CMC-2.28.2014-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
___________________________________
 
Delaware
75-0725338
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas 75039
(Address of Principal Executive Offices) (Zip Code)
(214) 689-4300
(Registrant's Telephone Number, Including Area Code)
 ___________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨

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

The number of shares outstanding of common stock as of March 21, 2014 was 117,742,434.



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2




PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands, except share data)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
1,649,098

 
$
1,688,657

 
$
3,331,989


$
3,438,172

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,503,908

 
1,549,291

 
3,005,706


3,112,141

Selling, general and administrative expenses
 
111,086

 
114,635

 
225,549


239,244

Interest expense
 
19,179

 
16,490

 
38,757

 
33,514

Gain on sale of cost method investment
 



 


(26,088
)
 
 
1,634,173

 
1,680,416

 
3,270,012


3,358,811

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
14,925

 
8,241

 
61,977


79,361

Income taxes
 
3,866

 
4,308

 
18,957


26,497

Earnings from continuing operations
 
11,059

 
3,933

 
43,020


52,864

 
 
 
 
 
 





Earnings from discontinued operations before income taxes
 
101

 
1,037

 
22,946


2,287

Income taxes
 
16

 
393

 
8,903


855

Earnings from discontinued operations
 
85

 
644

 
14,043


1,432

 
 
 
 
 
 





Net earnings
 
11,144

 
4,577

 
57,063


54,296

Less net earnings attributable to noncontrolling interests
 
1

 

 
1


2

Net earnings attributable to CMC
 
$
11,143

 
$
4,577

 
$
57,062


$
54,294

 
 
 
 
 
 



Basic earnings per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.09

 
$
0.03

 
$
0.37


$
0.46

Earnings from discontinued operations
 

 
0.01

 
0.12


0.01

Net earnings
 
$
0.09

 
$
0.04

 
$
0.49


$
0.47

 
 
 
 
 
 



Diluted earnings per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.09

 
$
0.03

 
$
0.36


$
0.45

Earnings from discontinued operations
 

 
0.01

 
0.12


0.01

Net earnings
 
$
0.09

 
$
0.04

 
$
0.48


$
0.46

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.24


$
0.24

Average basic shares outstanding
 
117,424,962

 
116,586,100

 
117,247,731


116,461,302

Average diluted shares outstanding
 
118,639,161

 
117,573,052

 
118,397,886


117,333,339

See notes to unaudited consolidated financial statements.

3





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

 
Three Months Ended February 28,

Six Months Ended February 28,
(in thousands)
 
2014

2013

2014

2013
Net earnings
 
$
11,144


$
4,577


$
57,063


$
54,296

Other comprehensive income (loss), net of income taxes:
 







Foreign currency translation adjustment and other, net of income taxes of $953, $(3,396), $3,030 and $8,396
 
8,743


(6,308
)

28,185


15,592

Net unrealized gain (loss) on derivatives:
 











Unrealized holding gain (loss), net of income taxes of $(95), $1, $(544) and $89
 
(426
)

57


(2,043
)

374

Reclassification for loss (gain) included in net earnings, net of income taxes of $127, $(125), $308 and $(174)
 
382


(274
)

1,362


(396
)
Net unrealized gain (loss) on derivatives, net of income taxes of $32, $(124), $(236) and $(85)
 
(44
)

(217
)

(681
)

(22
)
Defined benefit obligation:
 











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




550



Amortization of prior services, net of income taxes of $0, $1, $(1) and $1
 
(2
)

2


(4
)

4

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






1,315

Defined benefit obligation, net of income taxes of $0, $1, $295 and $309
 
(2
)

2


546


1,319

Other comprehensive income (loss)
 
8,697


(6,523
)

28,050


16,889

Comprehensive income (loss)
 
$
19,841


$
(1,946
)

$
85,113


$
71,185

See notes to unaudited consolidated financial statements.

4




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
February 28, 2014
 
August 31, 2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
431,754

 
$
378,770

Accounts receivable (less allowance for doubtful accounts of $6,219 and $10,042)
 
838,597

 
989,694

Inventories, net
 
980,643

 
757,417

Other
 
167,498

 
240,314

Total current assets
 
2,418,492

 
2,366,195

Property, plant and equipment:
 
 
 
 
Land
 
80,813

 
80,764

Buildings and improvements
 
499,794

 
486,494

Equipment
 
1,707,624

 
1,666,250

Construction in process
 
31,869

 
18,476


 
2,320,100

 
2,251,984

Less accumulated depreciation and amortization
 
(1,385,571
)
 
(1,311,747
)

 
934,529

 
940,237

Goodwill
 
69,790

 
69,579

Other assets
 
121,666

 
118,790

Total assets
 
$
3,544,477

 
$
3,494,801

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
383,958

 
$
342,678

Accounts payable-documentary letters of credit
 
117,222

 
112,281

Accrued expenses and other payables
 
250,013

 
314,949

Notes payable
 
8,538

 
5,973

Current maturities of long-term debt
 
6,776

 
5,228

Total current liabilities
 
766,507

 
781,109

Deferred income taxes
 
49,071

 
46,558

Other long-term liabilities
 
116,221

 
118,165

Long-term debt
 
1,276,759

 
1,278,814

Total liabilities
 
2,208,558

 
2,224,646

Commitments and contingencies
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 117,742,215 and 117,010,990 shares
 
1,290

 
1,290

Additional paid-in capital
 
358,293

 
363,772

Accumulated other comprehensive income (loss)
 
874

 
(27,176
)
Retained earnings
 
1,195,634

 
1,166,732

Less treasury stock, 11,318,449 and 12,049,674 shares at cost
 
(220,261
)
 
(234,619
)
Stockholders' equity attributable to CMC
 
1,335,830

 
1,269,999

Stockholders' equity attributable to noncontrolling interests
 
89

 
156

Total stockholders' equity
 
1,335,919

 
1,270,155

Total liabilities and stockholders' equity
 
$
3,544,477

 
$
3,494,801

See notes to unaudited consolidated financial statements.

5




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
57,063

 
$
54,296

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
67,284

 
68,037

Provision for losses (recoveries) on receivables, net
 
(1,871
)
 
2,463

Share-based compensation
 
10,788

 
7,185

Amortization of interest rate swaps termination gain
 
(3,799
)
 
(5,815
)
Deferred income taxes
 
18,550

 
29,362

Tax benefits from stock plans
 
(484
)
 
(1
)
Net gain on sale of a subsidiary, cost method investment and other
 
(28,046
)
 
(26,522
)
Asset impairment
 
1,227

 
3,028

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
20,195

 
4,785

Accounts receivable sold, net
 
149,832

 
(37,297
)
Inventories
 
(214,318
)
 
(83,056
)
Other assets
 
(14,314
)
 
11,461

Accounts payable, accrued expenses and other payables
 
(21,861
)
 
(73,764
)
Other long-term liabilities
 
(3,863
)
 
(5,326
)
Net cash flows from (used by) operating activities
 
36,383

 
(51,164
)
 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(36,223
)
 
(41,849
)
Proceeds from the sale of property, plant and equipment and other
 
6,381

 
6,897

Proceeds from the sale of a subsidiary
 
52,276

 

Proceeds from the sale of cost method investment
 

 
28,995

Net cash flows from (used by) investing activities
 
22,434

 
(5,957
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Increase (decrease) in documentary letters of credit, net
 
4,767

 
(30,816
)
Short-term borrowings, net change
 
2,565

 
21,870

Repayments on long-term debt
 
(3,143
)
 
(2,402
)
Payments for debt issuance costs
 
(430
)
 

Decrease in restricted cash
 
18,305

 

Stock issued under incentive and purchase plans, net of forfeitures
 
(740
)
 
2,353

Cash dividends
 
(28,160
)
 
(27,963
)
Tax benefits from stock plans
 
484

 
1

Contribution from (purchase of) noncontrolling interests
 
(37
)
 
10

Net cash flows from (used by) financing activities
 
(6,389
)
 
(36,947
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
556

 
1,743

Increase (decrease) in cash and cash equivalents
 
52,984

 
(92,325
)
Cash and cash equivalents at beginning of year
 
378,770

 
262,422

Cash and cash equivalents at end of period
 
$
431,754

 
$
170,097

See notes to unaudited consolidated financial statements.

6




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2012
129,060,664

$
1,290

$
365,778

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

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

$
1,246,507

Net earnings
 
 
 
 
54,294

 
 
2

54,296

Other comprehensive income
 
 
 
16,889

 
 
 
 
16,889

Cash dividends
 
 
 
 
(27,963
)
 
 
 
(27,963
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(8,291
)
 
 
526,785

10,644

 
2,353

Share-based compensation
 
 
4,785

 
 
 
 
 

4,785

Tax benefits from stock plans
 
 
1

 
 
 
 
 

1

Contribution of noncontrolling interest
 
 
 
 
 
 
 
14

14

Balance, February 28, 2013
129,060,664

$
1,290

$
362,273

$
(1,247
)
$
1,171,776

(12,182,455
)
$
(237,365
)
$
155

$
1,296,882

 
 
 
 
 
 
 
 
 
 
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2013
129,060,664

$
1,290

$
363,772

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

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

$
1,270,155

Net earnings
 
 
 
 
57,062

 
 
1

57,063

Other comprehensive income
 
 
 
28,050

 
 
 
 
28,050

Cash dividends
 
 
 
 
(28,160
)
 
 
 
(28,160
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(15,098
)
 
 
731,225

14,358

 
(740
)
Share-based compensation
 
 
9,104

 
 
 
 
 
9,104

Tax benefits from stock plans
 
 
484

 
 
 
 
 
484

Purchase of noncontrolling interests
 
 
31

 
 
 
 
(68
)
(37
)
Balance, February 28, 2014
129,060,664

$
1,290

$
358,293

$
874

$
1,195,634

(11,318,449
)
$
(220,261
)
$
89

$
1,335,919

See notes to unaudited consolidated financial statements.

