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COMMERCIAL METALS CO - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the federal securities laws, with respect to economic conditions, our financial condition, results of operations, cash flows and business, and our expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements. The Company's forward-looking statements are based on management's expectations and beliefs as of the time this report is filed with the Securities and Exchange Commission or, with respect to any document incorporated by reference, as of the time such document was prepared. Although the Company believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. These factors include those described in Item 1A of this Annual Report on Form 10-K. Except as required by law, the Company undertakes no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some of the important factors that could cause actual results to differ materially from the Company's expectations include the following: • absence of global economic recovery or possible recession relapse and the pace of overall global economic activity and its impact in a highly cyclical industry; • construction activity or lack thereof; • continued sovereign debt problems in the Euro-zone; • success or failure of governmental efforts to stimulate the economy including restoring credit availability and confidence in a recovery; • significant reductions in China's steel consumption or increased Chinese steel production; • rapid and significant changes in the price of metals; • increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing; • passage of new, or interpretation of existing, environmental laws and regulations; 24 --------------------------------------------------------------------------------• increased legislation associated with climate change and greenhouse gas emissions; • solvency of financial institutions and their ability or willingness to lend; • customers' inability to obtain credit and non-compliance with contracts; • financial covenants and restrictions on the operation of our business contained in agreements governing our debt; • currency fluctuations; • global factors including political and military uncertainties; • availability of electricity and natural gas for minimill operations; • information technology interruptions and breaches in security data; • ability to retain key executives; • execution of cost reduction strategies; • industry consolidation or changes in production capacity or utilization; • ability to make necessary capital expenditures; • availability and pricing of raw materials over which we exert little influence, including scrap metal, energy, insurance and supply prices; • unexpected equipment failures; • competition from other materials; • losses or limited potential gains due to hedging transactions; • litigation claims and settlements, court decisions and regulatory rulings; • risk of injury or death to employees, customers or other visitors to our operations; and • increased costs related to health care reform legislation. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. OVERVIEW Our business is organized into the following five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. Americas Recycling Our Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. This segment operates 29 scrap metal processing facilities with 15 locations in Texas, six in Florida, two locations in Missouri and one location each in Georgia, Kansas, Louisiana, North Carolina, Oklahoma and Tennessee. Americas Mills Our Americas Mills segment includes our five steel mills, commonly referred to as "minimills," that produce one or more of reinforcing bar ("rebar"), angles, flats, rounds, small beams, fence-post sections and other shapes; two scrap metal shredders and ten processing facilities that directly support the steel minimills; and a railroad salvage company. In October 2013, we sold all of the outstanding capital stock of our wholly owned copper tube manufacturing operation, Howell Metal Company ("Howell"), for $58.5 million, of which $3.2 million was held in escrow, subject to customary purchase price adjustments. During the second quarter of fiscal 2014, we made a $3.0 million working capital adjustment, which is included in our estimated pre-tax gain of $23.8 million. Howell was previously an operating segment included in the Americas Mills reporting segment. We have included Howell in discontinued operations for all periods presented. 25 --------------------------------------------------------------------------------Americas Fabrication Our Americas Fabrication segment consists of our steel fabrication facilities that bend, weld, cut and fabricate steel, primarily rebar; warehouses that sell or rent products for the installation of concrete; facilities that produce steel fence posts; and facilities that heat-treat steel to strengthen and provide flexibility. International Mill Our International Mill segment is comprised of all mill, recycling and fabrication operations located in Poland. Our subsidiary, CMC Poland Sp. z.o.o., owns a steel minimill and conducts its mill operations in Zawiercie, Poland. This segment's operations are conducted through: two rolling minimills that produce primarily rebar and high quality merchant products; a specialty rod finishing mill; our scrap processing facilities that directly support the minimill; and four steel fabrication facilities primarily for reinforcing bar and mesh. International Marketing and Distribution Our International Marketing and Distribution segment includes international operations for the sales, distribution and processing of primary and secondary metals, fabricated metals, semi-finished, long and flat steel products and other industrial products. Additionally, this segment includes two of our marketing and distribution divisions headquartered in the United States, CMC Cometals and CMC Cometals Steel, and a recycling facility in Singapore. We market and distribute these products through our global network of offices and processing facilities. Our customers use these products in a variety of industries. In September 2014, the Company made the decision to exit its steel distribution business in Australia. Despite focused efforts and substantial progress to stabilize and improve the results of the Australian distribution business, the Company determined that achieving acceptable financial returns would take additional time and investment. OUTLOOK Joe Alvarado, Chairman of the Board, President and Chief Executive Officer, concluded, "Heading into our fiscal year 2015, many of our key market indicators have shown strength in recent months. For example, the Architecture Billings Index (ABI) was 53.0 for the month of August, following 55.8 in July, which was the highest mark since 2007. The Eurozone economy is growing gradually, with rising construction activity. While macroeconomic and geopolitical concerns remain, all indications suggest continued market growth in fiscal 2015." RESULTS OF OPERATIONS The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations. Consolidated Results of Operations Year Ended August 31, (in thousands except per share data) 2014 2013 2012 Net sales* $ 7,039,959 $ 6,889,575 $ 7,656,375 Adjusted operating profit*+ 226,417 206,438 240,712 LIFO income (expense)** effect on net earnings attributable to CMC* (8,839 ) 34,393 27,149 Per diluted share (0.07 ) 0.29 0.23 Earnings from continuing operations 102,087 74,957 210,549 Per diluted share $ 0.86 $ 0.64 $ 1.80 Adjusted EBITDA*+ 361,728 353,542 368,710 _________________________* Excludes divisions classified as discontinued operations. ** Last-in, first-out inventory valuation method. + Non-GAAP financial measure. 26 --------------------------------------------------------------------------------Adjusted EBITDA In the table above, we have included financial statement measures that were not derived in accordance with United States generally accepted accounting principles ("GAAP"). We use adjusted EBITDA (earnings from continuing operations before net earnings attributable to noncontrolling interests, interest expense, income taxes (benefit), depreciation, amortization and impairment charges) as a non-GAAP financial measure. Adjusted EBITDA should not be considered as an alternative to net earnings or as a better measure of liquidity than net cash flows from operating activities, as determined by GAAP. However, we believe that adjusted EBITDA provides relevant and useful information, which is often used by analysts, creditors, and other interested parties in our industry. In calculating adjusted EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization, as well as impairment charges, which are also non-cash. 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 U.S. 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. Adjusted EBITDA is part of a debt compliance test in certain of our debt agreements and is the target benchmark for our annual and long-term cash incentive performance plans for management. Adjusted EBITDA may be inconsistent with similar measures presented by other companies. Reconciliations of earnings from continuing operations to adjusted EBITDA are provided below: Year Ended August 31, (in thousands) 2014 2013 2012 Earnings from continuing operations $ 102,087 $ 74,957 $ 210,549 Less: Net earnings attributable to noncontrolling interests 1 4 6 Interest expense 77,741 69,608 69,487 Income taxes (benefit) 42,724 57,979 (45,762 ) Depreciation and amortization 136,004 133,732 133,835 Impairment charges 3,173 17,270 607 Adjusted EBITDA $ 361,728 $ 353,542 $ 368,710 As noted above, our adjusted EBITDA does not include net earnings attributable to noncontrolling interests, interest expense, income taxes (benefit), depreciation, amortization and impairment charges. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Impairment charges, when necessary, accelerate the write-off of fixed assets that 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 determined in accordance with GAAP, as well as adjusted EBITDA, to evaluate our performance. Further, we separately analyze any significant fluctuations in interest expense, income taxes (benefit), depreciation, amortization and impairment charges. Adjusted Operating Profit (Loss) The other non-GAAP financial measure included in the table above is adjusted operating profit (loss). 