different types and sizes of products in their range depending on market conditions including pricing and demand. The actual capacity of our minimills depends on the products we actually produce. The following table provides estimated annual capacities, assuming a typical product mix in tons:
Annual Capacity | Melt | Roll | ||||
Texas | 1,000,000 | 900,000 | ||||
Alabama | 700,000 | 575,000 | ||||
South Carolina | 800,000 | 900,000 | ||||
Arkansas | — | 150,000 | ||||
Arizona | 300,000 | 300,000 | ||||
Our Texas minimill manufactures a full line of bar size products, including reinforcing bar, angles, rounds, channels, flats, and special sections used primarily in building highways, reinforcing concrete structures and manufacturing. It sells primarily to the construction, service center, energy, petrochemical, and original equipment manufacturing industries. The Texas minimill primarily ships its products to customers located in Texas, Louisiana, Arkansas, Oklahoma and New Mexico. It also ships products to approximately 20 other states and to Mexico. Our Texas minimill melted 949,000 tons during 2012 compared to 956,000 tons during 2011, and rolled 761,000 tons, a decrease of 11,000 tons from 2011.
Our Alabama minimill recorded 2012 melt shop production of 586,000 tons, an increase of 3,000 tons from 2011. It rolled 350,000 tons, during 2012, a decrease of 4,000 tons from 2011. This minimill primarily manufactures products that are larger in size relative to products manufactured by our other steel minimills. Such larger size products include mid-size structural steel products including angles, channels, beams of up to eight inches and special bar quality rounds and flats. It does not produce reinforcing bar. Our Alabama minimill sells primarily to service centers, as well as to the construction, manufacturing, and fabricating industries. The Alabama minimill primarily ships its products to customers located in Alabama, Georgia, Tennessee, North and South Carolina, and Mississippi.
Our South Carolina minimill manufactures a full line of bar size products, which primarily includes steel reinforcing bar. The minimill also manufactures angles, rounds, squares, fence post sections and flats. The South Carolina minimill ships its products to customers located in the Southeast and mid-Atlantic regions, which include the states from Florida through southern New England. During 2012, this minimill melted 727,000 tons and rolled 660,000 tons compared to 659,000 tons melted and 582,000 tons rolled during 2011.
Our minimill in Arizona utilizes a “continuous continuous” design where metal flows uninterrupted from melting to casting to rolling. It is more compact than existing, larger capacity steel minimills and production is dedicated to a limited product range, primarily reinforcing bar. We also operate a reinforcing bar fabrication facility located on the same site. This minimill began full operations in September 2009. During 2012, this minimill melted 306,000 tons and rolled 312,000 tons compared to 272,000 tons melted and 268,000 tons rolled during 2011.
The primary raw material for our Texas, Alabama, South Carolina and Arizona mills is ferrous scrap metal. We purchase raw materials from suppliers generally within a 300 mile radius of each minimill. This segment operates nine scrap metal recycling plants with four located in South Carolina, three located in Texas, and two located in Alabama, which directly support the mills. This segment also includes two automobile shredders. During 2012, these metal recycling plants processed 685,000 tons of ferrous scrap metal. We believe the supply of ferrous scrap metal is adequate to meet our future needs, but it has
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historically been subject to significant price fluctuations which have occurred more rapidly over the last several years. All four mills consume large amounts of electricity and natural gas. We have not had any significant curtailments and believe that supplies are adequate. The supply and demand of regional and national energy and the extent of applicable regulatory oversight of rates charged by providers affect the prices we pay for electricity and natural gas.
The smaller Arkansas minimill does not have a melt shop or continuous casting equipment. The Arkansas minimill manufacturing process begins with a reheating furnace utilizing used rail primarily salvaged from railroad abandonments and billets acquired either from our other mills or unrelated suppliers as its raw material. The remainder of the manufacturing process utilizes a rolling mill, cooling bed and finishing equipment and support facilities similar to, but on a smaller scale, than those at our other minimills. The Arkansas minimill primarily manufactures metal fence post stock, small diameter reinforcing bar and bed frame angles with some flats, angles and squares. At our Arkansas minimill and at our facilities in San Marcos, Texas, Brigham City, Utah, and Cayce, South Carolina, we fabricate fence post stock into studded “T” metal fence posts. Since our Arkansas minimill does not have melting facilities, the minimill depends on an adequate supply of competitively priced used rail or billets. The availability of these raw materials fluctuates with the pace of railroad abandonments, rail replacement by railroads, demand for used rail from competing domestic and foreign rail rerolling mills and the level of excess billet production offered for sale by steel producers. During 2012, the minimill rolled 123,000 tons compared to 113,000 tons rolled during 2011.
Our subsidiary, Howell Metal Company (“CMC Howell”), operates a copper tube minimill in New Market, Virginia, which manufactures copper tube, primarily water tubing, for the plumbing, air conditioning and refrigeration industries. CMC Howell also distributes selected steel products. Both high quality copper scrap and virgin copper are melted, cast, extruded and drawn into tubing. The minimill supplies tubing in straight lengths and coils for use in commercial, industrial and residential construction and by original equipment manufacturers. Our customers, largely wholesale plumbing and HVAC supply firms, large home improvement retailers and equipment manufacturers, are located across the United States and are supplied directly from the minimill as well as from our four warehouses. The demand for copper tube depends on the level of new apartment, hotel/motel, institutional and residential construction and renovation. Copper scrap is readily available, but subject to rapid price fluctuations. The price or supply of virgin copper causes the price of copper scrap to fluctuate rapidly. Our Americas Recycling segment supplies a portion of the copper scrap requirements of by CMC Howell. CMC Howell’s facilities include melting, casting, piercing, extruding, drawing, finishing and office facilities. During 2012, the facility produced approximately 39 million pounds of copper tube. CMC Howell has annual manufacturing capacity of approximately 80 million pounds.
No single customer purchases 10% or more of our Americas Mills segment’s production. Due to the nature of certain stock products we sell in the Americas Mills segment, we do not have a long lead time between receipt of a purchase order and delivery. We generally fill orders for stock products from inventory or with products near completion. As a result, we do not believe that backlog levels are a significant factor in the evaluation of these operations. Backlog for our Americas Mills minimills at August 31, 2012 was approximately $244 million as compared to $261 million at August 31, 2011.
AMERICAS FABRICATION SEGMENT
The Americas Fabrication segment consists of the Company's rebar fabrication operations, fence post manufacturing plants and construction-related and other product facilities. We conduct our Americas Fabrication operations through a network of:
• | steel plants that bend, cut, weld 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. |
Steel Fabrication Our Americas Fabrication segment operates 49 facilities that we consider to be engaged in the various aspects of steel fabrication. Most of the facilities engage in general fabrication of reinforcing and structural steel, with four facilities fabricating only steel fence posts. We obtain steel for these facilities from our own mills, purchases from other steel manufacturers through our distribution business and directly from unrelated steel vendors. In 2012, we shipped 1,061,000 tons of fabricated steel, an increase of 55,000 tons from 2011. During the third quarter of 2012, we closed two rebar fabrication facilities.
We conduct steel fabrication activities in 16 locations in Texas, five each in California and South Carolina, three in Florida, two each in Arkansas, Colorado, Illinois, Louisiana, Mississippi, North Carolina, and Virginia, and one each in Arizona, Georgia, Nevada, New Mexico, Tennessee and Utah.
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Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, bridges, arenas, stadiums, and dams. Generally, we sell fabricated steel in response to a bid solicitation from a construction contractor or the project owner. Typically, the contractor or owner of the project awards the job based on the competitive prices of the bids and does not individually negotiate with the bidders.
Construction Services We sell and rent construction related products and equipment to concrete installers and other construction businesses. We have 23 locations in Texas, Louisiana, Mississippi, and Oklahoma, where we store and sell these products which, with the exception of a small portion of steel products, are purchased from third-party suppliers. During the fourth quarter of 2012, we closed two construction services locations.
Impact Metals CMC Impact Metals is one of North America’s premier producers of high strength steel products. We operate plants in Chicora, Pennsylvania, Struthers, Ohio and Pell City, Alabama which manufacture armor plate for military vehicles, high strength bar for the truck trailer industry and special bar quality steel for the energy market. CMC Impact Metals works closely with our Alabama minimill, other steel mills and our distribution business that sell specialized heat-treated steel for customer specific use. We have annual operating capacity of approximately 150,000 tons.
Backlog in our steel fabrication operations was approximately $718 million at August 31, 2012 as compared to $620 million at August 31, 2011. We do not consider other backlogs in the Americas Fabrication segment to be material. No single customer accounted for 10% or more of our Americas Fabrication segment’s sales in 2012.
CMC INTERNATIONAL DIVISION OPERATIONS
INTERNATIONAL MILL SEGMENT
Our International Mill segment includes our minimill and recycling operations in Poland and our fabrication operations.
Our subsidiary, CMC Zawiercie S.A. (“CMCZ”), owns a steel minimill and conducts its operations at Zawiercie, Poland. CMCZ, along with our international recycling and fabrication operations, constitute the International Mill segment.
CMCZ operates equipment similar to our domestic steel minimills. We operate three rolling mills; one wire-rod mill and two bar mills including a specialty rod finishing mill. We own all or a substantial interest in several smaller metals related operations, including 14 scrap metals processing facilities in Poland that directly support CMCZ with approximately 40% of its scrap requirements.
CMCZ has annual melting and rolling capacity of approximately 1,900,000 tons. During 2012, the facility melted 1,638,000 tons of steel compared to approximately 1,585,000 tons the prior year; rolled approximately 1,395,000 compared to approximately 1,334,000 tons the prior year and shipped approximately 1,584,000 tons compared to approximately 1,494,000 tons the prior year. Principal products manufactured include rebar and wire rod as well as merchant bar and billets. CMCZ is a significant manufacturer of rebar and wire rod in Central Europe, selling rebar primarily to fabricators, distributors and construction companies. Principal customers for wire rod are meshmakers, end users and distributors. CMCZ’s products are generally sold to customers located within 400 miles of the mill. The majority of sales are to customers within Poland, and CMCZ exports approximately 40% of sales to Germany, the Czech Republic, Slovakia and other countries. Ferrous scrap metal is the principal raw material for CMCZ and is generally obtained from scrap metal processors and generators within 400 miles of the mill. Ferrous scrap metal, electricity, natural gas and other necessary raw materials for the steel manufacturing process are generally readily available, although they are subject to significant price fluctuations. A large capacity scrap metal shredding facility similar to the largest shredder we operate in the United States is located at CMCZ and supplies CMCZ with a portion of its scrap metal requirements.
CMCZ also operates a flexible rolling mill designed to allow efficient and flexible production of a range of medium section merchant bar product, which began operations in the third quarter of 2010. This rolling mill has a second finishing end designed to produce higher grade wire rod. This rolling mill complements the facility’s other two rolling mills dedicated primarily to rebar production and has a rolling capacity of approximately 700,000 tons of rebar and merchant and a wire rod rolling capacity of approximately 550,000 tons of mesh quality wire rod.
Our international fabrication operations have expanded downstream captive uses for a portion of the rebar and wire rod manufactured at CMCZ. We conduct rebar fabrication activities in Zawiercie, Żyrardów and Rzeszów, Poland. These three rebar fabrication facilities are similar to those operated by our domestic fabrication facilities and sell fabricated rebar to contractors for incorporation into construction projects generally within 200 miles of each facility. In addition to fabricated rebar, our units sell fabricated mesh, assembled rebar cages and other rebar byproducts. Total production capacity of these units is approximately 200,000 tons of steel products annually.
Additionally, we operate a fabrication facility in Dabrowa Górnicza, Poland, that produces welded steel mesh, cold rolled wire rod and cold rolled reinforcing bar. This operation enables our international fabrication operations to supplement sales of
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fabricated reinforcing bar by also offering wire mesh to customers including metals service centers as well as construction contractors. At the end of fiscal year 2010, we upgraded this facility with two cold drawing lines and a mesh welding line. Total production capacity of this facility is approximately 160,000 tons per year. With our cold drawn and mesh products we maintain a presence in the Polish market but we also sell to neighboring countries such as the Czech Republic, Germany and Slovakia.
During the first quarter of 2012, we announced the closure of our Croatian Pipe Mill, CMC Sisak, d.o.o. ("CMCS"). After review of the marketplace and our production capabilities, we determined that achieving sustained profitability would take additional time and investment in an operation which is not considered part of our core business. During the second and third quarters of 2012, we shipped all remaining production orders and liquidated all remaining inventory. Effective June 1, 2012, the Company completed the sale of all of the outstanding shares of CMCS for $30.6 million, of which $3.1 million will be paid when certain conditions are met. As part of the share sale, certain assets were excluded from the transaction. On June 13, 2012, the Company completed the sale of a portion of the excluded assets for $6.7 million. In the fourth quarter of 2012, the Company recorded a $13.8 million pre-tax gain for these transactions, including a foreign currency translation gain of $7.5 million. The remaining CMCS assets excluded from these transactions were sold on September 21, 2012 for $3.9 million. Additionally, the Company sold the rebar fabrication shop in Rosslau, Germany for $11.3 million which resulted in a fourth quarter loss of $3.8 million.
INTERNATIONAL MARKETING AND DISTRIBUTION SEGMENT
International Marketing and Distribution includes international operations for the sales, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products. Additionally, our International Marketing and Distribution segment includes the Company's U.S. based trading and distribution divisions, CMC Cometals and CMC Cometals Steel. Our International Marketing and Distribution business buys and sells primary and secondary metals, fabricated metals, semi-finished, long, flat steel products and other industrial products. During the past year, our International Marketing and Distribution facilities sold approximately 2.1 million tons of steel products in addition to raw material commodities. We market and distribute these products through a network of offices and processing facilities located around the world. We purchase steel products, industrial minerals, ores, metal concentrates and ferroalloys from producers in domestic and foreign markets. We utilize long-term contracts, spot market purchases and trading transactions to purchase materials. To obtain favorable long-term supply agreements, we occasionally offer assistance to producers by arranging structured finance transactions to suit their objectives.
We sell our products to customers, primarily manufacturers, in the steel, nonferrous metals, metal fabrication, chemical, refractory, construction and transportation businesses. We sell directly to our customers through and with the assistance of our offices in Irving, Texas; Fort Lee, New Jersey; Sydney, Perth, Melbourne, Brisbane and Adelaide, Australia; Singapore; Zug, Switzerland; Kürten, Germany; Cardiff, United Kingdom; Temse, Belgium; Hong Kong; Beijing, Guangzhou and Shanghai, China. We have a representative office in Moscow, and we have agents located in significant international markets. Our network of offices shares information regarding demand for our materials, assists with negotiation and performance of contracts and other services for our customers, and identifies and maintains relationships with our sources of supply.