7





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

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

In the accompanying consolidated statement of cash flows for the six months ended February 28, 2013, the Company corrected the classification of $25.5 million of changes in certain documentary letters of credit from cash flows used by operating activities to cash flows used by financing activities, which decreased cash flows used by operating activities and increased cash flows used by financing activities for that period. The Company considers accounts payable - documentary letters of credit a short-term financing activity and accordingly made this correction in order to properly present the changes in these certain documentary letters of credit as a financing activity in the consolidated statement of cash flows allowing users of its financial statements to better understand the level at which the Company uses documentary letters of credit. This correction did not have an impact on the Company’s consolidated results of operations, earnings per share, balance sheet or net cash flows used by investing activities in the consolidated statement of cash flows for the six months ended February 28, 2013.

Recent Accounting Pronouncements
In the first quarter of fiscal 2014, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to provide quantitative and qualitative disclosures about the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective is to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures will give financial statement users information about both gross and net exposures. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued guidance requiring entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

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

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

8





In February 2013, the FASB issued guidance requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The new guidance is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 
$
(3,293
)
 
$
(27,176
)
Other comprehensive income (loss) before reclassifications
 
28,185

 
(2,043
)
 
550

 
26,692

Amounts reclassified from AOCI
 

 
1,362

 
(4
)
 
1,358

Net other comprehensive income (loss)
 
28,185

 
(681
)
 
546

 
28,050

Balance, February 28, 2014
 
$
708

 
$
2,913

 
$
(2,747
)
 
$
874


The significant items reclassified out of accumulated other comprehensive income (loss) and the corresponding line items in the consolidated statements of operations to which the items were reclassified were as follows:
Components of AOCI (in thousands)
 
Location
 
Three Months Ended February 28, 2014
 
Six Months Ended February 28, 2014
Unrealized gain (loss) on derivatives:
 

 


 


Commodity
 
Cost of goods sold
 
$
(117
)
 
$
(236
)
Foreign exchange
 
Net sales
 
17

 
(233
)
Foreign exchange
 
Cost of goods sold
 
(592
)
 
(1,514
)
Foreign exchange
 
SG&A expenses
 
33

 
47

Interest rate
 
Interest expense
 
150

 
266


 

 
(509
)
 
(1,670
)
Income tax effect
 
Income taxes benefit
 
127

 
308

Net of income taxes
 

 
$
(382
)
 
$
(1,362
)
Defined benefit obligation:
 

 


 


Amortization of prior services
 
SG&A expenses
 
$
2

 
$
5

Income tax effect
 
Income taxes expense
 

 
(1
)
Net of income taxes
 

 
$
2

 
$
4

Amounts in parentheses reduce earnings.

9




NOTE 3. SALES OF ACCOUNTS RECEIVABLE

The Company has a domestic sale of accounts receivable program which expires on December 26, 2014. Under the program, Commercial Metals Company contributes, and several of its subsidiaries sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity and was formed for the sole purpose of buying and selling trade accounts receivable generated by the Company. CMCRV sells the trade accounts receivable in their entirety to two financial institutions. The financial institutions advance up to a maximum of $200.0 million for all trade accounts receivable sold, and the remaining portion of the purchase price of the trade accounts receivable will be paid to the Company from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. Additionally, the sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the credit facility described in Note 7, Credit Arrangements.

At February 28, 2014 and August 31, 2013, under its domestic sale of accounts receivable program, the Company had sold $358.6 million and $358.8 million of trade accounts receivable, respectively, to the financial institutions and received $80.0 million of advance payments at February 28, 2014 and no advance payments at August 31, 2013.
 
In addition to the domestic sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell trade accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the trade accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy. The European program allows the Company’s European subsidiaries to advance up to 90% of eligible trade accounts receivable sold under the terms of the arrangement. During the first quarter of fiscal 2014, the Company phased out its existing Australian program and entered into a new trade accounts receivable sales program with a different financial institution. Under the new Australian program, trade accounts receivable balances are sold to a special purpose vehicle, which in turn sells 100% of the eligible trade accounts receivable of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. Under the new Australian program, the financial institution will fund up to A$75.0 million for all trade accounts receivable sold, and the remaining portion of the purchase price of the trade accounts receivable will be paid to the Company from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows.

At February 28, 2014 and August 31, 2013, under its European and Australian programs, the Company had sold $135.6 million and $121.2 million of accounts receivable, respectively, to third-party financial institutions and received advance payments of $94.4 million and $24.5 million, respectively.

During the six months ended February 28, 2014 and 2013, cash proceeds from the domestic and international sale of accounts receivable programs were $364.7 million and $603.0 million, respectively, and cash payments to the owners of accounts receivable were $214.9 million and $640.3 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the accounts receivable for the domestic and Australian programs. Discounts on domestic and international sales of accounts receivable were $0.9 million and $1.5 million for the three and six months ended February 28, 2014, respectively, and $0.9 million and $2.1 million for the three and six months ended February 28, 2013, respectively, and are included in selling, general and administrative expenses in the Company's consolidated statements of operations.

The deferred purchase price on the Company's domestic and international sale of accounts receivable programs are included in accounts receivable on the Company's consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the domestic and international sale of accounts receivable programs:
 

10




 
 
Three Months Ended February 28, 2014
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
375,223

 
$
351,515

 
$

 
$
23,708

Transfers of accounts receivable
 
1,039,096

 
774,533

 
180,700

 
83,863

Collections
 
(1,101,202
)
 
(852,334
)
 
(151,065
)
 
(97,803
)
Ending balance
 
$
313,117

 
$
273,714

 
$
29,635

 
$
9,768


 
 
Six Months Ended February 28, 2014
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
453,252

 
$
358,822

 
$
64,996

 
$
29,434

Transfers of accounts receivable
 
2,076,301

 
1,615,104

 
253,820

 
207,377

Collections
 
(2,144,124
)
 
(1,700,212
)
 
(216,869
)
 
(227,043
)
Program termination
 
(72,312
)
 

 
(72,312
)
 

Ending balance
 
$
313,117

 
$
273,714

 
$
29,635

 
$
9,768


 
 
Three Months Ended February 28, 2013
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
535,871

 
$
404,993

 
$
77,161

 
$
53,717

Transfers of accounts receivable
 
1,118,904

 
912,376

 
91,328

 
115,200

Collections
 
(1,161,646
)
 
(925,344
)
 
(112,660
)
 
(123,642
)
Ending balance
 
$
493,129

 
$
392,025

 
$
55,829

 
$
45,275


 
 
Six Months Ended February 28, 2013
(in thousands)
 
Total
 
Domestic
 
Australia
 
Europe
Beginning balance
 
$
515,481

 
$
396,919

 
$
70,073

 
$
48,489

Transfers of accounts receivable
 
2,325,650

 
1,849,006

 
218,236

 
258,408

Collections
 
(2,348,002
)
 
(1,853,900
)
 
(232,480
)
 
(261,622
)
Ending balance
 
$
493,129

 
$
392,025

 
$
55,829

 
$
45,275

NOTE 4. INVENTORIES

Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in, first-out ("LIFO") method. At February 28, 2014 and August 31, 2013, 38% and 43%, respectively, of the Company's total net inventories were valued at LIFO. LIFO inventory reserves were $208.5 million and $185.5 million at February 28, 2014 and August 31, 2013, respectively. Inventory cost for international inventories and the remaining domestic inventories are determined by the first-in, first-out ("FIFO") method and consisted mainly of material dedicated to CMC Poland Sp. z.o.o. ("CMCP") and certain marketing and distribution businesses.

The majority of the Company's inventories are in the form of finished goods with minimal work in process. At February 28, 2014 and August 31, 2013, $108.9 million and $66.7 million, respectively, of the Company's inventories were in the form of raw materials.

11





NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table details the changes in the carrying amount of goodwill by reportable segment:
 
 
Americas
 
International
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Consolidated
Balance, August 31, 2013
 
$
7,267

 
$
295

 
$
57,144

 
$
2,755

 
$
2,118

 
$
69,579

Foreign currency translation
 

 

 

 
198

 
13

 
211

Balance, February 28, 2014
 
$
7,267

 
$
295

 
$
57,144

 
$
2,953

 
$
2,131

 
$
69,790


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $43.5 million and $42.9 million at February 28, 2014 and August 31, 2013, respectively, and are included in other noncurrent assets on the Company's consolidated balance sheets. Excluding goodwill, there are no other significant intangible assets with indefinite lives. Amortization expense for intangible assets was $1.2 million and $2.4 million for the three and six months ended February 28, 2014, respectively, and $1.2 million and $2.5 million for the three and six months ended February 28, 2013, respectively.
NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
The assets and liabilities of businesses classified as held for sale are included in other current assets and accrued expenses on the Company's consolidated balance sheets. The components of assets and liabilities of businesses held for sale are as follows:

(in thousands)
 
February 28, 2014
 
August 31, 2013
Assets:
 
 
 
 
Accounts receivable
 
$

 
$
20,313

Inventories, net
 

 
8,713

Other current assets
 

 
3,683

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

 
10,459

Assets of businesses held for sale
 
$
1,085

 
$
43,168

Liabilities:
 


 


Accounts payable-trade
 
$

 
$
7,615

Accrued expenses and other payables
 

 
3,251

Liabilities of businesses held for sale
 
$

 
$
10,866


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

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

12





Financial information for discontinued operations was as follows:
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
113

 
$
41,017

 
$
17,411

 
$
80,728

Earnings from discontinued operations before income taxes
 
101

 
1,037

 
22,946

 
2,287


Dispositions
On October 17, 2013, the Company sold all of the outstanding capital stock of Howell for $58.5 million, of which $4.2 million was held in escrow, subject to customary purchase price adjustments. During the second quarter of fiscal 2014, the Company made a $3.0 million working capital adjustment, which is included in the Company's estimated pre-tax gain of $23.8 million. Howell was previously an operating segment included in the Americas Mills reporting segment.

