CMC-11.30.2013-10Q

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 November 30, 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 January 3, 2014 was 117,310,716.



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 November 30,
(in thousands, except share data)
 
2013
 
2012
Net sales
 
$
1,682,891


$
1,749,515

Costs and expenses:
 



Cost of goods sold
 
1,501,798


1,562,850

Selling, general and administrative expenses
 
114,463


124,609

Interest expense
 
19,578

 
17,024

Gain on sale of cost method investment
 


(26,088
)
 
 
1,635,839


1,678,395

 
 
 
 
 
Earnings from continuing operations before income taxes
 
47,052


71,120

Income taxes
 
15,091


22,189

Earnings from continuing operations
 
31,961


48,931

 
 





Earnings from discontinued operations before income taxes
 
22,845


1,250

Income taxes
 
8,887


462

Earnings from discontinued operations
 
13,958


788

 
 





Net earnings
 
45,919


49,719

Less net earnings attributable to noncontrolling interests
 


2

Net earnings attributable to CMC
 
$
45,919


$
49,717

 
 



Basic earnings per share attributable to CMC:
 



Earnings from continuing operations
 
$
0.27


$
0.42

Earnings from discontinued operations
 
0.12


0.01

Net earnings
 
$
0.39


$
0.43

 
 



Diluted earnings per share attributable to CMC:
 



Earnings from continuing operations
 
$
0.27


$
0.42

Earnings from discontinued operations
 
0.12



Net earnings
 
$
0.39


$
0.42

 
 





Cash dividends per share
 
$
0.12


$
0.12

Average basic shares outstanding
 
117,070,499


116,336,504

Average diluted shares outstanding
 
118,156,611


117,093,627

See notes to unaudited consolidated financial statements.

3





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


Three Months Ended November 30,
(in thousands)

2013

2012
Net earnings

$
45,919


$
49,719

Other comprehensive income, net of income taxes:




Foreign currency translation adjustment and other, net of income taxes of $2,077 and $11,792

19,442


21,900

Net unrealized gain (loss) on derivatives:






Unrealized holding gain (loss), net of income taxes of $(449) and $88

(1,617
)

317

Reclassification for loss (gain) included in net earnings, net of income taxes of $181 and $(49)

980


(122
)
Net unrealized gain (loss) on derivatives, net of income taxes of $(268) and $39

(637
)

195

Defined benefit obligation:






Net gain, net of income taxes of $296 and $0

550



Amortization of prior service cost (credit), net of income taxes of $(1) and $0

(2
)

2

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



1,315

Defined benefit obligation, net of income taxes of $295 and $308

548


1,317

Other comprehensive income

19,353


23,412

Comprehensive income

$
65,272


$
73,131

See notes to unaudited consolidated financial statements.

4




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
November 30, 2013
 
August 31, 2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
515,473

 
$
378,770

Accounts receivable (less allowance for doubtful accounts of $9,773 and $10,042)
 
927,100

 
989,694

Inventories, net
 
792,763

 
757,417

Other
 
180,756

 
240,314

Total current assets
 
2,416,092

 
2,366,195

Property, plant and equipment:
 
 
 
 
Land
 
80,810

 
80,764

Buildings and improvements
 
494,256

 
486,494

Equipment
 
1,685,480

 
1,666,250

Construction in process
 
19,620

 
18,476


 
2,280,166

 
2,251,984

Less accumulated depreciation and amortization
 
(1,349,814
)
 
(1,311,747
)

 
930,352

 
940,237

Goodwill
 
69,733

 
69,579

Other assets
 
121,532

 
118,790

Total assets
 
$
3,537,709

 
$
3,494,801

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
347,354

 
$
342,678

Accounts payable-documentary letters of credit
 
131,412

 
112,281

Accrued expenses and other payables
 
269,889

 
314,949

Notes payable
 
7,993

 
5,973

Current maturities of long-term debt
 
6,232

 
5,228

Total current liabilities
 
762,880

 
781,109

Deferred income taxes
 
53,838

 
46,558

Other long-term liabilities
 
120,542

 
118,165

Long-term debt
 
1,277,303

 
1,278,814

Total liabilities
 
2,214,563

 
2,224,646

Commitments and contingencies
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 117,304,487 and 117,010,990 shares
 
1,290

 
1,290

Additional paid-in capital
 
359,765

 
363,772

Accumulated other comprehensive loss
 
(7,823
)
 
(27,176
)
Retained earnings
 
1,198,584

 
1,166,732

Less treasury stock, 11,756,177 and 12,049,674 shares at cost
 
(228,744
)
 
(234,619
)
Stockholders' equity attributable to CMC
 
1,323,072

 
1,269,999

Stockholders' equity attributable to noncontrolling interests
 
74

 
156

Total stockholders' equity
 
1,323,146

 
1,270,155

Total liabilities and stockholders' equity
 
$
3,537,709

 
$
3,494,801

See notes to unaudited consolidated financial statements.