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) from continuing operations before income taxes (benefit), interest expense and discounts on sales of accounts receivable. For added flexibility, we may sell certain accounts receivable both in the U.S. and internationally. We consider sales of receivables as an alternative source of liquidity to finance our operations and we believe that removing these costs provides a clearer perspective of our operating performance. Adjusted operating profit (loss) may be inconsistent with similar measures presented by other companies. 27 -------------------------------------------------------------------------------- Reconciliations of earnings from continuing operations to adjusted operating profit are provided below: Year Ended August 31, (in thousands) 2014 2013 2012 Earnings from continuing operations $ 102,087 $ 74,957 $ 210,549 Income taxes (benefit) 42,724 57,979 (45,762 ) Interest expense 77,741 69,608 69,487Discounts on sales of accounts receivable 3,865 3,894 6,438 Adjusted operating profit $ 226,417 $ 206,438 $ 240,712 Fiscal Year 2014 Compared to Fiscal Year 2013 Summary Net sales for fiscal 2014 increased $150.4 million, or 2%, compared to fiscal 2013. The increase in net sales was primarily due to an increase in tons shipped and average selling prices for our Americas Mills segment. Our Americas Fabrication segment also reported an increase in net sales over fiscal 2013, while our Americas Recycling and International Marketing and Distribution segments each reported a decline in net sales. In general, economic activity in the U.S. increased during the current fiscal year while weak global economies adversely impacted results for our International division. Adjusted operating profit for fiscal 2014 increased $20.0 million, or 10%, compared to fiscal 2013 primarily driven by our Americas Mills and International Mill segments. Americas Mills primarily benefited from increased volumes on flat metal margins. International Mill primarily benefited from improved metal margins and cost savings due to the commissioning of a new electric arc furnace in Poland during fiscal 2014. In contrast, our Americas Recycling, Americas Fabrication and International Marketing and Distribution segments reported decreases in adjusted operating profit for fiscal 2014 compared to fiscal 2013. Americas Recycling was adversely impacted by a squeeze on the average metal margin for ferrous material and increased employee-related expenses when compared to fiscal 2013. Margin compression on both rebar and structural fabrication products, coupled with increased employee-related expenses had an adverse impact on adjusted operating profit for Americas Fabrication compared to fiscal 2013. International Marketing and Distribution reported a decrease in adjusted operating profit for fiscal 2014 compared to fiscal 2013, as the global markets we serve remained weak through fiscal 2014, which continued to pressure margins and competition for volumes. During fiscal 2013, we completed the sale of our 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. This gain was recorded in our International Marketing and Distribution segment. Partially offsetting this gain, in fiscal 2013 we recorded $12.7 million of goodwill and other asset impairment charges related to our Australian operations within the International Marketing and Distribution segment. We reported an unfavorable change in pre-tax LIFO of $66.5 million from $52.9 million in pre-tax LIFO income reported in fiscal 2013 to $13.6 million in pre-tax LIFO expense reported in fiscal 2014. The unfavorable change in pre-tax LIFO primarily resulted from increasing prices in our Americas Mills and Americas Fabrication segments as well as one of our marketing and distribution divisions headquartered in the U.S. within the International Marketing and Distribution segment during fiscal 2014, as compared to decreasing prices overall during fiscal 2013. Selling, General and Administrative Expenses Selling, general and administrative expenses from continuing operations in fiscal 2014 increased $1.3 million compared to fiscal 2013. The increase in selling, general and administrative expenses in fiscal 2014 was due to an increase in variable employee-related expenses compared to fiscal 2013 and a pre-tax charge of approximately $4 million that was incurred in connection with our final settlement of the Standard Iron Works v. Arcelor Mittal et al. lawsuit in fiscal 2014. Reductions in lease and rent expenses as well as a reduction in our allowance for doubtful accounts in fiscal 2014 partially offset these increases to selling, general and administrative expenses compared to fiscal 2013. Interest Expense Interest expense from continuing operations for fiscal 2014 increased $8.1 million to $77.7 million compared to fiscal 2013 due to the issuance of additional long term debt in fiscal 2013. 28 --------------------------------------------------------------------------------Income Taxes Our effective income tax rate from continuing operations for the year ended August 31, 2014 was 29.5% compared to 43.6% for the year ended August 31, 2013. In fiscal 2014, the income tax rate benefited from income from operations in countries which have lower statutory income tax rates than the United States, notably Poland, which has a statutory rate of 19%. In addition, we realized a benefit under Section 199 of the Internal Revenue Code related to U.S. production activity income and had a non-taxable net holding gain on assets segregated to fund our nonqualified benefit restoration plan ("BRP plan"). In fiscal 2014, we released $3.0 million of valuation allowances previously recorded against net operating losses generated in various states due to losses in our Americas Fabrication reporting segment. The valuation allowances were released due to taxable income generated by this segment in both fiscal 2014 and 2013. In fiscal 2013, the relatively higher income tax rate of 43.6% was largely due to an increase in valuation allowances recorded against net operating losses generated by our non-U.S. operations, notably unfavorable results reported by our Australian operations during fiscal 2013, which led these operations to a three year cumulative loss position. As a result, we determined that it was more likely than not that the deferred tax assets associated with the Australian operations would not be realized and as such we established a $14.5 million valuation allowance for these operations in fiscal 2013. We intend to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries. While not expected, if a repatriation occurs in the future, we would be required to provide for income taxes on repatriated earnings from our non-U.S. subsidiaries. Determination of the unrecognized deferred income tax liability related to the undistributed earnings of our non-U.S. subsidiaries is not practicable because of the complexities with its hypothetical calculation. 29 --------------------------------------------------------------------------------Fiscal Year 2013 Compared to Fiscal Year 2012 Summary Net sales for fiscal 2013 decreased $766.8 million, or 10%, compared to fiscal 2012. The decrease in net sales was primarily due to a decrease in average selling prices for our marketing and distribution divisions headquartered in the U.S. combined with decreases in average selling prices and volumes for the remaining divisions within our International Marketing and Distribution segment. Additionally, our International Mill, Americas Recycling and Americas Mills segments reported decreases in net sales due to decreases in average selling prices and volumes. Partially offsetting these declines in net sales, our Americas Fabrication segment reported an increase in net sales over fiscal 2012 primarily due to an increase in the composite average selling price. Adjusted operating profit for fiscal 2013 decreased $34.3 million, or 14%, compared to fiscal 2012 primarily driven by reduced adjusted operating profit for our Americas Recycling, International Mill and International Marketing and Distribution segments. Our Americas Recycling segment was negatively impacted by declining ferrous and non-ferrous volumes and margins compared to the prior fiscal year. Our International Mill segment recorded a significant decline in adjusted operating profit in fiscal 2013 when compared to the prior year primarily due to 17% lower shipments when compared to fiscal 2012, as business conditions in the Eurozone remain challenged. Adjusted operating profit for our International Marketing and Distribution segment declined due to approximately $12.7 million in impairment charges related to our Australian operations, as market conditions in Australia continued to show weakness in general and specifically in the steel construction market. Additionally, this segment's adjusted operating profit was adversely affected by losses from our Australian operations, costs associated with exiting unprofitable locations, decreased margins in our raw materials businesses and overall weakness in the global markets we serve. During fiscal 2013, we completed the sale of our 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. This gain was recorded in our International Marketing and Distribution segment. Our Americas Fabrication segment showed the most progress when compared to the prior year, recording adjusted operating profit of $28.0 million, compared with an adjusted operating loss of $15.7 million in fiscal 2012. In our rebar and structural fabrication businesses, selling prices increased while raw material input prices for steel declined, enabling margin expansion for this segment. We reported a favorable change in pre-tax LIFO of $11.1 million from $41.8 million in pre-tax LIFO income reported in fiscal 2012 to $52.9 million in pre-tax LIFO income reported in fiscal 2013. The favorable change in pre-tax LIFO primarily resulted from inventory prices decreasing at a higher rate in fiscal 2013 than fiscal 2012 at one of our marketing and distribution divisions headquartered in the U.S. Partially offsetting this favorable change, our Americas Mills and Americas Fabrication segments reported unfavorable changes in pre-tax LIFO income as a result of prices decreasing at a lower rate in fiscal 2013 than fiscal 