CMC-05.31.2013-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact name of registrant as specified in its charter)
___________________________________
 
Delaware
75-0725338
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas 75039
(Address of principal executive offices)(Zip Code)
(214) 689-4300
(Registrant's telephone number, including area code)
 ___________________________________
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  x    No ¨
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  x    No  ¨
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 x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of common stock as of June 27, 2013 was 116,982,920.


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended May 31,
Nine Months Ended May 31,
(in thousands, except share data)
2013
 
2012
 
2013
 
2012
Net sales
$
1,794,306

 
$
2,006,729

 
$
5,313,206


$
5,950,293

Costs and expenses:
 
 
 
 



Cost of goods sold
1,616,784

 
1,822,520

 
4,805,127


5,410,770

Selling, general and administrative expenses
122,780

 
118,050

 
364,605


368,462

Gain on sale of cost method investment
—


—

 
(26,088
)

—

Interest expense
18,043

 
19,605

 
51,557


51,945

 
1,757,607

 
1,960,175

 
5,195,201


5,831,177

Earnings from continuing operations before taxes
36,699

 
46,554

 
118,005


119,116

Income taxes (benefit)
17,737

 
7,488

 
44,969


(72,824
)
Earnings from continuing operations
18,962

 
39,066

 
73,036


191,940

 
 
 
 
 





Earnings (loss) from discontinued operations before taxes
1

 
2,429

 
343


(22,780
)
Income taxes (benefit)
—

 
812

 
120


(8,112
)
Earnings (loss) from discontinued operations
1

 
1,617

 
223


(14,668
)
 
 
 
 
 





Net earnings
18,963

 
40,683

 
73,259


177,272

Less net earnings (loss) attributable to noncontrolling interests
(1
)
 
1

 
1


3

Net earnings attributable to CMC
$
18,964

 
$
40,682

 
$
73,258


$
177,269

 
 
 
 
 



Basic earnings (loss) per share attributable to CMC:
 
 
 
 



Earnings from continuing operations
$
0.16

 
$
0.34

 
$
0.63


$
1.65

Earnings (loss) from discontinued operations
—

 
0.01

 
—


(0.12
)
Net earnings
$
0.16

 
$
0.35

 
$
0.63


$
1.53

 
 
 
 
 



Diluted earnings (loss) per share attributable to CMC:
 
 
 
 



Earnings from continuing operations
$
0.16

 
$
0.34

 
$
0.62


$
1.64

Earnings (loss) from discontinued operations
—

 
0.01

 
—


(0.12
)
Net earnings
$
0.16

 
$
0.35

 
$
0.62


$
1.52

 
 
 
 
 





Cash dividends per share
$
0.12

 
$
0.12

 
$
0.36


$
0.36

Average basic shares outstanding
116,845,542

 
115,946,691

 
116,589,382


115,726,793

Average diluted shares outstanding
117,703,590

 
116,934,840

 
117,456,756


116,742,593

See notes to unaudited consolidated financial statements.

3




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three Months Ended May 31,

Nine Months Ended May 31,
(in thousands)
2013

2012

2013

2012
Net earnings
$
18,963


$
40,683


$
73,259


$
177,272

Other comprehensive income (loss), net of taxes:







Foreign currency translation adjustment and other, net of taxes of $(12,912) and $(39,894); $(4,516) and $(57,907)
(23,979
)

(74,090
)

(8,387
)

(107,542
)
Net unrealized gain (loss) on derivatives:











Unrealized holding gain (loss), net of taxes of $(154) and $(251); $(65) and $(916)
(210
)

(1,023
)

164


(2,632
)
Reclassification for loss (gain) included in net earnings, net of taxes of $(3) and $(27); $(177) and $341
(44
)

(29
)

(440
)

1,107

Net unrealized loss on derivatives, net of taxes of $(157) and $(278); $(242) and $(575)
(254
)

(1,052
)

(276
)

(1,525
)
Defined benefit obligation:











Amortization of prior service cost, net of taxes of $0 and $0; $1 and $0
1


—


5


—

Adjustment from plan changes, net of taxes of $0 and $0; $308 and $0
—


—


1,315


—

Defined benefit obligation, net of taxes of $0 and $0; $309 and $0
1


—


1,320


—

Other comprehensive loss
(24,232
)

(75,142
)

(7,343
)

(109,067
)
Comprehensive income (loss)
$
(5,269
)

$
(34,459
)

$
65,916


$
68,205

See notes to unaudited consolidated financial statements.

4



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
May 31, 2013
 
August 31, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
453,269

 
$
262,422

Accounts receivable (less allowance for doubtful accounts of $10,857 and $9,480)
960,471

 
958,364

Inventories, net
829,341

 
807,923

Other
183,789

 
211,122

Total current assets
2,426,870

 
2,239,831

Property, plant and equipment:
 
 
 
Land
81,943

 
79,123

Buildings and improvements
493,352

 
483,708

Equipment
1,695,377

 
1,656,328

Construction in process
23,982

 
41,036


2,294,654

 
2,260,195

Less accumulated depreciation and amortization
(1,340,933
)
 
(1,265,891
)

953,721

 
994,304

Goodwill
76,353

 
76,897

Other assets
130,722

 
130,214

Total assets
$
3,587,666

 
$
3,441,246

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable-trade
$
311,099

 
$
433,132

Accounts payable-documentary letters of credit
93,580

 
95,870

Accrued expenses and other payables
314,868

 
343,337

Notes payable
—

 
24,543

Current maturities of long-term debt
144,162

 
4,252

Total current liabilities
863,709

 
901,134

Deferred income taxes
50,321

 
20,271

Other long-term liabilities
114,338

 
116,261

Long-term debt
1,277,581

 
1,157,073

Total liabilities
2,305,949

 
2,194,739

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 116,899,574 and 116,351,424 shares
1,290

 
1,290

Additional paid-in capital
365,949

 
365,778

Accumulated other comprehensive loss
(25,479
)
 
(18,136
)
Retained earnings
1,176,713

 
1,145,445

Less treasury stock, 12,161,090 and 12,709,240 shares at cost
(236,909
)
 
(248,009
)
Stockholders' equity attributable to CMC
1,281,564

 
1,246,368

Stockholders' equity attributable to noncontrolling interests
153

 
139

Total equity
1,281,717

 
1,246,507

Total liabilities and stockholders' equity
$
3,587,666

 
$
3,441,246

See notes to unaudited consolidated financial statements.