5




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended November 30,
(in thousands)
 
2013
 
2012
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
45,919

 
$
49,719

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
33,860

 
33,751

Provision for losses on receivables, net
 
(240
)
 
1,153

Share-based compensation
 
5,544

 
4,509

Amortization of interest rate swaps termination gain
 
(1,900
)
 
(2,908
)
Deferred income taxes (benefit)
 
19,081

 
23,876

Tax benefits from stock plans
 
(109
)
 

Net gain on sale of a subsidiary, cost method investment and other
 
(25,064
)
 
(26,071
)
Asset impairment
 
1,005

 
3,028

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
73,052

 
81,217

Accounts receivable sold, net
 
3,327

 
(46,614
)
Inventories
 
(29,789
)
 
(99,076
)
Other assets
 
(20,185
)
 
(740
)
Accounts payable, accrued expenses and other payables
 
(31,534
)
 
(56,228
)
Other long-term liabilities
 
505

 
113

Net cash flows from (used by) operating activities
 
73,472

 
(34,271
)
 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(14,085
)
 
(24,757
)
Proceeds from the sale of property, plant and equipment and other
 
2,126

 
5,956

Proceeds from the sale of a subsidiary
 
54,265

 

Proceeds from the sale of cost method investment
 

 
28,995

Net cash flows from (used by) investing activities
 
42,306

 
10,194

 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Increase in documentary letters of credit
 
18,663

 
60,217

Short-term borrowings, net change
 
2,020

 
(13,045
)
Repayments on long-term debt
 
(1,551
)
 
(1,284
)
Payments for debt issuance costs
 
(430
)
 

Decrease in restricted cash
 
17,300

 

Stock issued under incentive and purchase plans, net of forfeitures
 
(2,089
)
 
(414
)
Cash dividends
 
(14,067
)
 
(13,963
)
Tax benefits from stock plans
 
109

 

Contribution from (purchase of) noncontrolling interests
 
(52
)
 
15

Net cash flows from (used by) financing activities
 
19,903

 
31,526

 
 
 
 
 
Effect of exchange rate changes on cash
 
1,022

 
1,525

Increase in cash and cash equivalents
 
136,703

 
8,974

Cash and cash equivalents at beginning of year
 
378,770

 
262,422

Cash and cash equivalents at end of period
 
$
515,473

 
$
271,396

See notes to unaudited consolidated financial statements.

6




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, 2012
129,060,664

$
1,290

$
365,778

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

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

$
1,246,507

Net earnings
 
 
 
 
49,717

 
 
2

49,719

Other comprehensive income
 
 
 
23,412

 
 
 
 
23,412

Cash dividends
 
 
 
 
(13,963
)
 
 
 
(13,963
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(2,523
)
 
 
97,474

2,109

 
(414
)
Share-based compensation
 
 
3,081

 
 
 
 
 

3,081

Tax benefits from stock plans
 
 
 
 
 
 
 
 


Contribution of noncontrolling interest
 
 
 
 
 
 
 
15

15

Balance, November 30, 2012
129,060,664

$
1,290

$
366,336

$
5,276

$
1,181,199

(12,611,766
)
$
(245,900
)
$
156

$
1,308,357

 
 
 
 
 
 
 
 
 
 
 
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, 2013
129,060,664

$
1,290

$
363,772

$
(27,176
)
$
1,166,732

(12,049,674
)
$
(234,619
)
$
156

$
1,270,155

Net earnings
 
 
 
 
45,919

 
 


45,919

Other comprehensive income
 
 
 
19,353

 
 
 
 
19,353

Cash dividends
 
 
 
 
(14,067
)
 
 
 
(14,067
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(7,964
)
 
 
293,497

5,875

 
(2,089
)
Share-based compensation
 
 
3,818

 
 
 
 
 
3,818

Tax benefits from stock plans
 
 
109

 
 
 
 
 
109

Purchase of noncontrolling interests
 
 
30

 
 
 
 
(82
)
(52
)
Balance, November 30, 2013
129,060,664

$
1,290

$
359,765

$
(7,823
)
$
1,198,584

(11,756,177
)
$
(228,744
)
$
74

$
1,323,146

See notes to unaudited consolidated financial statements.

7





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, 2013, and include all normal recurring adjustments necessary to present fairly the consolidated balance sheets and the consolidated statements of operations, comprehensive income, cash flows and stockholders' equity for the periods indicated. 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, 2013. The results of operations for the three month period are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements
In the first quarter of fiscal 2014, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to provide quantitative and qualitative disclosures about 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. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued guidance requiring entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective prospectively for fiscal years, and interim 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 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 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.