During the first quarter of fiscal 2013, the Company completed the sale of its 11% ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for $29.0 million resulting in a pre-tax gain of $26.1 million. The Trinecke investment was included in the International Marketing and Distribution reporting segment.
NOTE 7. CREDIT ARRANGEMENTS

In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 15, 2023 (the "2023 Notes") and received proceeds of $325.0 million, net of underwriting discounts and debt issuance costs. The Company used $205.3 million of the proceeds from the 2023 Notes to purchase all of its outstanding $200.0 million of 5.625% Notes due 2013. The Company intends to use the remaining proceeds for general corporate purposes. Interest on the 2023 Notes is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2013. The Company may, at any time, redeem the 2023 Notes at a redemption price equal to 100 percent of the principal amount, plus a "make-whole" premium described in the indenture. Additionally, if a change of control triggering event occurs, as defined by the terms of the indenture, holders of the 2023 Notes may require the Company to repurchase the 2023 Notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The Company is generally not limited under the indenture governing the 2023 Notes in its ability to incur additional indebtedness provided the Company is in compliance with certain restrictive covenants, including restrictions on liens, sale and leaseback transactions, mergers, consolidations and transfers of substantially all of the Company's assets.

In December 2011, the Company entered into a third amended and restated $300.0 million revolving credit facility that matures on December 27, 2016. The maximum availability under this facility can be increased to $400.0 million with the consent of both CMC and the lenders. The program's capacity, with a sublimit of $50.0 million for letters of credit, is reduced by outstanding stand-by letters of credit, which totaled $38.6 million and $28.3 million at February 28, 2014 and August 31, 2013, respectively. Under the credit facility, the Company was required to maintain a minimum interest coverage ratio (adjusted EBITDA to interest expense, as each is defined in the facility) of not less than 3.00 to 1.00 for the twelve month cumulative period ended November 30, 2012 and for each fiscal quarter on a rolling twelve month cumulative period thereafter. At February 28, 2014, the Company's interest coverage ratio was 4.89 to 1.00. The credit facility also requires the Company to maintain a debt to capitalization ratio that does not exceed 0.60 to 1.00. At February 28, 2014, the Company's debt to capitalization ratio was 0.50 to 1.00. The credit facility provides for interest based on the LIBOR, the Eurodollar rate or Bank of America's prime rate.

At February 28, 2014, the Company was in compliance with all covenants contained in its debt agreements.

During fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately $52.7 million, net of customary finance charges. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. At February 28, 2014 and August 31, 2013, the unamortized portion was $30.6 million and $34.4 million, respectively, and for the three and six months ended February 28, 2014, the amortization of the deferred gain was $1.9 million and $3.8 million, respectively. For the three and six months ended February 28, 2013, the amortization of the deferred gain was $2.9 million and $5.8 million, respectively.

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


13




Long-term debt, including the deferred gain from the termination of the interest rate swaps, was as follows: 
(in thousands)
 
Weighted Average
Interest Rate as of February 28, 2014
 
February 28, 2014
 
August 31, 2013
$400 million notes at 6.50% due July 2017
 
5.7%
 
$
410,032

 
$
411,518

$500 million notes at 7.35% due August 2018
 
6.4%
 
520,617

 
522,930

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

 
330,000

Other, including equipment notes
 
 
 
22,886

 
19,594

 
 
 
 
1,283,535

 
1,284,042

Less current maturities
 
 
 
6,776

 
5,228

 
 
 
 
$
1,276,759

 
$
1,278,814

 Interest on these notes is payable semiannually.

CMCP has uncommitted credit facilities of $68.0 million with several banks with expiration dates ranging from March 2014 to December 2014. During the six months ended February 28, 2014, CMCP had total borrowings of $78.0 million and total repayments of $78.0 million under these facilities. At February 28, 2014, no material amounts were outstanding under these facilities.

The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the three and six months ended February 28, 2014 and 2013, respectively. Cash paid for interest during the three and six months ended February 28, 2014 was $32.8 million and $42.3 million, respectively, and $33.7 million and $38.3 million during the three and six months ended February 28, 2013, respectively.
NOTE 8. DERIVATIVES AND RISK MANAGEMENT

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

At February 28, 2014, the notional value of the Company's foreign currency contract commitments and its commodity contract commitments was $439.9 million and $48.3 million, respectively. At February 28, 2013, the notional value of the Company's foreign currency contract commitments and its commodity contract commitments was $238.7 million and $57.6 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of February 28, 2014:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
1,322

 MT
Copper
 
Long
 
634

 MT
Copper
 
Short
 
5,749

 MT
Zinc
 
Long
 
22

 MT
                                      
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's consolidated statements of operations, and there were no components excluded from the assessment of hedge effectiveness for the three and six months ended February 28, 2014 and 2013. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.


14




The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the consolidated statements of operations: 
 
 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2014
 
2013
 
2014
 
2013
Commodity
 
Cost of goods sold
 
$
129

 
$
717

 
$
639

 
$
306

Commodity
 
SG&A expenses
 

 
588

 

 

Foreign exchange
 
Net sales
 
(226
)
 

 
(385
)
 
(11
)
Foreign exchange
 
Cost of goods sold
 
(250
)
 

 
(371
)
 

Foreign exchange
 
SG&A expenses
 
(2,122
)
 
2,916

 
(6,815
)
 
2,880

Other
 
Cost of goods sold
 

 
(10
)
 

 
5

Gain (loss) before income taxes
 
 
 
$
(2,469
)
 
$
4,211

 
$
(6,932
)
 
$
3,180


The Company's fair value hedges are designated for accounting purposes with gains and losses on the hedged items offsetting the gain or loss on the related derivative transaction. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
Location
 
2014
 
2013
 
2014
 
2013
Foreign exchange
 
Net sales
 
$
140

 
$
(228
)
 
$
27

 
$
(228
)
Foreign exchange
 
Cost of goods sold
 
(953
)
 
777

 
(1,080
)
 
548

Gain (loss) before income taxes
 
 
 
$
(813
)
 
$
549

 
$
(1,053
)
 
$
320


Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
Location
 
2014
 
2013
 
2014
 
2013
Foreign exchange
 
Net sales
 
$
(130
)
 
$
274

 
$
(37
)
 
$
251

Foreign exchange
 
Cost of goods sold
 
955

 
(705
)
 
1,080

 
(548
)
Gain (loss) before income taxes
 
 
 
$
825

 
$
(431
)
 
$
1,043

 
$
(297
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
2014
 
2013
 
2014
 
2013
Commodity
 
$
(24
)
 
$
(13
)
 
$
(113
)
 
$
1

Foreign exchange
 
(402
)
 
70

 
(1,930
)
 
373

Gain (loss), net of income taxes
 
$
(426
)
 
$
57

 
$
(2,043
)
 
$
374


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
 
Location
 
2014
 
2013
 
2014
 
2013
Commodity
 
Cost of goods sold
 
$
(64
)
 
$
6

 
$
(153
)
 
$
6

Foreign exchange
 
Net sales
 
(2
)
 
10

 
(233
)
 
61

Foreign exchange
 
Cost of goods sold
 
(416
)
 
91

 
(1,174
)
 
50

Foreign exchange
 
SG&A expenses
 
13

 
66

 
25

 
76

Interest rate
 
Interest expense
 
87

 
101

 
173

 
203

Gain (loss), net of income taxes
 
 
 
$
(382
)
 
$
274

 
$
(1,362
)
 
$
396



15




The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at February 28, 2014 and August 31, 2013. The fair value of the Company's derivative instruments on the consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
February 28, 2014
 
August 31, 2013
Commodity — designated for hedge accounting
 
$
4

 
$

Commodity — not designated for hedge accounting
 
926

 
1,066

Foreign exchange — designated for hedge accounting
 
529

 
1,626

Foreign exchange — not designated for hedge accounting
 
574

 
1,238

Derivative assets (other current assets and other assets)*
 
$
2,033

 
$
3,930

 
Derivative Liabilities (in thousands)
 
February 28, 2014
 
August 31, 2013
Commodity — designated for hedge accounting
 
$
10

 
$
129

Commodity — not designated for hedge accounting
 
74

 
1,268

Foreign exchange — designated for hedge accounting
 
525

 
432

Foreign exchange — not designated for hedge accounting
 
2,941

 
1,738

Derivative liabilities (accrued expenses, other payables and long-term liabilities)*
 
$
3,550

 
$
3,567

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

As of February 28, 2014, all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months.

All of the instruments are highly liquid and not entered into for trading purposes.
NOTE 9. FAIR VALUE

The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities;

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

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

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

16




 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
February 28, 2014
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market investments (1)
 
$
201,753

 
$
201,753

 
$

 
$

Commodity derivative assets (2)
 
930

 
930

 

 

Foreign exchange derivative assets (2)
 
1,103

 

 
1,103

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
84

 
84

 

 

Foreign exchange derivative liabilities (2)
 
3,466

 

 
3,466

 


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2013
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market investments (1)
 
$
236,727

 
$
236,727

 
$

 
$

Commodity derivative assets (2)
 
1,066

 
1,066

 

 

Foreign exchange derivative assets (2)
 
2,864

 

 
2,864

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
1,397

 
1,268

 
129

 

Foreign exchange derivative liabilities (2)
 
2,170

 

 
2,170

 

 _________________ 

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

(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or the New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivatives and the classification of the assets and liabilities is included in Note 8, Derivatives and Risk Management.

Fair value of property, plant and equipment held for sale (Level 3) was $3.8 million based on appraised values less costs to sell at February 28, 2014. CMC does not have other assets or intangible assets measured at fair value on a non-recurring basis at February 28, 2014.