In most transactions, we act as principal by taking title and ownership of the products. We are at times designated as a marketing representative, sometimes exclusively, by product suppliers and on occasion we act as a broker for these products. We buy and sell these products in almost all major markets throughout the world where permitted by United States companies.
As opposed to companies that trade commodity futures contracts and frequently do not take delivery of the commodity, we market physical products. As a result of sophisticated global communications, our customers and suppliers often have easy access to quoted market prices, although such price quotes are not always indicative of actual transaction prices. Therefore, to distinguish ourselves we focus on value-added services for both sellers and buyers. Our services include actual physical market pricing and trend information (in contrast to market information from more speculative metal exchange futures), technical information and assistance, financing, transportation and shipping (including chartering of vessels), storage, warehousing, just-in-time delivery, insurance, hedging and the ability to consolidate smaller purchases and sales into larger, more cost efficient transactions. We perform these services in the normal course of business and the services are included in the transaction price as there is no separate revenue stream for each service. We limit exposure to price fluctuations by offsetting purchases with concurrent sales. We also enter into currency exchange contracts as economic hedges of sales and purchase commitments denominated in currencies other than the U.S. dollar or the functional currency of our international subsidiaries. We design our policies to prohibit speculation on changes in the markets.
We believe we are the largest marketer of imported steel in Australia. We utilize warehouse facilities at several Australian ports to facilitate distribution, including just-in-time delivery and logistics management. Our CMC Coil Steels Group (“Coil Steels”) is a major distributor and processor of steel sheet, coil and long products, which are predominately procured from Australian sources but at times are supplied by our own import operations. Coil Steels operates processing facilities in Brisbane, Sydney and Melbourne, warehouses in Adelaide and Perth and smaller regional sales outlets in various locations,
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including Darwin and Townsville. The Australian operations also operate an industrial products distribution business supplying metals related industries including steel mills, foundries and smelters.
During the fourth quarter of 2011, our Australian operations acquired G.A.M. Steel Pty. Ltd., based in Melbourne, Australia (“G.A.M.”). G.A.M. is a leading distributor and processor of steel long products and plate in Australia, servicing the structural fabrication, rural and manufacturing segments in the state of Victoria, Australia.
This segment also operates a recycling facility in Singapore. The facility is similar to those operated by our Americas Recycling segment but on a smaller scale, and is operated as part of the International Marketing and Distribution segment due to its oversight by managers in this segment. We have an 11% investment in the outstanding stock of a Czech Republic long products steel mill.
For financial data on the above segments, see “Financial Statements and Supplementary Data — Note 20, Business Segments.”
SEASONALITY
Many of our mills and fabrication facilities serve customers in the construction business. Due to the increase in construction during the spring and summer months, our sales are generally higher in the third and fourth quarters than in the first and second quarters of our fiscal year.
COMPETITION
We believe our Americas Recycling segment is one of the largest entities engaged in the recycling of nonferrous scrap metals in the United States. We are also a major regional processor of ferrous scrap metal. The scrap metal recycling business is subject to cyclical fluctuations based upon the availability and price of unprocessed scrap metal and the demand for steel and nonferrous metals. In our Americas Recycling segment, we compete primarily on price and on services we provide to scrap suppliers and generators. The price offered for scrap metal is the principal competitive factor in acquiring material from smaller scrap metals collection firms. Industrial generators of scrap metal may also consider factors other than price, such as supplying appropriate collection containers, timely removal, reliable documentation including accurate and detailed purchase records with customized reports, the ability to service multiple locations, insurance coverage, and the buyer’s financial strength.
Our Americas Mills segment competes with regional, national and foreign manufacturers of steel and copper. We do not produce a significant percentage of the total domestic output of most of our products. However, we are considered a substantial supplier in the markets near our facilities. We compete primarily on the price and quality of our products and our service. See “Risk Factors — Risks Related to Our Industry.”
Our Americas Fabrication segment competes with regional and national suppliers. We believe that we are among the largest fabricators of reinforcing bar in the United States. We also believe that we are the largest manufacturer of steel fence posts in the United States.
Our International Mill segment competes with several large manufacturers of rebar and wire rod in Central and Eastern Europe, primarily on the basis of price, quality and product availability. We believe that CMCZ is the second largest supplier of wire rod and the second largest supplier of reinforcing bar in the Polish market.
Our International Marketing and Distribution segment is highly competitive. Our products in the distribution business are standard commodity items. We compete primarily on the price, quality and reliability of our products, our financing alternatives and our additional services. In this business, we compete with other domestic and foreign trading companies, some of which are larger and may have access to greater financial resources. In addition, some of our competitors may be able to pursue business without restriction by the laws of the United States. We also compete with industrial consumers who purchase directly from suppliers, and importers and manufacturers of semi-finished ferrous and nonferrous products. We believe our CMC Coil Steels Group and G.A.M., distributors of steel sheet and coil in Australia, are the third largest distributors of those products in Australia.
ENVIRONMENTAL MATTERS
A significant factor in our business is our compliance with environmental laws and regulations. See “Risk Factors — Risks Related to Our Industry” below. Compliance with and changes in various environmental requirements and environmental risks applicable to our industry may adversely affect our results of operations and financial condition.
Occasionally, we may be required to clean up or take certain remediation action with regard to sites we use or formerly used in our operations. We may also be required to pay for a portion of the costs of clean up or remediation at sites we never owned or on which we never operated if we are found to have arranged for treatment or disposal of hazardous substances on the sites. The U.S. Environmental Protection Agency (“EPA”), or equivalent state agency, has named us a potentially responsible party
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(“PRP”), at several Federal Superfund sites or similar state sites. These agencies allege that we and other PRPs are responsible for the cleanup of those sites solely because we sold scrap metals or other materials to unrelated manufacturers. With respect to the sale of scrap metals, we contend that an arm’s length sale of valuable scrap metal for use as a raw material in a manufacturing process that we do not control should not constitute “an arrangement for disposal or treatment of hazardous substances” as defined under Federal law. In 2000, the Superfund Recycling Equity Act was signed into law which, subject to the satisfaction of certain conditions, provides legitimate sellers of scrap metal for recycling with some relief from Superfund liability under Federal law. Despite Congress’ clarification of the intent of the Federal law, some state laws and environmental agencies still seek to impose such liability. We believe efforts to impose such liability are contrary to public policy objectives and legislation encouraging recycling and promoting the use of recycled materials, and we continue to support clarification of state laws and regulations consistent with Congress’ action.
New Federal, state and local laws, regulations and the varying interpretations of such laws by regulatory agencies and the judiciary impact how much money we spend on environmental compliance. In addition, uncertainty regarding adequate control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions impact our future expenditures in order to comply with environmental requirements. We cannot predict the total amount of capital expenditures or increases in operating costs or other expenses that may be required as a result of environmental compliance. We also do not know if we can pass such costs on to our customers through product price increases. During 2012, we incurred environmental costs including disposal, permits, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $27 million. In addition, we estimate that we spent approximately $8 million during 2012 on capital expenditures for environmental projects. We believe that our facilities are in material compliance with currently applicable environmental laws and regulations. We anticipate capital expenditures for new environmental control facilities during 2013 to be approximately $21 million.
EMPLOYEES
As of August 31, 2012, we had approximately 9,860 employees. The Americas Recycling segment employed approximately 1,430 people, the Americas Mills segment employed approximately 1,990 people, the Americas Fabrication segment employed approximately 2,890 people, the International Mill segment employed approximately 2,280 people and the International Marketing and Distribution segment employed approximately 730 people. As of August 31, 2012, we had approximately 500 employees providing services to our divisions and subsidiaries in shared service operations, general corporate administration (including treasury, tax, information technology, internal audit and other services), and management. Production employees at one metals recycling plant and five fabrication facilities are represented by unions for collective bargaining purposes. Approximately one half of International Mill's employees are represented by unions. We believe that our labor relations are generally good to excellent and our work force is highly motivated. In connection with our announcement of the closure of CMCS, included in the International Mill segment, there was a reduction in workforce of approximately 1,130.
ITEM 1A. RISK FACTORS
There are inherent risks and uncertainties associated with our business that could adversely affect our business, results of operations and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could adversely affect our business, results of operations and financial condition. If any of these risks actually occurs, our business, financial condition and results of operations could be materially adversely affected.
RISKS RELATED TO OUR INDUSTRY
OUR INDUSTRY IS VULNERABLE TO GLOBAL ECONOMIC CONDITIONS, INCLUDING THE SLOW RECOVERY FROM THE RECENT RECESSION AND THE RISK OF A RECESSION RELAPSE.
Our financial results are substantially dependent upon the overall economic conditions in the United States and the European Union. The sluggish pace of recovery from the deep global recession that began in the United States in December 2007 and officially ended in June 2009 has continued to have an adverse effect on the demand for our products and, consequently, our business, results of operations and financial condition. In addition, uncertainties in Europe regarding the financial sector and sovereign debt and the potential impact on banks in other regions of the world has continued to weigh on global and domestic growth. Metals industries have historically been vulnerable to significant declines in consumption and product pricing during prolonged periods of economic downturn. Likewise the pace of construction has historically slowed significantly during economic downturns. Our geographic concentration in the southern and southwestern United States as well as Central Europe, Australia, China, and the Middle East exposes us to the local market conditions in these regions. Economic downturns in these areas or decisions by governments that have an impact on the level and pace of overall economic activity in a particular region could also adversely affect our sales and profitability.
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Although we believe that the long-term prospectus for the steel industry remain bright, we are unable to predict the duration of the depressed economic conditions that are contributing to reduced demand for our products. Future economic downturns or a prolonged period of slow growth or economic stagnation could materially adversely affect our business, results of operations and financial condition.
OUR INDUSTRY IS CYCLICAL AND PROLONGED PERIODS OF SLOW ECONOMIC GROWTH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our business supports cyclical industries such as commercial, residential and government construction, energy, metals service center, petrochemical and original equipment manufacturing. We may experience significant fluctuations in demand for our products from these industries based on economic conditions, energy prices, consumer demand and decisions by governments to fund infrastructure projects such as highways, schools, energy plants and airports. As a result of the volatility in the industries we serve, we may have difficulty increasing or maintaining our level of sales or profitability. Our business, results of operations and financial condition would be adversely affected if the industries we serve suffer a prolonged downturn or anemic growth. Although the residential housing market is not a significant direct factor in our business, related commercial and infrastructure construction activities, such as shopping centers, schools and roads, could be impacted by a prolonged slump in new housing construction.
Our industry is characterized by low backlogs, which means that our business, results of operations and financial condition are promptly affected by short-term economic fluctuations.
THE SCRAP METAL RECYCLING INDUSTRY HAS HISTORICALLY BEEN, AND IS EXPECTED TO REMAIN, HIGHLY CYCLICAL. A PROLONGED PERIOD OF LOW SCRAP PRICES OR A FALL IN SCRAP METAL PRICES, COULD RESULT IN THE WEAKENING OF INBOUND SCRAP FLOWS AND THEREBY REDUCED OUR ABILITY TO OBTAIN, PROCESS AND SELL RECYCLED MATERIALS AND THIS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR METALS RECYCLING OPERATIONS' RESULTS.
Scrap metal prices are volatile and operating results within the metals recycling industry, in general, have historically been cyclical, and are expected to remain, highly cyclical in nature. Similarly, but not necessarily paralleling the price fluctuations in the steel business, the purchase prices for automobile bodies and various other grades of obsolete and industrial scrap, as well as the selling prices for processed and recycled scrap metals we utilize in our own manufacturing process or we resell to others through our metals recycling operations, are also highly volatile. As a metals recycler, we may attempt to respond to changing recycled metal selling prices by adjusting the scrap metal purchase prices we pay to others, but our ability to do this may be limited by competitive or other factors during periods of low scrap prices, when inbound scrap flow may slow considerably, as scrap generators hold onto their scrap in the hope of getting higher prices later; conversely, increased foreign demand for scrap due to economic expansion in countries such as China, India, Brazil, and Turkey can result in an outflow of available domestic scrap as well as higher scrap prices that cannot always be passed on to domestic scrap consumers further reducing the available domestic scrap flows and scrap margins all of which could adversely affect our sales and profitability.
A SIGNIFICANT REDUCTION IN CHINA'S STEEL CONSUMPTION OR INCREASED CHINESE STEEL PRODUCTION SUBSTANTIALLY EXCEEDING LOCAL DEMAND MAY RESULT IN CHINA BECOMING A LARGE EXPORTER OF STEEL AND DISRUPTION TO WORLD STEEL MARKETS.
Chinese economic expansion has affected the availability and heightened the volatility of many commodities that we market and use in our manufacturing process, including steel. Expansions and contractions in China's economy can have major effects on the price of our finished steel products and many commodities that affect us such as secondary metals, energy, marine freight rates, steel making supplies such as ferroalloys and graphite electrodes, and materials we market, such as iron ore and coke. If Chinese demand weakens or Chinese steel production expands to the point that it significantly exceeds the country's consumption, prices for many of the products that we both sell to and export from China may fall, causing erosion in our gross margins and subjecting us to possible renegotiation of contracts or increases in bad debts. Significant exports from China of steel in the product lines we manufacture would likely cause our selling prices to decline and negatively impact our volumes and gross margins.
RAPID AND SIGNIFICANT CHANGES IN THE PRICE OF METALS COULD ADVERSELY IMPACT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Prices for most metals in which we deal have experienced increased volatility over the last several years, and such increased price volatility impacts us in several ways. Some of our operations, such as our fabrication operations, may benefit from rapidly decreasing steel prices as their material cost for previously contracted fixed price work declines. Others, such as our Americas Mills and International Mill segments, would likely experience reduced margins and may be forced to liquidate high cost inventory at reduced margins or losses until prices stabilize. Sudden increases could have the opposite effect. Overall, we believe that rapid substantial price changes are not to our industry's benefit. Our customer and supplier base would be impacted due to uncertainty as to future prices. A reluctance to purchase inventory in the face of extreme price decreases or to
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sell quickly during a period of rapid price increases would likely reduce our volume of business. Marginal industry participants or speculators may attempt to participate to an unhealthy extent during a period of rapid price escalation with a substantial risk of contract default if prices suddenly reverse. Risks of default in contract performance by customers or suppliers as well as an increased risk of bad debts and customer credit exposure could increase during periods of rapid and substantial price changes.
EXCESS CAPACITY IN OUR INDUSTRY COULD INCREASE THE LEVEL OF STEEL IMPORTS INTO THE UNITED STATES, RESULTING IN LOWER DOMESTIC PRICES WHICH WOULD ADVERSELY AFFECT OUR SALES, MARGINS AND PROFITABILITY.
