ITEM 1A. RISK FACTORS
There are inherent risks and uncertainties associated with our business that could adversely affect our business, results of operations and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described below are not the only risks and uncertainties that could adversely affect our business, results of operations and financial condition. If any of these risks actually occur, our business, results of operations and financial condition could be materially adversely affected.
RISKS RELATED TO OUR BUSINESS
Scrap and other inputs for our business are subject to significant price fluctuations and limited availability, which may adversely affect our business, results of operations and financial condition.
At any given time, we may be unable to obtain an adequate supply of critical raw materials at prices and on other terms acceptable to us. We depend on ferrous scrap, the primary raw material used by our steel mills, and other inputs such as graphite electrodes and alloys for our steel mill operations. The price of scrap and other inputs has historically been subject to significant fluctuation, and we may not be able to adjust our product prices to recover the costs of rapid increases in raw material prices, especially over the short-term and in our fixed price contracts. The profitability of our operations would be adversely affected if we are unable to pass increased raw material and input costs on to our customers.
The purchase prices for automobile bodies and various other grades of obsolete and industrial scrap, as well as the selling prices for processed and recycled scrap metals we utilize in our own manufacturing process or resell to others, are highly volatile. A prolonged period of low scrap prices or a fall in scrap prices could impair our ability to obtain, process, sell and consume recycled material, which could have a material adverse effect on our business, results of operations and financial condition. Our ability to respond to changing recycled metal selling prices may be limited by competitive or other factors during periods of low scrap prices, when the supply of scrap may decline considerably, as scrap generators hold onto their scrap in the hope of getting higher prices later. Conversely, increased foreign demand for scrap due to economic expansion in countries such as China, India, Brazil and Turkey, as well as the growth of EAF steel production due to efforts by countries and producers to reduce carbon emissions in the industry, can result in an outflow of available domestic scrap as well as higher scrap prices that cannot always be passed on to domestic scrap consumers or consumers of our steel products, further reducing the available domestic scrap flows and margins, all of which could adversely affect our sales and profitability.
The availability of raw materials may also be negatively affected by new laws and regulations, countries limiting scrap exports, allocations by suppliers, interruptions in production, accidents or natural disasters, changes in exchange rates, global price fluctuations and the availability and cost of transportation. If we are unable to obtain adequate and timely deliveries of our required raw materials, we may be unable to timely manufacture significant quantities of our products.
We are vulnerable to the economic conditions in the regions in which our operations are concentrated.
Economic downturns in the U.S., United Kingdom (the "U.K."), Central Europe and China, or decisions by governments that have an impact on the level and pace of overall economic activity in one of these regions, could adversely affect demand for our products and, consequently, our sales and profitability. As a result, our financial results are substantially dependent upon the overall economic conditions in these areas.
We rely on the availability of large amounts of electricity and natural gas. Disruptions in delivery or substantial increases in energy costs, including crude oil prices, could adversely affect our business, results of operations and financial condition.
Our EAF mills melt steel scrap and use natural gas to heat steel billets for rolling into finished steel products. As large consumers of electricity and natural gas, often the largest in the geographic area where our mills are located, we must have dependable delivery of electricity and natural gas in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes would substantially disrupt our production. While we have not suffered prolonged production delays due to our inability to access electricity or natural gas, several of our competitors have experienced such occurrences. Prolonged substantial increases in energy costs would have an adverse effect on the costs of operating our mills and would negatively impact our profitability unless we were able to fully pass through the additional expense to our customers. Further, our finished steel products are typically delivered by
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truck. Rapid increases in the price of fuel attributable to increases in crude oil prices would increase our costs and adversely affect many of our customers' financial results, which in turn could result in reduced margins and declining demand for our products.
We may encounter labor disputes and shortages for skilled labor and/or qualified employees in operational positions, which could adversely impact our operations.