2012. Pre-tax LIFO did not fluctuate materially for our Americas Recycling segment. Selling, General and Administrative Expenses Selling, general and administrative expenses from continuing operations in fiscal 2013 decreased $13.1 million, or 3%, compared to fiscal 2012 as a result of our cost containment initiatives. Interest Expense Our interest expense increased by $0.1 million to $69.6 million during fiscal 2013 as compared to fiscal 2012 due to the issuance of additional long term debt in fiscal 2013, offset by the settlement of our interest rate swap transactions in fiscal 2012. The resulting gain from the settlement of our interest rate swap transactions was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. Income Taxes Our effective income tax rate from continuing operations for the year ended August 31, 2013 was 43.6% as compared to (27.8)% in fiscal 2012. The increase in the effective income tax rate to 43.6% for the year ended August 31, 2013 over the statutory income tax rate of 35% is due to the mix and amount of pre-tax income in the jurisdictions in which we operate and the recognition of valuation allowances on deferred tax assets in various jurisdictions that more likely than not would not be realized. Our effective income tax rates can be impacted by state and local income taxes as well as by earnings or losses from foreign jurisdictions. State and local income taxes are generally consistent while the composition of U.S. and foreign earnings can create larger fluctuations in the rate. During fiscal 2013, our foreign operations provided a $3.3 million reduction in our effective income tax rate as a result of differences between actual foreign statutory rates and the U.S. statutory rate of 35%. Of this $3.3 million reduction, no foreign operation 30 -------------------------------------------------------------------------------- individually provided a material reduction in our effective income tax rate. This reduction was offset by a $14.3 million increase in our valuation allowances on deferred assets in jurisdictions that more likely than not will not be realized. The increase in the valuation allowances was primarily related to unfavorable results reported by our Australian operations during fiscal 2013 that led these operations to a three year cumulative loss position. As a result, we determined that it was more likely than not that the deferred tax assets associated with the Australian operations would not to be realized and as such we established a $14.5 million valuation allowance for these operations. During the year ended August 31, 2012, we recognized an income tax loss in the amount of $291.0 million related to our investments in our Croatian subsidiary. As a result, an income tax benefit of $102.1 million was recorded from these losses in continuing operations for the year ended August 31, 2012. We reported and disclosed the investment loss on its U.S. income tax return as ordinary worthless stock and bad debt deductions. This income tax benefit is the primary reason for the variance from the statutory income tax rate of 35%. 31 --------------------------------------------------------------------------------Segments Unless otherwise indicated, all dollar amounts below are calculated before income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 21, Business Segments, to the consolidated financial statements included in this report. Fiscal Year 2014 Compared to Fiscal Year 2013 Americas Recycling Year Ended August 31, (in thousands) 2014 2013 Net sales $ 1,367,070 $ 1,391,749 Adjusted operating profit (loss) (3,222 ) 3,170 Pre-tax LIFO income 2,465 7,423 Average selling price (per short ton) Average ferrous selling price $ 327 $ 327 Average nonferrous selling price 2,631 2,729 Short tons shipped (in thousands) Ferrous tons shipped 2,097 2,078 Nonferrous tons shipped 232 234 Total tons shipped 2,329 2,312 Net sales in fiscal 2014 decreased $24.7 million, or 2%, compared to fiscal 2013 primarily due to a 4% per short ton decline in average nonferrous selling prices. Adjusted operating profit in fiscal 2014 decreased $6.4 million compared to fiscal 2013, primarily due to the decline in net sales discussed above outpacing a $21.6 million decrease in cost of goods sold. The decrease in adjusted operating profit in fiscal 2014 was also attributed to a 5% increase in selling, general and administrative expenses as a result of an increase in this segment's labor and other variable employee-related expenses compared to fiscal 2013. In fiscal 2014, ferrous tons shipped increased 1% while average ferrous selling price was flat and average ferrous material cost increased $2 per short ton, resulting in a 2% ferrous metal margin squeeze compared to fiscal 2013. The contraction in ferrous metal margin was due to a lower availability in the scrap markets in which we operate and pressure from falling iron ore prices. Adding additional pressure to adjusted operating profit, pre-tax LIFO income decreased $5.0 million in fiscal 2014 compared to fiscal 2013. The lower pre-tax LIFO income in fiscal 2014 was mostly due to flat inventory pricing and lower volumes, while in fiscal 2013 inventory pricing declined overall. Partially offsetting the decrease in adjusted operating profit, nonferrous material cost declined at a faster pace than the decline in average nonferrous selling price, on stable tons shipped, and resulted in nonferrous metal margins expanding 6% in fiscal 2014 compared to fiscal 2013. The expansion in nonferrous metal margin was due to an increase in demand for certain products such as aluminum and stainless steel primarily due to demand from manufacturers in the U.S. and Europe. Americas Mills Year Ended August 31, (in thousands) 2014 2013 Net sales $ 1,991,334 $ 1,819,520 Adjusted operating profit 247,703 204,333Pre-tax LIFO income (expense) (8,833 ) 7,166 Average price (per short ton) Finished goods selling price $ 690 $ 683 Total sales 675 669 Cost of ferrous scrap consumed 348 343 Metal margin 327 326 Ferrous scrap purchase price 305 299 Short tons (in thousands) Tons melted 2,627 2,407 Tons rolled 2,437 2,295 Tons shipped 2,773 2,561 Net sales in fiscal 2014 increased $171.8 million, or 9%, compared to fiscal 2013 due to an 8% increase in total shipments and a $6 per short ton increase in average selling prices across all product groups. The increases in shipments and average selling prices were due to stronger construction activity and capacity improvements in U.S. steelmaking. Shipments of our higher priced finished products, including rebar and merchant, increased 202 thousand short tons while our lower priced billet shipments increased twelve thousand short tons compared to fiscal 2013. Adjusted operating profit in fiscal 2014 increased $43.4 million, or 21%, compared to fiscal 2013, primarily due to the increase in total shipments discussed above. There were no material changes in product mix affecting the change in adjusted operating profit. Average total conversion costs improved $3 per short ton further contributing to the improvement in adjusted operating profit. Average metal margin in fiscal 2014 was essentially flat compared to fiscal 2013 as a result of the average cost of ferrous scrap consumed increasing at the same rate as the increase in average selling prices. Adjusted operating profit was impacted by an 8% increase in cost of goods sold, including a $16.0 million unfavorable change in pre-tax LIFO due to price increases in fiscal 2014, compared to price decreases in fiscal 2013. Furthermore, the increase in cost of goods sold in fiscal 2014 included a 5% increase in freight expense per ton shipped. Utility expenses increased approximately $6.5 million, and alloy expenses increased approximately $5.9 million primarily due to the increase in tons melted. The increases in utility and alloy costs were partially offset by approximately a $2 per short ton decrease in electrode rates. Selling, general and administrative expense related to this segment increased 9% in fiscal 2014 as a result of an increase in labor and other employee-related expenses and further offset the increase in adjusted operating profit compared to fiscal 2013. Americas Fabrication Year Ended August 31, (in thousands) 2014 2013 Net sales $ 1,537,485 $ 1,442,691 Adjusted operating profit 6,196 28,033 Pre-tax LIFO income (expense) (578 ) 12,177 Average selling price (excluding stock and buyout sales) (per short ton) Rebar $ 895 $ 901 Structural 2,231 2,580 Post 887 914 Short tons shipped (in thousands) Rebar 988 902 Structural 53 53 Post 99 99 Net sales in fiscal 2014 increased $94.8 million, or 7%, compared to fiscal 2013 primarily due to a 10% increase in rebar tons shipped, which outpaced a 2% decline in our composite average selling price. The increase in rebar tons shipped is the result of an improvement in the non-residential construction market during fiscal 2014 and growth of our backlog over time. Adjusted operating profit in fiscal 2014 decreased $21.8 million compared to fiscal 2013. The decrease in adjusted operating profit was impacted by margin compression on rebar and structural fabrication products due to a decline in the average selling price and an increase in average material costs, coupled with flat volumes for structural products. An increased availability of lower priced, import products and competitive price pressures were the primary drivers of lower average selling prices. Conversely, higher operating rates by U.S. mills resulted in higher average material costs. In addition, a 13% increase in employee-related expenses, resulting from the increase in rebar shipments, also contributed to the decline in adjusted operating profit in fiscal 2014. Furthermore, an unfavorable change in pre-tax LIFO of $12.8 million was primarily due to increasing input prices in fiscal 2014 compared to decreasing prices in fiscal 2013. International Mill Year Ended August 31, (in thousands) 2014 2013 Net sales $ 823,193 $ 826,044 Adjusted operating profit 30,632 890 Average price (per short ton) Total sales $ 605 $ 589 Cost of ferrous scrap consumed 351 360 Metal margin 254 229 Ferrous scrap purchase price 297 289 Short tons (in thousands) Tons melted 1,235 1,386 Tons rolled 1,137 1,244 Tons shipped 1,285 1,318 Net sales in fiscal 2014 decreased $2.9 million, or less than 1%, compared to fiscal 2013 