8




NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss), net of income taxes, is comprised of the following:
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total Accumulated Other Comprehensive Income (Loss)
Balance, August 31, 2013
 
$
(27,477
)
 
$
3,594

 
$
(3,293
)
 
$
(27,176
)
Other comprehensive income (loss) before reclassifications
 
19,442

 
(1,617
)
 
550

 
18,375

Amounts reclassified from AOCI
 

 
980

 
(2
)
 
978

Net other comprehensive income (loss)
 
19,442

 
(637
)
 
548

 
19,353

Balance, November 30, 2013
 
$
(8,035
)
 
$
2,957

 
$
(2,745
)
 
$
(7,823
)

The significant items reclassified out of accumulated other comprehensive income (loss) and the corresponding line items in the consolidated statements of operations to which the items were reclassified were as follows:
Components of AOCI (in thousands)
 
Location
 
Three Months Ended November 30, 2013
Unrealized gain (loss) on derivatives:
 

 


Commodity
 
Cost of goods sold
 
$
(119
)
Foreign exchange
 
Net sales
 
(250
)
Foreign exchange
 
Cost of goods sold
 
(922
)
Foreign exchange
 
SG&A expenses
 
14

Interest rate
 
Interest expense
 
116


 

 
(1,161
)
Income tax effect
 
Income taxes (expense) benefit
 
181

Net of income taxes
 

 
$
(980
)
Defined benefit obligation:
 

 


Amortization of net gain
 
SG&A expenses
 
$
3

Income tax effect
 
Income taxes (expense) benefit
 
(1
)
Net of income taxes
 

 
$
2

Amounts in parentheses reduce earnings.
NOTE 3. SALES OF ACCOUNTS RECEIVABLE

The Company has a domestic sale of accounts receivable program which expires on December 26, 2014. Under the program, Commercial Metals Company contributes, and several of its subsidiaries 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. CMCRV sells the trade accounts receivable in their entirety to two financial institutions. The financial institutions advance up to a maximum of $200 million for all receivables sold, and the remaining portion of the purchase price of the receivables will be paid to the Company from the ultimate collection of the receivables after payment of certain fees and other costs. The Company accounts for sales of the receivables as true sales and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. 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 7, Credit Arrangements.

At November 30, 2013 and August 31, 2013, under its domestic sale of accounts receivable program, the Company had sold $356.9 million and $358.8 million of receivables, respectively, to the financial institutions and received no advance payments.
 

9




In addition to the domestic sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell accounts receivable to financial institutions 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. The European program allows the Company’s European subsidiaries to advance up to 90% of eligible receivables sold under the terms of the arrangement. During the first quarter of fiscal 2014, the Company phased out its existing Australian accounts receivable sales program and entered into a new accounts receivable sales program with a different financial institution. Under the new Australian program, accounts receivable balances will be sold to a special purpose vehicle, which in turn will sell 100% of the eligible receivables of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. Under the Australian program, the financial institution will fund up to A$75.0 million for all receivables sold, and the remaining portion of the purchase price of the receivables will be paid to the Company from the ultimate collection of the receivables after payment of certain fees and other costs. During the three months ended November 30, 2013, no accounts receivable were sold under the new Australian program. The Company accounts for sales of the receivables as true sales and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows.

At November 30, 2013 and August 31, 2013, under its international sale of accounts receivable programs, the Company had sold $55.4 million and $121.2 million of accounts receivable, respectively, to third-party financial institutions and had received advance payments of $31.7 million and $24.5 million, respectively.

During the three months ended November 30, 2013 and 2012, cash proceeds from the domestic and international sale of accounts receivable programs were $162.8 million and $287.0 million, respectively, and cash payments to the owners of accounts receivable were $159.4 million and $333.6 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the accounts receivable for the domestic and Australian programs. Discounts on domestic and international sales of accounts receivable were $0.6 million and $1.2 million for the three months ended November 30, 2013 and 2012, respectively, and are included in selling, general and administrative expenses in the Company's consolidated statements of operations.

The deferred purchase price on the Company's domestic and international sale of accounts receivable programs are included in accounts receivable on the Company's consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the domestic and international sale of accounts receivable programs:
 
 
 
Three Months Ended November 30, 2013
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
453,252

 
$
358,822

 
$
64,996

 
$
29,434

Transfers of accounts receivable
 
1,037,205

 
840,571

 
73,120

 
123,514

Collections
 
(1,042,922
)
 
(847,878
)
 
(65,804
)
 
(129,240
)
Program termination
 
(72,312
)
 

 
(72,312
)
 

Ending balance
 
$
375,223

 
$
351,515

 
$

 
$
23,708


 
 
Three Months Ended November 30, 2012
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
515,481

 
$
396,919

 
$
70,073

 
$
48,489

Transfers of accounts receivable
 
1,206,746

 
936,630

 
126,908

 
143,208

Collections
 
(1,186,356
)
 
(928,556
)
 
(119,820
)
 
(137,980
)
Ending balance
 
$
535,871

 
$
404,993

 
$
77,161

 
$
53,717

NOTE 4. 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. At November 30, 2013 and August 31, 2013, 39% and 43%, respectively, of the Company's total net inventories were valued at LIFO. LIFO inventory reserves were $189.6 million and $185.5 million at November 30, 2013 and August 31, 2013, respectively. Inventory cost for international inventories and the remaining domestic inventories are determined by the first-in, first-out ("FIFO") method and consisted mainly of material dedicated to CMC Poland Sp. z.o.o. ("CMCP") and certain marketing and distribution businesses.