Our employees contribute to developing and meeting our business goals and objectives, and we depend on a qualified labor force for the manufacture of our products. The impact of labor shortages and increased competition for available workers may increase our costs or impede our ability to optimally staff our facilities and could have an adverse impact on our results of operations, financial condition and cash flows. In addition, an ongoing labor shortage may result in increased expenses related to hiring and retention of qualified employees. As our experienced employees retire and we lose their institutional knowledge, we may encounter challenges and may have difficulty replacing them with employees of comparable skill and efficiency. Additionally, as of August 31, 2024, 14%, 29% and 10% of the employees in our North America Steel Group, Europe Steel Group and Emerging Businesses Group segments, respectively, belong to unions. While we believe that we have good relations with the union representatives, there can be no assurance that any future labor negotiations will prove successful, which may result in a significant increase in the cost of labor, or may break down and result in the disruption of our business or operations.
The loss of, or inability to hire, key employees may adversely affect our ability to successfully manage our operations and meet our strategic objectives.
Our future success depends, in large part, on the continued service of our officers and other key employees and our ability to continue to attract and retain additional highly qualified personnel. These employees are integral to our success based on their expertise and knowledge of our business and products. We compete for such personnel with other companies, including public and private company competitors who may periodically offer more favorable terms of employment. The loss or interruption of the services of a number of our key employees could reduce our ability to effectively manage our operations should we be unable to find appropriate replacement personnel in a timely manner.
Our business, financial condition and results of operations may be adversely impacted by the effects of inflation.
Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. Other inflationary pressures could affect wages, energy prices, the cost and availability of components and raw materials and other inputs and our ability to meet customer demand. Inflation may further exacerbate other risk factors, including supply chain disruptions, risks related to international operations and the recruitment and retention of qualified employees.
We may have difficulty competing with companies that have a lower cost structure or access to greater financial resources.
We compete with regional, national and foreign manufacturers and traders. Consolidation among participants in the steel manufacturing and recycling industries has resulted in fewer competitors, and several of our competitors are significantly larger than us and have greater financial resources and more diverse businesses than us. Some of our foreign competitors may be able to pursue business opportunities without regard to certain laws and regulations with which we must comply, such as environmental regulations. These companies may have a lower cost structure and more operating flexibility, and consequently they may be able to offer lower prices and more services than we can. There is no assurance that we will be able to compete successfully with these companies. Any of these factors could have a material adverse effect on our business, results of operations and financial condition.
Operating and startup risks, as well as market risks associated with the commissioning of our micro mills, could prevent us from realizing anticipated benefits and could result in a loss of all or a substantial part of our investments.
Although we have successfully commissioned and operated similar facilities, there are technological, operational, market and start-up risks associated with the continued ramp up of our third micro mill and the construction and commissioning of our fourth micro mill. Construction of our micro mills is subject to changing market conditions, delays, inflation and cost overruns, work stoppages, labor shortages, weather interferences, supply chain delays, changes in transportation costs and availability, changes required by governmental authorities, and delays in acquiring or the inability to acquire required permits or licenses, any of which could have an adverse impact on our operational and financial results. Further, although we believe these facilities should each be capable of consistently producing high-quality products in sufficient quantities and at costs that will compare
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favorably with other similar steel manufacturing facilities, there can be no assurance that these expectations will be achieved. If we encounter cost overruns, system or process difficulties or quality control restrictions during commissioning of our fourth micro mill or after startup with either or both facilities, our capital costs could increase materially, the expected benefits from the development of the applicable facilities could be diminished or lost and we could lose all or a substantial portion of our investments. In addition, reductions in the availability of certain modes of transportation, such as rail or trucking, during construction of our micro mills could result in significant delays, and reduced transportation availability following startup at our facilities could limit our ability to deliver our steel products and therefore adversely affect our operational and financial results. We could also encounter commodity market risk if, during a sustained period, the cost to manufacture is greater than projected or the market prices for steel products decline.
Our mills require continual capital investments that we may not be able to sustain.
We must make regular, substantial capital investments in our steel mills to maintain the mills, lower production costs and remain competitive. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary substantial capital expenditures in the future. The availability of external financing depends on many factors outside of our control, including capital market conditions and the overall performance of the economy. If funding is insufficient, we may be unable to develop or enhance our mills, take advantage of business opportunities and respond to competitive pressures.