5



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended May 31,
(in thousands)
2013
 
2012
Cash flows from (used by) operating activities:
 
 
 
Net earnings
$
73,259

 
$
177,272

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
Depreciation and amortization
102,164

 
103,941

Provision for losses on receivables, net
3,349

 
785

Share-based compensation
13,528

 
9,196

Amortization of interest rate swaps termination gain
(8,723
)
 
(2,908
)
Loss on debt extinguishment
1,502

 
—

Deferred income taxes (benefit)
44,371

 
(67,497
)
Tax benefits from stock plans
(6
)
 
(58
)
Net gain on sale of cost method investment and other
(25,999
)
 
(1,134
)
Write-down of inventory
2,310

 
9,305

Asset impairment
3,434

 
1,628

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,189
)
 
4,157

Accounts receivable sold (repurchased), net
(2,292
)
 
23,891

Inventories
(32,321
)
 
(8,130
)
Other assets
5,128

 
17,854

Accounts payable, accrued expenses and other payables
(148,030
)
 
(145,900
)
Other long-term liabilities
(1,962
)
 
12,433

Net cash flows from (used by) operating activities
17,523

 
134,835

 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
Capital expenditures
(63,008
)
 
(82,505
)
Proceeds from the sale of property, plant and equipment and other
11,164

 
11,371

Proceeds from the sale of cost method investment
28,995

 
—

Decrease in deposit for letters of credit
—

 
30,404

Net cash flows from (used by) investing activities
(22,849
)
 
(40,730
)
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
Increase (decrease) in documentary letters of credit
395

 
(59,492
)
Short-term borrowings, net change
(25,595
)
 
38,091

Repayments on long-term debt
(63,442
)
 
(63,542
)
Proceeds from termination of interest rate swaps
—

 
52,733

Proceeds from issuance of long-term debt
330,000

 
—

Payments for debt issuance costs
(4,125
)
 
—

Debt extinguishment costs
(1,502
)
 
—

Stock issued under incentive and purchase plans, net of forfeitures
1,347

 
1,488

Cash dividends
(41,990
)
 
(41,657
)
Tax benefits from stock plans
6

 
58

Contribution from (purchase of) noncontrolling interests
13

 
(46
)
Net cash flows from (used by) financing activities
195,107

 
(72,367
)
 
 
 
 
Effect of exchange rate changes on cash
1,066

 
(10,469
)
Increase in cash and cash equivalents
190,847

 
11,269

Cash and cash equivalents at beginning of year
262,422

 
222,390

Cash and cash equivalents at end of period
$
453,269

 
$
233,659


6



See notes to unaudited consolidated financial statements.

7



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2011
129,060,664

$
1,290

$
371,616

$
59,473

$
993,578

(13,526,901
)
$
(265,532
)
$
223

$
1,160,648

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net earnings
 
 
 
 
177,269

 
 
3

177,272

Other comprehensive loss
 
 
 
(109,067
)
 
 
 
 
(109,067
)
Comprehensive income
 
 
 
 
 
 
 
 
68,205

Cash dividends
 
 
 
 
(41,657
)
 
 
 
(41,657
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(7,682
)
 
 
441,153

9,170

 
1,488

Share-based compensation
 
 
7,385

 
 
 
 
 
7,385

Tax benefits from stock plans
 
 
58

 
 
 
 
 
58

Purchase of noncontrolling interests
 
 
29

 
 
 
 
(75
)
(46
)
Balance, May 31, 2012
129,060,664

$
1,290

$
371,406

$
(49,594
)
$
1,129,190

(13,085,748
)
$
(256,362
)
$
151

$
1,196,081

 
 
 
 
 
 
 
 
 
 
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2012
129,060,664

$
1,290

$
365,778

$
(18,136
)
$
1,145,445

(12,709,240
)
$
(248,009
)
$
139

$
1,246,507

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net earnings
 
 
 
 
73,258

 
 
1

73,259

Other comprehensive loss
 
 
 
(7,343
)
 
 
 
 
(7,343
)
Comprehensive income
 
 
 
 
 
 
 
 
65,916

Cash dividends
 
 
 
 
(41,990
)
 
 
 
(41,990
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(9,753
)
 
 
548,150

11,100

 
1,347

Share-based compensation
 
 
9,918

 
 
 
 
 
9,918

Tax benefits from stock plans
 
 
6

 
 
 
 


6

Contribution from noncontrolling interests
 
 


 
 
 
 
13

13

Balance, May 31, 2013
129,060,664

$
1,290

$
365,949

$
(25,479
)
$
1,176,713

(12,161,090
)
$
(236,909
)
$
153

$
1,281,717

See notes to unaudited consolidated financial statements.

8




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES

Accounting Principles The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") for the year ended August 31, 2012, and include all normal recurring adjustments necessary to present fairly the consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods indicated. Certain amounts in fiscal 2012 have been reclassified to conform to the fiscal 2013 presentation. These notes should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended August 31, 2012. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements In the first quarter of 2013, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") on disclosure requirements for the presentation of comprehensive income (loss). This guidance requires entities to report components of comprehensive income (loss) in either (1) a continuous statement of comprehensive income (loss) or (2) two separate but consecutive statements. As a result of the adoption, the Company's financial statements now include a separate consolidated statement of comprehensive income (loss) immediately following the consolidated statements of operations.

In the first quarter of 2013, the Company adopted guidance that simplifies how entities test indefinite-lived intangible assets for impairment and improves consistency in impairment testing guidance among long-lived asset categories. The guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with U.S. generally accepted accounting principles. An entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In April 2013, the FASB issued guidance requiring an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The new guidance is effective prospectively for entities that determine liquidation is imminent during fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In March 2013, the FASB issued guidance requiring an entity to release any related cumulative translation adjustment into net income when it either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the guidance resolves the diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The new guidance is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2013, the FASB issued guidance requiring an entity to disclose additional information about reclassifications out of accumulated other comprehensive income (loss), including (1) changes in accumulated other comprehensive income (loss) balances by component and (2) significant items reclassified out of accumulated other comprehensive income (loss) and the effect on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2012. The Company does not expect the adoption of these disclosure requirements to have a material impact on its consolidated financial statements.