Steel-making capacity exceeds demand for steel products in some countries. Rather than reducing employment by rationalizing capacity with consumption, steel manufacturers in these countries (often with local government assistance or subsidies in various forms) have traditionally periodically exported steel at prices significantly below their home market prices and which may not reflect their costs of production or capital. This supply of imports can decrease the sensitivity of domestic steel prices to increases in demand or decrease our ability to recover our manufacturing costs. The excess capacity may create downward pressure on our steel prices which would adversely affect our sales, margins and profitability.
COMPLIANCE WITH AND CHANGES IN ENVIRONMENTAL AND REMEDIATION REQUIREMENTS COULD RESULT IN SUBSTANTIALLY INCREASED CAPITAL REQUIREMENTS AND OPERATING COSTS.
Existing laws or regulations, as currently interpreted or reinterpreted in the future, and future laws and regulations, may have a material adverse effect on our business, results of operations and financial condition. Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, Federal and international environmental laws and regulations concerning, among other matters, waste disposal, air emissions, waste and storm water effluent and disposal and employee health. New facilities that we may build, especially steel minimills, are required to obtain several environmental permits before significant construction or commencement of operations. Delays in obtaining permits or unanticipated conditions in such permits could delay the project or increase construction costs or operating expenses. Our manufacturing and recycling operations produce significant amounts of by-products, some of which are handled as industrial waste or hazardous waste. For example, our minimills generate electric arc furnace dust (“EAF dust”), which the Environmental Protection Agency (the “EPA”) and other regulatory authorities classify as hazardous waste. EAF dust and other industrial waste and hazardous waste require special handling, recycling or disposal.
In addition, the primary feed materials for the shredders operated by our scrap metal recycling facilities are automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hull consists of unrecyclable material known as shredder fluff. After the segregation of ferrous and saleable nonferrous metals, shredder fluff remains. We, along with others in the recycling industry, interpret Federal regulations to require shredder fluff to meet certain criteria and pass a toxic leaching test to avoid classification as a hazardous waste. We also endeavor to remove hazardous contaminants from the feed material prior to shredding. As a result, we believe the shredder fluff we generate is not normally considered or properly classified as hazardous waste. If the laws, regulations or testing methods change with regard to EAF dust or shredder fluff or other by-products, we may incur additional significant expenditures.
Legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate pollution control levels, testing and sampling procedures, new pollution control technology and cost/benefit analysis based on market conditions are all factors that may increase our future expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations. We cannot predict whether such costs would be able to be passed on to customers through product price increases. Competitors in various regions or countries where environmental regulation is less restrictive, subject to different interpretation or generally not enforced, may enjoy a competitive advantage.
We may also be required to conduct additional clean up at sites where we have already participated in remediation efforts or to take remediation action with regard to sites formerly used in connection with our operations. We may be required to pay for a portion or all of the costs of clean up or remediation at sites we never owned or on which we never operated if we are found to have arranged for treatment or disposal of hazardous substances on the sites. In cases of joint and several liability, we may be obligated to pay a disproportionate share of cleanup costs if other responsible parties are financially insolvent.
INCREASED REGULATION ASSOCIATED WITH CLIMATE CHANGE AND GREENHOUSE GAS EMISSIONS COULD IMPOSE SIGNIFICANT ADDITIONAL COSTS ON BOTH OUR STEELMAKING AND METALS RECYCLING OPERATIONS.
The U.S. government and various governmental agencies have introduced or are contemplating regulatory changes in response to the potential impact of climate change. International treaties or agreements may also result in increasing regulation of greenhouse gas emissions, including the introduction of carbon emissions trading mechanisms. Any such regulation regarding climate change and greenhouse gas (“GHG”) emissions could impose significant costs on our steelmaking and metals
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recycling operations and on the operations of our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with current or future laws or regulations concerning and limitations imposed on our operations by virtue of climate change and GHG emissions laws and regulations. The potential costs of “allowances,” “offsets” or “credits” that may be part of potential cap-and-trade programs or similar future regulatory measures are still uncertain. Any adopted future climate change and GHG regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations. From a medium and long-term perspective, as a result of these regulatory initiatives, we may see an increase in costs relating to our assets that emit significant amounts of greenhouse gases. These regulatory initiatives will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our business, results of operations or financial condition.
RISKS RELATED TO OUR COMPANY
POTENTIAL LIMITATIONS ON OUR ABILITY TO ACCESS CREDIT MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We could be adversely affected if our banks refused to honor their contract commitments or ceased lending. Events in the global credit markets, including the failure, takeover or rescue by various government entities of major financial institutions, have created uncertainty of credit availability to an extent not experienced in recent decades. Our senior unsecured debt is rated by Standard & Poor's Corporation (BB+) and Moody's Investors Service (Ba2). In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings (loss), fixed charges such as interest, cash flows, total debt outstanding, off-balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy and diversity, industry conditions and contingencies.
OUR CUSTOMERS' INABILITY TO OBTAIN CREDIT MAY RESULT IN THEIR DEFAULT ON THE DEBTS THEY OWE TO US.
If the recent constraints on access to credit continue for a prolonged period, some of our customers may struggle or fail to
meet their obligations to pay us, especially if they in turn experience defaults on receivables due from their customers. A continued economic downturn could result in our incurring bad debt costs in excess of our expectations and prior experience. In certain markets, we have experienced a consolidation among those entities to whom we sell. This consolidation, along with higher metals and other commodity prices, has resulted in an increased credit risk spread among fewer customers often without a corresponding strengthening of their financial status. We use credit insurance both in the United States and internationally to mitigate the risk of customer insolvency. However, it is possible that we may not be capable of recovering all of our insured losses if the insurers with whom our accounts receivable are insured experience significant losses threatening their viability. Additionally, credit insurance policies typically have relatively short policy periods and require pre-approval of customers with maximum insured limits established by the customer. If credit insurers incur large losses, the insurance may be more difficult and more costly to secure and may be on less favorable terms. While in many international sales transactions we require letters of credit from financial institutions, which we believe to be financially secure, we may be at risk in the event the financial institution subsequently fails and the customer is unable to pay for the products we sold. A significant amount of our accounts receivable are considered to be open account uninsured accounts receivable. We regularly maintain a substantial amount of accounts receivable ($958.4 million at August 31, 2012).
POTENTIAL IMPACT OF OUR CUSTOMERS' NON COMPLIANCE WITH EXISTING COMMERCIAL CONTRACTS AND COMMITMENTS.
Most consumers of the metals products we sell have been negatively impacted by the recession and the continued slow recovery therefrom. Due to their economic hardship or the contraction in their operations or due to the fact that the prices for many of the products we sell have declined since the customers entered into the contracts with us, some of our customers have sought to renegotiate or cancel their existing purchase commitments. In addition, some of our customers have breached previously agreed upon contracts to buy our products by refusing delivery of the products. Where appropriate, we have and will in the future pursue litigation to recover our damages resulting from customer contract defaults. A large number of our customers defaulting on existing contractual obligations to purchase our products could have a material adverse effect on our business, results of operations and financial condition.
THE AGREEMENTS GOVERNING OUR NOTES AND OUR OTHER DEBT CONTAIN FINANCIAL COVENANTS AND IMPOSE RESTRICTIONS ON OUR BUSINESS.
The indenture governing our 5.625% notes due 2013, 6.50% notes due 2017 and 7.35% notes due 2018 contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions and consolidate or merge. In addition to these restrictions, our credit facility contains covenants that restrict our ability to, among other things, enter into transactions with
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affiliates and guarantee the debt of some of our subsidiaries. Our credit facility also requires that we meet certain financial tests and maintain certain financial ratios, including a maximum debt to capitalization and interest coverage ratios.
Other agreements that we may enter into in the future may contain covenants imposing significant restrictions on our business that are similar to, or in addition to, the covenants under our existing agreements. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants could result in a default under the indenture governing the notes or under our other debt agreements. An event of default under our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we were unable to repay debt to our secured lenders or if we incur secured debt in the future, these lenders could proceed against the collateral securing that debt. In addition, acceleration of our other indebtedness may cause us to be unable to make interest payments on the notes.
FLUCTUATIONS IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO OTHER CURRENCIES MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Fluctuations in the value of the U.S. dollar may affect our business, results of operations and financial condition. In particular, major changes in the rate of exchange of China's renminbi or the value of the euro to the U.S. dollar could adversely affect our business, results of operations and financial condition. A strong U.S. dollar makes imported metal products less expensive, resulting in more imports of steel products into the United States by our foreign competitors, while a weak U.S. dollar may have the opposite impact on imports. With the exception of exports of nonferrous scrap metal by our Americas Recycling segment, we have not recently been a significant exporter of metal products from our United States operations. Economic difficulties in some large steel producing regions of the world, resulting in lower local demand for steel products, have historically encouraged greater steel exports to the United States at depressed prices which can be exacerbated by a strong dollar. As a result, our products that are made in the United States may become relatively more expensive as compared to imported steel, which has had and in the future could have a negative impact on our business, results of operations and financial condition.
A strong U.S. dollar hampers our international marketing and distribution business. Weak local currencies limit the amount of U.S. dollar denominated products that we can import for our international operations and limit our ability to be competitive against local producers selling in local currencies.
OPERATING INTERNATIONALLY CARRIES RISKS AND UNCERTAINTIES WHICH COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our foreign operations generated approximately 29% of our 2012 revenue. We have significant facilities in Poland and Australia. Our marketing and trading offices are located in most major markets of the world, and our suppliers and customers are located throughout the world. Our marketing and distribution segment relies on substantial international shipments of materials and products in the ordinary course of its business. Our stability, growth and profitability are subject to a number of risks inherent in doing business internationally in addition to the currency exchange risk discussed above, including:
• | political, military, terrorist or major pandemic events; |
• | legal and regulatory requirements or limitations imposed by foreign governments (particularly those with significant steel consumption or steel related production including China, Brazil, Russia and India) including quotas, tariffs or other protectionist trade barriers, adverse tax law changes, nationalization or currency restrictions; |
• | disruptions or delays in shipments caused by customs compliance or government agencies; and |
• | potential difficulties in staffing and managing local operations. |
These types of events may adversely affect our business, results of operations and financial condition.
WE RELY ON THE AVAILABILITY OF LARGE AMOUNTS OF ELECTRICITY AND NATURAL GAS FOR OUR MINIMILL OPERATIONS. DISRUPTIONS IN DELIVERY OR SUBSTANTIAL INCREASES IN ENERGY COSTS, INCLUDING CRUDE OIL PRICES, COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Minimills melt steel scrap in electric arc furnaces and use natural gas to heat steel billets for rolling into finished products. As large consumers of electricity and gas, often the largest in the geographic area where our minimills are located, we must have dependable delivery of electricity and natural gas in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes would substantially disrupt our production. While we have not suffered prolonged production delays due to our inability to access electricity or natural gas, several of our competitors have experienced such occurrences. Prolonged substantial increases in
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energy costs would have an adverse effect on the costs of operating our minimills and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our customers. Our finished steel products are typically delivered by truck. Rapid increases in the price of fuel attributable to increases in crude oil prices will increase our costs and adversely affect many of our customers' financial results, which in turn could result in reduced margins and declining demand for our products. Rapid increases in fuel costs may also negatively impact our ability to charter ships for international deliveries at anticipated freight rates, thereby decreasing our margins on those transactions or causing our customers to look for alternative sources.
IF WE LOSE THE SERVICES OF KEY EMPLOYEES WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS AND MEET OUR STRATEGIC OBJECTIVES.
Our future success depends, in large part, on the continued service of our officers and other key employees and our ability to continue to attract and retain additional highly qualified personnel. These employees are integral to our success based on their expertise and knowledge of our business and products. We compete for such personnel with other companies, including public and private company competitors who may periodically offer more favorable terms of employment. The loss or interruption of the services of a number of our key employees could reduce our ability to effectively manage our operations due to the fact that we may not be able to find in a timely manner, appropriate replacement personnel should the need arise.
WE MAY HAVE DIFFICULTY COMPETING WITH COMPANIES THAT HAVE A LOWER COST STRUCTURE OR ACCESS TO GREATER FINANCIAL RESOURCES.
We compete with regional, national and foreign manufacturers and traders. Consolidation among participants in the steel manufacturing and recycling industries has resulted in fewer competitors but several which are significantly larger than us. Some of our larger competitors have greater financial resources and more diverse businesses than us. Some of our foreign competitors may be able to pursue business opportunities without regard to certain of the laws and regulations with which we must comply, such as environmental regulations. These companies may have a lower cost structure, more operating flexibility and consequently they may be able to offer better prices and more services than we can. There is no assurance that we will be able to compete successfully with these companies. Any of these factors could have a material adverse effect on our business, results of operations and financial condition.
OUR MINIMILLS REQUIRE CONTINUOUS CAPITAL INVESTMENTS THAT WE MAY NOT BE ABLE TO SUSTAIN.
We must make regular substantial capital investments in our steel minimills to maintain the minimills, lower production costs and remain competitive. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary substantial capital expenditures in the future. The availability of external financing depends on many factors outside of our control, including capital market conditions and the overall performance of the economy. If funding is insufficient, we may be unable to develop or enhance our minimills, take advantage of business opportunities and respond to competitive pressures.
SCRAP AND OTHER SUPPLIES FOR OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT PRICE FLUCTUATIONS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We depend on ferrous scrap, the primary feedstock for our steel minimills, and other supplies such as graphite electrodes and ferroalloys for our steel minimill operations. The price of scrap and other supplies has historically been subject to significant fluctuation, and we may not be able to adjust our product prices to recover the costs of rapid increases in material prices, especially over the short-term and in our domestic fabrication segment's fixed price contracts. Our future profitability will be adversely affected if we are unable to pass on to our customers increased raw material and supply costs.
The raw material used in manufacturing copper tubing is copper scrap, supplemented occasionally by virgin copper ingot. Copper scrap is subject to rapid price fluctuations related to the price and supply of virgin copper. Price increases for high quality copper scrap could adversely affect our business, results of operations and financial condition. Our Arkansas mill does not have melting capacity, so it is dependent on an adequate supply of competitively priced used rail. The availability of used rail fluctuates with the pace of railroad abandonments, rail replacement by railroads in the United States and abroad and demand for used rail from other domestic and foreign rail rerolling mills. Price increases for used rail could adversely affect our business, results of operations and financial condition.
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Interruptions in our production capabilities would adversely affect our production costs, steel available for sales and earnings for the affected period. Our manufacturing processes are dependent upon critical pieces of steel-making equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers. This equipment may, on occasion, be out of service as a result of unanticipated failures. We have experienced, and may in the future experience, material plant shutdowns or periods of reduced production as a result of such equipment failures. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires,
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explosions or violent weather conditions.