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

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

 
 
 
 
February 28, 2014
 
August 31, 2013
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
$400 million notes at 6.50% due July 2017 (1)
 
Level 2
 
$
410,032

 
$
446,800

 
$
411,518

 
$
443,646

$500 million notes at 7.35% due August 2018 (1)
 
Level 2
 
520,617

 
570,190

 
522,930

 
570,429

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

 
323,400

 
330,000

 
298,650


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

17




NOTE 10. INCOME TAX

The Company's effective income tax rate from continuing operations for the three and six months ended February 28, 2014 was 25.9% and 30.6%, respectively, compared with 52.3% and 33.4% for the three and six months ended February 28, 2013, respectively. The decrease in our effective income tax rate from continuing operations was attributed to the improvement in our International Mill segment's operating results for the three and six months ended February 28, 2014. The Company's effective income tax rate from discontinued operations for the three and six months ended February 28, 2014 was 15.8% and 38.8%, respectively, compared with 37.9% and 37.4% for the three and six months ended February 28, 2013, respectively.

The Company made net payments of $8.7 million and received net refunds of $2.2 million for income taxes during the six months ended February 28, 2014 and 2013, respectively.

The reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $28.6 million and $27.4 million, exclusive of interest and penalties, as of February 28, 2014 and 2013, respectively.

The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as income tax expense, and the balances at the end of a reporting period are recorded as part of the current or noncurrent reserve for uncertain income tax positions. For the three and six months ended February 28, 2014, before any income tax benefits, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.

During the twelve months ending February 28, 2015, it is reasonably possible that the statute of limitations pertaining to positions taken by the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately $17.9 million, which would reduce the provision for income taxes on earnings by an immaterial amount.

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

US Federal — 2009 and forward
US States — 2009 and forward
Foreign — 2006 and forward

The Company is currently under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded tax liabilities as of February 28, 2014 sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. SHARE-BASED COMPENSATION PLANS

The Company's share-based compensation plans are described, and informational disclosures provided, in Note 15, Share-Based Compensation Plans, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013. During the six months ended February 28, 2014 and 2013, restricted stock units ("RSUs") and performance stock units ("PSUs") totaling 1.2 million and 1.6 million, respectively, were granted at a weighted-average fair value of $16.89 and $13.44, respectively. Stock appreciation rights ("SARs") were not granted during the six months ended February 28, 2014. The Company granted 0.2 million in SARs at a weighted average exercise price of $14.25 during the six months ended February 28, 2013.

During the six months ended February 28, 2014 and 2013, the Company granted 59,565 equivalent shares of cash-settled RSUs and PSUs and 234,109 equivalent shares of cash-settled RSUs, PSUs and SARs, respectively. The fair value of these cash-settled awards is remeasured each reporting period and is recognized ratably over the service period. As of February 28, 2014, the Company had 1,722,173 equivalent shares in awards outstanding. The Company expects 1,637,113 equivalent shares to vest.

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

18





Share-based compensation expense for the three and six months ended February 28, 2014 of $5.3 million and $10.8 million, respectively, and for the three and six months ended February 28, 2013 of $3.6 million and $7.2 million, respectively, is included in selling, general and administrative expenses on the Company's consolidated statements of operations.
NOTE 12. EARNINGS PER SHARE ATTRIBUTABLE TO CMC

The calculations of the basic and diluted earnings per share for the three and six months ended February 28, 2014 and 2013 are as follows: 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands, except share data)
 
2014
 
2013
 
2014
 
2013
Net earnings attributable to CMC
 
$
11,143

 
$
4,577

 
$
57,062

 
$
54,294

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Shares outstanding for basic earnings per share
 
117,424,962

 
116,586,100

 
117,247,731

 
116,461,302

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
$
0.09

 
$
0.04

 
$
0.49

 
$
0.47

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Shares outstanding for basic earnings per share
 
117,424,962

 
116,586,100

 
117,247,731

 
116,461,302

 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
Share-based incentive/purchase plans
 
1,214,199

 
986,952

 
1,150,155

 
872,037

Shares outstanding for diluted earnings per share
 
118,639,161

 
117,573,052

 
118,397,886

 
117,333,339

 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
$
0.09

 
$
0.04

 
$
0.48

 
$
0.46

 
 
 
 
 
 
 
 
 
Anti-dilutive shares not included above
 
1,175,090

 
2,042,017

 
1,175,090

 
2,042,017


All stock options and SARs expire by 2020.
CMC's restricted stock is included in the number of shares of common stock issued and outstanding, but is omitted from the basic earnings per share calculation until the shares vest.
The Company did not purchase any shares during the first six months of fiscal 2014 and had remaining authorization to purchase 8,259,647 shares of its common stock at February 28, 2014.
NOTE 13. COMMITMENTS AND CONTINGENCIES

In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and government investigations, including environmental matters. See Note 18, Commitments and Contingencies, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
On September 18, 2008, the Company was served with a class action antitrust lawsuit alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against nine steel manufacturing companies, including CMC. The lawsuit, filed in the United States District Court for the Northern District of Illinois, alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products. The lawsuit, which purports to be brought on behalf of a class consisting of all purchasers of steel products directly from the defendants between January 1, 2005 and September 2008 (collectively, the "Direct Purchaser Plaintiffs"), seeks treble damages and costs, including reasonable attorney fees and pre- and post-judgment interest.

On March 14, 2014, the Company entered into a final settlement agreement with the Direct Purchaser Plaintiffs pursuant to which the Company will pay the Direct Purchaser Plaintiffs an amount of approximately $4.0 million and all claims of the Direct Purchaser Plaintiffs will be fully and finally released. The Company continues to maintain that the claims lack merit and that it has full and complete defenses to all of the claims asserted against it. However, the Company has agreed to enter into the settlement agreement

19




to avoid further expense, inconvenience, and distraction of burdensome and protracted litigation. The settlement is subject to preliminary and final court approval.
Since the filing of the direct purchaser lawsuit, a case has been filed in federal court in the Northern District of Illinois on behalf of a class of indirect purchasers in approximately 28 states naming the same defendants and containing allegations substantially identical to those of the Standard Iron Works complaint. That case has in effect been stayed. Another indirect purchaser action was filed in Tennessee state court, again naming the same defendants but contending that the conspiracy continued through 2010. The case has been removed to federal court, and plaintiffs have moved to remand. The motion to remand has not yet been decided, and no motion practice or discovery has taken place. The Company believes that the lawsuits are without merit and plans to defend them vigorously. Due to the uncertainty and the information available at this time, the Company cannot reasonably estimate a range of loss relating to these cases.

Guarantees
During fiscal 2012, the Company entered into a guarantee agreement with a bank in connection with a credit facility granted by the bank to a supplier of the Company. The fair value of the guarantee is negligible. The maximum credit facility with the bank was $4.0 million, and the Company's maximum exposure was $2.1 million as of February 28, 2014.
NOTE 14. BUSINESS SEGMENTS

The Company's reporting segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise.

The Company structures its business into the following five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. The Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. The Americas Mills segment manufactures finished long steel products including reinforcement bar ("rebar"), merchant bar, light structural, some special bar quality (SBQ) and other special sections as well as semi-finished billets for re-rolling and forging applications. The Americas Fabrication segment consists of the Company's rebar and structural fabrication operations, fence post manufacturing plants, construction-related product facilities and plants that heat-treat steel to strengthen and provide flexibility. The International Mill segment includes the Company's minimill and the Company's recycling and fabrication operations in Poland. The International Marketing and Distribution segment includes international operations for the sale, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products. Additionally, this segment includes the Company's U.S.-based marketing and distribution divisions and also operates a recycling facility in Singapore. Corporate contains expenses of the Company's corporate headquarters and interest expense related to its long-term public debt.

The financial information presented for the International Mill segment excludes CMCS operations. Additionally, the financial information presented for the Americas Mills segment excludes Howell. These operations have been classified as discontinued operations in the consolidated statements of operations. See Note 6, Businesses Held for Sale, Discontinued Operations and Dispositions, for more information.

The Company uses adjusted operating profit (loss), a non-GAAP financial measure, to compare and to evaluate the financial performance of its segments. Adjusted operating profit (loss) is the sum of our earnings (loss) from continuing operations before income taxes, interest expense and discounts on sales of accounts receivable. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2013.

20





The following is a summary of certain financial information from continuing operations by reportable segment:
 
 
Three Months Ended February 28, 2014
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
293,146

 
$
277,562

 
$
322,572

 
$
181,245

 
$
569,407

 
$
5,166

 
$

 
$
1,649,098

Intersegment sales
 
49,121

 
179,287

 
3,318

 
117

 
2,401

 

 
(234,244
)
 

Net sales
 
342,267

 
456,849

 
325,890

 
181,362

 
571,808

 
5,166

 
(234,244
)
 
1,649,098

Adjusted operating profit (loss)
 
(863
)
 
44,062

 
(5,330
)
 
8,331

 
2,493

 
(15,064
)
 
1,422

 
35,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended February 28, 2013
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
301,035

 
$
244,285

 
$
314,389

 
$
179,842

 
$
645,445

 
$
3,661

 
$

 
$
1,688,657

Intersegment sales
 
50,339

 
191,292

 
3,577

 
(77
)
 
4,491

 

 
(249,622
)
 

Net sales
 
351,374

 
435,577

 
317,966

 
179,765

 
649,936

 
3,661

 
(249,622
)
 
1,688,657

Adjusted operating profit (loss)
 
2,243

 
47,685

 
(3,812
)
 
(4,153
)
 
3,948

 
(19,194
)
 
(1,083
)
 
25,634

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2014
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
586,622

 
$
569,135

 
$
676,564

 
$
409,737

 
$
1,078,580

 
$
11,351

 
$

 
$
3,331,989

Intersegment sales
 
93,848

 
368,865

 
7,544

 
775

 
4,385

 

 
(475,417
)
 

Net sales
 
680,470

 
938,000

 
684,108

 
410,512

 
1,082,965

 
11,351

 
(475,417
)
 
3,331,989

Adjusted operating profit (loss)
 
(24
)
 
109,876

 
(3,113
)
 
23,600

 
2,996

 
(33,113
)
 
2,018

 
102,240

Total assets*
 
271,047

 
598,171

 
590,410

 
563,579

 
903,444

 
1,022,523

 
(413,383
)
 
3,535,791

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2013
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
608,506

 
$
511,390

 
$
667,136

 
$
395,700

 
$
1,248,980

 
$
6,460

 
$

 
$
3,438,172

Intersegment sales
 
94,829

 
380,925

 
7,422

 
6,132

 
9,544

 

 
(498,852
)
 

Net sales
 
703,335

 
892,315

 
674,558

 
401,832

 
1,258,524

 
6,460

 
(498,852
)
 
3,438,172

Adjusted operating profit (loss)
 
6,737

 
99,346

 
6,380

 
(3,277
)
 
44,109

 
(36,564
)
 
(1,744
)
 
114,987

Total assets at August 31, 2013*
 
309,599

 
598,478

 
631,510

 
487,613

 
838,413

 
1,075,594

 
(496,946
)
 
3,444,261

                                             
* Excludes total assets from discontinued operations of $8.7 million at February 28, 2014 and $50.5 million at August 31, 2013.