9



In February 2013, the FASB issued guidance requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The new guidance is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued guidance requiring an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective is to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures will give financial statement users information about both gross and net exposures. In January 2013, the FASB issued an update and clarified the scope of transactions that are subject to disclosures concerning offsetting. These disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and should be applied retrospectively for all comparative periods presented. The Company does not expect the adoption of these disclosure requirements to have a material impact on its consolidated financial statements.
NOTE 2. SALES OF ACCOUNTS RECEIVABLE

The Company has a domestic sale of accounts receivable program which expires on December 26, 2014. Under the program, the Company periodically contributes, and several of its subsidiaries periodically sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly-owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity and was formed for the sole purpose of buying and selling receivables generated by the Company. Depending on the Company's level of financing needs, CMCRV sells the trade accounts receivable in their entirety to two third-party financial institutions. The third-party financial institutions advance up to a maximum of $200 million for all receivables, and the remaining portion due to the Company is deferred until the ultimate collection of the underlying receivables. The Company accounts for sales to the financial institutions as true sales, and the cash advances for receivables are removed from the consolidated balance sheets and are reflected as cash provided by operating activities. Additionally, the receivables program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the credit facility described in Note 8, Credit Arrangements.

At May 31, 2013 and August 31, 2012, the Company sold $408.2 million and $406.9 million of receivables, respectively, to the third-party financial institutions and received $35.0 million and $10.0 million, respectively, as advance payments. The remaining amounts of $373.2 million and $396.9 million, respectively, are the deferred purchase prices and are included in trade receivables on the Company's consolidated balance sheets.

In addition to the domestic sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia periodically sell accounts receivable without recourse. These arrangements constitute true sales, and once the accounts are sold, they are no longer available to the Company's creditors in the event of bankruptcy. Uncollected accounts receivable sold under these arrangements and removed from the consolidated balance sheets were $67.8 million and $95.1 million as of May 31, 2013 and August 31, 2012, respectively. The Australian program contains financial covenants in which the subsidiary must meet certain coverage and tangible net worth levels. At May 31, 2013, the Australian subsidiary was not in compliance with these covenants. The Company provided a guarantee of the Australian subsidiary's performance which resulted in the financial covenants being waived at May 31, 2013.

During the nine months ended May 31, 2013 and 2012, proceeds from the domestic and international sales of receivables were $828.6 million and $1.5 billion, respectively, and cash payments to the owners of receivables were $830.9 million and $1.5 billion, respectively. The Company is responsible for servicing the receivables for a nominal servicing fee. Discounts on domestic and international sales of accounts receivable were $1.0 million and $3.1 million for the three and nine months ended May 31, 2013, respectively, and $1.6 million and $5.1 million for the three and nine months ended May 31, 2012, respectively. These discounts primarily represent the cost of funds and are included in selling, general and administrative expenses in the Company's consolidated statements of operations.

10




NOTE 3. INVENTORIES

Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in-first-out ("LIFO") method. LIFO inventory reserves were $221.6 million and $261.8 million at May 31, 2013 and August 31, 2012, respectively. Inventory cost for international inventories and the remaining domestic inventories are determined by the first-in-first-out ("FIFO") method.

At May 31, 2013 and August 31, 2012, 45% and 55%, respectively, of the Company's total inventories were valued at LIFO. The remainder of inventories, valued at FIFO, consisted mainly of material dedicated to CMC Poland Sp. z o.o. ("CMCP") (formerly CMC Zawiercie S.A. or CMCZ) and certain marketing and distribution businesses.

The majority of the Company's inventories are in the form of finished goods with minimal work in process. At May 31, 2013 and August 31, 2012, $101.1 million and $68.0 million, respectively, were in the form of raw materials.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table details the changes in the carrying amount of goodwill by reportable segment:
 
Americas
 
International
 
 
(in thousands)
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Consolidated
Balance at August 31, 2012
$
7,267

 
$
295

 
$
57,144

 
$
2,685

 
$
9,506

 
$
76,897

Foreign currency translation
—

 
—

 
—

 
18

 
(562
)
 
(544
)
Balance at May 31, 2013
$
7,267

 
$
295

 
$
57,144

 
$
2,703

 
$
8,944

 
$
76,353


The total gross carrying amounts of the Company's intangible assets that are subject to amortization was $43.4 million and $44.3 million at May 31, 2013 and August 31, 2012, respectively, and are included in other noncurrent assets on the Company's consolidated balance sheets. Excluding goodwill, there are no other significant intangible assets with indefinite lives. Amortization expense for intangible assets was $1.2 million and $3.7 million for the three and nine months ended May 31, 2013, respectively, and $1.5 million and $4.5 million for the three and nine months ended May 31, 2012, respectively.
NOTE 5. SEVERANCE

The Company recorded severance cost of $2.8 million and $4.3 million during the three and nine months ended May 31, 2013, respectively. The severance cost recorded during fiscal 2013 was not individually material to any of the Company's business segments. During the three and nine months ended May 31, 2012, the Company recorded severance cost of $1.0 million and $23.3 million, respectively. The severance cost recorded during fiscal 2012 primarily related to the Company's discontinued operations. See Note 7, Discontinued Operations, for additional details.
NOTE 6. DISPOSITIONS

During the first quarter of fiscal 2013, the Company completed the sale of its 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. The Trinecke investment was included in the International Marketing and Distribution segment. During the first quarter of fiscal 2012, the Company completed the sale of two properties that were previously joist and deck locations.
NOTE 7. DISCONTINUED OPERATIONS

During the first quarter of fiscal 2012, the Company announced its decision to exit the steel pipe manufacturing operations in Croatia ("CMCS") by closure of the facility and sale of the assets. The Company determined that the decision to exit this business met the definition of a discontinued operation. As a result, the Company recorded severance cost of $18.0 million and this business has been presented as a discontinued operation for all periods presented. The Company sold a majority of CMCS' assets during fiscal 2012. The remaining assets were sold during the first quarter of fiscal 2013 for $3.9 million with no impact to the consolidated statements of operations.