COMPETITION FROM OTHER MATERIALS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In many applications, steel competes with other materials, such as aluminum and plastics (particularly in the automobile industry), cement, composites, glass and wood. Increased use of or additional substitutes for steel products could adversely affect future market prices and demand for steel products.
HEDGING TRANSACTIONS MAY EXPOSE US TO LOSSES OR LIMIT OUR POTENTIAL GAINS.
Our product lines and worldwide operations expose us to risks associated with fluctuations in foreign currency exchange rates, commodity prices and interest rates. As part of our risk management program, we use financial instruments, including metals commodity futures, natural gas forward contracts, freight forward contracts, foreign currency exchange forward contracts and interest rate swap contracts. While intended to reduce the effects of the fluctuations, these transactions may limit our potential gains or expose us to losses. If our counterparties to such transactions or the sponsors of the exchanges through which these transactions are offered, such as the London Metal Exchange, fail to honor their obligations due to financial distress we would be exposed to potential losses or the inability to recover anticipated gains from these transactions.
We enter into the foreign currency exchange forward contracts as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. These foreign exchange commitments are dependent on timely performance by our counterparties. Their failure to perform could result in our having to close these hedges without the anticipated underlying transaction and could result in losses if foreign currency exchange rates have changed.
WE ARE INVOLVED AND MAY IN THE FUTURE BECOME INVOLVED IN VARIOUS ENVIRONMENTAL MATTERS THAT MAY RESULT IN FINES, PENALTIES OR JUDGMENTS BEING ASSESSED AGAINST US OR LIABILITY IMPOSED UPON US WHICH WE CANNOT PRESENTLY ESTIMATE OR REASONABLY FORESEE AND WHICH MAY HAVE A MATERIAL IMPACT ON OUR BUSINESS, RESULTS OF OPERATIONS AND CASH FLOWS.
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, called CERCLA or Superfund, or similar state statutes, we may have obligations to conduct investigation and remediation activities associated with alleged releases of hazardous substances or to reimburse the EPA (or state agencies as applicable) for such activities and to pay for natural resource damages associated with alleged releases. We have been named a potentially responsible party at several Federal and state Superfund sites because the EPA or an equivalent state agency contends that we and other potentially responsible scrap metal suppliers are liable for the cleanup of those sites as a result of having sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacture of new products. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites.
Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with various environmental matters or the effect on our consolidated financial position, we make accruals as warranted. In addition, although we do not believe that a reasonably possible range of loss in excess of amounts accrued for pending lawsuits, claims or proceedings would be material to our financial statements, additional developments may occur, and due to inherent uncertainties, including evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors, the amounts we ultimately are required to pay could vary significantly from the amounts we accrue, and this could have a material adverse effect on our business, results of operations and financial condition.
WE ARE SUBJECT TO LITIGATION WHICH COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We are involved in various litigation matters, including regulatory proceedings, administrative proceedings, governmental investigations, environmental matters and construction contract disputes. The nature of our operations also exposes us to possible litigation claims in the future. Because of the uncertain nature of litigation and coverage decisions, we cannot predict the outcome of these matters. These matters could have a material adverse effect on our business, results of operations and financial condition. Litigation is very costly, and the costs associated with prosecuting and defending litigation matters could have a material adverse effect on our business, results of operations and financial condition. Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with litigation matters, we make accruals as warranted. However, the amounts that we accrue could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors.
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SOME OF OUR OPERATIONS PRESENT SIGNIFICANT RISK OF INJURY OR DEATH.
The industrial activities conducted at our facilities present significant risk of serious injury or death to our employees, customers or other visitors to our operations, notwithstanding our safety precautions, including our material compliance with Federal, state and local employee health and safety regulations, and we may be unable to avoid material liabilities for injuries or deaths. We maintain workers' compensation insurance to address the risk of incurring material liabilities for injuries or deaths, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on the terms acceptable to us, or at all, which could result in material liabilities to us for any injuries or deaths.
HEALTH CARE LEGISLATION COULD RESULT IN SUBSTANTIALLY INCREASED COSTS AND ADVERSELY AFFECT OUR WORKFORCE.
Recently enacted health care mandates may cause us to evaluate the scope of health benefits offered to our workforce and the method in which they are delivered, and increase our and our employees' costs. If we are not able to offer a competitive level of benefits, our ability to hire and retain qualified personnel may be adversely affected. Higher health care costs may result in (i) an inability to reinvest sufficient capital in our operations, (ii) an inability to sustain dividends, (iii) lowered debt ratings and (iv) an increase in the cost of capital, all of which may have a negative effect on the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our Texas steel minimill is located on approximately 660 acres of land that we own. Our Texas minimill facilities include several buildings that occupy approximately 850,000 square feet. Our Alabama steel minimill is located on approximately 70 acres of land, and it includes several buildings that occupy approximately 540,000 square feet. We utilize our facilities at the Texas and Alabama steel minimills for manufacturing, storage, office and other related uses. Our South Carolina steel minimill is located on approximately 110 acres of land, and the buildings occupy approximately 700,000 square feet. Our Arkansas steel minimill is located on approximately 140 acres of land, and the buildings occupy approximately 240,000 square feet. Our Arizona steel minimill is located on approximately 230 acres of land, and the buildings occupy approximately 130,000 square feet. We lease approximately 30 acres of land at the Alabama minimill and all the land at the Arkansas and South Carolina minimills in connection with revenue bond financing or property tax incentives. CMC Howell owns approximately 83 acres of land in New Market, Virginia, with buildings occupying approximately 410,000 square feet.
Our domestic recycling operating plants occupy approximately 880 acres of land, of which we lease approximately 60 acres. The facilities of our domestic fabrication and construction service operations utilize approximately 840 acres of land, of which we lease approximately 70 acres.
CMCZ’s steel manufacturing operations are located in Zawiercie in South Central Poland about 40 kilometers from Katowice. CMCZ and its subsidiaries lease approximately 98% of the 2 million square meters of land utilized by the principal operations with the remaining portion owned. The land is leased from the State of Poland under contracts with 99 year durations that are considered to create a right of perpetual usufruct. The leases expire beginning in 2089 through 2100. The principal operations are conducted in buildings having an area of approximately 260,000 square meters. The seven major buildings in use have all been constructed on or after 1974. The real estate is also developed with over 130 other buildings including warehouses, administrative offices, workshops, garage, transformer stations, pumping stations, gas stations, boiler houses, gate houses and contains some structures leased to unrelated parties, CMCZ subsidiaries and affiliated companies. Other much smaller tracts of land are leased or owned in communities nearby Zawiercie including those utilized by six affiliated scrap processing facilities. Our international fabrication operations utilize approximately 136,000 square meters of land, which is either owned or subject to a perpetual usufruct.
We own two warehouse buildings which our operations in Australia utilize, one of which is located on leased real estate. We lease the other warehouse facilities located in Australia as well as our Australian headquarters, marketing and administration offices.
We lease the office space occupied by our corporate headquarters as well as that occupied by all of our marketing and distribution offices.
The leases on the leased properties described above will expire on various dates and, with the exception of the CMCZ leases described above, generally expire over the next six years. Several of the leases have renewal options. We have had little difficulty in the past renewing such leases prior to their expiration. We estimate our minimum annual rental obligation for real estate operating leases in effect at August 31, 2012, to be paid during fiscal 2013, to be approximately $22 million. We also lease a portion of the equipment we use in our plants. We estimate our minimum annual rental obligation for equipment operating leases in effect at August 31, 2012, to be paid during fiscal 2013, to be approximately $14 million.
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ITEM 3. LEGAL PROCEEDINGS
On September 18, 2008, we were served with a purported class action antitrust lawsuit alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against nine steel manufacturing companies, including Commercial Metals Company. The lawsuit, filed in the United States District Court for the Northern District of Illinois, alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products. The lawsuit, which purports to be brought on behalf of a class consisting of all parties who purchased steel products directly from the defendants between January 1, 2005 and September 2008, seeks treble damages and costs, including reasonable attorney fees and pre- and post-judgment interest. Since the filing of this lawsuit, additional plaintiffs have filed class action lawsuits naming the same defendants and containing allegations substantially identical to those of the Standard Iron Works complaint. We believe that the lawsuits are without merit and plan to aggressively defend the actions.
We have received notices from the EPA or state agencies with similar responsibility that we and numerous other parties are considered PRPs and may be obligated under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), or similar state statutes, to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at ten locations. We may contest our designation as a PRP with regard to certain sites, while at other sites we are participating with other named PRPs in agreements or negotiations that have resulted or that we expect will result in agreements to remediate the sites. The EPA or state agency, as applicable, refers to these locations, none of which involve real estate we ever owned or conducted operations upon: the Sapp Battery Site in Cottondale, Florida, the Interstate Lead Company Site in Leeds, Alabama, the Ross Metals Site in Rossville, Tennessee, the Li Tungsten Site in Glen Cove, New York, the Peak Oil Site in Tampa, Florida, the R&H Oil Site in San Antonio, Texas, the SoGreen/Parramore Site in Tifton, Georgia, the Jensen Drive site in Houston, Texas, and the Industrial Salvage site in Corpus Christi, Texas. During 2010, we acquired a 70% interest in the real property at Jensen Drive as part of the remediation of that site. We have periodically received information requests from government environmental agencies with regard to other sites that are apparently under consideration for designation as listed sites under CERCLA or similar state statutes. Often we do not receive any further communication with regard to these sites, and as of the date of this report, we do not know if any of these inquiries will ultimately result in a demand for payment from us.
The EPA notified us and other alleged PRPs that under Sec. 106 of CERCLA we and the other PRPs could be subject to a maximum fine of $25,000 per day and the imposition of treble damages if we and the other PRPs refuse to clean up the Peak Oil, Sapp Battery, and SoGreen/Parramore sites as ordered by the EPA. We are presently participating in PRP organizations at these sites which are paying for certain site remediation expenses. We do not believe that the EPA will pursue any fines against us if we continue to participate in the PRP groups or if we have adequate defenses to the EPA’s imposition of fines against us in these matters.
We believe that adequate provision has been made in the financial statements for the potential impact of any loss in connection with the above-described legal proceedings, environmental matters, government proceedings, and disputes that could result in additional litigation. Management believes that the outcome of the suits and proceedings mentioned, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on our business, consolidated financial position or liquidity.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET AND DIVIDEND INFORMATION
The table below summarizes the high and low sales prices reported on the New York Stock Exchange for a share of our common stock and the quarterly cash dividends per share that we paid for the past two fiscal years.
PRICE RANGE
OF COMMON STOCK
2012 FISCAL QUARTER | HIGH | LOW | CASH DIVIDENDS | |||||||||
1st | $ | 14.50 | $ | 8.64 | $ | 0.12 | ||||||
2nd | 16.48 | 12.57 | 0.12 | |||||||||
3rd | 15.40 | 11.50 | 0.12 | |||||||||
4th | 14.09 | 11.30 | 0.12 | |||||||||
2011 FISCAL QUARTER | HIGH | LOW | CASH DIVIDENDS | |||||||||
1st | $ | 15.88 | $ | 13.40 | $ | 0.12 | ||||||
2nd | 18.20 | 15.68 | 0.12 | |||||||||
3rd | 17.84 | 14.56 | 0.12 | |||||||||
4th | 15.04 | 10.51 | 0.12 | |||||||||
Our common stock is traded on the New York Stock Exchange. The number of shareholders of record of our common stock at October 26, 2012, was 4,568.
EQUITY COMPENSATION PLANS
Information about our equity compensation plans as of August 31, 2012 is as follows:
A. | B. | C. | ||||
PLAN CATEGORY | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (A)) | |||
Equity | ||||||
Compensation plans approved by security holders | 2,930,492 | $24.81 | 3,831,278 | |||
Equity | ||||||
Compensation plans not approved by security holders | — | — | — | |||
TOTAL | 2,930,492 | $24.81 | 3,831,278 | |||
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STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return of our common stock during the five year period beginning September 1, 2007 and ending August 31, 2012 with the Standard & Poor’s 500 Composite Stock Price Index also known as the “S&P 500” and the Standard & Poor’s Steel Industry Group Index also known as the “S&P Steel Group.” Each index assumes $100 invested at the close of trading August 31, 2007, and reinvestment of dividends.
8/07 | 8/08 | 8/09 | 8/10 | 8/11 | 8/12 | |||||||||||||
Commercial Metals Company | 100.00 | 91.40 | 61.49 | 48.79 | 45.40 | 51.10 | ||||||||||||
S&P 500 | 100.00 | 88.86 | 72.64 | 76.20 | 90.30 | 106.56 | ||||||||||||
S&P Steel | 100.00 | 100.77 | 59.79 | 61.29 | 65.31 | 46.81 | ||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth a summary of our selected consolidated financial information for the periods indicated. The per share amounts have been adjusted to reflect any stock dividends.
FOR THE YEAR ENDED AUGUST 31,
(DOLLARS IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Net sales * | $ | 7,828,440 | $ | 7,863,345 | $ | 6,276,928 | $ | 6,364,017 | $ | 9,836,882 | |||||||||
Net earnings (loss) attributable to CMC | 207,484 | (129,617 | ) | (205,344 | ) | 20,802 | 231,966 | ||||||||||||
Diluted earnings (loss) per share | 1.78 | (1.12 | ) | (1.81 | ) | 0.18 | 1.97 | ||||||||||||
Total assets | 3,441,246 | 3,683,131 | 3,706,153 | 3,687,556 | 4,746,371 | ||||||||||||||
Stockholders’ equity attributable to CMC | 1,246,368 | 1,160,425 | 1,250,736 | 1,529,693 | 1,638,383 | ||||||||||||||
Long-term debt | 1,157,073 | 1,167,497 | 1,197,282 | 1,181,740 | 1,197,533 | ||||||||||||||
Cash dividends per share | 0.48 | 0.48 | 0.48 | 0.48 | 0.45 | ||||||||||||||
Ratio of earnings to fixed charges | 2.77 | ** | ** | 1.20 | 4.78 | ||||||||||||||
* Excludes the net sales of divisions classified as discontinued operations.
** Earnings for the years ended August 31, 2011 and 2010 were inadequate to cover fixed charges. The coverage deficiencies were approximately $111 million and $267 million for the years ended August 31, 2011 and 2010, respectively.