Unexpected equipment failures may lead to production curtailments or shutdowns, which may adversely affect our business, results of operations and financial condition.
Interruptions in our production capabilities would adversely affect our production costs, products available for sale and earnings for the affected period. Our manufacturing processes are dependent upon critical pieces of steelmaking equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers. This equipment may, on occasion, be out of service as a result of unanticipated failures. While we maintain backups for certain critical pieces of equipment to use during the time it may take to repair or replace inoperable equipment, we have experienced, and may in the future experience, material plant shutdowns or periods of reduced production as a result of such equipment failures. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions.
Information technology interruptions and breaches in data security could adversely impact our business, results of operations and financial condition.
We rely on computers, information and communications technology and related systems and networks in order to operate our business, including to store sensitive data such as intellectual property, our own proprietary business information and that of our customers, suppliers and business partners and personally identifiable information of our employees. Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted cyber attacks, which may be heightened in times of hostilities or war, computer viruses, phishing attacks, social engineering schemes, malicious code, ransomware attacks, acts of terrorism and physical or electronic security breaches, including breaches by computer hackers, cyber-terrorists and/or unauthorized access to or disclosure of our and/or our employees’ or customers’ data pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our data. Our systems and networks are also subject to damage or interruption from power outages, natural disasters, telecommunications failures, intentional or inadvertent user misuse, employee error, operator negligence and other similar events. Any of these or other events could result in system interruption, the disclosure, modification or destruction of proprietary and other key information, corruption of data, legal claims or proceedings, government enforcement actions, civil or criminal penalties, increased cybersecurity protection and remediation costs, production delays or disruptions to operations including processing transactions and reporting financial results and could adversely impact our reputation and our operating results. We have taken steps to address these concerns and have implemented internal control and security measures to protect our systems and networks from security breaches; however, measures that the Company takes to avoid, detect, mitigate or recover from material incidents, may be insufficient or circumvented, or may become ineffective and there can be no assurance that a system or network failure, or security breach, will not impact our business, results of operations and financial condition. As cybersecurity threats continue to evolve and become more sophisticated, we may be required to incur significant costs and invest additional resources to protect against and, if required, remediate the damage caused by such disruptions or system failures in the future.
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Increasing attention to ESG matters, including any targets or other ESG, environmental justice or regulatory initiatives, could result in additional costs or risks or adverse impacts on our business.
Our business faces increasing scrutiny related to ESG issues, including environmental stewardship, supply chain management, climate change, diversity and inclusion, workplace conduct, human rights, philanthropy and support for local communities. Investors, stakeholders and other interested parties are also increasingly focused on issues related to environmental justice and ESG in general. Implementation of our environmental and sustainability initiatives, including the goals set forth in our annual sustainability report, requires certain financial expenditures and employee resources, and the implementation of certain ESG practices or disclosures. In addition, we are, or in the future may become, subject to domestic and international disclosure frameworks, regulations and requirements related to climate change and sustainability. Compliance with such disclosure frameworks, regulations and requirements, if and when they are implemented, could require significant effort, and if we fail to meet the applicable regulatory standards or expectations with respect to these issues, including the expectations we establish for our business, we could be subject to penalties, fines, lawsuits or regulatory action, our reputation and brand could be damaged, and our business, financial condition and results of operations could be adversely impacted. Furthermore, negative publicity with respect to our business and operations could result in the cancellation or delay of projects, the revocation of permits or termination of contracts, each of which may adversely affect our business strategy, increase our costs, or adversely affect our reputation and performance.
We are subject to litigation, potential liability claims and contract disputes, and may become subject to additional litigation, claims and disputes in the future, any of which could adversely affect our business, results of operations and financial condition.
We are involved in various litigation matters, including regulatory proceedings, administrative proceedings, governmental investigations, environmental matters and construction contract disputes. The nature of our operations also exposes us to possible litigation claims in the future. Furthermore, the manufacture and sale of our products as well as the use of our products in a wide variety of commercial and industrial applications expose us to potential product liability and related claims. In the event that a product of ours fails to perform as expected, regardless of fault, or is used in an unexpected manner, and such failure or use results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability and product quality claims.