10





The majority of the Company's inventories are in the form of finished goods with minimal work in process. At November 30, 2013 and August 31, 2013, $74.6 million and $66.7 million, respectively, of the Company's inventories were in the form of raw materials.
NOTE 5. 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, August 31, 2013
 
$
7,267

 
$
295

 
$
57,144

 
$
2,755

 
$
2,118

 
$
69,579

Foreign currency translation
 

 

 

 
121

 
33

 
154

Balance, November 30, 2013
 
$
7,267

 
$
295

 
$
57,144

 
$
2,876

 
$
2,151

 
$
69,733


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $43.3 million and $42.9 million at November 30, 2013 and August 31, 2013, 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 for each of the three months ended November 30, 2013 and 2012.
NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
The assets and liabilities of businesses classified as held for sale are included in other current assets and accrued expenses on the Company's consolidated balance sheets. The components of assets and liabilities of businesses held for sale are as follows.
(in thousands)
 
November 30, 2013
 
August 31, 2013
Assets:
 
 
 
 
Accounts receivable
 
$

 
$
20,313

Inventories, net
 

 
8,713

Other current assets
 

 
3,683

Property, plant and equipment, net of accumulated depreciation and amortization
 
1,085

 
10,459

Assets of businesses held for sale
 
$
1,085

 
$
43,168

Liabilities:
 


 


Accounts payable-trade
 
$

 
$
7,615

Accrued expenses and other payables
 

 
3,251

Liabilities of businesses held for sale
 
$

 
$
10,866


Discontinued Operations
During the fourth quarter of fiscal 2013, the Company decided to sell all of the stock of its wholly owned copper tube manufacturing operation, Howell Metal Company ("Howell"). The Company determined that the decision to sell this business met the definition of a discontinued operation. As a result, the Company included Howell in discontinued operations for all periods presented.

During 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 included CMCS in discontinued operations 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





Financial information for discontinued operations was as follows:
 
 
Three Months Ended November 30,
(in thousands)
 
2013
 
2012
Net Sales
 
$
17,298

 
$
39,711

Earnings from discontinued operations before income taxes
 
22,845

 
1,250


Dispositions
On October 17, 2013, the Company sold all of the stock of Howell for $58.5 million, of which $4.2 million is held in escrow, subject to customary purchase price adjustments, resulting in a pre-tax gain of $23.8 million. Howell was previously an operating segment included in the Americas Mills reporting segment.

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 reporting segment.
NOTE 7. 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 used $205.3 million of the proceeds from the 2023 Notes to purchase all of its outstanding $200.0 million of 5.625% Notes due 2013 (the "2013 Notes"). The Company uses the remaining proceeds 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.

In December 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 $35.2 million at November 30, 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 November 30, 2013, the Company's interest coverage ratio was 4.96 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 November 30, 2013, the Company's debt to capitalization ratio was 0.50 to 1.00. The credit facility provides for interest based on the LIBOR, the Eurodollar rate or Bank of America's prime rate.

At November 30, 2013, the Company was in compliance with all covenants related to its debt agreements.

During fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately $52.7 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 November 30, 2013 and August 31, 2013, the unamortized portion was $32.5 million and $34.4 million, respectively, and for the three months ended November 30, 2013 and 2012, the amortization of the deferred gain was $1.9 million and $2.9 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.


12




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 November 30, 2013
 
November 30, 2013
 
August 31, 2013
$400 million notes at 6.50% due July 2017
 
5.7%
 
$
410,775

 
$
411,518

$500 million notes at 7.35% due August 2018
 
6.4%
 
521,773

 
522,930

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

 
330,000

Other, including equipment notes
 
 
 
20,987

 
19,594

 
 
 
 
1,283,535

 
1,284,042

Less current maturities
 
 
 
6,232

 
5,228

 
 
 
 
$
1,277,303

 
$
1,278,814

 Interest on these notes is payable semiannually.

CMCP has uncommitted credit facilities of $66.3 million with several banks with expiration dates ranging from December 2013 to October 2014. During the three months ended November 30, 2013, CMCP had no borrowings and no repayments under these facilities. At November 30, 2013, no material amounts were outstanding under these facilities.

The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the three months ended November 30, 2013 and 2012, respectively. Cash paid for interest during the three months ended November 30, 2013 and 2012 was $9.5 million and $4.6 million, respectively.
NOTE 8. DERIVATIVES AND RISK MANAGEMENT

The Company's global 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 November 30, 2013, the notional value of the Company's foreign currency contract commitments and its commodity contract commitments was $433.3 million and $54.9 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of November 30, 2013:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
4,945

 MT
Aluminum
 
Short
 
1,800

 MT
Copper
 
Long
 
476

 MT
Copper
 
Short
 
5,443

 MT
Zinc
 
Long
 
7

 MT
                                      
MT = Metric Ton

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 months ended November 30, 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.