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 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, with respect to our financial condition, results of operations, cash flows and business, and our 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. Developments that could impact our expectations include the following:
• | absence of global economic recovery or possible recession relapse; |
• | 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 Greece and other countries within the Euro zone; |
• | customer non-compliance with contracts; |
• | construction activity or lack thereof; |
• | decisions by governments affecting the level of steel imports, including tariffs and duties; |
• | litigation claims and settlements; |
• | difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes; |
• | metals pricing over which we exert little influence; |
• | increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing; |
• | execution of cost reduction strategies; |
• | ability to retain key executives; |
• | court decisions and regulatory rulings; |
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• | industry consolidation or changes in production capacity or utilization; |
• | global factors including political and military uncertainties; |
• | currency fluctuations; |
• | interest rate changes; |
• | availability and pricing of raw materials, including scrap metal, energy, insurance and supply prices; |
• | passage of new, or interpretation of existing, environmental laws and regulations; |
• | the pace of overall economic activity, particularly in China; and |
• | business disruptions, costs and future events related to any tender offers and proxy contests initiated by an activist shareholder. |
Our forward-looking statements are based on our expectations and beliefs as of the time this report is filed with the Securities and Exchange Commission or, with respect to any documents incorporated by reference, as of the time such document was prepared. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risk and uncertainties that could cause actual outcomes and results to be materially different from those indicated in such statements. These factors include those described in Item 1A of this Annual Report on Form 10-K. Except as required by law, we, undertake no obligation to update or revise 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. We caution readers not to place undue reliance on any forward-looking statements.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 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. Our domestic and international distribution business activities consist only of physical transactions and not market speculation.
Americas Recycling Operations
We conduct our recycling operations through metal processing facilities located in the states of Arkansas, Florida, Georgia, Kansas, Louisiana, Missouri, North Carolina, Oklahoma, Tennessee and Texas.
Americas Mills Operations
We conduct our domestic mills operations through a network of:
• | 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 processing facilities that directly support the steel minimills; |
• | a railroad salvage company; and |
• | a copper tube minimill which is aggregated with the Company’s steel minimills because it has similar economic characteristics. |
Americas Fabrication Operations
We conduct our domestic fabrication operations through a network of:
• | 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 |
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• | plants that treat steel with heat to strengthen and provide flexibility. |
International Mill Operations
Our International Mill operations include CMC Zawiercie S.A. (“CMCZ”), which owns a steel minimill and conducts its operations at Zawiercie, Poland, and recycling and fabrication operations in Poland. We conduct our International Mill operations through:
• | two rolling mills that produce primarily reinforcing bar and high quality merchant products; |
• | a rolling mill that produces primarily wire rod; |
• | 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 Operations
We market and distribute steel, copper and aluminum coil, sheet and tubing, ores, metal concentrates, industrial minerals, ferroalloys and chemicals through our network of marketing and distribution offices, processing facilities and joint ventures domestically and internationally. Our customers use these products in a variety of industries.
Consolidated Results of Operations
Year ended August 31, | ||||||||||||
(in thousands except per share data) | 2012 | 2011 | 2010 | |||||||||
Net sales* | $ | 7,828,440 | $ | 7,863,345 | $ | 6,276,928 | ||||||
Earnings (loss) from continuing operations | 208,983 | 19,278 | (99,447 | ) | ||||||||
Per diluted share | 1.79 | 0.16 | (0.88 | ) | ||||||||
Adjusted EBITDA | 364,235 | 237,250 | 14,879 | |||||||||
International net sales* | 3,153,736 | 3,500,716 | 3,061,591 | |||||||||
As % of total sales | 40 | % | 45 | % | 49 | % | ||||||
LIFO income (expense)** effect on net earnings (loss) attributable to CMC | $ | 29,604 | $ | (50,049 | ) | $ | 7,385 | |||||
Per diluted share | 0.25 | (0.43 | ) | 0.07 | ||||||||
__________________________________________
* 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 and impairment charges) as a non-GAAP performance 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. Also, we 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. Adjusted EBITDA is also the target benchmark for our long-term cash incentive performance plan for management and part of a debt compliance test for our revolving credit agreement.
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Reconciliations from net earnings (loss) from continuing operations to adjusted EBITDA are provided below for the years ended August 31:
(in thousands) | 2012 | 2011 | 2010 | |||||||||
Earnings (loss) from continuing operations | $ | 208,983 | $ | 19,278 | $ | (99,447 | ) | |||||
Less net earnings attributable to noncontrolling interests | (6 | ) | (213 | ) | (236 | ) | ||||||
Interest expense | 69,496 | 69,821 | 74,181 | |||||||||
Income taxes (benefit) | (46,190 | ) | 19,328 | (61,942 | ) | |||||||
Depreciation, amortization and impairment charges | 137,289 | 178,251 | 165,316 | |||||||||
Adjusted EBITDA from continuing operations | $ | 369,572 | $ | 286,465 | $ | 77,872 | ||||||
Adjusted EBITDA from discontinued operations | (5,337 | ) | (49,215 | ) | (62,993 | ) | ||||||
Adjusted EBITDA | $ | 364,235 | $ | 237,250 | $ | 14,879 | ||||||
Our adjusted EBITDA does not include interest expense, income taxes, depreciation, amortization and impairment charges. 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 would otherwise have been accomplished by periodic depreciation charges. Also, 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. Also, we separately analyze any significant fluctuations in interest expense, depreciation, amortization, impairment charges and income taxes.
The following events and performances had a significant financial impact to the Company's performance during 2012 as compared to 2011 or are expected to be significant for our future operations:
1. | Net sales of the Americas Recycling segment decreased 12% and adjusted operating profit decreased $3.6 million during 2012 as compared to the prior year primarily due to lower nonferrous volumes and average selling prices and ferrous margin compression offset by a swing of $20.0 million to LIFO income. |
2. | Net sales of the Americas Mills segment increased 6% and adjusted operating profit increased $72.2 million from the prior year. The results were primarily impacted by a change of $74.1 million from LIFO expense to income. |
3. | Net sales of the Americas Fabrication segment increased 13% and the segment reported an improvement in adjusted operating results of $113.4 million due to stable material pricing and improved market conditions in commercial construction markets resulting in stronger volume and pricing. The results were impacted by a change of $21.9 million from LIFO expense to income. |
4. | Net sales of the International Mill segment were consistent and adjusted operating profit decreased $24.6 million from the prior year primarily due to margin compression and deteriorating economic conditions in Europe. Although the results were unfavorable, CMCZ set record volumes for the year ended August 31, 2012. |
5. | Net sales of the International Marketing and Distribution segment increased 3% and adjusted operating profit decreased $29.1 million from the prior year primarily due to losses on iron ore contracts, reduced demand in some of our key products and uncertainty concerning economic stimulus in China. The results were impacted by a change of $7.1 million from LIFO expense to income. |
6. | During the third quarter 2012, we terminated our interest rate swap transactions and received cash proceeds of approximately $53 million. |
7. | During the first quarter of 2012, we announced the exit of our steel pipe manufacturing operation in Croatia (“CMCS”). Effective June 1, 2012, the Company completed the sale of all of the outstanding shares of CMCS for $30.6 million, of which $3.1 million will be paid when certain conditions are met. As part of the share sale, certain assets were excluded from the transaction. On June 13, 2012, the Company completed the sale of a portion of the excluded assets for $6.7 million. In the fourth quarter of 2012, the Company recorded a $13.8 million pre-tax gain for these transactions, including a foreign currency translation gain of $7.5 million. The remaining CMCS assets excluded from these transactions were sold on September 21, 2012 for $3.9 million. |
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8. | During the first quarter of 2012, we recognized a tax benefit of $102.1 million in continuing operations related to ordinary worthless stock and bad debt deductions from our investment in CMCS. The Company recorded a tax benefit of $11.5 million during the year ended August 31, 2012 related to federal and state research and experimentation expenditures. |
9. | We recorded consolidated pre-tax LIFO income of $45.5 million for 2012 compared to pre-tax LIFO expense of $77.0 for 2011. |
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 20, Business Segments, to the consolidated financial statements included in this report.
We use adjusted operating profit (loss) to compare and evaluate 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) | 2012 | 2011 | 2010 | |||||||||
Net sales: | ||||||||||||
Americas Recycling | $ | 1,606,161 | $ | 1,829,537 | $ | 1,316,430 | ||||||
Americas Mills | 2,155,817 | 2,036,325 | 1,478,426 | |||||||||
Americas Fabrication | 1,381,638 | 1,225,722 | 1,140,277 | |||||||||
International Mill | 1,033,357 | 1,046,233 | 699,064 | |||||||||
International Marketing and Distribution | 2,727,319 | 2,650,899 | 2,463,414 | |||||||||
Corporate | 8,033 | 6,882 | 4,249 | |||||||||
Eliminations | (1,083,885 | ) | (932,253 | ) | (824,932 | ) | ||||||
Adjusted operating profit (loss): | ||||||||||||
Americas Recycling | 39,446 | 43,059 | 11,416 | |||||||||
Americas Mills | 233,933 | 161,731 | 37,251 | |||||||||
Americas Fabrication | (15,697 | ) | (129,141 | ) | (107,800 | ) | ||||||
International Mill | 23,044 | 47,594 | (31,594 | ) | ||||||||
International Marketing and Distribution | 47,287 | 76,337 | 74,689 | |||||||||
Corporate | (83,035 | ) | (84,729 | ) | (70,678 | ) | ||||||
Eliminations | (6,251 | ) | (1,275 | ) | 3,460 | |||||||
Discontinued Operations | (8,675 | ) | (150,678 | ) | (101,645 | ) | ||||||
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.
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The International Mill segment exclusively uses the FIFO inventory valuation method and thus is not included in this table:
Three Months Ended August 31, | Year Ended August 31, | |||||||||||||||
(in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Americas Recycling | $ | 4,056 | $ | (1,236 | ) | $ | 7,007 | $ | (12,980 | ) | ||||||
Americas Mills | 21,614 | (5,781 | ) | 20,405 | (53,648 | ) | ||||||||||
Americas Fabrication | 3,663 | (1,724 | ) | 15,248 | (6,644 | ) | ||||||||||
International Marketing and Distribution | (1,152 | ) | (902 | ) | 2,884 | (4,217 | ) | |||||||||
Discontinued Operations | — | — | — | 491 | ||||||||||||
Consolidated pre-tax LIFO income (expense) | $ | 28,181 | $ | (9,643 | ) | $ | 45,544 | $ | (76,998 | ) | ||||||
Americas Recycling The decreased adjusted operating profit during 2012 resulted in part from lower nonferrous average selling prices and volumes primarily from reduced export demand within Asia coupled with ferrous margin compression . LIFO income was $7.0 million for 2012 as compared to LIFO expense of $13.0 million for 2011. We exported 6% of our ferrous scrap tonnage and 35% of our nonferrous scrap tonnage during 2012.
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) | |||||||||||||||
2012 | 2011 | Amount | % | ||||||||||||
Average ferrous selling price | $ | 345 | $ | 340 | $ | 5 | 1 | % | |||||||
Average nonferrous selling price | $ | 2,823 | $ | 3,292 | $ | (469 | ) | (14 | )% | ||||||
Ferrous tons shipped | 2,196 | 2,202 | (6 | ) | — | % | |||||||||
Nonferrous tons shipped | 243 | 267 | (24 | ) | (9 | )% | |||||||||
Americas Mills We include our five domestic steel mills, including the scrap locations which directly support the steel mills, and our copper tube minimill in our Americas Mills segment.
Within the segment, adjusted operating profit for our five domestic steel mills was $235.9 million for 2012 as compared to $149.2 million for 2011. The results were primarily impacted from the change in LIFO to income of $16.6 million in 2012 as compared to LIFO expense of $48.0 million in 2011. Results were also positively impacted from higher shipments and better margin. The Arizona mill in its third full year of operations has been profitable for the last two years. Our mills ran at 78% utilization during 2012 as compared to 74% during 2011. Rebar accounted for 51% of tonnage shipped, consistent with the prior year. Higher electrical and alloy rates resulted in an overall increase of $7.6 million in electrode, alloys and energy costs. Shipments included 410 thousand tons of billets in 2012 as compared to 430 thousand tons of billets in 2011.
The table below reflects our domestic steel mills' operating statistics (in thousands) and average prices per short ton for the year ended August 31:
Increase | |||||||||||||||
2012 | 2011 | Amount | % | ||||||||||||
Tons melted | 2,568 | 2,470 | 98 | 4 | % | ||||||||||
Tons rolled | 2,206 | 2,088 | 118 | 6 | % | ||||||||||
Tons shipped | 2,682 | 2,518 | 164 | 7 | % | ||||||||||
Average mill selling price (finished goods) | $ | 730 | $ | 696 | $ | 34 | 5 | % | |||||||
Average mill selling price (total sales) | 706 | 669 | 37 | 6 | % | ||||||||||
Average cost of ferrous scrap consumed | 379 | 364 | 15 | 4 | % | ||||||||||
Average metal margin | 327 | 305 | 22 | 7 | % | ||||||||||
Average ferrous scrap purchase price | 339 | 329 | 10 | 3 | % | ||||||||||
Our copper tube minimill recorded an adjusted operating loss of $2.0 million during 2012 as compared to an adjusted operating profit of $12.5 million in 2011. The decline in adjusted operating profit was primarily due to lower copper selling prices. The results were impacted positively by the change in LIFO to income of $3.8 million in 2012 as compared to LIFO expense of $5.6 million in 2011.
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The table below reflects our copper tube minimill’s operating statistics for the year ended August 31:
Increase (Decrease) | ||||||||||||
(pounds in millions) | 2012 | 2011 | Amount | % | ||||||||
Pounds shipped | 41.5 | 41.9 | (0.4 | ) | (1 | )% | ||||||
Pounds produced | 39.3 | 39.2 | 0.1 | — | % | |||||||
Americas Fabrication This segment recorded an improvement in 2012 adjusted operating results of $113.4 million as compared to 2011. Included in last year's result is impairment, severance and closure costs of $21.7 million for closing certain rebar fabrication and construction services locations. The segment benefited from stable material pricing and improved market conditions in commercial construction markets resulting in stronger volume and pricing. Backlogs increased in both prices and tonnage in 2012 as compared to 2011. We are continuing to see encouraging results of market recovery as this segment’s backlogs continue to be near all-time highs in tonnage and total value. Additionally, LIFO changed to income of $15.2 million in 2012 as compared to LIFO expense of $6.6 million in 2011. The composite average fabrication selling price was $906 per ton in 2012, up from $817 per ton in 2011.
The tables below show our average fabrication selling prices per short ton and total fabrication plant shipments for the year ended August 31:
Increase | |||||||||||||||
Average selling price (excluding stock and buyout sales) | 2012 | 2011 | Amount | % | |||||||||||
Rebar | $ | 864 | $ | 773 | $ | 91 | 12 | % | |||||||
Structural | 2,342 | 1,980 | 362 | 18 | % | ||||||||||
Post | 949 | 928 | 21 | 2 | % | ||||||||||
Increase (Decrease) | ||||||||||||
Tons shipped (in thousands) | 2012 | 2011 | Amount | % | ||||||||
Rebar | 911 | 851 | 60 | 7 | % | |||||||
Structural | 60 | 56 | 4 | 7 | % | |||||||
Post | 90 | 99 | (9 | ) | (9 | )% | ||||||
International Mill This segment had an adjusted operating profit of $23.0 million during 2012 as compared to an adjusted operating profit of $47.6 million during 2011. Included in this year's fourth quarter is a loss of $3.8 million on the sale of a rebar fabrication shop in Rosslau, Germany. As of the date of this report, market conditions in Europe continue to be soft and significant uncertainty remains. On the positive side, our Polish operations recorded improvement in fourth quarter results and set full year production and shipping records in the mill operation in 2012, primarily on the strength of rebar and billet demand. Our mill operated at 85% of capacity in 2012 and 2011. Shipments in 2012 included 205 thousand tons of billets compared to 203 thousand tons of billets in 2011.