11



As of May 31, 2013, the assets of discontinued operations are included in other current assets on the Company's consolidated balance sheets. Financial information for discontinued operations was as follows: 
(in thousands)
 
May 31, 2013
 
 August 31, 2012
 
 
 
 
 Current assets
 
$
3,840

 
$
6,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
 Revenue
 
$
—

 
$
6,545

 
$
—

 
$
30,547

 Earnings (loss) before taxes
 
1

 
2,429

 
343

 
(22,780
)
NOTE 8. CREDIT ARRANGEMENTS

In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 15, 2023 (the “2023 Notes”) and received proceeds of $325.0 million, net of underwriting discounts and debt issuance costs. The Company intends to use the proceeds from the 2023 Notes to purchase any and all of its outstanding $200.0 million of 5.625% Notes due 2013 (the “2013 Notes”) and for general corporate purposes. Interest on the 2023 Notes is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2013. The Company may, at any time, redeem the 2023 Notes at a redemption price equal to 100 percent of the principal amount, plus a “make-whole” premium described in the indenture. Additionally, if a change of control triggering event occurs, as defined by the terms of the indenture, holders of the 2023 Notes may require the Company to repurchase the 2023 Notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The Company is generally not limited under the indenture governing the 2023 Notes in its ability to incur additional indebtedness provided the Company is in compliance with certain restrictive covenants, including restrictions on liens, sale and leaseback transactions, mergers, consolidations and transfers of substantially all of the Company's assets.

On May 6, 2013, the Company commenced a cash tender offer to purchase any and all of its outstanding 2013 Notes at 102.45% of par. During May 2013, the Company accepted for purchase approximately $60 million of the outstanding principal amount of its 2013 Notes. As a result of the cash tender offer, the Company recognized expenses of approximately $1.5 million related to tender and consent premiums and loss on early extinguishment of debt, all of which are included in selling, general and administrative expenses in the consolidated statements of operations for the three and nine months ended May 31, 2013. Unamortized debt issuance costs associated with the partial repurchase of the 2013 Notes were not material as of May 31, 2013.

On May 20, 2013, the Company provided notice of its election to redeem all of the remaining $140 million outstanding principal amount of its 2013 Notes at 100% of par, plus a make-whole premium, as defined, and accrued and unpaid interest. On June 19, 2013, the Company purchased all of the remaining 2013 Notes outstanding and recognized expenses of approximately $3.1 million related to loss on early extinguishment of debt, write-off of unamortized debt issuance costs, discounts and premiums related to the 2013 Notes.

On December 27, 2011, the Company entered into a third amended and restated $300 million revolving credit facility that matures on December 27, 2016. The maximum availability under this facility can be increased to $400 million with the consent of both parties. The program's capacity, with a sublimit of $50 million for letters of credit, is reduced by outstanding stand-by letters of credit which totaled $31.9 million at May 31, 2013. Under the credit facility, the Company was required to maintain a minimum interest coverage ratio (adjusted EBITDA to interest expense, as each is defined in the facility) of not less than 3.00 to 1.00 for the twelve month cumulative period ended November 30, 2012 and for each fiscal quarter on a rolling twelve month cumulative period thereafter. At May 31, 2013, the Company's interest coverage ratio was 5.57 to 1.00. The credit facility also requires the Company to maintain a debt to capitalization ratio that does not exceed 0.60 to 1.00. At May 31, 2013, the Company's debt to capitalization ratio was 0.55 to 1.00. The credit facility provides for interest based on the LIBOR, the Eurodollar rate or Bank of America's prime rate.

At May 31, 2013, the Company was in compliance with all covenants related to its debt agreements.


12



During the third quarter of fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately $53 million, net of customary finance charges. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. At May 31, 2013, the unamortized portion was $38.2 million, and for the three and nine months ended May 31, 2013, the amortization of the deferred gain was $2.9 million and $8.7 million, respectively.

The Company has uncommitted credit facilities available from domestic and international banks. In general, these credit facilities are used to support trade letters of credit (including accounts payable settled under bankers' acceptances), foreign exchange transactions and short-term advances which are priced at market rates.

Long-term debt, including the deferred gain from the termination of the interest rate swaps, was as follows: 
(in thousands)
Weighted Average
Interest Rate as of May 31, 2013
 
May 31, 2013
 
August 31, 2012
$200 million notes at 5.625% due November 2013
2.8%
 
$
141,886

 
$
204,873

$400 million notes at 6.50% due July 2017
5.7%
 
412,261

 
414,491

$500 million notes at 7.35% due August 2018
6.4%
 
524,086

 
527,554

$330 million notes at 4.875% due May 2023
4.9%
 
330,000

 
—

Other, including equipment notes
 
 
13,510

 
14,407

 
 
 
1,421,743

 
1,161,325

Less current maturities
 
 
144,162

 
4,252

 
 
 
$
1,277,581

 
$
1,157,073

 Interest on these notes is payable semiannually.
 
CMCP has uncommitted credit facilities of $73.4 million with several banks with expiration dates ranging from September 30, 2013 to March 31, 2014. At May 31, 2013, no amounts were outstanding under these facilities. The weighted average interest rate on these facilities was 4.57% at May 31, 2013.

The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the periods presented. Interest of $7.5 million and $45.8 million was paid during the three and nine months ended May 31, 2013, respectively, and $5.2 million and $39.8 million during the three and nine months ended May 31, 2012, respectively.
NOTE 9. DERIVATIVES AND RISK MANAGEMENT

The Company's worldwide operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. One objective of the Company's risk management program is to mitigate these risks using derivative instruments. The Company enters into metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in gross margin due to the volatility of the commodities' prices, enters into foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and enters into natural gas forward contracts to mitigate the risk of unanticipated changes in operating cost due to the volatility of natural gas prices. When sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to reduce the effects of the volatility of ocean freight rates.