13




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 November 30,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2013
 
2012
Commodity
 
Cost of goods sold
 
$
510

 
$
(411
)
Commodity
 
SG&A expenses
 

 
(588
)
Foreign exchange
 
Net sales
 
(159
)
 
(11
)
Foreign exchange
 
Cost of goods sold
 
(121
)
 

Foreign exchange
 
SG&A expenses
 
(4,693
)
 
(36
)
Other
 
Cost of goods sold
 

 
15

Loss before income taxes
 
 
 
$
(4,463
)
 
$
(1,031
)

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 November 30,
 
Location
 
2013
 
2012
Foreign exchange
 
Net sales
 
$
(113
)
 
$

Foreign exchange
 
Cost of goods sold
 
(127
)
 
(229
)
Loss before income taxes
 
 
 
$
(240
)
 
$
(229
)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2013
 
2012
Foreign exchange
 
Net sales
 
$
93

 
$
(23
)
Foreign exchange
 
Cost of goods sold
 
125

 
157

Gain before income taxes
 
 
 
$
218

 
$
134


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended November 30,
 
2013
 
2012
Commodity
 
$
(89
)
 
$
14

Foreign exchange
 
(1,528
)
 
303

Gain (loss), net of income taxes
 
$
(1,617
)
 
$
317


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2013
 
2012
Commodity
 
Cost of  goods sold
 
$
(89
)
 
$

Foreign exchange
 
Net sales
 
(231
)
 
51

Foreign exchange
 
Cost of goods sold
 
(758
)
 
(41
)
Foreign exchange
 
SG&A expenses
 
12

 
10

Interest rate
 
Interest expense
 
86

 
102

Gain (loss), net of income taxes
 
 
 
$
(980
)
 
$
122



14




The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at November 30, 2013 and August 31, 2013. The fair value of the Company's derivative instruments on the consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
November 30, 2013
 
August 31, 2013
Commodity — not designated for hedge accounting
 
$
1,357

 
$
1,066

Foreign exchange — designated for hedge accounting
 
1,414

 
1,626

Foreign exchange — not designated for hedge accounting
 
1,971

 
1,238

Derivative assets (other current assets and other assets)*
 
$
4,742

 
$
3,930

 
Derivative Liabilities (in thousands)
 
November 30, 2013
 
August 31, 2013
Commodity — designated for hedge accounting
 
$
39

 
$
129

Commodity — not designated for hedge accounting
 
1,302

 
1,268

Foreign exchange — designated for hedge accounting
 
889

 
432

Foreign exchange — not designated for hedge accounting
 
1,633

 
1,738

Derivative liabilities (accrued expenses, other payables and long-term liabilities)*
 
$
3,863

 
$
3,567

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

As of November 30, 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 9. 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:
 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
November 30, 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)
 
$
371,574

 
$
371,574

 
$

 
$

Commodity derivative assets (2)
 
1,357

 
1,357

 

 

Foreign exchange derivative assets (2)
 
3,385

 

 
3,385

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
1,341

 
1,302

 
39

 

Foreign exchange derivative liabilities (2)
 
2,522

 

 
2,522

 



15




 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 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)
 
$
236,727

 
$
236,727

 
$

 
$

Commodity derivative assets (2)
 
1,066

 
1,066

 

 

Foreign exchange derivative assets (2)
 
2,864

 

 
2,864

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
1,397

 
1,268

 
129

 

Foreign exchange derivative liabilities (2)
 
2,170

 

 
2,170

 

 _________________ 

(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 8, 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 November 30, 2013. CMC does not have other assets or intangible assets measured at fair value on a non-recurring basis at November 30, 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 on the consolidated balance sheets are as follows:

 
 
 
 
November 30, 2013
 
August 31, 2013
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
$400 million notes at 6.50% due July 2017 (1)
 
Level 2
 
$
410,775

 
$
447,760

 
$
411,518

 
$
443,646

$500 million notes at 7.35% due August 2018 (1)
 
Level 2
 
521,773

 
574,840

 
522,930

 
570,429

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

 
311,025

 
330,000

 
298,650


(1) The fair value of the notes is calculated based on indicated market values.
NOTE 10. INCOME TAX

The Company's effective income tax rate from continuing operations for the three months ended November 30, 2013 and 2012 was 32.1% and 31.2%, respectively. The Company's effective income tax rate from discontinued operations for the three months ended November 30, 2013 and 2012 was 38.9% and 37.0%, respectively.

The Company made net payments of $1.4 million and $0.3 million for income taxes during the three months ended November 30, 2013 and 2012, respectively.

The reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $28.6 million and $27.4 million, exclusive of interest and penalties, as of November 30, 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 income tax expense and the balances at the end of a reporting period are recorded as part of the current or

16




noncurrent reserve for uncertain income tax positions. For the three months ended November 30, 2013, before any income tax benefits, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.