Because of the uncertain nature of litigation and insurance coverage decisions, we cannot predict the outcome of these matters. These matters could have a material adverse effect on our reputation, business, results of operations and financial condition. Litigation is very costly, and the costs associated with prosecuting and defending litigation matters could have a material adverse effect on our business, results of operations and financial condition. Although we are unable to precisely estimate the ultimate dollar amount of exposure to loss in connection with litigation matters, we make accruals as warranted. However, the amounts that we accrue could vary significantly from the amounts we actually pay, due to inherent uncertainties, including the inherent uncertainties of the estimation process, the uncertainties involved in litigation and other factors. See Part I, Item 3, Legal Proceedings of this Annual Report for a description of certain pending legal proceedings.
Potential limitations on our ability to access credit, or the ability of our customers and suppliers to access credit, may adversely affect our business, results of operations and financial condition.
If our access to credit is limited or impaired, our business, results of operations and financial condition could be adversely impacted. Our senior unsecured notes are rated by Standard & Poor's Corporation, Moody's Investors Service and Fitch Group, Inc. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings (loss), fixed charges such as interest, cash flows, total debt outstanding, off-balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy and diversity, industry conditions and contingencies. Any downgrades in our credit ratings may make raising capital more difficult, increase the cost and affect the terms of future borrowings, affect the terms under which we purchase goods and services and limit our ability to take advantage of potential business opportunities. We could also be adversely affected if our banks refused to honor their contractual commitments or cease lending.
We are also exposed to risks associated with the creditworthiness of our customers and suppliers. In certain markets, we have experienced a consolidation among those entities to whom we sell. This consolidation has resulted in an increased credit risk spread among fewer customers, often without a corresponding strengthening of their financial status. If the availability of credit to fund or support the continuation and expansion of our customers' business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible
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customer accounts. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase and bankruptcy of customers, suppliers or other creditors. Any of these events may adversely affect our business, results of operations and financial condition.
Geopolitical conditions, including political turmoil and volatility, regional conflicts, terrorism and war have caused disruptions in the global economy, energy supplies and raw materials, which may continue to negatively impact our business and operations.
We operate globally and sell our products in countries throughout the world. Since early 2022, Russia and Ukraine have been engaged in active armed conflict. We continue to monitor the adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the U.S. and several European and Asian countries may continue to have on the global economy in general, on our business and operations and on the businesses and operations of our suppliers and customers. The ongoing conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices and credit markets, as well as reductions in demand and supply chain interruptions, and contributed to global inflation. Further, if the conflict intensifies or expands beyond Ukraine, it could continue to have an adverse, indirect impact on our operations in Poland. The Russian invasion of Ukraine did not have a direct material adverse impact on our business, financial condition or results of operations during 2024, 2023 or 2022. However, we will continue to monitor this fluid situation and develop contingency plans as necessary to address any disruptions to our business operations. To the extent this and other geopolitical conflicts may continue to adversely affect the global economy as discussed above, they may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to data security, supply chain, volatility in prices of scrap, energy and other inputs, and market conditions, any of which could negatively affect our business, results of operations and financial condition.
The potential impact of our customers' non-compliance with existing commercial contracts and commitments, due to insolvency or for any other reason, may adversely affect our business, results of operations and financial condition.
From time to time in the past, some of our customers have sought to renegotiate or cancel their existing purchase commitments with us. In addition, some of our customers have breached previously agreed upon contracts to buy our products by refusing delivery of the products.
Where appropriate, we have and expect to in the future pursue litigation to recover our damages resulting from customer contract defaults and bankruptcy filings. We use credit assessments in the U.S. and credit insurance in Poland to mitigate the risk of customer insolvency. However, a large number of our customers defaulting on existing contractual obligations to purchase our products could have a material adverse effect on our business, results of operations and financial condition.
The agreements governing our notes and our other debt contain financial covenants and impose restrictions on our business.