due to a 3% decline in shipments offset by a 3% increase in average selling prices. Changes in the U.S. dollar relative to other currencies did not have a material impact on International Mill's net sales in fiscal 2014 or fiscal 2013. Adjusted operating profit in fiscal 2014 increased $29.7 million compared to fiscal 2013 due to an 11% increase in average metal margin in fiscal 2014 as a result of a $16 per short ton increase in average selling prices coupled with a $9 per short ton decrease in the average cost of ferrous scrap consumed. The improvement in average selling prices and average metal margin in fiscal 2014 as the negative effects of the value-added tax circumvention schemes that impacted this segment in prior years have continued to subside. Further contributing to the increase in adjusted operating profit, direct utility costs decreased 10% in fiscal 2014 when compared to fiscal 2013 due to lower tons melted and rolled and, to a lesser extent, efficiencies gained by the commissioning of our new electric arc furnace in Poland. Adjusted operating profit was unfavorably impacted in fiscal 2014 and fiscal 2013 by $4.6 million and $3.2 million, respectively, as a result of changes in the U.S. dollar relative to other currencies. International Marketing and Distribution Year Ended August 31, (in thousands) 2014 2013 Net sales $ 2,326,512 $ 2,355,572 Adjusted operating profit 17,757 35,617 Pre-tax LIFO income (expense) (6,652 ) 26,146 Net sales in fiscal 2014 decreased $29.1 million, or 1%, compared to fiscal 2013 primarily due to a decrease in volumes for one of our marketing and distribution divisions headquartered in the U.S., which more than offset an increase in the average selling price per short ton at that same division. Further attributing to the decrease in net sales was a decline in the average selling price for our Australian operations while volumes for this division were flat compared to fiscal 2013. However, net sales in fiscal 2014 was favorably impacted as a result of volumes for the remaining marketing and distribution divisions increasing at a pace that exceeded the pace of decreasing average selling prices and partially offset the decline in net sales in fiscal 2014 compared to fiscal 2013. Changes in the U.S. dollar relative to other currencies did not have a material impact on this segment's net sales in fiscal 2014. Net sales in fiscal 2013 were positively impacted by $3.7 million due to changes in the value of the U.S. dollar relative to other currencies. Adjusted operating profit in fiscal 2014 decreased $17.9 million compared to fiscal 2013 primarily due to the decline in net sales discussed above outpacing an $11.9 million decline in this segment's costs of goods sold. Costs of goods sold in fiscal 2014 was impacted by an increase in freight expense and an unfavorable change in pre-tax LIFO of $32.8 million from pre-tax LIFO income of $26.1 million in fiscal 2013 to pre-tax LIFO expense of $6.7 million in fiscal 2014. The unfavorable change in pre-tax LIFO was due to price increases in fiscal 2014, compared to price decreases in fiscal 2013. However, these unfavorable impacts to cost of goods sold in fiscal 2014 were partially offset by a 3% decline in material cost as a result of an overall decrease in volumes compared to fiscal 2013. Overall, the global markets we serve remained weak through fiscal 2014, which continued to pressure margins and competition for volumes. Adjusted operating profit in fiscal 2013 included a $26.1 million gain on the sale of our 11% ownership interest in Trinecke partially offset by $12.7 million in goodwill and other asset impairment charges related to our Australian operations. Changes in the U.S. dollar relative to other currencies did not have a material impact on this segment's adjusted operating profit in fiscal 2014 or fiscal 2013. Corporate Corporate expenses in fiscal 2014 increased $5.9 million to $72.3 million compared to fiscal 2013 primarily as a result of an increase in variable employee benefits and other employee-related expenses. DISCONTINUED OPERATIONS DATA During the fourth quarter of fiscal 2013, we decided to sell all of the outstanding capital stock of Howell. In October 2013, the Company sold all of the outstanding capital stock of Howell for $58.5 million, of which $3.2 million was held in escrow as of August 31, 2014. During the second quarter of fiscal 2014, we made a $3.0 million working capital adjustment, which is included in our estimated pre-tax gain of $23.8 million. We sold the remaining assets of our copper tube manufacturing operation for $1.1 million during the fourth quarter of fiscal 2014 with an immaterial impact to the consolidated statements of operations. We have included Howell in discontinued operations for all periods presented. Howell was previously an operating segment included in the Americas Mills reporting segment. Fiscal Year 2013 Compared to Fiscal Year 2012 Americas Recycling Year Ended August 31, (in thousands) 2013 2012 Net sales $ 1,391,749 $ 1,606,161 Adjusted operating profit 3,170 39,446 Pre-tax LIFO income 7,423 7,007 Average selling price (per short ton) Average ferrous selling price $ 327 $ 345 Average nonferrous selling price 2,729 2,823 Short tons shipped (in thousands) Ferrous tons shipped 2,078 2,196 Nonferrous tons shipped 234 243 Total tons shipped 2,312 2,439 Net sales in fiscal 2013 decreased $214.4 million, or 13%, compared to fiscal 2012. The decrease in net sales in fiscal 2013 was the result of a 5% decline in both average ferrous selling prices and ferrous volumes. The decline in average ferrous selling prices was due to a slowdown in export demand in fiscal 2013 compared to fiscal 2012. The decline in ferrous volumes was due to the tight nature of the scrap market and a slowdown in industrial business in fiscal 2013, including the mining and heavy equipment industries. In addition, average nonferrous selling prices decreased 3% while nonferrous volumes decreased 4%. This segment recorded a $36.3 million decrease in adjusted operating profit from fiscal 2012 to fiscal 2013. The decline in profitability in fiscal 2013 was due to a decrease in both ferrous and nonferrous volumes and average selling prices. In fiscal 2013, this segment was impacted by nonferrous margin compression of approximately 15% when compared to the nonferrous margin in fiscal 2012. The global demand for nonferrous material declined in fiscal 2013 as a result of the slow global economic recovery, which led to selling prices falling at a greater rate than material purchase prices, resulting in an adverse effect on operating margins in fiscal 2013. Americas Mills Year Ended August 31, (in thousands) 2013 2012 Net sales $ 1,819,520 $ 1,983,721 Adjusted operating profit 204,333 235,918 Pre-tax LIFO income 7,166 16,629 Average price (per short ton) Finished goods selling price $ 683 $ 730 Total sales 669 706 Cost of ferrous scrap consumed 343 379 Metal margin 326 327 Ferrous scrap purchase price 299 339 Short tons (in thousands) Tons melted 2,407 2,568 Tons rolled 2,295 2,206 Tons shipped 2,561 2,682 Net sales for this segment decreased $164.2 million when compared to fiscal 2012. During fiscal 2013, this segment's total shipments decreased 5% when compared to fiscal 2012. Additionally in fiscal 2013, average selling prices decreased $37 per short ton when compared to fiscal 2012, further attributing to the decrease in net sales in fiscal 2013. The decreases in shipments and average selling prices were due to decline in apparent steel consumption in the U.S. for fiscal 2013 compared to fiscal 2012. This segment recorded an adjusted operating profit of $204.3 million for fiscal 2013, compared with adjusted operating profit of $235.9 million for fiscal 2012. As a result of a shift in product mix to our higher margin finished products, including rebar and merchants, from our lower margin billets, our average metal margin was flat in fiscal 2013 when compared to fiscal 2012. Our lower margin billet shipments decreased 168 thousand short tons while our higher margin finished products increased 45 thousand short tons. Additionally, pre-tax LIFO income decreased $9.5 million from fiscal 2012 to fiscal 2013, as a result of inventory prices declining at a lower rate in fiscal 2013 when compared to fiscal 2012. This decrease in pre-tax LIFO income coupled with the overall decrease in shipments resulted in a $31.6 million decline in this segment's adjusted operating profit in fiscal 2013 when compared to fiscal 2012. Americas Fabrication Year Ended August 31, (in thousands) 2013 2012 Net sales $ 1,442,691 $ 1,381,638 Adjusted operating profit (loss) 28,033 (15,697 ) Pre-tax LIFO income 12,177 15,248 Average selling price (excluding stock and buyout sales) (per short ton) Rebar $ 901 $ 864 Structural 2,580 2,342 Post 914 949 Short tons shipped (in thousands) Rebar 902 911 Structural 53 60 Post 99 90 Net sales in fiscal 2013 increased $61.1 million, or 4%, compared to fiscal 2012 primarily due to a 4% increase in our composite average selling price, which outpaced the overall decline in total tons shipped. Selling prices improved as markets strengthened coming out of the U.S. recession, including improved demand for commercial work. The decline in shipments was due to strategic location closures in fiscal 2013 and fiscal 2012. This segment recorded an adjusted operating profit of $28.0 million for fiscal 2013, marking a significant improvement over the adjusted operating loss in fiscal 2012 of $15.7 million. The segment continued to experience margin expansion as input pricing declined while transactional selling prices improved when compared to fiscal 2012. The decline in input prices was due to an overall decline in apparent steel consumption in the U.S. in fiscal 2013 as compared to fiscal 2012. At August 31, 2013, the composite average fabrication selling price was $943 per short ton, up from $906 per short ton at August 31, 2012. Additionally, pre-tax LIFO income for fiscal 2013 was $12.2 million, compared with pre-tax LIFO income of $15.2 million for fiscal 2012. International Mill Year Ended August 31, (in thousands) 2013 2012 Net sales $ 826,044 $ 1,033,357 Adjusted operating profit 890 23,044 Average price (per short ton) Total sales $ 589 $ 601 Cost of ferrous scrap consumed 360 385 Metal margin 229 216 Ferrous scrap purchase