The table below reflects our International Mill’s operating statistics (in thousands) and average prices per short ton:
Increase (Decrease) | |||||||||||||||
2012 | 2011 | Amount | % | ||||||||||||
Tons melted | 1,638 | 1,585 | 53 | 3 | % | ||||||||||
Tons rolled | 1,395 | 1,334 | 61 | 5 | % | ||||||||||
Tons shipped | 1,584 | 1,494 | 90 | 6 | % | ||||||||||
Average mill selling price (total sales) | $ | 601 | $ | 638 | $ | (37 | ) | (6 | )% | ||||||
Average ferrous scrap production cost | 385 | 389 | (4 | ) | (1 | )% | |||||||||
Average metal margin | 216 | 249 | (33 | ) | (13 | )% | |||||||||
Average ferrous scrap purchase price | 315 | 325 | (10 | ) | (3 | )% | |||||||||
International Marketing and Distribution This segment reported an increase in sales of 3% and reported an adjusted operating profit of $47.3 million for 2012 as compared to an adjusted operating profit of $76.3 million during 2011, primarily due to losses on iron ore contracts, reduced demand in some of our key products and uncertainty concerning economic stimulus in China. This segment recorded LIFO income of $2.9 million for 2012 compared to LIFO expense of $4.2 million for 2011.
Corporate Our corporate expenses decreased by $1.7 million in 2012 to $83.0 million primarily as a result of our cost containment initiatives, partially offset by $15.0 million in fees and expenses associated with a proxy contest and hostile tender offer.
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CONTINUING OPERATIONS DATA
Consolidated Data The LIFO method of inventory valuation increased our net earnings from continuing operations by approximately $30 million for 2012 as compared to increasing our net loss by approximately $50 million for 2011.
Selling, General and Administrative (“SG&A”) Expenses Our overall SG&A expenses decreased by $30.2 million, or 6%, for 2012 as compared to 2011. The costs were down as a result of our cost containment initiatives offset by expenses associated with a proxy contest and hostile tender offer as discussed above.
Impairment of Assets Our impairment of assets decreased by $23.9 million as a result of 2011 impairments related to closure of certain rebar fabrication and construction services locations. There were no significant impairments in 2012.
Interest Expense Our interest expense decreased by $0.3 million to $69.5 million during 2012 as compared to 2011 primarily from lower average debt outstanding internationally.
Income Taxes Our effective tax rate from continuing operations for the year ended August 31, 2012 was (28.4)% as compared to 50.1% in 2011. For 2013, the Company expects the effective tax rate from continuing operations to be approximately 33%. The Company recognized a tax benefit of $102.1 million for ordinary worthless stock and bad debt deductions on the investment in CMCS. The Company also recorded a tax benefit of $11.5 million in 2012 related to federal and state research and experimentation expenditures. These tax benefits are the primary reason for the variance from the statutory tax rate of 35%. Additionally, the effective tax rate is increased by state and local taxes, while earnings generated in foreign jurisdictions decrease the rate. State and local taxes are generally consistent while the composition of domestic and foreign earnings can create larger fluctuations in the rate.
DISCONTINUED OPERATIONS DATA
Discontinued operations primarily consist of CMCS, which was classified as a discontinued operation in the first quarter of 2012. These operations reported adjusted operating loss of $8.7 million in 2012 as compared to adjusted operating loss of $150.7 million in the same period in the prior year. The results for 2012 include $18.0 million of severance expense associated with closing the facility and a pre-tax gain of $13.8 million for the sale of all of the shares of the CMCS operation, excluding $3.9 million in assets which were sold in September 2012 with no impact to the statement of operations. The results for 2011 include approximately $110.6 million of impairment and other charges incurred at CMCS.
OUTLOOK
In general we see economic recovery lacking meaningful momentum due to uncertainty on many levels. So far, in the first quarter of fiscal 2013, scrap prices have moved downward but we expect improvement during the winter months of 2013. We believe that, despite weakness in the scrap markets, our Recycling segment has done a good job adjusting to the market volatility and maintaining profitability. Domestically, there is a clear indication that residential construction is improving, which is a leading indicator of increased non-residential activity. Our International Mill segment continues to face difficult markets due to economic uncertainty in the Euro zone. Lastly, our International Marketing and Distribution segment faces substantial headwinds due to reduced demand in raw material division as well as the impact of China's unclear growth outlook. As always, we remain committed to improving our cost structure and cash flows.
2011 Compared to 2010
Americas Recycling Adjusted operating profit increased to $43.1 million for 2011 from $11.4 million for 2010. Strong market demand drove an increase in prices and volumes for both ferrous and nonferrous scrap. LIFO expense was $13.0 million for 2011 as compared to $11.2 million LIFO expense for 2010. We exported 8% of our ferrous scrap tonnage and 38% of our nonferrous scrap tonnage during 2011.
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 | |||||||||||||||
2011 | 2010 | Amount | % | ||||||||||||
Average ferrous selling price | $ | 340 | $ | 264 | $ | 76 | 29 | % | |||||||
Average nonferrous selling price | $ | 3,292 | $ | 2,636 | $ | 656 | 25 | % | |||||||
Ferrous tons shipped | 2,202 | 1,900 | 302 | 16 | % | ||||||||||
Nonferrous tons shipped | 267 | 238 | 29 | 12 | % | ||||||||||
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Americas Mills We include our five domestic steel mills, including the scrap locations, which directly support the steel mills, and our copper tube minimill in our Americas Mills segment.
Within the segment, adjusted operating profit for our five domestic steel mills was $149.2 million for 2011 as compared to $33.7 million for 2010. The improvement in adjusted operating profit was driven by margin expansion as selling prices outpaced scrap price increases and higher shipments. Additionally, our mill in Arizona was profitable during 2011 in its second full year of operations. We recorded LIFO expense of $48.0 million in 2011 as compared to LIFO expense of $19.1 million in 2010. Our mills ran at 74% utilization during 2011 as compared to 63% during 2010. Rebar accounted for 51% of tonnage shipped, consistent with the prior year. Higher electrical and alloy rates resulted in an overall increase of $25.4 million in electrode, alloys and energy costs. Shipments included 430 thousand tons of billets in 2011 as compared to 363 thousand tons of billets in 2010.
The table below reflects steel and ferrous scrap prices per ton for the year ended August 31:
Increase | |||||||||||||||
2011 | 2010 | Amount | % | ||||||||||||
Average mill selling price (finished goods)* | $ | 696 | $ | 591 | $ | 105 | 18 | % | |||||||
Average mill selling price (total sales)* | 669 | 563 | 106 | 19 | % | ||||||||||
Average cost of ferrous scrap consumed | 364 | 292 | 72 | 25 | % | ||||||||||
Average metal margin | 305 | 271 | 34 | 13 | % | ||||||||||
Average ferrous scrap purchase price | 329 | 259 | 70 | 27 | % | ||||||||||
* 2010 domestic selling prices revised to eliminate net freight costs.
Increase | ||||||||||||
2011 | 2010 | Amount | % | |||||||||
Tons melted | 2,470 | 2,077 | 393 | 19 | % | |||||||
Tons rolled | 2,088 | 1,734 | 354 | 20 | % | |||||||
Tons shipped | 2,518 | 2,156 | 362 | 17 | % | |||||||
Our copper tube minimill’s adjusted operating profit increased $9.0 million to $12.5 million during 2011 as compared to 2010 primarily due to higher copper prices and a year-over-year decrease in LIFO expense of $2.5 million partially offset by lower shipments.
The table below reflects our copper tube minimill’s operating statistics for the year ended August 31:
Decrease | ||||||||||||
(pounds in millions) | 2011 | 2010 | Amount | % | ||||||||
Pounds shipped | 41.9 | 42.6 | (0.7 | ) | (2 | )% | ||||||
Pounds produced | 39.2 | 40.9 | (1.7 | ) | (4 | )% | ||||||
Americas Fabrication This segment continued to face challenging market conditions in 2011 and recorded an adjusted operating loss of $129.1 million as compared to $107.8 million in 2010. During the fourth quarter of 2011, CMC decided to close certain rebar fabrication and construction services locations and recorded impairment, severance and closure costs of $21.7 million. LIFO expense was $6.6 million for 2011 compared to $10.0 million in 2010. During the second half of 2011, this segment showed improvement as mill prices to the downstream fabricating units stabilized resulting in a slight increase in margins. Backlogs as of August 31, 2011 was higher in both prices and tonnage as compared to backlogs as of August 31, 2010. The composite average fabrication selling price was $817 per ton in 2011, up from $768 per ton in 2010. Post and Impact Metals were profitable for the year.
The tables below show our average fabrication selling prices per short ton and total fabrication plant shipments for the year ended August 31:
Increase | |||||||||||||||
Average selling price (excludes stock and buyout sales) | 2011 | 2010 | Amount | % | |||||||||||
Rebar | $ | 773 | $ | 720 | $ | 53 | 7 | % | |||||||
Structural | 1,980 | 1,835 | 145 | 8 | % | ||||||||||
Post | 928 | 881 | 47 | 5 | % | ||||||||||
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Increase | ||||||||||||
Tons shipped (in thousands) | 2011 | 2010 | Amount | % | ||||||||
Rebar | 851 | 830 | 21 | 3 | % | |||||||
Structural | 56 | 54 | 2 | 4 | % | |||||||
Post | 99 | 95 | 4 | 4 | % | |||||||
International Mill CMCZ had an adjusted operating profit of $47.6 million during 2011 as compared to an adjusted operating loss of $31.6 million during 2010. In 2011, our Polish mill benefited from a continued strong Polish economy and the increased sales of merchant bar from our new flexible rolling mill which was hot commissioned during the third quarter of 2010. Metal margins expanded in 2011 as compared to 2010, as average selling prices outpaced ferrous scrap prices. Shipments in 2011 included 203 thousand tons of billets compared to 297 thousand tons of billets in the prior year. During the fourth quarter of 2011, we decided to close our fabrication operation in Germany due to challenging market conditions and continued poor operating results. In connection with the closure, we incurred approximately $1 million in impairment charges relating to the fixed assets of the operation.
The table below reflects our International Mill operating statistics (in thousands) and average prices per short ton:
Increase | |||||||||||||||
2011 | 2010 | Amount | % | ||||||||||||
Tons melted | 1,585 | 1,468 | 117 | 8 | % | ||||||||||
Tons rolled | 1,334 | 1,107 | 227 | 21 | % | ||||||||||
Tons shipped | 1,494 | 1,387 | 107 | 8 | % | ||||||||||
Average mill selling price (total sales) | $ | 638 | $ | 461 | $ | 177 | 38 | % | |||||||
Average ferrous scrap production cost | $ | 389 | $ | 295 | $ | 94 | 32 | % | |||||||
Average metal margin | $ | 249 | $ | 166 | $ | 83 | 50 | % | |||||||
Average ferrous scrap purchase price | $ | 325 | $ | 244 | $ | 81 | 33 | % | |||||||
International Marketing and Distribution This segment reported an increase in sales of 8% and reported an adjusted operating profit of $76.3 million for 2011 as compared to an adjusted operating profit of $74.7 million during 2010. This segment recorded LIFO expense of $4.2 million for 2011 compared to LIFO income of $40.4 million for 2010. Led by our raw materials marketing operation, each of our major geographic marketing operations was profitable for 2011. Additionally, our domestic steel import business continued its turnaround with strong performance in 2011. Overall, our Australian operations were profitable in 2011 but our Australian distribution suffered in 2011 from the weakened state of the economy in Australia.
During the fourth quarter of 2011, we completed the purchase of G.A.M. Steel Pty. Ltd., based in Melbourne, Australia (“G.A.M.”). G.A.M. is a leading distributor and processor of steel long products and plate, servicing the structural fabrication, rural and manufacturing segments in the state of Victoria, Australia. The acquisition of G.A.M. complements our existing national long products distribution investments in Australia.
CONTINUING OPERATIONS DATA
Corporate Our corporate expenses increased $14.0 million in 2011 to $84.7 million primarily due to higher employee benefit costs, severance costs and information technology costs.
Consolidated Data The LIFO method of inventory valuation increased our net loss from continuing operations by approximately $50 million for 2011 as compared to increasing our net loss by approximately $5 million for 2010.
Selling, General and Administrative (“SG&A”) Expenses Our overall SG&A expenses increased by $7.8 million, or 2%, for 2011 as compared to 2010. SG&A expenses increased due to restructuring costs, including severance, higher employee benefit costs and higher information technology costs.
Interest Expense Our interest expense decreased by $4.4 million to $69.8 million during 2011 as compared to 2010 primarily as a result of the favorable impact of interest rate swap transactions of $10.0 million in 2011, partially offset by less capitalized interest as less capital projects were completed in 2011 as compared 2010.
Income Taxes Our effective tax rate from continuing operations for the year ended August 31, 2011 was 50.1% as compared to 38.4% in 2010.
Asset Impairment Charges We recorded impairment charges of $24.5 million in 2011 as compared to $3.8 million in 2010. The impairment charges in 2011 primarily relate to the closure of certain rebar fabrication and construction services locations discussed above. See discontinued operations below for asset impairment charges related to discontinued operations.
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DISCONTINUED OPERATIONS DATA
Our joist and deck division, classified as a discontinued operation, reported an adjusted operating loss of $3.0 million during 2011 as compared to an adjusted operating loss of $59.8 million during 2010. The results for 2011 include carrying costs for the remaining owned real estate assets offset by a gain on the sale of certain joist facilities of $1.9 million. The results for 2010 include the impairment and closure costs of exiting the joist and deck business offset by LIFO income of $19.4 million.
During the first quarter of 2012, we announced our decision to exit CMCS by way of sale and/or closure of the facility. After review of the marketplace and our production capabilities we determined that achieving sustained profitability would take considerable additional time and investment in a product line that was not considered a core business.