Reconciliations of earnings from continuing operations to adjusted operating profit are provided below:
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Earnings from continuing operations
 
$
11,059


$
3,933

 
$
43,020


$
52,864

Income taxes
 
3,866


4,308

 
18,957


26,497

Interest expense
 
19,179


16,490

 
38,757


33,514

Discounts on sales of accounts receivable
 
947


903

 
1,506


2,112

Adjusted operating profit
 
$
35,051


$
25,634

 
$
102,240


$
114,987


21





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

In the following discussion, references to "we," "us," "our" or the "Company" mean Commercial Metals Company and its consolidated subsidiaries, unless the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013. This discussion contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the Securities and Exchange Commission ("SEC") or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled "Forward-Looking Statements" in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2013. We do not undertake any 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, except as required by law.
CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
CONSOLIDATED RESULTS OF OPERATIONS

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

22




 
 
Three Months Ended February 28,
 
Increase
(Decrease)
 
Six Months Ended February 28,
 
Increase
(Decrease)
(in thousands)
 
2014
 
2013
 
%
 
2014
 
2013
 
%
Net sales*
 
$
1,649,098

 
$
1,688,657

 
(2
)%
 
$
3,331,989

 
$
3,438,172

 
(3
)%
Adjusted operating profit*
 
35,051

 
25,634

 
37
 %
 
102,240

 
114,987

 
(11
)%
LIFO income (expense) before income taxes*
 
(18,924
)
 
443

 
(4,372
)%
 
(23,291
)
 
23,679

 
(198
)%
Earnings from continuing operations
 
11,059

 
3,933

 
181
 %
 
43,020

 
52,864

 
(19
)%
Adjusted EBITDA*
 
67,749

 
58,303

 
16
 %
 
168,919

 
182,504

 
(7
)%
_______________________________________
* Excludes divisions classified as discontinued operations.

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, 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 domestic jurisdictions. Tax regulations in international operations add additional complexity. We also exclude interest cost in our calculation of adjusted EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. 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:
 
 
Three Months Ended February 28,
 
Increase
(Decrease)
 
Six Months Ended February 28,
 
Increase
(Decrease)
(in thousands)
 
2014
 
2013
 
%
 
2014
 
2013
 
%
Earnings from continuing operations
 
$
11,059

 
$
3,933

 
181
 %
 
$
43,020


$
52,864

 
(19
)%
Less net earnings attributable to noncontrolling interests
 
1

 

 
100
 %
 
1


2

 
(50
)%
Interest expense
 
19,179

 
16,490

 
16
 %
 
38,757


33,514

 
16
 %
Income taxes
 
3,866

 
4,308

 
(10
)%
 
18,957


26,497

 
(28
)%
Depreciation and amortization
 
33,424

 
33,572

 
 %
 
67,284


66,603

 
1
 %
Impairment charges
 
222

 

 
100
 %
 
902

 
3,028

 
(70
)%
Adjusted EBITDA
 
$
67,749

 
$
58,303

 
16
 %
 
$
168,919


$
182,504

 
(7
)%
As noted above, our adjusted EBITDA does not include net earnings attributable to noncontrolling interests, interest expense, income taxes, depreciation or amortization and impairment charges. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Impairment charges, when necessary, accelerate the write-off of fixed assets that otherwise would have been accomplished by periodic depreciation charges. Additionally, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings (loss) determined in accordance with GAAP, as well as adjusted EBITDA, to evaluate our performance. Further, we separately analyze any significant fluctuations in interest expense, depreciation, amortization, impairment charges and income taxes.

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, 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

23




as an alternative source of liquidity to finance our operations and we believe that removing these costs provides a clearer perspective of the Company's operating performance. Adjusted operating profit (loss) may be inconsistent with similar measures presented by other companies.

Reconciliations of earnings from continuing operations to adjusted operating profit (loss) are provided below:
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Earnings from continuing operations
 
$
11,059

 
$
3,933

 
$
43,020

 
$
52,864

Income taxes
 
3,866

 
4,308

 
18,957

 
26,497

Interest expense
 
19,179

 
16,490

 
38,757

 
33,514

Discounts on sales of accounts receivable
 
947

 
903

 
1,506

 
2,112

Adjusted operating profit
 
$
35,051

 
$
25,634

 
$
102,240

 
$
114,987


Summary

Net sales for the three and six months ended February 28, 2014 decreased $39.6 million, or 2%, and $106.2 million, or 3%, respectively, compared to the three and six months ended February 28, 2013, primarily due to a significant decline in volumes for one of our U.S.-based trading divisions within our International Marketing and Distribution segment. This decline was partially offset by an increase in our Americas Mills segment as a result of increased shipments during the first six months of fiscal 2014.

Adjusted operating profit for the three months ended February 28, 2014 increased $9.4 million, or 37%, and decreased $12.7 million, or 11% for the six months ended February 28, 2014, compared to the corresponding periods in fiscal 2013. The increase in adjusted operating profit for the three months ended February 28, 2014 was principally due to improvements reported by our International Mill segment. This segment’s improved performance is attributed to an increase in selling prices and a decrease in material cost during the second quarter of fiscal 2014. The decrease in adjusted operating profit for the six months ended February 28, 2014 was principally due to a decline in profitability reported by our International Marketing and Distribution segment resulting from the recognition of a gain on the sale of our 11% ownership interest in Trinecke during the six months ended February 28, 2013 and an unfavorable change in pre-tax LIFO. The decline in profitability reported by our International Marketing and Distribution segment was offset by improvements reported by our Americas Mills and International Mill segments. Our Americas Mills segment benefited from an increase in tons shipped, which more than offset metal margin compression of $15 per short ton, or 5%. Our International Mill’s improved performance is attributed to an increase in selling prices and a decrease in material cost during the first half of fiscal 2014. We continued to be encouraged by the improvements we saw in our Polish operations, which reported the best second fiscal quarter since fiscal 2008 largely as a result of economic improvements in Poland and surrounding markets.

We reported an unfavorable change in pre-tax LIFO of $19.4 million and $47.0 million for the three and six months ended February 28, 2014, respectively, when compared to the corresponding periods in fiscal 2013. For the second quarter of fiscal 2014, prices increased for all of our segments, resulting in pre-tax LIFO expense; whereas, price increases in our Americas Mills segment were more than offset by price decreases related to our International Marketing and Distribution segment, resulting in pre-tax LIFO income for the second quarter of fiscal 2013. For the first half of fiscal 2014, prices increased for all of our segments, resulting in pre-tax LIFO expense, while in general prices decreased for all of our segments resulting in pre-tax LIFO income for the first half of fiscal 2013.

Additionally, results for the three and six months ended February 28, 2014 included a pre-tax charge of approximately $4 million incurred in connection with our final settlement of the Standard Iron Works v. Arcelor Mittal et al. lawsuit. See Note 13, Commitments and Contingencies, to the unaudited consolidated financial statements included in this report.
SEGMENT OPERATING DATA

Unless otherwise indicated, all dollar amounts below are calculated before income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 14, Business Segments, to the unaudited consolidated financial statements included in this report.


24




Americas Recycling
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
342,267

 
$
351,374

 
$
680,470

 
$
703,335

Adjusted operating profit (loss)
 
(863
)
 
2,243

 
(24
)
 
6,737

LIFO income (expense)
 
1,022

 
(957
)
 
(1,503
)
 
1,393

Average selling price (per short ton)
 
 
 
 
 
 
 
 
Average ferrous selling price
 
$
350

 
$
336

 
$
338

 
$
329

Average nonferrous selling price
 
2,730

 
2,815

 
2,710

 
2,807

Tons shipped (in thousands)
 
 
 
 
 
 
 
 
Ferrous tons shipped
 
519

 
515

 
1,022

 
1,018

Nonferrous tons shipped
 
54

 
59

 
110

 
118

Total tons shipped
 
573

 
574

 
1,132

 
1,136


Net sales for this segment decreased $9.1 million, or 3%, during the three months ended February 28, 2014 when compared to the corresponding quarter in fiscal 2013. The decrease in net sales is primarily attributed to an 8% decrease in nonferrous volumes and an $85 per short ton decrease in average nonferrous selling prices when compared to the second quarter of fiscal 2013.

Net sales for this segment decreased $22.9 million, or 3%, during the six months ended February 28, 2014 when compared to the corresponding period in fiscal 2013. The decrease in net sales is primarily attributed to a 7% decrease in nonferrous volumes and a $97 decrease in average nonferrous selling prices per short ton when compared to the corresponding period in fiscal 2013. The declines in volumes and pricing during the three and six months ended February 28, 2014 were mostly driven by lower demand in China, where overall economic growth is slowing.