price 289 315 Short tons (in thousands) Tons melted 1,386 1,638 Tons rolled 1,244 1,395 Tons shipped 1,318 1,584 Net sales in fiscal 2013 decreased $207.3 million, or 20%, compared to fiscal 2012 primarily due to a 17% decrease in tons shipped, coupled with a 2% per short ton decline in average selling prices. Changes in the value of the U.S. dollar relative to other currencies did not have a material impact on this segment's net sales. This segment recorded an adjusted operating profit of $0.9 million for fiscal 2013, compared with an adjusted operating profit of $23.0 million in fiscal 2012. The lack of meaningful market improvements across Europe continued to challenge this segment. Additionally, this segment was negatively impacted by value-added tax circumvention schemes in Poland, which decreased demand for this segment's products. Volumes declined 17%, or approximately 266 thousand short tons, primarily related to our merchant and wire rod products. International Mill selling prices also declined $12 per short ton to $589 per short ton during fiscal 2013. Shipments in fiscal 2013 included 75 thousand short tons of billets compared to 205 thousand short tons of billets in fiscal 2012. Included in the fiscal 2012 results was a loss of $3.8 million on the sale of a rebar fabrication shop in Rosslau, Germany. Adjusted operating profit for this segment was negatively impacted by $3.2 million due to changes in the value of the U.S. dollar relative to other currencies. International Marketing and Distribution Year Ended August 31, (in thousands) 2013 2012 Net sales $ 2,355,572 $ 2,727,319 Adjusted operating profit 35,617 47,287 Pre-tax LIFO income 26,146 2,884 Net sales in fiscal 2013 decreased $371.7 million, or 14% compared to fiscal 2012 primarily due to a decrease in the average selling prices for our marketing and distribution divisions headquartered in the U.S., which more than offset an increase in volumes at those same divisions. Further attributing to the decrease in net sales in fiscal 2013 was an overall decline in both average selling prices and volumes for the remaining marketing and distribution divisions compared to fiscal 2012. Net sales were positively impacted by $3.7 million due to changes in the value of the U.S. dollar relative to other currencies in fiscal 2013. This segment recorded an adjusted operating profit of $35.6 million for fiscal 2013, compared with an adjusted operating profit of $47.3 million in fiscal 2012. The reduced profitability is primarily due to $12.7 million of goodwill and other asset impairment charges related to our Australia operations, as well as other one-time costs for exiting unprofitable locations. Decreased revenues and margins in our raw materials business and losses from our Australian operations also adversely affected this segment's results. Additionally, overall weakness in global markets we serve continue to negatively impact this segment's results. Within this segment, one of our marketing and distribution divisions headquartered in the U.S. recorded pre-tax LIFO income of $26.1 million for fiscal 2013, an increase of $23.3 million over fiscal 2012. Inventory prices related to one of our marketing and distribution divisions headquartered in the U.S. declined 22% in fiscal 2013 compared to a decline of 8% in fiscal 2012. These inventory price declines were a primary factor attributing to the $23.3 million increase in pre-tax LIFO income in fiscal 2013 when compared to fiscal 2012. During the first quarter of fiscal 2013, we completed the sale of our 11% ownership interest in Trinecke, a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. Corporate Our corporate expenses decreased by $16.6 million in fiscal 2013 to $66.5 million primarily as a result of our continued cost containment initiatives when compared to the prior year. DISCONTINUED OPERATIONS DATA During the fourth quarter of fiscal 2013, we decided to sell all of the outstanding capital stock of Howell. On October 17, 2013, we sold all of the stock of Howell for $58.5 million, subject to customary purchase price adjustments. We determined that the decision to sell this business met the definition of a discontinued operation. As result, we have included Howell in discontinued operations for all periods presented. Howell was previously an operating segment included in the Americas Mills reporting segment. During fiscal 2012, we announced our decision to exit CMC Sisak, d.o.o. ("CMCS") by closure of the facility and sale of the assets. We determined that the decision to exit this business met the definition of a discontinued operation and has been presented as such for all periods presented. The results for fiscal 2012 consist of severance cost of $18.0 million associated with closing the facility and a pre-tax gain of $13.8 million for the sale of all of the shares of the CMCS operation, excluding $3.9 million in assets which were sold in the first quarter of fiscal 2013 with no impact to the consolidated statements of operations. CMCS' operations were previously included as part of the International Mill segment. See Note 10, Businesses Held for Sale, Discontinued Operations and Dispositions. Fiscal 2014 Liquidity and Capital Resources See Note 11, Credit Arrangements, to the consolidated financial statements included in this report for additional information. While we believe the lending institutions participating in our credit arrangements are financially capable, it is important to note that the banking and capital markets periodically experience volatility that may limit our ability to raise capital. Additionally, changes to our credit rating by any rating agency may negatively impact our ability to raise capital and our financing costs. The table below reflects our sources, facilities and availability of liquidity as of August 31, 2014: (in thousands) Total Facility Availability Cash and cash equivalents $ 434,925 $ N/A Revolving credit facility 350,000 321,870 U.S. receivables sale facility 200,000 145,000 International accounts receivable sales facilities 123,046 32,551 Bank credit facilities - uncommitted 95,951 94,943 Notes due from 2017 to 2023 1,230,000 * Equipment notes 32,196 * _________________________________ * We believe we have access to additional financing and refinancing, if needed. We have $400 million of 6.50% Senior Notes due July 2017 (the "2017 Notes"), $500 million of 7.35% Senior Notes due August 2018 (the "2018 Notes") and $330 million of 4.875% Senior Notes due May 2023 (the "2023 Notes" and together with the 2017 Notes and the 2018 Notes, the "Notes"). The Notes require interest only payments until maturity. We expect cash from operations to be sufficient to meet all interest and principal payments due within the next twelve months, and we believe we will be able to obtain additional financing or to refinance these notes when they mature. CMC Poland Sp. z.o.o. ("CMCP") has uncommitted credit facilities of PLN 205.0 million ($64.0 million) with several banks with expiration dates ranging from October 2014 to March 2015. We intend to renew the uncommitted credit facilities upon expiration. 32 --------------------------------------------------------------------------------During fiscal 2014, CMCP had total borrowings of $111.7 million and total repayments of $111.7 million under these facilities. At August 31, 2014, no material amounts were outstanding under these facilities. On June 26, 2014, we entered into a fourth amended and restated credit agreement (the "Credit Agreement") with a revolving credit facility of $350.0 million and a maturity date of June 26, 2019, replacing the third amended and restated $300.0 million revolving credit facility with a maturity date of December 27, 2016. The maximum availability under the Credit Agreement can be increased to $500.0 million. The Company's obligation under its Credit Agreement is secured by its inventory. Consistent with our previous revolving credit facility, the Credit Agreement's capacity includes $50.0 million for the issuance of stand-by letters of credit and was reduced by outstanding stand-by letters of credit which totaled $28.1 million at August 31, 2014. Under the Credit Agreement, we are required to comply with certain financial and non-financial covenants, including covenants to maintain: (i) an interest coverage ratio (consolidated EBITDA to consolidated interest expense, as each is defined in the Credit Agreement) of not less than 2.50 to 1.00 and (ii) a debt to capitalization ratio (consolidated funded debt to total capitalization, as each is defined in the Credit Agreement) that does not exceed 0.60 to 1.00. In addition, beginning on the date three months prior to each maturity date of the 2017 Notes and the 2018 Notes and each day thereafter that the 2017 Notes and the 2018 Notes are outstanding, we will be required to maintain liquidity of at least $150 million in excess of each of the outstanding aggregate principal amounts of the 2017 Notes and 2018 Notes. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate. At August 31, 2014, our interest coverage ratio was 4.94 to 1.00 and our debt to capitalization ratio was 0.48 to 1.00. At August 31, 2014, we were in compliance with all covenants related to our debt agreements. Our foreign operations generated approximately 28% of our revenue in fiscal 2014, and as a result, our foreign operations had cash and cash equivalents of approximately $42.0 million and $56.6 million at August 31, 2014 and 2013, respectively. Historically, our U.S. operations have generated the majority of our cash, which has been used to fund the cash needs of our U.S. operations as well as our foreign operations. Additionally, our U.S. operations have access to the $350 million Credit Agreement described above and the $200 million sale of receivable program described below. We intend to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries. While not expected, if a repatriation occurs in the future, we would be required to provide for income taxes on repatriated earnings from our non-U.S. subsidiaries. Determination of the unrecognized deferred income tax liability related to the undistributed earnings of our non-U.S. subsidiaries is not practicable because of the complexities with its hypothetical calculation. We regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, we record allowances as soon as we believe accounts are uncollectible. Continued pressure on the liquidity of our customers could result in additional allowances as we make our assessments in the future. We use credit insurance both in the U.S. and internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit insured receivables (and those covered by export letters of credit) was approximately 49% of total receivables at August 31, 2014. For added flexibility, we may sell certain accounts receivable both in the U.S. and internationally. See Note 5, Sales of Accounts Receivable, to the consolidated financial statements contained in this report. Our U.S. sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if we default under certain of our credit arrangements. Additionally, our sales of accounts receivable program contains covenants that are consistent with the covenants contained in the Credit Agreement. We utilize documentary letter of credit programs whereby we assign certain trade accounts payable associated with trading transactions entered into by our marketing and distribution divisions. These letters of credit allow for payment at a future date and are used as an additional source of working capital financing. These letters of credit are issued under uncommitted lines of credit, which are in addition to and separate from our contractually committed revolving credit arrangements and are not included in our overall liquidity analysis. We had $125.1 million and $112.3 million of documentary letters of credit outstanding at August 31, 2014 and August 31, 2013, respectively. The increase in documentary letters of credit in fiscal 2014 resulted in an increase of cash of $11.8 million for financing activities. The amount of documentary letters of credit outstanding during the period can fluctuate as a result of the level of activity and volume of materials purchased during the period as well as a result of their length and timing to maturity. On October 27, 2014, the Board of Directors authorized a new share repurchase program under which we may repurchase up to $100.0 million of CMC's outstanding common stock. This new program replaces the existing program, which has been terminated by our Board of Directors in connection with the approval of the new program. We intend to repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. 33 --------------------------------------------------------------------------------The timing and the amount of repurchases, if any, will be determined by management based on an evaluation of market conditions, capital allocation alternatives and other factors. The new share repurchase program does not require us to acquire any dollar amount or number of shares of CMC's common stock and may be modified, suspended, extended or terminated at any time without prior notice. Cash Flows Our cash flows from operating activities result primarily from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products and other raw materials used in steel and other manufacturing applications. We have a diverse and generally stable customer base. From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in foreign currency exchange rates, metal commodity prices and natural gas prices. See Note 12, Derivatives and Risk Management, to the consolidated financial statements contained in this report. Fiscal 2014 Compared to Fiscal 2013 Net cash flows from operating activities were $136.9 million and $147.7 million in fiscal 2014 and fiscal 2013, respectively. The $10.8 million decline in cash flow from operations is primarily due to the following: • Cash inflows from deferred income taxes (benefit) decreased $22.3 million in fiscal 2014 compared to fiscal 2013. This was primarily the result of the utilization of $14.3 million of deferred tax assets in fiscal year 2013. • The net change in operating assets and liabilities was a reduced cash inflow of $3.7 million during fiscal 2014 compared to fiscal 2013. The most significant components of change within the operating assets and liabilities are as follows: • Accounts receivable - Cash outflows from accounts receivable increased $154.5 million in fiscal 2014 compared to fiscal 2013. This was the result of $169.0 million higher net sales in the fourth quarter of fiscal 2014 than in the same period last year. • Accounts receivable sold, net - Cash inflows from accounts receivable sold, net increased $201.5 million in fiscal 2014 compared to fiscal 2013. This was due to a $65.0 million increase related to the U.S. accounts receivable sales facility, a $95.5 million increase related to the Australian accounts receivable sales facility, and a $41.0 million increase related to the European accounts receivable facility. • Inventories - Cash used by inventories increased $203.8 million in fiscal 2014 compared to fiscal 2013 due to an unplanned outage at our Texas mill in August 2014 and an increase in purchases across other business units. Furthermore, for the year ended August 31, 2014 our days' sales in inventory increased nine days to 53 days in fiscal 2014 from 44 days in fiscal 2013. • Accounts payable, accrued expenses and other payables - Cash inflows from payables and accrued expenses increased $178.0 million in fiscal 2014 compared to fiscal 2013. The increase is a result of increased material purchases, as noted above, and variable employee expenses. Net cash flows used by investing activities increased $1.1 million in fiscal 2014 compared to fiscal 2013. For the year ended August 31, 2014, we invested $101.7 million in capital expenditures and $15.7 million in acquisitions offset by $52.6 million of proceeds from the sale of Howell in October 2013 and $17.6 million of proceeds from sales of other long-lived assets. We estimate that our fiscal 2015 capital budget will be between $140 million and $180 million. We periodically assess our capital spending and reevaluate our requirements based on current and expected results. Net cash flows related to our financing activities decreased $49.4 million in fiscal 2014 compared to an increase in net cash flows of $136.8 million in fiscal 2013. The decline in net cash flows provided by financing activities in fiscal 2014 was driven by the cash proceeds received from the issuance of our 2023 Notes in fiscal 2013. In addition, in fiscal 2014, cash used by our stock-based compensation and incentive plans increased compared to fiscal 2013. These net cash flows used by financing activities in fiscal 2014 were partially offset by a decrease in repayments on our long term debt compared to fiscal 2013. During fiscal 2014, we had net short-term borrowings of $6.3 million and an increase of $11.8 million in our usage of documentary letters of credit. The amount of documentary letters of credit outstanding during the period can fluctuate as a result of the level of activity and volume of materials purchased during the period as well as a result of their length and timing to maturity. Additionally, we had a release of $18.0 million in restricted cash that had been serving as collateral for letters of credit obligations for our 34 -------------------------------------------------------------------------------- Australian subsidiary. Offsetting these increases in cash flows from financing activities, our cash dividends remained consistent at $56.4 million and $56.0 million in fiscal 2014 and fiscal 2013, respectively. Fiscal 2013 Compared to Fiscal 2012 Net cash flows from operating activities were $147.7 million and $196.0 million in fiscal 2013 and fiscal 2012, respectively. The $48.3 million decline in cash flow from operations is primarily due to the following: • Net earnings for fiscal 2013 declined by $130.2 million when compared to fiscal 2012. See further discussion under the Consolidated Results of Operations above. • Deferred income taxes changed by $114.7 million from fiscal 2012 from a benefit of $60.0 million in fiscal 2012 to an expense of $54.7 million in fiscal 2013. • The net change in operating assets and liabilities was a reduced cash inflow of $35.6 million during fiscal 2013 compared to fiscal 2012. The most significant components of change within the operating assets and liabilities are as follows: • Accounts receivable - Excluding the impacts of our accounts receivable sales program, cash inflows from accounts receivable decreased in fiscal 2013 when compared to fiscal 2012, as a result of an increase in our days' sales outstanding from 44 days at August 31, 2012 to 52 days at August 31, 2013. The increase in days sales outstanding is primarily due to higher sales volume in our Americas Fabrication segment, which typically has longer customer payment terms than our other segments. • Inventory - Cash generated from inventory during fiscal 2013 was lower when compared to fiscal 2012. As overall net sales declined year-over-year, we continued to adjust our operating levels to reflect changing market demands, while maintaining stocking levels that allowed us to meet our customers' needs. Furthermore, our days' sales in inventory increased three days in fiscal 2013 from 41 days in fiscal 2012. • Accounts payable, accrued expenses and other payables - Cash outflows from payables and accrued expenses declined $69.7 million during fiscal 2013 when compared to fiscal 2012. The decline is a reflection of the overall reduction in net sales as well as lower accruals for compensation and benefits when compared to the prior year. Net cash flows used by investing activities were $46.1 million and $27.4 million in fiscal 2013 and fiscal 2012, respectively. For the year ended August 31, 2013, we invested $89.0 million in capital expenditures offset by $29.0 million in proceeds from the November 2012 sale of our Trinecke investment and $13.9 million in proceeds from sales of other long-lived assets. Net cash flows from financing activities were $15.0 million in fiscal 2013, while net cash flows used by financing activities were $121.7 million in fiscal 2012. In May 2013, we issued $330.0 million of the 2023 Notes and received proceeds of $325.0 million, net of underwriting discounts and debt issuance costs. We used $205.3 million of the proceeds from the 2023 Notes to purchase all of our outstanding $200.0 million of 5.625% Notes due 2013 (the "2013 Notes"). Interest on the 2023 Notes is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2013. We 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 us 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. We are generally not limited under the indenture governing the 2023 Notes in our ability to incur additional indebtedness provided we are in compliance with certain restrictive covenants, including restrictions on liens, sale and leaseback transactions, mergers, consolidations and transfers of substantially all of our assets. These covenants are not expected to impact our liquidity or capital resources. During fiscal 2013, we had net short-term borrowings of $19.5 million. The increase in documentary letters of credit in fiscal 2013 resulted in an increase of cash of $6.2 million for financing activities. The amount of documentary letters of credit outstanding during the period can fluctuate as a result of the level of activity and volume of materials purchased during the period as well as a result of their length and timing to maturity. Our cash dividend payments were $56.0 million and $55.6 million in fiscal 2013 and fiscal 2012, respectively. 