At May 31, 2013, the Company's notional value of its foreign currency contract commitments was $307 million.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2013:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
4,052

 MT
Aluminum
 
Short
 
375

 MT
Copper
 
Long
 
986

 MT
Copper
 
Short
 
5,024

 MT
Zinc
 
Long
 
22

MT
                                      
MT = Metric Ton

13




The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's consolidated statements of operations, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 2013 and 2012. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the consolidated statements of operations: 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2013
 
2012
 
2013
 
2012
Commodity
 
Cost of goods sold
 
$
1,469

 
$
5,737

 
$
1,775

 
$
5,978

Foreign exchange
 
Net sales
 
23

 
(18
)
 
12

 
(199
)
Foreign exchange
 
Cost of goods sold
 
3

 
—

 
3

 
(537
)
Foreign exchange
 
SG&A expenses
 
1,336

 
1,173

 
4,216

 
479

Other
 
Cost of goods sold
 
4

 
—

 
9

 
—

Gain (loss) before taxes
 
 
 
$
2,835

 
$
6,892

 
$
6,015

 
$
5,721


The Company's fair value hedges are designated for accounting purposes with gains and losses on the hedged items offsetting the gain or loss on the related derivative transaction. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2013
 
2012
 
2013
 
2012
Foreign exchange
 
Net sales
 
$
38

 
$
—

 
$
(190
)
 
$
—

Foreign exchange
 
Cost of goods sold
 
2,291

 
—

 
2,839

 
—

Foreign exchange
 
SG&A expenses
 
—

 
5,805

 
—

 
4,255

Interest rate
 
Interest expense
 
—

 
(6,613
)
 
—

 
10,561

Gain (loss) before taxes
 
 
 
$
2,329

 
$
(808
)
 
$
2,649

 
$
14,816

 
Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2013
 
2012
 
2013
 
2012
Foreign exchange
 
Net sales
 
$
(19
)
 
$
—

 
$
232

 
$
—

Foreign exchange
 
Cost of goods sold
 
(2,291
)
 
—

 
(2,839
)
 
—

Foreign exchange
 
SG&A expenses
 
—

 
(5,805
)
 
—

 
(4,255
)
Interest rate
 
Interest expense
 
—

 
6,613

 
—

 
(10,561
)
Gain (loss) before taxes
 
 
 
$
(2,310
)
 
$
808

 
$
(2,607
)
 
$
(14,816
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2013
 
2012
 
2013
 
2012
Commodity
 
$
(193
)
 
$
(22
)
 
$
(192
)
 
$
(3
)
Foreign exchange
 
(17
)
 
(1,001
)
 
356

 
(2,629
)
Gain (loss), net of taxes
 
$
(210
)
 
$
(1,023
)
 
$
164

 
$
(2,632
)


14



Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2013
 
2012
 
2013
 
2012
Commodity
 
Cost of  goods sold
 
$
(62
)
 
$
3

 
$
(56
)
 
$
18

Foreign exchange
 
Net sales
 
80

 
40

 
141

 
(1,153
)
Foreign exchange
 
Cost of goods sold
 
(37
)
 
—

 
13

 
—

Foreign exchange
 
SG&A expenses
 
(47
)
 
(116
)
 
29

 
(277
)
Interest rate
 
Interest expense
 
110

 
102

 
313

 
305

Gain (loss), net of taxes
 
 
 
$
44

 
$
29

 
$
440

 
$
(1,107
)

The Company's derivative instruments were recorded at their respective fair values as follows on the consolidated balance sheets: 
Derivative Assets (in thousands)
 
May 31, 2013
 
August 31, 2012
Commodity — not designated for hedge accounting
 
$
823

 
$
407

Foreign exchange — designated for hedge accounting
 
2,635

 
670

Foreign exchange — not designated for hedge accounting
 
1,456

 
798

Derivative assets (other current assets and other assets)*
 
$
4,914

 
$
1,875

 
Derivative Liabilities (in thousands)
 
May 31, 2013
 
August 31, 2012
Commodity — designated for hedge accounting
 
$
130

 
$
2

Commodity — not designated for hedge accounting
 
1,418

 
993

Foreign exchange — designated for hedge accounting
 
542

 
1,272

Foreign exchange — not designated for hedge accounting
 
2,002

 
1,248

Other — not designated for hedge accounting
 
—

 
32

Derivative liabilities (accrued expenses, other payables and long-term liabilities)*
 
$
4,092

 
$
3,547

 _________________ 
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.

As of May 31, 2013, all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months.

All of the instruments are highly liquid and not entered into for trading purposes.
NOTE 10. FAIR VALUE

The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
 
Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities;

Level 2 - Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:

15



 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
May 31, 2013
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market investments (1)
$
282,787

 
$
282,787

 
$
—

 
$
—

Commodity derivative assets (2)
823

 
823

 
—

 
—

Foreign exchange derivative assets (2)
4,091

 
—

 
4,091

 


Liabilities:
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
1,548

 
1,418

 
130

 
—

Foreign exchange derivative liabilities (2)
2,544

 
—

 
2,544

 
—

 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
August 31, 2012
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market investments (1)
$
172,462

 
$
172,462

 
$
—

 
$
—

Commodity derivative assets (2)
407

 
407

 
—

 
—

Foreign exchange derivative assets (2)
1,468

 
—

 
1,468

 
—

Liabilities:
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
995

 
993

 
2

 
—

Foreign exchange derivative liabilities (2)
2,520

 
—

 
2,520

 
—

Other derivative liabilities (2)
32

 
—

 
32

 
—

 _________________ 

(1) Money market investments are short-term in nature, and the value is determined by broker quoted prices in active markets. The investment portfolio mix can change each period based on the Company's assessment of investment options.

(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or the New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivatives and the classification of the assets and liabilities is included in Note 9. Derivatives and Risk Management.

Fair value of property, plant and equipment held for sale (Level 3) was $3.8 million based on appraised values less costs to sell at May 31, 2013. CMC does not have other assets or intangible assets measured at fair value on a non-recurring basis at May 31, 2013. Impairment charges for property, plant and equipment were $3.4 million for the nine months ended May 31, 2013.