Adjusted operating profit for the three months ended February 28, 2014 decreased $3.1 million when compared to the second quarter of fiscal 2013. During the second quarter of fiscal 2014, nonferrous metal margins increased 9% as a result of nonferrous material costs decreasing at a higher rate than the decrease in average nonferrous selling prices when compared to the second quarter of fiscal 2013. While average ferrous selling prices increased 4% to $350 per short ton during the second quarter of fiscal 2014, ferrous metal margins declined 5% during that period because ferrous material costs increased at a higher rate than the average ferrous selling prices increased. This decline in ferrous metal margins resulted in the decline in adjusted operating profit during the second quarter of fiscal 2014. The decline in adjusted operating profit was offset by a $2.0 million favorable change in pre-tax LIFO, from pre-tax LIFO expense of $1.0 million in the second quarter of fiscal 2013 to pre-tax LIFO income of $1.0 million in the second quarter of fiscal 2014, driven by lower nonferrous volumes and nonferrous inventory prices in the second quarter of fiscal 2014 when compared to the corresponding quarter in fiscal 2013.

Adjusted operating profit for the six months ended February 28, 2014 decreased $6.8 million when compared to the corresponding period in fiscal 2013. During the first six months of fiscal 2014, nonferrous metal margins increased 2% as a result of nonferrous material costs decreasing at a higher rate than the decrease in average nonferrous selling prices when compared to the first six months of fiscal 2013. While average ferrous selling prices increased 3% to $338 per short ton during the six months ended February 28, 2014, ferrous metal margins declined 5% during the period because ferrous material costs increased at a higher rate than the average ferrous selling prices increased. This decline in ferrous metal margins resulted in the decline in adjusted operating profit during the first six months of fiscal 2014. The decline in adjusted operating profit was also attributed to a $2.9 million unfavorable change in pre-tax LIFO, from pre-tax LIFO income of $1.4 million for the six months ended February 28, 2013 to pre-tax LIFO expense of $1.5 million for the six months ended February 28, 2014. The decline in pre-tax LIFO was due to price increases during the first half of fiscal 2014, compared to price decreases during the first half of fiscal 2013.


25




Americas Mills
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
456,849

 
$
435,577

 
$
938,000

 
$
892,315

Adjusted operating profit
 
44,062

 
47,685

 
109,876

 
99,346

LIFO income (expense)
 
(11,673
)
 
(3,383
)
 
(9,804
)
 
1,518

Average price (per short ton)
 
 
 
 
 
 
 
 
Finished goods selling price
 
$
695

 
$
696

 
$
681

 
$
691

Total sales
 
675

 
682

 
666

 
675

Cost of ferrous scrap consumed
 
368

 
350

 
351

 
345

Metal margin
 
307

 
332

 
315

 
330

Ferrous scrap purchase price
 
322

 
307

 
310

 
300

Tons (in thousands)
 
 
 
 
 
 
 
 
Tons melted
 
610

 
626

 
1,262

 
1,198

Tons rolled
 
543

 
543

 
1,161

 
1,137

Tons shipped
 
631

 
602

 
1,307

 
1,268


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

During the second quarter of fiscal 2014, tons shipped increased 5% over the second quarter of fiscal 2013. This increase in tons shipped more than offset a $7 per short ton decrease in the average selling price, resulting in an increase in net sales for this segment of $21.3 million, or 5%, for the second quarter of fiscal 2014 when compared to the second quarter of fiscal 2013.

Net sales for the six months ended February 28, 2014 increased $45.7 million, or 5%, when compared to the six months ended February 28, 2013. The increase in net sales is due to a 3% increase in tons shipped during the first six months of fiscal 2014, which more than offset a $9 per short ton decrease in the average selling price when compared to the first six months of fiscal 2013.
While shipments for each of this segment’s products increased during the second quarter of fiscal 2014 when compared to the second quarter of fiscal 2013, an $18 per short ton increase in the average cost of ferrous scrap consumed, as well as a $7 per short ton decrease in average selling price of this segment's products, resulted in an 8%, or $25 per short ton, metal margin compression, when compared to the second quarter of fiscal 2013. Further, during the second quarter of fiscal 2014, freight expense increased 10% when compared to the second quarter of fiscal 2013 due to the increase in shipments. Additionally, pre-tax LIFO expense increased $8.3 million from the second quarter of fiscal 2013 to the second quarter of fiscal 2014. The unfavorable change in pre-tax LIFO expense is due to prices increasing at a faster pace during the second quarter of fiscal 2014, compared with the second quarter of fiscal 2013. This increase in pre-tax LIFO expense, coupled with the metal margin compression and increased freight expense resulted in a $3.6 million, or 8%, decline in this segment’s adjusted operating profit in the second quarter of fiscal 2014 when compared to the second quarter of fiscal 2013.

Adjusted operating profit for the six months ended February 28, 2014 increased $10.5 million as a result of a 39 thousand short ton increase in shipments when compared to the six months ended February 28, 2013. This increase in tons shipped during the first half of fiscal 2014 more than offset a 5%, or $15 per short ton, metal margin compression when compared to the first half of fiscal 2013. Further, during the first half of fiscal 2014, freight expense increased 11% when compared to the first half of fiscal 2013 due to the increase in shipments. The increase in adjusted operating profit was also partially offset by an $11.3 million unfavorable change in pre-tax LIFO, from pre-tax LIFO income of $1.5 million for the six months ended February 28, 2013 to pre-tax LIFO expense of $9.8 million for the six months ended February 28, 2014. The unfavorable change in pre-tax LIFO is due to price increases during the first six months of fiscal 2014, compared with price decreases during the corresponding period in fiscal 2013.


26




Americas Fabrication
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
325,890

 
$
317,966

 
$
684,108

 
$
674,558

Adjusted operating profit (loss)
 
(5,330
)
 
(3,812
)
 
(3,113
)
 
6,380

LIFO income (expense)
 
(4,470
)
 
491

 
(6,305
)
 
7,723

Average selling price (excluding stock and buyout sales) (per short ton)
 
 
 
 
 
 
 
 
Rebar
 
$
905

 
$
897

 
$
890

 
$
898

Structural
 
2,478

 
2,819

 
2,489

 
2,442

Post
 
881

 
938

 
886

 
921

Tons shipped (in thousands)
 
 
 
 
 
 
 
 
Rebar
 
203

 
204

 
437

 
429

Structural
 
13

 
12

 
25

 
27

Post
 
24

 
25

 
45

 
45


Adjusted operating loss for the second quarter of fiscal 2014 increased $1.5 million when compared to the prior year's second quarter. The decline in profitability was primarily due to a $5.0 million unfavorable change in pre-tax LIFO, from pre-tax LIFO income of $0.5 million in the second quarter of fiscal 2013 to pre-tax LIFO expense of $4.5 million in the second quarter of fiscal 2014. The unfavorable change in pre-tax LIFO is attributed to price increases during the second quarter of fiscal 2014, when compared to the second quarter of fiscal 2013. The unfavorable charge to pre-tax LIFO was partially offset by a $45 per short ton increase in metal margin as a result of a 6% decrease in material cost, when compared to the second quarter of fiscal 2013. In addition, during the second quarter of fiscal 2014, this segment recorded a $2.9 million gain on sale of property, plant and equipment, further offsetting the unfavorable change in pre-tax LIFO.

Adjusted operating profit for the six months ended February 28, 2014 decreased $9.5 million when compared to the same period in fiscal 2013. The decline in profitability was primarily due to a $14.0 million unfavorable change in pre-tax LIFO, from pre-tax LIFO income of $7.7 million for the six months ended February 28, 2013 to pre-tax LIFO expense of $6.3 million for the six months ended February 28, 2014. The unfavorable charge to pre-tax LIFO is attributed to price increases during the first half of fiscal 2014, when compared to price decreases during the first half of fiscal 2013, partially offset by a $34 per short ton increase in metal margin as a result of a 8% decrease in material cost, when compared to the first six months of fiscal 2013.

International Mill
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
181,362

 
$
179,765

 
$
410,512

 
$
401,832

Adjusted operating profit (loss)
 
8,331

 
(4,153
)
 
23,600

 
(3,277
)
Average price (per short ton)
 
 
 
 
 
 
 
 
Total sales
 
$
628

 
$
605

 
$
614

 
$
604

Cost of ferrous scrap consumed
 
375

 
379

 
363

 
380

Metal margin
 
253

 
226

 
251

 
224

Ferrous scrap purchase price
 
315

 
303

 
308

 
307

Tons (in thousands)
 
 
 
 
 
 
 
 
Tons melted
 
312

 
266

 
692

 
659

Tons rolled
 
256

 
241

 
565

 
581

Tons shipped
 
271

 
277

 
631

 
622



27




Adjusted operating profit for the three months ended February 28, 2014 increased $12.5 million when compared to the second quarter of fiscal 2013. While tons shipped were steady for the current quarter when compared to the corresponding quarter in the prior year, sales prices increased by $23 per short ton and the cost of ferrous scrap consumed decreased by $4 per short ton, resulting in a 12% increase in metal margin, which contributed to the improved operating results.

Adjusted operating profit for the six months ended February 28, 2014 increased $26.9 million due to a nine thousand short ton increase in shipments when compared to the corresponding period in fiscal 2013. Additionally, when compared to the first six months of fiscal 2013, sales prices increased by $10 per short ton and the cost of ferrous scrap consumed decreased by $17 per short ton, resulting in a 12% increase in metal margin, which contributed to the improved operating results for the six months ended February 28, 2014.

For the three and six months ended February 28, 2014 and 2013, 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. For the three and six months ended February 28, 2014, adjusted operating profit for this segment was negatively impacted by $1.9 million and $5.4 million due to changes in the value of the U.S. dollar relative to other currencies, respectively, and $3.3 million and $4.7 million for the three and six months ended February 28, 2013, respectively.