During the twelve months ending November 30, 2014, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior year income tax returns or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately $17.9 million, which would reduce the provision for income 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 — 2009 and forward
US States — 2009 and forward
Foreign — 2006 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 November 30, 2013 sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. SHARE-BASED COMPENSATION PLANS

The Company's share-based compensation plans are described, and informational disclosures provided, in Note 15, Share-Based Compensation Plans, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended August 31, 2013. During the three months ended November 30, 2013 and 2012, restricted stock units ("RSUs") and performance stock units ("PSUs") totaling 1.1 million and 1.3 million, respectively, were granted at a weighted-average fair value of $16.75 and $12.99, respectively. Stock appreciation rights ("SARs") were not granted during the three months ended November 30, 2013. The Company granted 0.2 million SARs at a weighted average exercise price of $14.12 during the three months ended November 30, 2012.

During the three months ended November 30, 2013 and 2012, the Company granted 59,565 equivalent shares of cash-settled RSUs and PSUs and 204,069 equivalent shares of cash-settled RSUs, PSUs and SARs, respectively. The fair value of these cash-settled awards is remeasured each reporting period and is recognized ratably over the service period. As of November 30, 2013, the Company had 2,016,522 equivalent shares in awards outstanding. The Company expects 1,717,684 equivalent shares to vest.

In general, the RSUs and PSUs granted during fiscal 2014 will vest over a period of three years; however, certain RSUs granted during fiscal 2014 will vest over a period of four years. The RSUs granted during fiscal 2013 will vest over a period of three years. Subject to the achievement of performance targets established by the Compensation Committee of the Board of Directors, the PSUs granted during fiscal 2014 and fiscal 2013 will vest after a period of three years. The SARs granted during fiscal 2013 vest ratably over a period of three years. The SARs have a contractual term of seven years.

Share-based compensation expense for the three months ended November 30, 2013 and 2012 of $5.5 million and $4.5 million, respectively, is included in selling, general and administrative expenses on the Company's consolidated statements of operations.

17





NOTE 12. EARNINGS PER SHARE ATTRIBUTABLE TO CMC

The calculations of the basic and diluted earnings per share for the three months ended November 30, 2013 and 2012 are as follows: 
 
 
Three Months Ended November 30,
(in thousands, except share data)
 
2013
 
2012
Net earnings attributable to CMC
 
$
45,919

 
$
49,717

 
 
 
 
 
Basic earnings per share:
 
 
 
 
Shares outstanding for basic earnings per share
 
117,070,499

 
116,336,504

 
 
 
 
 
Basic earnings per share attributable to CMC:
 
$
0.39

 
$
0.43

 
 
 
 
 
Diluted earnings per share:
 
 
 
 
Shares outstanding for basic earnings per share
 
117,070,499

 
116,336,504

 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
Share-based incentive/purchase plans
 
1,086,112

 
757,123

Shares outstanding for diluted earnings per share
 
118,156,611

 
117,093,627

 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
$
0.39

 
$
0.42

 
 
 
 
 
Anti-dilutive shares not included above
 
1,364,036

 
2,945,188


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 three months of fiscal 2014 and had remaining authorization to purchase 8,259,647 shares of its common stock at November 30, 2013.
NOTE 13. 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 18, Commitments and Contingencies, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended August 31, 2013.
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 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, the Company cannot reasonably estimate a range of loss relating to these cases.

18





Guarantees
During fiscal 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 $2.8 million as of November 30, 2013.
NOTE 14. 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 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 manufactures finished long steel products including rebar, merchant bar, light structural, some special bar quality (SBQ) and other special sections as well as semi-finished billets for re-rolling and forging applications. 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. Additionally, the financial information presented for the Americas Mills segment excludes Howell. These operations have been classified as discontinued operations in the consolidated statements of operations. See Note 6, Businesses Held for Sale, Discontinued Operations and Dispositions, for more information.

The Company uses adjusted operating profit (loss) to measure the financial performance of its segments. 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 the summary of significant accounting policies.

The following is a summary of certain financial information from continuing operations by reportable segment:
 
 
Three Months Ended November 30, 2013
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
293,475

 
$
291,573

 
$
353,992

 
$
228,492

 
$
509,174

 
$
6,185

 
$

 
$
1,682,891

Intersegment sales
 
44,727

 
189,578

 
4,226

 
658

 
1,984

 

 
(241,173
)
 

Net sales
 
338,202

 
481,151

 
358,218

 
229,150

 
511,158

 
6,185

 
(241,173
)
 
1,682,891

Adjusted operating profit (loss)
 
839

 
65,814

 
2,217

 
15,268

 
503

 
(18,049
)
 
597

 
67,189

Total assets*
 
281,102

 
594,224

 
608,313

 
499,366

 
858,567

 
1,182,688

 
(493,199
)
 
3,531,061

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2012
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
307,471

 
$
267,105

 
$
352,747

 
$
215,858

 
$
603,535

 
$
2,799

 
$

 
$
1,749,515

Intersegment sales
 
44,490

 
189,633

 
3,845

 
6,209

 
5,053

 

 
(249,230
)
 

Net sales
 
351,961

 
456,738

 
356,592

 
222,067

 
608,588

 
2,799

 
(249,230
)
 
1,749,515

Adjusted operating profit (loss)
 
4,494

 
51,660

 
10,192

 
876

 
40,161

 
(17,370
)
 
(660
)
 
89,353

Total assets at August 31, 2013*
 
309,599

 
598,478

 
631,510

 
487,613

 
838,413

 
1,075,594

 
(496,946
)
 
3,444,261

                                             
* Excludes total assets from discontinued operations of $6.6 million at November 30, 2013 and $50.5 million at August 31, 2013.