CMCS reported an adjusted operating loss of $147.7 million during 2011 as compared to an adjusted operating loss of $41.9 million during 2010. During the fourth quarter of 2011, we recorded restructuring charges, including impairment charges, of $110.6 million due to the following: we determined that improvements in key operating areas could not be achieved and maintained without additional capital expenditures; we could not achieve adequate market share for billets as the mill is currently designed; the down-turn in the global economy, especially debt issues in Europe, further delayed recovery and will likely result in continued losses in future years; accession to the European Union, which is required to allow our operation to be competitive, was further delayed until 2013 or mid-2014; and uncertainties in the Middle East and North Africa, which are the primary markets for this operation.
2012 Liquidity and Capital Resources
We believe we have adequate access to several sources of contractually committed borrowings and other available credit facilities.
While we believe the lending institutions participating in our credit arrangements are financially capable, it is important to note that the banking and capital markets periodically experience volatility that may limit our ability to raise capital. Additionally, changes to our credit rating by any rating agency may negatively impact our ability to raise capital and our financing costs.
The table below reflects our sources, facilities and availability of liquidity as of August 31, 2012:
(in thousands) | Total Facility | Availability | |||||
Cash and cash equivalents | $ | 262,422 | $ N/A | ||||
Revolving credit facility* | 300,000 | 271,137 | |||||
Domestic receivable sales facility | 200,000 | 190,000 | |||||
International accounts receivable sales facilities | 198,882 | 103,765 | |||||
Bank credit facilities — uncommitted | 111,000 | 86,457 | |||||
Notes due from 2013 to 2018 | 1,100,000 | ** | |||||
Equipment notes | 14,407 | ** | |||||
* The availability under the revolving credit agreement may be limited by the debt to capitalization ratio covenant. Additionally, the availability under the revolving credit facility is reduced by $28.9 million of stand-by letters of credit issued at August 31, 2012.
** We believe we have access to additional financing and refinancing, if needed.
During the second quarter of 2012, we entered into a third amended and restated credit agreement which reduced the availability under our revolving credit facility to $300 million and extended the maturity date to December 27, 2016. The credit facility may be increased to $400 million with the consent of both parties. Additionally, we amended our domestic sales of receivable facility during the second quarter of 2012, which increased the capacity from $100 million to $200 million and extended the maturity date to December 26, 2014.
During the first quarter of 2012, we repaid our $48.6 million CMCZ term note and subsequently entered into current uncommitted credit facilities of PLN 255 million ($76.9 million) with several banks which expire in October and November of 2012. The Company intends to renew the uncommitted credit facilities upon expiration. At August 31, 2012, we had PLN 81.3 million ($24.5 million) outstanding under these facilities. Additionally, during the third quarter of 2012, we repaid our $18.5 million CMCS term note.
We have $200 million of 5.625% notes due November 2013, $400 million of 6.50% notes due July 2017 and $500 million of 7.35% notes due August 2018. All of these notes require interest only payments until maturity. We previously had interest rate swaps on $800 million of our notes which effectively converted our fixed rate interest to floating rate interest. During the third quarter of 2012, we terminated these transactions and received cash proceeds of approximately $53 million. We expect cash
31
from operations to be sufficient to meet all interest and principal payments due within the next twelve months, and we believe we will be able to obtain additional financing or refinance these notes when they mature.
Certain of our financing agreements include various financial covenants. Our revolving credit facility required us to maintain a minimum interest coverage ratio (adjusted EBITDA to interest expense, as each is defined in the facility) of not less than 2.50 to 1.00 for the twelve month cumulative period ended August 31, 2012. Beginning for the twelve month cumulative period ending November 30, 2012, the Company is required to maintain a minimum interest coverage ratio of not less than 3.00 to 1.00 and for each fiscal quarter on a rolling twelve month cumulative period thereafter. At August 31, 2012, our interest coverage ratio was 5.15 to 1.00. The debt to capitalization ratio covenant under the agreement requires us to maintain a ratio not greater than 0.60 to 1.00. At August 31, 2012, our debt to capitalization ratio was 0.51 to 1.00. The revolving credit facility is used as an alternative source of liquidity. Our public debt does not contain any such covenants.
Our foreign operations generated approximately 29% of our revenue, and as a result, our foreign operations had approximately $108 million and $100 million of cash and cash equivalents at August 31, 2012 and August 31, 2011, respectively. Historically, our domestic operations have generated the majority of our cash which has been used to fund the cash needs of our domestic operations as well as our foreign operations. Additionally, our domestic operations have access to the $300 million revolving credit facility and the $200 million sale of receivable program described above. Although not expected, we would be required to provide for taxes on any repatriated earnings from our foreign operations which would result in a higher effective tax rate.
We regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and record allowances as soon as we believe accounts are uncollectible based on current market conditions and customers' financial condition. Continued pressure on the liquidity of our customers could result in additional reserves as we make our assessments in the future. We use credit insurance both in the U.S. and internationally to mitigate the risk of customer insolvency. We estimate the amount of credit insured receivables (and those covered by export letters of credit) was approximately 60% of total receivables at August 31, 2012.
For added flexibility, we may sell certain accounts receivable both in the U.S. and internationally. See Note 4, Sales of Accounts Receivable, to the consolidated financial statements contained in this report. Our domestic sale of receivables program contains certain cross-default provisions whereby a termination event could occur if we default under certain of our credit arrangements, and contains covenants that conform to the same requirements contained in our revolving credit agreement.
Cash Flows Our cash flows from operating activities result primarily from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products and other raw materials used in steel manufacturing. We have a diverse and generally stable customer base. We use futures or forward contracts from time to time to mitigate the risks from fluctuations in foreign currency exchange rates and commodity prices. See Note 11, Derivatives and Risk Management, to the consolidated financial statements contained in this report.
During 2012, we generated $196.0 million of net cash flows from operating activities as compared to generating $27.7 million during 2011. This increase resulted primarily from a significant improvement in pre-tax earnings and improvements in operations for working capital. Significant fluctuations in working capital were as follows:
• | Inventory — inventory decreased during the year ended 2012 as compared to the fourth quarter of 2011 as inventory levels were matched to lower sales in the fourth quarter 2012 as compared to fourth quarter 2011. Days sales in inventory was 41 days and 45 days for the years ended 2012 and 2011. |
• | Accounts payable and accrued expenses — accounts payable and accrued expenses decreased as our expenses were lower from decreased sales in the fourth quarter of 2012 as compared to the fourth quarter of 2011. |
During 2012, we used $27.4 million of net cash flows from investing activities as compared to using $61.5 million in 2011. We invested $113.9 million in property, plant and equipment during 2012, an increase of $40.6 million over 2011. Additionally, proceeds from disposal of assets and businesses were $55.4 million in 2012, an increase of $2.0 million over 2011. During 2012, we sold all outstanding shares of CMCS, excluding certain assets that were sold in June and September 2012, and we also sold a rebar fabrication shop in Rosslau, Germany. Additionally, we generated cash of $31.1 million in 2012 from the release of deposits for letters of credit. During 2011, we sold assets of our joist and deck business and sold the forms of our heavy forms rental business.
We expect our total capital expenditures for fiscal 2013 to be approximately $160 million. We regularly assess our capital spending and reevaluate our requirements based on current and expected results.
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During 2012, we used $121.7 million of net cash flows from financing activities as compared to using $147.0 million during 2011. The change was primarily due to approximately $53 million of proceeds from the termination of our interest rate swaps during 2012 which was partially offset by the increase in cash used of $18.5 million from the decrease in outstanding documentary letters of credit. Our cash dividends remained consistent for 2012 and 2011.
Our contractual obligations for the next twelve months of approximately $760 million are typically expenditures incurred in connection with normal revenue producing activities. We believe our cash flows from operating activities and debt facilities are adequate to fund our ongoing operations and planned capital expenditures.
Contractual Obligations
The following table represents our contractual obligations as of August 31, 2012 (dollars in thousands):
Payments Due By Period* | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Long-term debt(1) | $ | 1,114,407 | $ | 4,252 | $ | 206,510 | $ | 402,717 | $ | 500,928 | ||||||||||
Notes payable | 24,543 | 24,543 | — | — | — | |||||||||||||||
Interest(2) | 360,998 | 74,656 | 128,601 | 122,490 | 35,251 | |||||||||||||||
Operating leases(3) | 144,836 | 35,985 | 55,141 | 32,099 | 21,611 | |||||||||||||||
Purchase obligations(4) | 805,377 | 618,658 | 139,838 | 38,070 | 8,811 | |||||||||||||||
Total contractual cash obligations | $ | 2,450,161 | $ | 758,094 | $ | 530,090 | $ | 595,376 | $ | 566,601 | ||||||||||
* We have not discounted the cash obligations in this table.
(1) | Total amounts are included in the August 31, 2012 consolidated balance sheet. See Note 10, Credit Arrangements, to the consolidated financial statements included in this report. |
(2) | Interest payments related to our short-term debt are not included in the table as they do not represent a significant obligation as of August 31, 2012. |
(3) | Includes minimum lease payment obligations for non-cancelable equipment and real-estate leases in effect as of August 31, 2012. See Note 17, Commitments and Contingencies, to the consolidated financial statements included in this report. |
(4) | Approximately 67% of these purchase obligations are for inventory items to be sold in the ordinary course of business. Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement. Agreements with variable terms are excluded because we are unable to estimate the minimum amounts. Another significant obligation relates to capital expenditures. |
The Company also provides certain eligible executives’ benefits pursuant to a nonqualified benefit restoration plan (“BRP Plan”) equal to amounts that would have been available under the tax qualified ERISA plans, but for limitations of ERISA, tax laws and regulations. The deferred compensation liability under the BRP Plan was $77.0 million at August 31, 2012 and recorded in other long-term liabilities. We generally expect to fund future contributions with cash flows from operating activities. We did not include estimated payments related to BRP in the above contractual obligation table. Refer to Note 16, Employees' Retirement Plans to the consolidated financial Statements included in this report.
A certain number of employees, primarily outside of the U.S., participate in defined benefit plans maintained in accordance with local regulations. At August 31, 2012, the Company’s liability related to the unfunded status of the defined benefit plans was $5.1 million. We generally expect to fund future contributions with cash flows from operating activities. We did not include estimated payments related to defined benefit plans in the table above. We generally expect to fund future contributions with cash flows from operating activities. Refer to Note 16, Employees' Retirement Plans to the consolidated financial statements included in this report.
The Company's other noncurrent liabilities in the Consolidated Balance Sheets include deferred tax liabilities, gross unrecognized tax benefits, and the related gross interest and penalties. As of August 31, 2012, the Company had noncurrent deferred tax liabilities of $20.3 million. In addition, as of August 31, 2012, the Company had gross unrecognized tax benefits of $15.2 million and an additional $2.0 million for gross interest and penalties classified as noncurrent liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
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Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that our insurance providers and suppliers request. At August 31, 2012, we had committed $30.3 million under these arrangements.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contingencies
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and government investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. Inherent uncertainties exist in these estimates primarily due to evolving remediation technology, changing regulations, possible third-party contributions and the uncertainties involved in litigation. We believe that we have adequately provided in our consolidated financial statements for the potential impact of these contingencies. We also believe that the outcomes will not materially affect the results of operations, our financial position or our cash flows.
Environmental and Other Matters
The information set forth in Note 17, Commitments and Contingencies, to the consolidated financial statements included in this report are hereby incorporated by reference.
General We are subject to Federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.
Our original business and one of our core businesses for over nine decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, may expose us and our industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications.
Solid and Hazardous Waste We currently own or lease, and in the past owned or leased, properties that have been used in our operations. Although we used operating and disposal practices that were standard in the industry at the time, wastes may have been disposed or released on or under the properties or on or under locations where such wastes have been taken for disposal. We are currently involved in the investigation and remediation of several such properties. State and Federal laws applicable to wastes and contaminated properties have gradually become stricter over time. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. We have been named as a potentially responsible party (“PRP”) at a number of contaminated sites.
We generate wastes, including hazardous wastes, that are subject to the Federal Resource Conservation and Recovery Act and comparable state and local statutes where we operate. These statutes, regulations and laws may have limited disposal options for certain wastes.
Superfund The U.S. Environmental Protection Agency (“EPA”) or an equivalent state agency has notified us that we are considered a PRP at ten sites, none of which is owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) or a similar state statute to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. Based on currently available information, which is in many cases preliminary and incomplete, on August 31, 2012, we had $1.0 million accrued for cleanup and remediation costs in connection with CERCLA sites. We have accrued for these liabilities based upon our best estimates. The amounts paid and the expenses incurred on these sites for the years ended August 31, 2012, 2011 and 2010 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.
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Clean Water Act The Clean Water Act (“CWA”) imposes restrictions and strict controls regarding the discharge of wastes into waters of the United States, a term broadly defined, or into publicly owned treatment works. These controls have become more stringent over time and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into Federal waters or into publicly owned treatment works; comparable permits may be required at the state level. The CWA and many state agencies provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA’s regulations and comparable state regulations may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge or non-compliance with permit requirements, we may be liable for penalties and costs.
Clean Air Act Our operations are subject to regulations at the Federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increased scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources may be required to construct emission sources using what is referred to as the Best Available Control Technology, or in any areas that are not meeting national ambient air quality standards, using methods that satisfy requirements for Lowest Achievable Emission Rate. Additionally, the EPA is implementing new, more stringent standards for ozone and fine particulate matter. The EPA recently has promulgated new national emission standards for hazardous air pollutants for steel mills which will require specific sources in this category to meet the standards by reflecting application of maximum achievable control technology. Compliance with the new standards could require additional expenditures.
In 2012, we incurred environmental expenses of $26.8 million. The expenses included the cost of environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. In addition, we spent $8.3 million in capital expenditures related to costs directly associated with environmental compliance. At August 31, 2012, we accrued $9.0 million for environmental liabilities of which $4.9 million was classified as other long-term liabilities.
Dividends
We have paid quarterly cash dividends in each of the past 192 consecutive quarters. We paid dividends in 2012 at the rate of $0.12 per share for each quarter.
Critical Accounting Policies and Estimates
The following are important accounting policies, estimates and assumptions that you should understand as you review our financial statements. We apply these accounting policies and make these estimates and assumptions to prepare financial statements in accordance with GAAP. Our use of these accounting policies, estimates and assumptions affects our results of operations and our reported amounts of assets and liabilities. Where we have used estimates or assumptions, actual results could differ significantly from our estimates.
Revenue Recognition and Allowance for Doubtful Accounts We recognize sales when title passes to the customer either when goods are shipped or when they are delivered based on the terms of the sale, there is persuasive evidence of an agreement, the price is fixed or determinable and collectability is reasonably assured. When we estimate that a contract with one of our customers will result in a loss, we accrue the calculated loss as soon as it is probable and estimable. We account for fabrication projects based on the percentage of completion accounting method. We maintain an allowance for doubtful accounts to reflect our estimate of the uncollectability of accounts receivable. These reserves are based on historical trends, current market conditions and customers’ financial condition.