The carrying values of the Company's short-term items, including the deferred purchase prices of accounts receivable, documentary letters of credit and notes payable approximate fair value due to their short term nature.

The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value are as follows:

 
 
 
May 31, 2013
 
August 31, 2012
(in thousands)
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
$200 million notes at 5.625% due November 2013 (1)
Level 2
 
$
141,886

 
$
145,148

 
$
204,873

 
$
212,413

$400 million notes at 6.50% due July 2017 (1)
Level 2
 
412,261

 
447,453

 
414,491

 
434,991

$500 million notes at 7.35% due August 2018 (1)
Level 2
 
524,086

 
579,755

 
527,554

 
559,894

$330 million notes at 4.875% due May 2023 (1)
Level 2
 
330,000

 
316,800

 
—

 
—



16



(1) The fair value of the notes is calculated based on indicated market values.
NOTE 11. INCOME TAX

The Company's effective income tax rate from continuing operations for the three and nine months ended May 31, 2013 was 48.3% and 38.1%, respectively, compared with 16.1% and (61.1)% for the three and nine months ended May 31, 2012, respectively. The Company's effective tax rate from discontinued operations for the three and nine months ended May 31, 2013 was 0.0% and 35.0%, respectively, compared with 33.4% and 35.6% for the three and nine months ended May 31, 2012, respectively.

The increase in the effective tax rate to 48.3% for the three months ended May 31, 2013 compared to 16.1% for the three months ended May 31, 2012 is due to a change in the mix and amount of pre-tax income in the jurisdictions in which the Company operates. Additionally, during the three and nine months ended May 31, 2012 the Company recorded a tax benefit of $11.5 million related to federal and state research and development tax credits for fiscal years 2008 through 2011.

During the first quarter of fiscal 2012, the Company recognized a tax loss in the amount of $291 million related to its investment in its former Croatian subsidiary. As a result of this loss, a tax benefit of $102.1 million was recorded in continuing operations in the first quarter of 2012. The Company reported and disclosed the investment loss on its U.S. tax return as ordinary worthless stock and bad debt deductions. This tax benefit was the primary reason for the variance from the statutory tax rate of 35%.

The Company received net refunds of $561 thousand and made net payments of $17.2 million for income taxes during the nine months ended May 31, 2013 and 2012, respectively.

The reserve for unrecognized tax benefits related to the accounting for uncertainty in income taxes was $27.4 million and $20.7 million, exclusive of interest and penalties, as of May 31, 2013 and 2012, respectively.

The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as tax expense and the balances at the end of a reporting period are recorded as part of the current or noncurrent reserve for uncertain income tax positions. For the three and nine months ended May 31, 2013, before any tax benefits, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized tax benefits.

During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior year tax returns or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized tax benefits may decrease by approximately $17.8 million, which would reduce the provision for taxes on earnings by an immaterial amount.

The Company files income tax returns in the United States and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:

US Federal — 2008 and forward
US States — 2008 and forward
Foreign — 2005 and forward

The Company is currently under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded tax liabilities as of May 31, 2013 sufficiently reflect the anticipated outcome of these examinations.

17



NOTE 12. SHARE-BASED COMPENSATION PLANS

Restricted stock units ("RSUs") and performance stock units ("PSUs") totaling 1.6 million and 0.5 million, respectively, were granted during the nine months ended May 31, 2013 and 2012, respectively, at a weighted-average fair value of $13.44 and $10.64, respectively. The Company granted 0.2 million and 0.8 million in stock appreciation rights ("SARs") at a weighted average exercise price of $14.25 and $11.63 during the nine months ended May 31, 2013 and 2012, respectively. The RSUs, PSUs and SARs granted during fiscal 2013 and 2012 will vest over a period of three years.

Total share-based compensation expense recognized as a component of selling, general and administrative expenses was $5.5 million and $13.5 million for the three and nine months ended May 31, 2013, respectively, and $3.2 million and $9.2 million for the three and nine months ended May 31, 2012, respectively.

Share-Based Liability Awards The Company granted 234,109 and 1,132,204 equivalent shares of cash-settled RSUs, PSUs and stock appreciation rights ("SARs") during the nine months ended May 31, 2013 and 2012, respectively. The PSUs vest upon the achievement of performance goals and objectives of the Company over the performance period. The RSUs and SARs vest over a three year period. The Company has accounted for these cash-settled awards as a liability and the value is adjusted to the current share price of CMC's common stock at each reporting period. As of May 31, 2013, the Company had 1,450,373 equivalent shares in awards outstanding. The Company expects 1,103,108 equivalent shares to vest.
NOTE 13. CAPITAL STOCK

On December 6, 2012, the Company amended the stockholder rights plan (the "Rights Agreement") dated as of July 30, 2011. As a result of the amendment, the rights to purchase Series B Junior Participating Preferred Stock of the Company pursuant to the Rights Agreement expired at 5:00 p.m. (Dallas, Texas time) on December 6, 2012 (the "Final Expiration Date"), and the Rights Agreement effectively terminated as of such time.
NOTE 14. EARNINGS PER SHARE ATTRIBUTABLE TO CMC

In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for any periods presented. The reconciliation of the denominators of the earnings per share calculations is as follows: 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
 
2013
 
2012
 
2013
 
2012
Shares outstanding for basic earnings per share
 
116,845,542

 
115,946,691

 
116,589,382

 
115,726,793

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Share-based incentive/purchase plans
 
858,048

 
988,149

 
867,374

 
1,015,800

Shares outstanding for diluted earnings per share
 
117,703,590

 
116,934,840

 
117,456,756

 
116,742,593


At May 31, 2013 and 2012, SARs with total share commitments of 1.7 million and 2.1 million, respectively, were antidilutive and therefore were excluded from the calculation of diluted earnings per share. All stock options and SARs expire by 2020.
CMC's restricted stock is included in the number of shares of common stock issued and outstanding, but is omitted from the basic earnings per share calculation until the shares vest.
The Company did not purchase any shares during the first nine months of 2013 and had remaining authorization to purchase 8,259,647 shares of its common stock at May 31, 2013.
NOTE 15. COMMITMENTS AND CONTINGENCIES