19





Reconciliations of earnings from continuing operations to adjusted operating profit are provided below:
 
 
Three Months Ended November 30,
(in thousands)
 
2013
 
2012
Earnings from continuing operations
 
$
31,961


$
48,931

Income taxes
 
15,091


22,189

Interest expense
 
19,578


17,024

Discounts on sales of accounts receivable
 
559


1,209

Adjusted operating profit
 
$
67,189


$
89,353

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

In the following discussion, references to "we," "us" or the "Company" mean Commercial Metals Company and its consolidated subsidiaries, unless the context otherwise requires. 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, 2013. 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, 2013. 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, 2013.
CONSOLIDATED RESULTS OF OPERATIONS

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

20




 
 
Three Months Ended November 30,
 
Increase
(Decrease)
(in thousands)
 
2013
 
2012
 
%
Net sales*
 
$
1,682,891

 
$
1,749,515

 
(4
)%
Earnings from continuing operations
 
31,961

 
48,931

 
(35
)%
Adjusted EBITDA*
 
101,170

 
124,202

 
(19
)%
_______________________________________
* Excludes divisions classified as discontinued operations.


21




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 earnings from continuing operations to adjusted EBITDA are provided below:
 
 
Three Months Ended November 30,
 
Increase
(Decrease)
(in thousands)
 
2013
 
2012
 
%
Earnings from continuing operations
 
$
31,961


$
48,931

 
(35
)%
Less net earnings attributable to noncontrolling interests
 


2

 
(100
)%
Interest expense
 
19,578


17,024

 
15
 %
Income taxes
 
15,091


22,189

 
(32
)%
Depreciation, amortization and impairment charges
 
34,540


36,060

 
(4
)%
Adjusted EBITDA
 
$
101,170


$
124,202

 
(19
)%
Our adjusted EBITDA does not include net earnings attributable to noncontrolling interests, interest expense, income taxes, depreciation or 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 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 first quarter of fiscal 2014 compared with the same period during fiscal 2013:

- Overall, our sales for the first quarter of fiscal 2014 were down when compared to the first quarter of fiscal 2013, with the International Marketing and Distribution segment having the most significant sales decline. The decline in sales for this segment is primarily due to the performance of our domestic raw materials business.

- Our Americas Mills segment's adjusted operating profit improved $14.2 million during the first quarter of fiscal 2014 as compared the prior year's first quarter. Additionally, our International Mill segment's adjusted operating profit improved $14.4 million during the first quarter of fiscal 2014 as compared the prior year's first quarter. The improvements in both segments were the result of a favorable change in product mix toward higher margin products.

- We reported LIFO income of $23.2 million in the first quarter of fiscal 2013 as compared to LIFO expense of $4.4 million in the first quarter of fiscal 2014, which is a significant unfavorable change of $27.6 million.

- Results for the first quarter of fiscal 2014 included an after-tax gain of $15.5 million associated with the sale of the Company’s wholly owned copper tube manufacturing operation, Howell Metal Company ("Howell"). Results for the first quarter of fiscal 2013 included an after-tax gain of $17.0 million associated with the sale of the Company’s 11% ownership investment in Trinecke Zelezarny, a.s., a Czech Republic joint-stock company ("Trinecke").

22




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 14, 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 November 30,
(in thousands)
 
2013
 
2012
Net sales:
 
 
 
 
Americas Recycling
 
$
338,202

 
$
351,961

Americas Mills
 
481,151

 
456,738

Americas Fabrication
 
358,218

 
356,592

International Mill
 
229,150

 
222,067

International Marketing and Distribution
 
511,158

 
608,588

Corporate
 
6,185

 
2,799

Eliminations
 
(241,173
)
 
(249,230
)
 
 
$
1,682,891


$
1,749,515

Adjusted operating profit (loss):
 
 
 
 
Americas Recycling
 
$
839

 
$
4,494

Americas Mills
 
65,814

 
51,660

Americas Fabrication
 
2,217

 
10,192

International Mill
 
15,268

 
876

International Marketing and Distribution
 
503

 
40,161

Corporate
 
(18,049
)
 
(17,370
)
Eliminations
 
597

 
(660
)
Adjusted operating profit
 
$
67,189


$
89,353


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) which represents decreases or (increases) in the LIFO inventory reserve.