International Marketing and Distribution
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
571,808

 
$
649,936

 
$
1,082,965

 
$
1,258,524

Adjusted operating profit
 
2,493

 
3,948

 
2,996

 
44,109

LIFO income (expense)
 
(3,803
)
 
4,292

 
(5,679
)
 
13,045


During the second quarter of fiscal 2014, net sales decreased $78.1 million when compared to the corresponding quarter in the prior year, primarily related to one of our U.S.-based trading divisions. This division experienced an 828 thousand ton decline in volumes, partially offset by a $390 per short ton increase in selling prices. All other divisions within this segment reported volume increases coupled with selling price decreases. The volume increases in these divisions outpaced selling price decreases, except in the Australian market where ongoing aggressive competition for volumes continues.

Net sales for the six months ended February 28, 2014 decreased $175.6 million, or 14%, when compared to the six months ended February 28, 2013. Within this segment, all divisions except one of our U.S.-based trading divisions saw increases in volumes during the first six months of fiscal 2014. Offsetting these increases, the decline in sales volume at one of our U.S.-based trading divisions resulted in the decrease in net sales for the six months ended February 28, 2014 when compared to the corresponding period in fiscal 2013.

Adjusted operating profit for the three months ended February 28, 2014 decreased 37% when compared to the second quarter of fiscal 2013. The decline in adjusted operating profit compared to the second quarter of fiscal 2013 was primarily due to an $8.1 million unfavorable change in pre-tax LIFO associated with our U.S.-based trading divisions, from pre-tax LIFO income of $4.3 million in the second quarter of fiscal 2013 to pre-tax LIFO expense of $3.8 million in the second quarter of fiscal 2014. The unfavorable change in pre-tax LIFO was due to increasing inventory prices during the second quarter of fiscal 2014, compared with decreasing inventory prices in the corresponding quarter in the prior year. Additionally, one of our U.S.-based trading divisions experienced an increase in metal margin of $9 per short ton, which partially offset the unfavorable change in pre-tax LIFO.

All non-U.S. divisions within this segment recorded improvements to adjusted operating profit for the second quarter of fiscal 2014 when compared to the corresponding quarter in the prior year. The improvements to adjusted operating profit from these divisions partially offset the decrease in adjusted operating profit from one of our U.S.-based trading divisions discussed above. Our Australian operations reported a modest improvement for the second quarter of fiscal 2014 compared to the same quarter in the prior year. The Australian market remains depressed with ongoing aggressive competition for volumes; however, cost improvements have resulted in improved operating results for this division.

Adjusted operating profit for the six months ended February 28, 2014 declined $41.1 million when compared to the six months ended February 28, 2013. The decline in adjusted operating profit during the first six months of fiscal 2014 is the result of an $18.7 million unfavorable change in pre-tax LIFO associated with our U.S-based trading divisions, from pre-tax LIFO income of $13.0 million for the six months ended February 28, 2013 to pre-tax LIFO expense of $5.7 million for the six months ended February 28, 2014. The unfavorable change in pre-tax LIFO was due to increasing inventory prices during the first six months of fiscal 2014,

28




compared with decreasing inventory prices in the corresponding period in fiscal 2013. Furthermore, results for the first six months of fiscal 2013 included a $26.1 million pre-tax gain associated with the sale of our 11% ownership interest in Trinecke.

For the three and six months ended February 28, 2014 and 2013, 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 or adjusted operating profit.

Corporate
Our corporate expenses for the three months ended February 28, 2014 were $15.1 million compared to $19.2 million for the three months ended February 28, 2013. The $4.1 million, or 21%, decrease in corporate expenses is principally related to a reduction in employee related expenses.

Interest Expense

Interest expense for the three and six months ended February 28, 2014 increased when compared to the corresponding periods in fiscal 2013 due to an increase in our long-term debt in the third quarter of fiscal 2013. In addition, during the third and fourth quarters of fiscal 2013, we extinguished our previously outstanding $200 million of 5.625% Notes due 2013, resulting in a reduction in the amortization of the deferred gain that was recognized in conjunction with the termination of our interest rate swap transactions, further attributing to the increase in interest expense during the three and six months ended February 28, 2014.

Income Taxes

Our effective income tax rate from continuing operations for the three and six months ended February 28, 2014 was 25.9% and 30.6%, respectively, compared with 52.3% and 33.4% for the three and six months ended February 28, 2013, respectively. The decrease in our effective income tax rate from continuing operations was attributed to the improvement in our International Mill segment's operating results for the three and six months ended February 28, 2014. Our effective income tax rate can change from period to period as a result of changes in the mix and amount of pre-tax income generated in the jurisdictions in which the Company operates. Our effective income tax rates can also be impacted by state and local taxes as well as by earnings or losses from foreign jurisdictions. State and local taxes are generally consistent while the composition of domestic and foreign earnings can create larger fluctuations in the rate.

DISCONTINUED OPERATIONS DATA

Adjusted operating profit from discontinued operations was $0.1 million and $22.9 million for the three and six months ended February 28, 2014, respectively, compared to an adjusted operating profit of $1.0 million and $2.3 million for the three and six months ended February 28, 2013, respectively. During the fourth quarter of fiscal 2013, we decided to sell Howell Metal Company, our wholly owned copper tube manufacturing operation ("Howell"). On October 17, 2013, the Company sold all of the outstanding capital stock of Howell for $58.5 million, of which $4.2 million was held in escrow, subject to customary purchase price adjustments. During the second quarter of fiscal 2014, the Company made a $3.0 million working capital adjustment, which is included in the Company's estimated pre-tax gain of $23.8 million. We have included Howell in discontinued operations for all periods presented. Howell was previously an operating segment included in the Americas Mills reporting segment.
OUTLOOK

Our third quarter typically brings warmer weather and therefore seasonal improvements in the construction markets, which is expected to spur activity in the industry. Overall, the U.S. construction markets continued to show improvement during the second quarter of 2014, but at a slower pace than we would like to see. While the American Institute of Architects reported the Architecture Billings Index (ABI) below 50 in November and December of 2013, the ABI index rebounded in January 2014 to 50.4, which we believe points to improvement in the domestic construction marketplace. In the upcoming months, our Polish operations plan to commission a new modern electric arc furnace, and we anticipate that this upgrade will translate into meaningful operating cost improvements in our International Mill segment. The Eurozone continued to improve during the second quarter of fiscal 2014, with business growth accelerating in February 2014 to its fastest pace since June of 2011; however, the recent turmoil in Ukraine could have an adverse impact on our European operations. Although growth in China has slowed and import pricing has continued to challenge our operations, we are hopeful that improvements in most global markets in which we participate will positively impact our businesses.

29




LIQUIDITY AND CAPITAL RESOURCES

See Note 7, Credit Arrangements, to the unaudited 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 February 28, 2014:
(in thousands)
 
Total Facility
 
Availability
Cash and cash equivalents
 
$
431,754

 
$ N/A

Revolving credit facility
 
300,000

 
261,385

Domestic receivable sales facility
 
200,000

 
120,000

International accounts receivable sales facilities
 
125,836

 
31,467

Bank credit facilities — uncommitted
 
100,045

 
90,294

Notes due from 2017 to 2023
 
1,230,000

 
*

Equipment notes
 
22,886

 
*

                                                             
* We believe we have access to additional financing and refinancing, if needed.

We have $400 million of 6.50% notes due July 2017, $500 million of 7.35% notes due August 2018 and $330 million of 4.875% notes due May 2023. All of our 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 twelve months ending February 28, 2015, 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 ($68.0 million) with several banks with expiration dates ranging from March 2014 to December 2014. We intend to renew the uncommitted credit facilities upon expiration. During the six months ended February 28, 2014, CMCP had total borrowings of $78.0 million and total repayments of $78.0 million under these facilities. At February 28, 2014, no material amounts were outstanding under these facilities.

The maximum availability under our $300.0 million revolving credit facility (the "credit facility") can be increased to $400.0 million with the consent of both CMC and our lenders. The credit facility's capacity, with a sublimit of $50.0 million for letters of credit, is reduced by outstanding stand-by letters of credit which totaled $38.6 million at February 28, 2014. Under the credit facility, we are required to maintain a minimum interest coverage ratio (adjusted EBITDA to interest expense, as each is defined in the facility) of not less than 3.00 to 1.00 for each fiscal quarter on a rolling twelve month cumulative period following November 30, 2012. At February 28, 2014, our interest coverage ratio was 4.89 to 1.00. The credit facility also requires us to maintain a debt to capitalization ratio that does not exceed 0.60 to 1.00. At February 28, 2014, our debt to capitalization ratio was 0.50 to 1.00. The credit facility provides for interest based on the LIBOR, the Eurodollar rate or Bank of America's prime rate.

Our foreign operations generated approximately 30% of our revenue during the second quarter of fiscal 2014, and as a result, our foreign operations had cash and cash equivalents of approximately $61.3 million at February 28, 2014. Historically, our domestic operations have generated the majority of our cash, which has been used to fund the cash needs of our domestic operations as well as our foreign operations. Additionally, our domestic operations have access to the credit facility described above and the $200.0 million sale of accounts receivable program described below. It is the Company's intention 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

30




the amount of credit insured receivables (and those covered by export letters of credit) was approximately 50% of total receivables at February 28, 2014.

For added flexibility, we may sell certain accounts receivable both in the U.S. and internationally. See Note 3, Sales of Accounts Receivable, to the unaudited consolidated financial statements contained in this report. Our domestic 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 facility.

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. The Company had $117.2 million and $112.3 million of documentary letters of credit outstanding at February 28, 2014 and August 31, 2013, respectively.

Cash Flows

Our cash flows from operating activities result primarily from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products and other raw materials used in steel manufacturing. We have a diverse and generally stable customer base. From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in foreign currency exchange rates, commodity prices and natural gas prices. See Note 8, Derivatives and Risk Management, to the unaudited consolidated financial statements contained in this report.