In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and government investigations, including environmental matters. See Note 17, Commitments and Contingencies, to the consolidated financial statements in the Annual Report on Form 10-K for the year ended August 31, 2012.
On September 18, 2008, the Company was served with a 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 CMC. The lawsuit, filed in the United States District Court for the Northern District of Illinois, alleges that the

18



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 purchasers of 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. Motions for and against class certification have been filed. Oral arguments related to class certification are pending. Discovery on the case merits remains pending. The Company believes the case is without merit and intends to defend it vigorously.
Since the filing of the direct purchaser lawsuit, a case has been filed in federal court in the Northern District of Illinois on behalf of a class of indirect purchasers in approximately 28 states naming the same defendants and containing allegations substantially identical to those of the Standard Iron Works complaint. That case has in effect been stayed. Another indirect purchaser action was filed in Tennessee state court, again naming the same defendants but contending that the conspiracy continued through 2010. The case has been removed to federal court, and plaintiffs have moved to remand. The motion to remand has not yet been decided, and no motion practice or discovery has taken place. The Company believes that the lawsuits are without merit and plans to defend them vigorously. Due to the uncertainty and the information available at this time, we cannot reasonably estimate a range of loss relating to these cases.

Guarantees During the fourth quarter of 2012, the Company entered into a guarantee agreement with a bank in connection with a credit facility granted by the bank to a supplier of the Company. The fair value of the guarantee is negligible. The maximum credit facility with the bank was $4.0 million, and the Company's maximum exposure was $4.0 million as of May 31, 2013.
NOTE 16. BUSINESS SEGMENTS

The Company's reporting segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise. The reporting segments are the Company's operating segments except for the Americas Mills reporting segment, which includes the domestic steel mills operating segment, and the domestic copper tube minimill operating segment. The domestic copper tube minimill is aggregated with the domestic steel mills because of similar economic characteristics, products, production processes, customers and distribution methods.

The Company structures its business into the following five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. The Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. The Americas Mills segment includes the Company's five domestic steel minimills, two scrap metal shredders and nine processing facilities that directly support these mills, and the Company's domestic copper tube minimill. The Americas Fabrication segment consists of the Company's rebar and structural fabrication operations, fence post manufacturing plants, construction-related product facilities and plants that heat-treat steel to strengthen and provide flexibility. The International Mill segment includes the Company's minimill and the Company's recycling and fabrication operations in Poland. The International Marketing and Distribution segment includes international operations for the sale, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products. Additionally, this segment includes the Company's U.S.-based marketing and distribution divisions and also operates a recycling facility in Singapore. Corporate contains expenses of the Company's corporate headquarters and interest expense related to its long-term public debt.

The financial information presented for the International Mill segment excludes CMCS operations. These operations have been classified as discontinued operations in the consolidated statements of operations. See Note 7, Discontinued Operations, for more information.

The Company uses adjusted operating profit (loss) to measure segment performance. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in the Annual Report on Form 10-K for the year ended August 31, 2012.

19




The following is a summary of certain financial information from continuing operations by reportable segment:
 
 
Three Months Ended May 31, 2013
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
300,866

 
$
315,185

 
$
380,629

 
$
200,750

 
$
592,988

 
$
3,888

 
$
—

 
$
1,794,306

Intersegment sales
 
40,877

 
188,507

 
3,171

 
2

 
816

 
—

 
(233,373
)
 
—

Net sales
 
341,743

 
503,692

 
383,800

 
200,752

 
593,804

 
3,888

 
(233,373
)
 
1,794,306

Adjusted operating profit (loss)
 
3,155

 
47,511

 
13,499

 
(3,831
)
 
7,728

 
(14,834
)
 
2,524

 
55,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended May 31, 2012
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
364,195

 
$
343,700

 
$
375,097

 
$
246,553

 
$
677,859

 
$
(675
)
 
$
—

 
$
2,006,729

Intersegment sales
 
48,217

 
221,425

 
4,229

 
5,285

 
5,549

 
—

 
(284,705
)
 
—

Net sales
 
412,412

 
565,125

 
379,326

 
251,838

 
683,408

 
(675
)
 
(284,705
)
 
2,006,729

Adjusted operating profit (loss)
 
3,895

 
59,285

 
199

 
1,277

 
23,346

 
(20,110
)
 
(122
)
 
67,770

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2013
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
909,372

 
$
907,303

 
$
1,047,765

 
$
596,450

 
$
1,841,968

 
$
10,348

 
$
—

 
$
5,313,206

Intersegment sales
 
135,706

 
569,432

 
10,593

 
6,134

 
10,360

 
—

 
(732,225
)
 
—

Net sales
 
1,045,078

 
1,476,735

 
1,058,358

 
602,584

 
1,852,328

 
10,348

 
(732,225
)
 
5,313,206

Adjusted operating profit (loss)
 
9,892

 
148,802

 
19,879

 
(7,108
)
 
51,837

 
(51,398
)
 
780

 
172,684

Total assets*
 
272,678

 
665,405

 
649,338

 
456,093

 
868,978

 
1,215,106

 
(543,772
)
 
3,583,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2012
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
1,114,185

 
$
1,032,891

 
$
988,840

 
$
715,651

 
$
2,094,050

 
$
4,676

 
$
—

 
$
5,950,293

Intersegment sales
 
132,676

 
583,615

 
11,847

 
49,458

 
22,784

 
—

 
(800,380
)
 
—

Net sales
 
1,246,861

 
1,616,506

 
1,000,687

 
765,109

 
2,116,834

 
4,676

 
(800,380
)
 
5,950,293

Adjusted operating profit (loss)
 
31,100

 
171,617

 
(17,150
)
 
17,691

 
45,799

 
(64,314
)
 
(8,613
)
 
176,130

Total assets at August 31, 2012*
 
285,136

 
676,909

 
629,970

 
529,160

 
870,933

 
961,654

 
(519,117
)
 
3,434,645

                                             
* Excludes total assets from discontinued operations of $3.8 million at May 31, 2013 and $6.6 million at August 31, 2012.