The International Mill segment exclusively uses the FIFO inventory valuation method and thus is not included in this table:
 
 
Three Months Ended November 30,
(in thousands)
 
2013
 
2012
Americas Recycling
 
$
(2,525
)
 
$
2,350

Americas Mills
 
1,869

 
4,901

Americas Fabrication
 
(1,835
)
 
7,232

International Marketing and Distribution
 
(1,876
)
 
8,753

Consolidated pre-tax LIFO income (expense)
 
$
(4,367
)
 
$
23,236



23




BUSINESS SEGMENT RESULTS

Americas Recycling
Adjusted operating profit decreased during the first quarter of fiscal 2014 when compared to the prior year's first quarter. This segment’s results were impacted by a $4.9 million unfavorable change in pre-tax LIFO, from LIFO income of $2.4 million in the first quarter of fiscal 2013 to LIFO expense of $2.5 million in the first quarter of fiscal 2014. Although ferrous selling prices increased 1% to $326 per ton during the first quarter of fiscal 2014, metal margins declined 7% and nonferrous selling prices and metal margins declined in the current quarter compared to the same quarter in fiscal 2013. Lower shipments and metal margins in the first quarter of fiscal 2014 were offset by a gain on sale of real estate and facility relocation reimbursements. Furthermore, on a sequential quarter basis, for both ferrous and nonferrous shipments, selling prices and metal margins improved. We exported 7% and 5% of our ferrous scrap tonnage during the first quarter of fiscal 2014 and fiscal 2013, respectively, and 26% and 32% of our nonferrous scrap tonnage during the first quarter of fiscal 2014 and fiscal 2013, respectively.

The following table reflects our Americas Recycling segment's average selling prices per ton and tons shipped (in thousands):
 
 
Three Months Ended November 30,
 
Increase (Decrease)
 
 
2013
 
2012
 
Amount
 
%
Average ferrous selling price
 
$
326

 
$
322

 
$
4

 
1
 %
Average nonferrous selling price
 
2,679

 
2,798

 
(119
)
 
(4
)%
 
 
 
 
 
 
 
 
 
Ferrous tons shipped
 
503

 
503

 

 
 %
Nonferrous tons shipped
 
56

 
59

 
(3
)
 
(5
)%
Total tons shipped
 
559

 
562

 
(3
)
 
(1
)%

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

This segment recorded adjusted operating profit of $65.8 million for the first quarter of fiscal 2014, compared to adjusted operating profit of $51.6 million for the first quarter of fiscal 2013. Shipments of this segment’s higher margin products, such as merchant and rebar, increased, while shipments of lower margin billets declined when compared to the first quarter of fiscal 2013. Furthermore, in the first quarter of fiscal 2013 we incurred approximately $5.5 million of expenses associated with an outage at our South Carolina melt shop for the successful installation of a new electric arc furnace and related equipment. Conversion costs during the first quarter of fiscal 2014 improved 7% compared to the first quarter of fiscal 2013.

The table below reflects our domestic steel minimills' operating statistics (in thousands) and average prices per short ton:
 
 
Three Months Ended November 30,
 
Increase (Decrease)
 
 
2013
 
2012
 
Amount
 
%
Tons melted
 
652

 
572

 
80

 
14
 %
Tons rolled
 
618

 
594

 
24

 
4
 %
Tons shipped
 
676

 
666

 
10

 
2
 %
 
 
 
 
 
 
 
 
 
Average mill selling price (finished goods)
 
$
668

 
$
687

 
$
(19
)
 
(3
)%
Average mill selling price (total sales)
 
657

 
669

 
(12
)
 
(2
)%
Average cost of ferrous scrap consumed
 
334

 
339

 
(5
)
 
(1
)%
Average metal margin
 
323

 
330

 
(7
)
 
(2
)%
Average ferrous scrap purchase price
 
297

 
294

 
3

 
1
 %

Americas Fabrication
This segment recorded adjusted operating profit of $2.2 million for this year's first quarter, compared with adjusted operating profit of $10.2 million for the first quarter of fiscal 2013. The decline in profitability is due to a $9.0 million unfavorable change in pre-tax LIFO, from LIFO income of $7.2 million in the first quarter of fiscal 2013 to LIFO expense in the first quarter of fiscal

24




2014 of $1.8 million. Compared to the same quarter in the prior year, this segment noted improvements in its key commercial and operating metrics, including tons bid, tons booked and tons shipped as well as a slight increase in the backlog.

The tables below show our average fabrication selling prices per short ton and total fabrication plant shipments:
 
 
Three Months Ended November 30,
 
Increase (Decrease)
Average selling price (excluding stock and buyout sales)
 
2013
 
2012
 
Amount
 
%
Rebar
 
$
877

 
$
899

 
$
(22
)
 
(2
)%
Structural
 
2,433

 
2,134

 
299

 
14
 %
Post
 
888

 
899

 
(11
)
 
(1
)%

 
 
Three Months Ended November 30,
 
Increase (Decrease)
Tons shipped (in thousands)
 
2013
 
2012
 
Amount
 
%
Rebar
 
234

 
225

 
9

 
4
 %
Structural
 
12

 
15

 
(3
)
 
(20
)%
Post
 
21

 
20

 
1

 
5
 %

International Mill
During the first quarter of fiscal 2014, this segment had adjusted operating profit of $15.3 million