35 --------------------------------------------------------------------------------Contractual Obligations The following table represents our contractual obligations as of August 31, 2014: Payments Due By Period* Contractual Obligations (in Less than More than thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt(1) $ 1,262,196 $ 8,005 $ 414,022 $ 509,114 $ 331,055 Notes payable 12,288 12,288 - - - Interest(2) 358,360 79,928 155,726 67,765 54,941 Operating leases(3) 135,191 33,754 47,470 25,836 28,131 Purchase obligations(4) 1,096,774 786,390 154,862 110,197 45,325 Total contractual cash obligations $ 2,864,809 $ 920,365 $ 772,080 $ 712,912 $ 459,452 __________________________________ * We have not discounted the cash obligations in this table. (1) Total amounts are included in the August 31, 2014 consolidated balance sheet. See Note 11, Credit Arrangements, to the consolidated financial statements included in this report for more information regarding scheduled maturities of our long-term debt. (2) Interest payments related to our short-term debt are not included in the table as they do not represent a significant obligation as of August 31, 2014. (3) Includes minimum lease payment obligations for noncancelable equipment and real estate leases in effect as of August 31, 2014. See Note 18, Commitments and Contingencies, to the consolidated financial statements included in this report for more information regarding minimum lease commitments payable for noncancelable operating leases. (4) Approximately 80% of these purchase obligations are for inventory items to be sold in the ordinary course of business. Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement. Agreements with variable terms are excluded because we are unable to estimate the minimum amounts. Another significant obligation relates to capital expenditures. We provide certain eligible executives' benefits pursuant to a nonqualified benefit restoration plan ("BRP Plan") equal to amounts that would have been available under the tax qualified plans under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), but for limitations of ERISA, tax laws and regulations. The deferred compensation liability under the BRP Plan was $78.0 million at August 31, 2014 and is included in other long-term liabilities on the consolidated balance sheets. We generally expect to fund future contributions with cash flows from operating activities. We did not include estimated payments related to BRP in the above contractual obligation table. Refer to Note 17, Employees' Retirement Plans to the consolidated financial Statements included in this report. A certain number of employees, primarily outside of the U.S., participate in defined benefit plans maintained in accordance with local regulations. At August 31, 2014, our liability related to the unfunded status of the defined benefit plans was $2.4 million. We generally expect to fund future contributions with cash flows from operating activities. We did not include estimated payments related to defined benefit plans in the table above. Refer to Note 17, Employees' Retirement Plans to the consolidated financial statements included in this report. Our other noncurrent liabilities on the consolidated balance sheets include deferred tax liabilities, gross unrecognized tax benefits, and the related gross interest and penalties. As of August 31, 2014, we had noncurrent deferred tax liabilities of $55.6 million. In addition, as of August 31, 2014, we had gross unrecognized tax benefits of $10.5 million and an additional $3.4 million for gross interest and penalties classified as noncurrent liabilities. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligations table. Other Commercial Commitments We maintain stand-by letters of credit to provide support for certain transactions that governmental agencies, our insurance providers and suppliers request. At August 31, 2014, we had committed $28.2 million under these arrangements. 36 --------------------------------------------------------------------------------Off-Balance Sheet Arrangements For added flexibility, we sell certain accounts receivable both in the U.S. and internationally. We utilize proceeds from the sales of the trade accounts receivables as an alternative to short-term borrowings, effectively managing our overall borrowing costs and providing an additional source of working capital. We account for sales of the trade accounts 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 our consolidated statements of cash flows. See Note 5, Sales of Accounts Receivable, to the consolidated financial statements included in this report. Contingencies See Note 18, Commitments and Contingencies, to the consolidated financial statements included in this report. In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. Liabilities and costs associated with litigation related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. Environmental and Other Matters The information set forth in Note 18, Commitments and Contingencies, to the consolidated financial statements included in this report is hereby incorporated by reference. General We are subject to Federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs. Our original business and one of our core businesses for over nine decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, may expose us and our industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications. Solid and Hazardous Waste We currently own or lease, and in the past owned or leased, properties that have been used in our operations. Although we used operating and disposal practices that were standard in the industry at the time, wastes may have been disposed of or released on or under the properties or on or under locations where such wastes have been taken for disposal. We are currently involved in the investigation and remediation of several such properties. State and Federal laws applicable to wastes and contaminated properties have gradually become stricter over time. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. We have been named as a potentially responsible party ("PRP") at a number of contaminated sites. There is no guarantee that the EPA or individual states will not adopt more stringent requirements for the handling of, or make changes to the exemptions upon which we rely for, the wastes that we generate. Any such change could result in an increase in our costs to manage and dispose of waste which could have a material adverse effect on the results of our operations and financial condition. We generate wastes, including hazardous wastes, that are subject to the Federal Resource Conservation and Recovery Act and comparable state and local statutes where we operate. These statutes, regulations and laws may have limited disposal options for certain wastes. Superfund 37 -------------------------------------------------------------------------------- The U.S. Environmental Protection Agency ("EPA"), or an equivalent state agency, has notified us that we are considered a PRP at several sites, none of which are owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), or similar state statutes, to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities and pay costs for associated damages to natural resources. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. Based on currently available information, which is in many cases preliminary and incomplete, we had $0.7 million and $0.9 million accrued as of August 31, 2014 and 2013, respectively, in connection with CERCLA sites. We have accrued for these liabilities based upon our best estimates. The amounts paid and the expenses incurred on these sites for the years ended August 31, 2014, 2013 and 2012 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material. Clean Water Act The Clean Water Act ("CWA") imposes restrictions and strict controls regarding the discharge of wastes into waters of the United States, a term broadly defined, or into publicly owned treatment works. These controls have become more stringent over time and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into Federal waters or into publicly owned treatment works; comparable permits may be required at the state level. The CWA and many state agencies provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA's regulations and comparable state regulations may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge or non-compliance with permit requirements, we may be liable for penalties and costs. Clean Air Act Our operations are subject to regulations at the Federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increase scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources may be required to construct emission sources using what is referred to as the Best Available Control Technology, or in any areas that are not meeting national ambient air quality standards, using methods that satisfy requirements for Lowest Achievable Emission Rate. Additionally, the EPA has implemented and is continuing to implement new, more stringent standards for National Ambient Air Quality Standards including fine particulate matter. Compliance with new standards could require additional expenditures. We incurred environmental expenses of $34.5 million, $30.1 million and $26.8 million for fiscal 2014, 