During the first six months of fiscal 2014, we generated $36.4 million of net cash flows provided by operating activities compared to $51.2 million of net cash flows used by operating activities during the first six months of fiscal 2013. Significant fluctuations in working capital were as follows:

Accounts receivable - For the six months ended February 28, 2014 compared to the six months ended February 28, 2013, our accounts receivable provided more cash to operations primarily due to increased collections of outstanding receivables. Days sales outstanding were 46 days, a five day decrease from 51 days at February 28, 2013.

Inventories - For the six months ended February 28, 2014 compared to the six months ended February 28, 2013, our inventories increased at a higher rate than sales. Days sales in inventories were 59 days, an eight day increase from 51 days at February 28, 2013. This is primarily due to the decrease in sales year over year, as noted above, and building up inventory levels in anticipation of spring and summer construction as well as in preparation for the installation of a new electric arc furnace in Poland.

Net cash flows from investing activities were $22.4 million for the six months ended February 28, 2014, compared with net cash flows used by investing activities of $6.0 million for the six months ended February 28, 2013. The change in net cash flows from investing activities is a result of a decrease in capital expenditures during the first six months of fiscal 2014 compared to the same period in fiscal 2013. In addition, our net cash flows from investing activities for the first six months of fiscal 2014 include $52.3 million of cash proceeds from the sale of Howell.

We expect our total capital expenditures for fiscal 2014 to be between $130 million and $140 million. We regularly assess our capital spending and reevaluate our requirements based on current and expected results.

We used net cash flows of $6.4 million and $36.9 million from financing activities during the first six months of fiscal 2014 and fiscal 2013, respectively.

An increase in documentary letters of credit over the period resulted in cash flow from financing activities of $4.8 million. 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 $18.3 million in restricted cash that had been serving as collateral for letters of credit obligations for our Australian subsidiary. Offsetting these increases in cash flows from financing activities, our cash dividends remained consistent at $28.2 million and $28.0 million for the six months ended February 28, 2014 and 2013, respectively.


31




Our estimated contractual obligations for the twelve months ending February 28, 2015 were approximately $1.0 billion and constitute expenditures incurred in connection with normal revenue producing activities. We believe our cash flows from operating activities and credit facilities are adequate to fund our ongoing operations and planned capital expenditures.
CONTRACTUAL OBLIGATIONS

There were no material changes to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013.

Other Commercial Commitments

We maintain stand-by letters of credit to provide support for certain transactions that our insurance providers and suppliers request. At February 28, 2014, we had committed $47.4 million under these arrangements.
OFF-BALANCE SHEET ARRANGEMENTS

For added flexibility, we may 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. The Company accounts 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 the Company's consolidated statements of cash flows.
CONTINGENCIES

See Note 13, Commitments and Contingencies, to the unaudited 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. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. Inherent uncertainties exist in these estimates primarily due to evolving remediation technology, changing regulations, possible third-party contributions and the uncertainties involved in litigation. We believe that we have adequately provided in our consolidated financial statements for the potential impact of these contingencies. We 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.
FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, with respect to our financial condition, results of operations, cash flows and business, and our expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. 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. 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;

significant reductions in China’s steel consumption or increased Chinese steel production;

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

32




    
success or failure of governmental efforts to stimulate the economy including restoring credit availability and confidence in a recovery;
    
continued sovereign debt problems in the Euro-zone;
    
construction activity or lack thereof;
    
availability and pricing of raw materials over which we exert little influence, including scrap metal, energy, insurance and supply prices;
    
increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing;

decisions by governments affecting the level of steel imports;

passage of new, or interpretation of existing, environmental laws and regulations;
increased regulation associated with climate change and greenhouse gas emissions;
    
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;
    
difficulties or delays in the execution of construction contracts, resulting in cost overruns or contract disputes;
    
ability to retain key executives;
    
execution of cost reduction strategies;
    
industry consolidation or changes in production capacity or utilization;
    
ability to make necessary capital expenditures;

unexpected equipment failures;
 
competition from other materials;
    
losses or limited potential gains due to hedging transactions;
    
litigation claims and settlements, court decisions and regulatory rulings;
    
risk of injury or death to employees, customers or other visitors to our operations;
    
increased costs related to health care reform legislation;

seasonal slowdowns; and
 
those factors listed under Item 1A. "Risk Factors" included in the Company's Annual Report filed on Form 10-K for the fiscal year ended August 31, 2013.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the information set forth in Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
ITEM 4. CONTROLS AND PROCEDURES

The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods, and includes controls and disclosures designed to ensure that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and they have concluded that as of that date, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended February 28, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2013, on September 18, 2008, the Company was served with a class action antitrust lawsuit alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against nine steel manufacturing companies, including CMC. The lawsuit, filed in the United States District Court for the Northern District of Illinois, alleges that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products. The lawsuit, which purports to be brought on behalf of a class consisting of all purchasers of steel products directly from the defendants between January 1, 2005 and September 2008 (collectively, the "Direct Purchaser Plaintiffs"), seeks treble damages and costs, including reasonable attorney fees and pre- and post-judgment interest.

On March 14, 2014, the Company entered into a final settlement agreement with the Direct Purchaser Plaintiffs pursuant to which the Company will pay the Direct Purchaser Plaintiffs an amount of approximately $4.0 million and all claims of the Direct Purchaser Plaintiffs will be fully and finally released. The Company continues to maintain that the claims lack merit and that it has full and complete defenses to all of the claims asserted against it. However, the Company has agreed to enter into the settlement agreement to avoid further expense, inconvenience, and distraction of burdensome and protracted litigation. The settlement is subject to preliminary and final court approval.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Item 1A Part I of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.
ITEM 5. OTHER INFORMATION

None.


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ITEM 6.
EXHIBITS

Exhibits required by Item 601 of Regulation S-K:
3.1(a)
Restated Certificate of Incorporation (filed as Exhibit 3(i) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(b)
Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (filed as Exhibit 3(i)(a) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(c)
Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (filed as Exhibit 3(i)(b) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(d)
Certificate of Amendment of Restated Certificate of Incorporation dated January 22, 2004 (filed as Exhibit 3(i)(d) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 and incorporated herein by reference).
 
 
3.1(e)
Certificate of Amendment of Restated Certificate of Incorporation dated January 26, 2006 (filed as Exhibit 3(i) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2006 and incorporated herein by reference).
 
 
3.1(f)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock (filed as Exhibit 2 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference).
 
 
3.1(g)
Certificate of Designation of Series B Junior Participating Preferred Stock of Commercial Metals Company (filed as Exhibit 2 to Commercial Metals Company's Form 8-A filed August 1, 2011 and incorporated herein by reference).
 
 
3.1(h)
Certificate of Elimination of Series B Junior Participating Preferred Stock dated December 7, 2012 (filed as Exhibit 3.1 to Commercial Metals Company's Current Report on Form 8-K filed December 7, 2012 and incorporated herein by reference).
 
 
3.2
Second Amended and Restated Bylaws (filed as Exhibit 3.1 to Commercial Metals Company's Current Report on Form 8-K filed October 25, 2010 and incorporated herein by reference).
 
 
31.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 to the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
Certification of Barbara R. Smith, Senior Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.2
Certification of Barbara R. Smith, Senior Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
101
The following financial information from Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations (Unaudited), (ii) the Consolidated Statements of Comprehensive Income (Unaudited) (iii) the Consolidated Balance Sheets (Unaudited), (iv) the Consolidated Statements of Cash Flows (Unaudited), (v) the Consolidated Statements of Stockholders' Equity (Unaudited) and (vi) the Notes to Consolidated Financial Statements (Unaudited) (submitted electronically herewith).



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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
COMMERCIAL METALS COMPANY
 
 
March 31, 2014
/s/ Barbara R. Smith
 
Barbara R. Smith
 
Senior Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer of the registrant)





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INDEX TO EXHIBITS
 
Exhibit No.
 
Description of Exhibit
3.1(a)
 
Restated Certificate of Incorporation (filed as Exhibit 3(i) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
 
3.1(b)
 
Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (filed as Exhibit 3(i)(a) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
 
3.1(c)
 
Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (filed as Exhibit 3(i)(b) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
 
3.1(d)
 
Certificate of Amendment of Restated Certificate of Incorporation Dated January 22, 2004 (filed as Exhibit 3(i)(d) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 and incorporated herein by reference).
 
 
 
3.1(e)
 
Certificate of Amendment of Restated Certificate of Incorporation dated January 26, 2006 (filed as Exhibit 3(i) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2006 and incorporated herein by reference).
 
 
 
3.1(f)
 
Certificate of Designation, Preferences and Rights of Series A Preferred Stock (filed as Exhibit 2 to Commercial Metals' Form 8-A filed August 3, 1999 and incorporated herein by reference).
 
 
 
3.1(g)
 
Certificate of Designation of Series B Junior Participating Preferred Stock of Commercial Metals Company (filed as Exhibit 2 to Commercial Metals Company's Form 8-A filed August 1, 2011 and incorporated herein by reference).
 
 
 
3.1(h)
 
Certificate of Elimination of Series B Junior Participating Preferred Stock dated December 7, 2012 (filed as Exhibit 3.1 to Commercial Metals Company's Current Report on Form 8-K filed December 7, 2012 and incorporated herein by reference).
 
 
 
3.2
 
Second Amended and Restated Bylaws (filed as Exhibit 3.1 to Commercial Metals Company's Current Report on Form 8-K filed October 25, 2010 and incorporated herein by reference).
 
 
 
31.1
 
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 to the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
31.2
 
Certification of Barbara R. Smith, Senior Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
32.1
 
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
32.2
 
Certification of Barbara R. Smith, Senior Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
101
 
The following financial information from Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations (Unaudited), (ii) the Consolidated Statements of Comprehensive Income (Unaudited) (iii) the Consolidated Balance Sheets (Unaudited), (iv) the Consolidated Statements of Cash Flows (Unaudited), (v) the Consolidated Statements of Stockholders' Equity (Unaudited) and (vi) the Notes to Consolidated Financial Statements (Unaudited) (submitted electronically herewith).
 

38