20



The following table provides a reconciliation of consolidated adjusted operating profit to net earnings from continuing operations:
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Earnings from continuing operations
 
$
18,962


$
39,066

 
$
73,036


$
191,940

Income taxes (benefit)
 
17,737


7,488

 
44,969


(72,824
)
Interest expense
 
18,043


19,605

 
51,557


51,945

Discounts on sales of accounts receivable
 
1,010


1,611

 
3,122


5,069

Adjusted operating profit from continuing operations
 
55,752


67,770

 
172,684


176,130


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2012. This discussion contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the Securities and Exchange Commission ("SEC") or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled "Forward-Looking Statements" in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2012. We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.
CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K filed with the SEC for the fiscal year ended August 31, 2012.

21



CONSOLIDATED RESULTS OF OPERATIONS
 
 
Three Months Ended May 31,
 
Increase
(Decrease)
 
Nine Months Ended May 31,
 
Increase
(Decrease)
(in thousands)

 
2013
 
2012
 
%
 
2013
 
2012
 
%
Net sales*
 
$
1,794,306

 
$
2,006,729

 
(11
)%
 
$
5,313,206

 
$
5,950,293

 
(11
)%
Earnings from continuing operations
 
18,962

 
39,066

 
(51
)%
 
73,036

 
191,940

 
(62
)%
Adjusted EBITDA
 
89,277

 
104,257

 
(14
)%
 
275,502

 
255,084

 
8
 %
_______________________________________
* Excludes divisions classified as discontinued operations.

In the table above, we have included a financial statement measure that was not derived in accordance with United States generally accepted accounting principles ("GAAP"). We use adjusted EBITDA (earnings before interest expense, income taxes, depreciation, amortization, impairment charges and net earnings attributable to noncontrolling interests) as a non-GAAP financial measure. In calculating adjusted EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization, as well as impairment charges. Adjusted EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. We also exclude interest cost in our calculation of adjusted EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. We use adjusted EBITDA as one guideline to assess our unleveraged performance return on our investments, our ability to pay our current debt obligations as they mature and as a tool to calculate possible future levels of leverage capacity. Adjusted EBITDA is also the target benchmark for our annual and long-term cash incentive performance plans for management and part of a debt compliance test in certain of our debt agreements. Adjusted EBITDA may be inconsistent with similar measures presented by other companies. Reconciliations of net earnings from continuing operations to adjusted EBITDA are provided below:
 
 
Three Months Ended May 31,
 
Increase
(Decrease)
 
Nine Months Ended May 31,
 
Increase
(Decrease)
(in thousands)
 
2013
 
2012
 
%
 
2013
 
2,012
 
%
Earnings from continuing operations
 
$
18,962

 
$
39,066

 
(51
)%
 
$
73,036


$
191,940

 
(62
)%
Loss (earnings) attributable to noncontrolling interests
 
1

 
(1
)
 
—
 %
 
(1
)

(3
)
 
(67
)%
Interest expense
 
18,043

 
19,605

 
(8
)%
 
51,557


51,945

 
(1
)%
Income taxes (benefit) from continuing operations
 
17,737

 
7,488

 
137
 %
 
44,969


(72,824
)
 
(162
)%
Depreciation, amortization and impairment charges
 
34,533

 
34,790

 
—
 %
 
105,598


103,391

 
2
 %
Adjusted EBITDA from continuing operations
 
89,276

 
100,948

 
(12
)%
 
275,159


274,449

 
—
 %
Adjusted EBITDA from discontinued operations
 
1

 
3,309

 
(100
)%
 
343


(19,365
)
 
(102
)%
Adjusted EBITDA

$
89,277


$
104,257


(14
)%

$
275,502


$
255,084


8
 %
Our adjusted EBITDA does not include interest expense, income taxes, depreciation, amortization and impairment charges or net earnings attributable to noncontrolling interests. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Impairment charges, when necessary, accelerate the write-off of fixed assets that otherwise would have been accomplished by periodic depreciation charges. Additionally, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings (loss) determined in accordance with GAAP, as well as adjusted EBITDA, to evaluate our performance. Further, we separately analyze any significant fluctuations in interest expense, depreciation, amortization, impairment charges and income taxes.

The following are the significant factors that impacted our financial performance during the third quarter of 2013 compared with the same period during fiscal 2012:

22




- Our sales for the third quarter of 2013 were down across most of our segments, with the International Marketing and Distribution segment having the most significant sales decline when compared to the third quarter of 2012.

- Our International Marketing and Distribution segment's net sales declined $89.6 million or 13% and adjusted operating profit decreased $15.6 million during the third quarter of 2013 as compared to the prior year's third quarter. Decreased revenues and margins in our raw materials business and losses from our Australian operations adversely affected this segment's results.

- Our International Mill segment's net sales decreased 20% and adjusted operating profit decreased $5.1 million to an adjusted operating loss of $3.8 million during the third quarter of 2013 as compared to the prior year's third quarter. The decline in adjusted operating profit is primarily due to a 13% or 49 thousand ton decrease in shipment volumes.

- Partially offsetting these declines, our Americas Fabrication segment's net sales increased $4.5 million and adjusted operating profit improved $13.3 million during the third quarter of fiscal year 2013 as compared to the prior year's third quarter. This operating improvement is mostly due to expanding margins on the heels of declining raw material input prices.
SEGMENT OPERATING DATA

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 16, Business Segments, to the unaudited consolidated financial statements included in this report.

We use adjusted operating profit (loss) to compare and to 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:

 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Net sales:
 
 
 
 
 
 
 
 
Americas Recycling
 
$
341,743


$
412,412

 
$
1,045,078

 
$
1,246,861

Americas Mills
 
503,692


565,125

 
1,476,735

 
1,616,506

Americas Fabrication
 
383,800


379,326

 
1,058,358

 
1,000,687

International Mill
 
200,752


251,838

 
602,584

 
765,109

International Marketing and Distribution
 
593,804


683,408

 
1,852,328

 
2,116,834

Corporate
 
3,888


(675
)
 
10,348

 
4,676

Eliminations
 
(233,373
)

(284,705