2013 and 2012, respectively. The expenses included the cost of disposal, environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. In addition, we spent $6.6 million in capital expenditures related to costs directly associated with environmental compliance. We accrued environmental liabilities of $6.2 million and $9.0 million as of August 31, 2014 and 2013, respectively, of which $2.3 million and $5.0 million were classified as other long-term liabilities as of August 31, 2014 and 2013, respectively. Dividends We have paid quarterly cash dividends in each of the past 200 consecutive quarters. We paid dividends in fiscal 2014 at the rate of $0.12 per share of common stock for each quarter. Critical Accounting Policies and Estimates The preceding discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimates and assumptions, including those related to the valuation allowances for receivables, the carrying value of non-current 38 -------------------------------------------------------------------------------- assets, reserves for environmental obligations and income taxes, on an ongoing basis. Estimates and assumptions are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these estimates. Significant judgments and estimates used in the preparation of the consolidated financial statements apply to the following critical accounting policies: Revenue Recognition and Allowance for Doubtful Accounts We recognize sales when title passes to the customer either when goods are shipped or when they are delivered based on the terms of the sale, there is persuasive evidence of an agreement, the price is fixed or determinable and collectability is reasonably assured. When we estimate that a contract with one of our customers will result in a loss, we accrue the calculated loss as soon as it is probable and estimable. We account for certain fabrication projects based on the percentage of completion accounting method, based primarily on contract cost incurred to date compared to total estimated contract cost. Changes in revenue attributed to the changes in the estimated total contract cost, or loss, if any, are recognized in the period in which they are determined. We maintain an allowance for doubtful accounts to reflect our estimate of the uncollectability of accounts receivable. These reserves are based on historical trends, current market conditions and customers' financial condition. Income Taxes We determine the income tax expense related to continuing operations to be the income tax consequences of amounts reported in continuing operations without regard to the income tax consequences of other components of the financial statements, such as other comprehensive income or discontinued operations. The amount of income tax expense or benefit to be allocated to the other components is the incremental effect that those pre-tax amounts have on the total income tax expense or benefit. If there is more than one financial statement component other than continuing operations, the allocation is made on a pro-rata basis in accordance with each component's incremental income tax effects. In fiscal 2014 total income taxes of $42.7 million, or 83%, were allocated to continuing operations and $8.5 million of incremental income taxes, or 17%, were allocated to discontinued operations. The continuing operations income tax rate was lower than the income tax rate allocated to discontinued operations because of favorable factors directly related to continuing operations; primarily lower foreign statutory income tax rates applicable to foreign continuing operations; benefit under Section 199 of the Internal Revenue Code and non-taxable interest in BRP plan assets. There were no additional financial statement components. We periodically assess the likelihood of realizing our deferred tax assets based on the amount of deferred tax assets that we believe is more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings, prudent and feasible tax planning strategies, and current and future ownership changes. Our effective income tax rate may fluctuate on a quarterly basis due to various factors, including, but not limited to, total earnings and the mix of earnings by jurisdiction, the timing of changes in tax laws, and the amount of income tax provided for uncertain income tax positions. We establish income tax liabilities to reduce some or all of the income tax benefit of any of our income tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. Our evaluation of whether or not a tax position is uncertain is based on the following: (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these income tax liabilities when our judgment changes as a result of new information. Any change will impact income tax expense in the period in which such determination is made. Inventory Cost We determine inventory cost for most U.S. inventories by the last-in, first-out method, or LIFO. We calculate our LIFO reserve by using quantities and costs at period end and recording the resulting LIFO income or expense in its entirety. During the fourth quarter of fiscal 2014, we elected to change the inventory costing method used by our International Mill segment from the first-in, first-out ("FIFO") method to the weighted average cost method. We believe the weighted average cost method is preferable because it more closely aligns with the physical flow of inventory, because it is the method we use to monitor the 39 -------------------------------------------------------------------------------- financial results of the International Mill segment for operational and financial planning and because the information system within the segment calculates inventory at weighted average cost, thus adding an administrative burden to report inventories under the FIFO method. Because the change in accounting principle was immaterial in all prior periods, it was not applied retrospectively. The change did not have a material impact on our consolidated financial statements as of and for the fiscal year ended August 31, 2014. The cost for international and the remaining U.S. inventories is determined by the FIFO method. We record all inventories at the lower of their cost or market value. Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance, production, wages and transportation costs. Additionally, the costs of departments that support production, including materials management and quality control, are allocated to inventory. Goodwill We perform our goodwill impairment test in the fourth quarter of each fiscal year or when changes in circumstances indicate an impairment event may have occurred by estimating the fair value of each reporting unit compared to its carrying value. Our reporting units represent an operating segment or a reporting level below an operating segment. Additionally, the reporting units are aggregated based on similar economic characteristics, nature of products and services, nature of production processes, type of customers and distribution methods. We use a discounted cash flow model and a market approach to calculate the fair value of our reporting units. The model includes a number of significant assumptions and estimates regarding future cash flows including discount rates, volumes, prices, capital expenditures and the impact of current market conditions. These estimates could be materially impacted by adverse changes in market conditions. The annual goodwill impairment analysis in fiscal year 2014 did not result in any impairment charges at any of our reporting units. We believe that the fair value of each of our reporting units substantially exceeds its book value; the fair value of each of our reporting units exceeded carrying value by at least 69%. We recorded goodwill impairment charges of $6.4 million, including foreign currency translation gains of $0.6 million, related to our Australian subsidiaries in fiscal year 2013. As of August 31, 2014 and 2013, one of our reporting units within the Americas Fabrication reporting segment comprised $51.3 million of our total goodwill. Goodwill at other reporting units is not material. See Note 7, Goodwill and Other Intangible Assets, to the consolidated financial statements included in this report for additional information. Long-Lived Assets We evaluate the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations. Events or circumstances that could trigger an impairment review of a long-lived asset or asset group include, but are not limited to, a significant decrease in the market price of the asset, a significant adverse change in the extent or manner that the asset is used or in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of the asset, an accumulation of costs significantly in excess of original expectation for the acquisition or construction of the asset, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast of continuing losses associated with the use of the asset, and a more-likely-than-not expectation that the asset will be sold or disposed of significantly before the end of its previously estimated useful life. If an impairment exists, the net book values are reduced to fair values as warranted. Our U.S. and international minimills, fabrication and recycling businesses are capital intensive. Some of the estimated values for assets that we currently use in our operations are based upon judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer's different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. Depreciable lives are based on our estimate of the assets' economical useful lives. To the extent that an asset's actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred. Contingencies In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments in connection with some of these matters. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, and the uncertainties involved in litigation. We believe that we have adequately provided 40 --------------------------------------------------------------------------------in our consolidated financial statements for the impact of these contingencies. We also believe that the outcomes will not materially affect our results of operations, our financial position or our cash flows. Other Accounting Policies and New Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report. 41-------------------------------------------------------------------------------- |