Income Taxes We periodically assess the likelihood of realizing our deferred tax assets based on the amount of deferred tax assets that we believe is more likely than not to be realized. We base our judgment of the recoverability of our deferred tax asset primarily on historical earnings, our estimate of current and expected future earnings, prudent and feasible tax planning strategies, and current and future ownership changes.
Our effective income tax rate may fluctuate on a quarterly basis due to various factors, including, but not limited to, total earnings and the mix of earnings by jurisdiction, the timing of changes in tax laws, and the amount of tax provided for uncertain tax positions.
We establish income tax reserves to remove some or all of the income tax benefit of any of our income tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. Our evaluation of whether or not a tax position is uncertain is based on the following: (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax
35
position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these income tax reserves when our judgment changes as a result of new information. Any change will impact income tax expense in the period in which such determination is made.
Inventory Cost We determine inventory cost for most domestic inventories by the last-in, first-out method, or LIFO. We calculate our LIFO reserve by using quantities and costs at period end and recording the resulting LIFO income or expense in its entirety. Inventory cost for international and remaining inventories is determined by the first-in, first-out method, or FIFO. We record all inventories at the lower of their cost or market value.
Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance, production, wages and transportation costs. Additionally, the costs of departments that support production, including materials management and quality control, are allocated to inventory.
Goodwill The Company tests for impairment of goodwill by estimating the fair value of each reporting unit compared to its carrying value. Our reporting units are based on our internal reporting structure and represent an operating segment or a reporting level below an operating segment.
Additionally, the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. The Company uses a discounted cash flow model to calculate the fair value of its reporting units. The model includes a number of significant assumptions and estimates regarding future cash flows including discount rates, volumes, prices, capital expenditures and the impact of current market conditions. These estimates could be materially impacted by adverse changes in market conditions. The Company tests for goodwill impairment during the fourth quarter of each fiscal year, or when changes in circumstances indicate an impairment event may have occurred.
As of August 31, 2012, $51.3 million of goodwill was associated with one of the Company's reporting units, which consists of our Americas Fabrication reporting segment excluding the construction services division. As of August 31, 2012, the Company estimates that the fair value of this reporting unit exceeds the carrying value by approximately 30%. The fair value of this reporting unit could be adversely affected by prolonged weakness in US construction activity, volatility in the price of ferrous scrap, and global economic recession.
Goodwill at the other reporting units is not material and the fair value of these reporting units exceeds their respective carrying values.
Long-Lived Assets We evaluate the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. If an impairment exists, the net book values are reduced to fair values as warranted. Our domestic and international mills, fabrication and recycling businesses are capital intensive. Some of the estimated values for assets that we currently use in our operations are based upon judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer's different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. Depreciable lives are based on our estimate of the assets' economical useful lives. To the extent that an asset's actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred.
Contingencies In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and government investigations, including environmental matters. We may incur settlements, fines, penalties or judgments in connection with some of these matters. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, and the uncertainties involved in litigation. We believe that we have adequately provided in our consolidated financial statements for the impact of these contingencies. We also believe that the outcomes will not materially affect our results of operations, our financial position or our cash flows.
Other Accounting Policies and New Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Approach to Mitigating Market Risk See Note 11, Derivatives and Risk Management, to the consolidated financial statements included in this report for disclosure regarding our approach to mitigating market risk and summarized market risk information for the preceding fiscal year. Also, see Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in this report. The following types of derivative instruments were outstanding or utilized by us during 2012, in accordance with our risk management program.
Currency Exchange Forwards We enter into currency exchange forward contracts as economic hedges of international trade commitments denominated in currencies other than the functional currency of the Company or its subsidiaries. No single foreign currency poses a primary risk to us. Fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments.
Commodity Prices We base pricing in some of our sales and purchase contracts on metal commodity futures exchange quotes, which we determine at the beginning of the contract. Due to the volatility of the metal commodity indexes, we enter into metal commodity futures contracts for copper, aluminum, nickel and zinc. These futures mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodity prices on these contractual commitments. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to minimal gains and losses from ineffectiveness.
Natural Gas We enter into natural gas forward contracts as economic hedges of the Company’s Americas Mills operations based on anticipated consumption of natural gas in order to mitigate the risk of unanticipated increases in operating cost due to the volatility of natural gas prices.
Freight We occasionally enter into freight forward contracts when sales commitments to customers include a fixed price freight component in order to mitigate the effect of the volatility of ocean freight rates.
Interest Rates We enter into interest rate swap contracts to maintain a portion of our debt obligations at variable interest rates. These interest rate swap contracts, under which we have agreed to pay variable rates of interest and receive fixed rates of interest, are designated as fair value hedges of fixed rate debt. During the third quarter of 2012, the Company terminated its existing interest rate swap transactions with a notional value of $800 million and received cash proceeds of approximately $53 million, net of customary finance charges.
The following tables provide certain information regarding the foreign exchange and commodity financial instruments discussed above.
Gross foreign currency exchange contract commitments as of August 31, 2012:
Functional Currency | Foreign Currency | |||||||||||||
Type | Amount (in thousands) | Type | Amount (in thousands) | Range of Hedge Rates (1) | U.S. Equivalent (in thousands) | |||||||||
AUD | 223 | EUR | 183 | 0.79 — 0.84 | $ | 230 | ||||||||
AUD | 901 | NZD (2) | 1,157 | 1.27 — 1.30 | 919 | |||||||||
AUD | 103,015 | USD | 105,027 | 0.95 — 1.05 | 105,027 | |||||||||
AUD | 5,843 | CNY (3) | 38,878 | 6.57 — 6.66 | 6,144 | |||||||||
GBP | 5,091 | EUR | 6,425 | 0.78 — 0.81 | 7,993 | |||||||||
GBP | 1,701 | USD | 2,653 | 1.55 — 1.58 | 2,653 | |||||||||
PLN | 318,162 | EUR | 75,822 | 4.07 — 4.62 | 95,603 | |||||||||
PLN | 1,174 | USD | 345 | 3.38 — 3.41 | 345 | |||||||||
SGD | 2,599 | USD | 2,074 | 1.25 | 2,074 | |||||||||
USD | 10,646 | EUR | 8,530 | 1.22 — 1.30 | 10,646 | |||||||||
USD | 70,134 | GBP | 44,200 | 1.58 — 1.59 | 70,134 | |||||||||
USD | 1,764 | JPY | 138,987 | 78.31 — 78.82 | 1,764 | |||||||||
USD | 2,194 | PLN | 7,472 | 3.33 — 3.48 | 2,194 | |||||||||
$ | 305,726 | |||||||||||||
(1) Substantially all foreign currency exchange contracts mature within one year. The range of hedge rates represents functional to foreign currency conversion rates.
(2) New Zealand dollar
(3) Chinese yuan
37
Commodity contract commitments as of August 31, 2012:
Terminal Exchange | Metal | Long/ Short | # of Lots | Standard Lot Size | Total Weight | Range or Amount of Hedge Rates Per MT/lb. | Total Contract Value at Inception (in thousands) | ||||||||||
London Metal Exchange | Aluminum | Long | 173 | 25 MT | 4,325 MT | 1,838.00 — 1,926.00 | $ | 8,216 | |||||||||
Aluminum | Short | 157 | 25 MT | 3,925 MT | 1,875.00 — 1,919.50 | 7,414 | |||||||||||
New York Mercantile Exchange | Copper | Long | 51 | 25,000 lbs. | 1,275,000 lbs. | 336.70 — 346.90 | 4,378 | ||||||||||
Copper | Short | 449 | 25,000 lbs. | 11,225,000 lbs. | 329.05 — 354.25 | 38,593 | |||||||||||
Natural Gas | Long | 5 | 10,000 MMBtu | 50,000 MMBtu | 3.90 | 195 | |||||||||||
$ | 58,796 | ||||||||||||||||
MT = Metric ton
MMBtu = One million British thermal units
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of August 31, 2012. Deloitte & Touche LLP has audited the effectiveness of the Company’s internal control over financial reporting; their attestation report is included on page 40 of this Form 10-K.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Commercial Metals Company
Irving, Texas
We have audited the internal control over financial reporting of Commercial Metals Company and subsidiaries (the "Company") as of August 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended August 31, 2012 of the Company and our report dated October 30, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Dallas, Texas
October 30, 2012
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Commercial Metals Company
Irving, Texas
We have audited the accompanying consolidated balance sheets of Commercial Metals Company and subsidiaries (the "Company") as of August 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Commercial Metals Company and subsidiaries at August 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of August 31, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 30, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Dallas, Texas
October 30, 2012
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COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||
Year Ended August 31, | |||||||||||
(in thousands, except share data) | 2012 | 2011 | 2010 | ||||||||
Net sales | $ | 7,828,440 | $ | 7,863,345 | $ | 6,276,928 | |||||
Costs and expenses: | |||||||||||
Cost of goods sold | 7,108,938 | 7,213,674 | 5,851,373 | ||||||||
Selling, general and administrative expenses | 486,606 | 516,778 | 508,997 | ||||||||
Impairment of assets | 607 | 24,466 | 3,766 | ||||||||
Interest expense | 69,496 | 69,821 | 74,181 | ||||||||
7,665,647 | 7,824,739 | 6,438,317 | |||||||||
Earnings (loss) from continuing operations before taxes | 162,793 | 38,606 | (161,389 | ) | |||||||
Income taxes (benefit) | (46,190 | ) | 19,328 | (61,942 | ) | ||||||
Earnings (loss) from continuing operations | 208,983 | 19,278 | (99,447 | ) | |||||||
Loss from discontinued operations before taxes | (9,912 | ) | (151,670 | ) | (102,979 | ) | |||||
Income taxes (benefit) | (8,419 | ) | (2,988 | ) | 2,682 | ||||||
Loss from discontinued operations | (1,493 | ) | (148,682 | ) | (105,661 | ) | |||||
Net earnings (loss) | 207,490 | (129,404 | ) | (205,108 | ) | ||||||
Less net earnings attributable to noncontrolling interests | 6 | 213 | 236 | ||||||||
Net earnings (loss) attributable to CMC | $ | 207,484 | $ | (129,617 | ) | $ | (205,344 | ) | |||
Basic earnings (loss) per share attributable to CMC: | |||||||||||
Earnings (loss) from continuing operations | $ | 1.80 | $ | 0.16 | $ | (0.88 | ) | ||||
Loss from discontinued operations | (0.01 | ) | (1.29 | ) | (0.93 | ) | |||||
Net earnings (loss) | $ | 1.79 | $ | (1.13 | ) | $ | (1.81 | ) | |||
Diluted earnings (loss) per share attributable to CMC: | |||||||||||
Earnings (loss) from continuing operations | $ | 1.79 | $ | 0.16 | $ | (0.88 | ) | ||||
Loss from discontinued operations | (0.01 | ) | (1.28 | ) | (0.93 | ) | |||||
Net earnings (loss) | $ | 1.78 | $ | (1.12 | ) | $ | (1.81 | ) | |||
See notes to consolidated financial statements.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS | |||||||
August 31, | |||||||
(in thousands, except share data) | 2012 | 2011 | |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 262,422 | $ | 222,390 | |||
Accounts receivable (less allowance for doubtful accounts of $9,480 and $16,095) | 958,364 | 956,852 | |||||
Inventories, net | 807,923 | 908,338 | |||||
Other | 211,122 | 238,673 | |||||
Total current assets | 2,239,831 | 2,326,253 | |||||
Property, plant and equipment: | |||||||
Land | 79,123 | 93,496 | |||||
Buildings and improvements | 483,708 | 507,797 | |||||
Equipment | 1,656,328 | 1,666,682 | |||||
Construction in process | 41,036 | 42,499 | |||||
2,260,195 | 2,310,474 | ||||||
Less accumulated depreciation and amortization | (1,265,891 | ) | (1,198,459 | ) | |||
994,304 | 1,112,015 | ||||||
Goodwill | 76,897 | 77,638 | |||||
Other assets | 130,214 | 167,225 | |||||
Total assets | $ | 3,441,246 | $ | 3,683,131 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities: | |||||||
Accounts payable-trade | $ | 433,132 | $ | 585,289 | |||
Accounts payable-documentary letters of credit | 95,870 | 170,683 | |||||
Accrued expenses and other payables | 343,337 | 377,774 | |||||
Notes payable | 24,543 | 6,200 | |||||
Current maturities of long-term debt | 4,252 | 58,908 | |||||
Total current liabilities | 901,134 | 1,198,854 | |||||
Deferred income taxes | 20,271 | 49,572 | |||||
Other long-term liabilities | 116,261 | 106,560 | |||||
Long-term debt | 1,157,073 | 1,167,497 | |||||
Total liabilities | 2,194,739 | 2,522,483 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock | — | — | |||||
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 116,351,424 and 115,533,763 shares | 1,290 | 1,290 | |||||
Additional paid-in capital | 365,778 | 371,616 | |||||
Accumulated other comprehensive income | (18,136 | ) | 59,473 | ||||
Retained earnings | 1,145,445 | 993,578 | |||||
Less treasury stock, 12,709,240 and 13,526,901 shares at cost | (248,009 | ) | (265,532 | ) | |||
Stockholders’ equity attributable to CMC | 1,246,368 | 1,160,425 | |||||
Stockholders’ equity attributable to noncontrolling interests | 139 | 223 | |||||
Total equity | 1,246,507 | 1,160,648 | |||||
Total liabilities and stockholders’ equity | $ | 3,441,246 | $ | 3,683,131 | |||
See notes to consolidated financial statements.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
Year Ended August 31, | |||||||||||
(in thousands) | 2012 | 2011 | 2010 | ||||||||
Cash flows from (used by) operating activities: | |||||||||||
Net earnings (loss) | $ | 207,490 | $ | (129,404 | ) | $ | (205,108 | ) | |||
Adjustments to reconcile net earnings (loss) to cash flows from (used by) operating activities: | |||||||||||
Depreciation and amortization | 137,310 | 159,576 | 168,934 | ||||||||
Provision for losses (recoveries) on receivables, net | (2,463 | ) | 306 | (2,582 | ) | ||||||
Share-based compensation | 13,125 | 12,893 | 13,132 | ||||||||
Amortization of interest rate swaps termination gain | (5,815 | ) | — | — | |||||||
Deferred income taxes (benefit) | (59,999 | ) | (19,856 | ) | 59,286 | ||||||
Tax benefits from stock plans | (1,968 | ) | (2,355 | ) | (4,033 | ) | |||||
Net gain on sale of assets and other | (11,932 | ) | (1,315 | ) | (4,740 | ) | |||||
Write-down of inventory | 13,917 | 25,503 | 53,203 | ||||||||
Asset impairment | 3,316 | 120,145 | 35,041 | ||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||