The indentures governing our 4.125% Senior Notes due 2030, our 3.875% Senior Notes due 2031 and our 4.375% Senior Notes due 2032 contain restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions and consummate transactions causing a change of control such as a merger or consolidation. In addition to these restrictions, our Credit Agreement, as defined in Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, contains covenants that restrict our ability to, among other things, enter into transactions with affiliates and guarantee the debt of some of our subsidiaries. Our Credit Agreement, as defined in Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report also requires that we meet certain financial tests and maintain certain financial ratios, including maximum debt to capitalization and interest coverage ratios. The loan agreement related to the Series 2022 Bonds, as defined in Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, also restricts our ability to, among other things, enter into certain sale and leaseback transactions, incur certain liens and take certain actions that would adversely affect the tax-exempt status of the Series 2022 Bonds.
Other agreements that we may enter into in the future may contain covenants imposing significant restrictions on our business that are similar to, or in addition to, the covenants under our existing agreements. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants could result in a default under the indentures governing our notes or under our other debt agreements. An event of default under our debt agreements would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we were unable to
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repay debt to our secured lenders or if we incur additional secured debt in the future, these lenders could proceed against the collateral securing such debt. In addition, acceleration of our other indebtedness may cause us to be unable to make interest payments on our notes.
We may not be able to successfully identify, consummate or integrate acquisitions, and acquisitions may adversely affect our financial leverage.
Part of our business strategy includes pursuing synergistic acquisitions. We have expanded, and plan to continue to expand, our business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance our growth. We may fund such acquisitions using cash on hand, drawing under our credit facility or accessing the capital markets. To the extent we finance such acquisitions with additional debt, the incurrence of such debt may result in a significant increase in our interest expense and financial leverage, which could be further exacerbated by volatility in the debt capital markets. Further, an increase in our leverage could lead to deterioration in our credit ratings.
The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions.
Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing or at all. For example, elimination of duplicative costs may not be fully achieved or may take longer than anticipated. The benefits from any acquisition may be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection with acquisitions to which we would not otherwise be exposed. An inability to realize any or all of the anticipated synergies or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business, results of operations and financial condition.
Goodwill or other indefinite-lived intangible asset impairment charges in the future could have a material adverse effect on our business, results of operations and financial condition.
Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of the first day of our fourth quarter and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit, including goodwill, or an indefinite-lived intangible asset exceeds its fair value.
To evaluate goodwill and other indefinite-lived intangible assets for impairment, we may use qualitative assessments to determine whether it is more likely than not that the fair value of a reporting unit, including goodwill, or an indefinite-lived intangible asset is less than its carrying amount. The qualitative assessments require assumptions to be made regarding multiple factors, including the current operating environment, historical and future financial performance and industry and market conditions. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. Alternatively, the Company may elect to bypass the qualitative assessment and instead perform a quantitative impairment test to calculate the fair value of the reporting unit in comparison to its associated carrying value.
The quantitative impairment tests require us to make an estimate of the fair value of our reporting units and indefinite-lived intangible assets. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) our cost of capital; (iii) higher material prices; (iv) slower growth rates in our industry; and (v) changes in the market based discount rates. Since a number of factors may influence determinations of fair value of goodwill and indefinite-lived intangible assets, we are unable to predict whether impairments will occur in the future, and there can be no assurance that continued conditions will not result in future impairments. The future occurrence of a potential indicator of impairment could include matters such as (i) a decrease in expected net earnings; (ii) adverse equity market conditions; (iii) a decline in current market multiples; (iv) a decline in our common stock price; (v) a significant adverse change in legal factors or the general business climate; (vi) an adverse action or assessment by a regulator; (vii) a significant downturn in residential or non-residential construction markets; and (viii) excess steelmaking capacity due to new mill startup in the U.S. or levels of imported steel. Any such impairment would result in us recognizing a non-cash charge in our consolidated statements of earnings, which could adversely affect our business, results of operations and financial condition.
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Impairment of long-lived assets in the future could have a material adverse effect on our business, results of operations and financial condition.
We have a significant amount of property, plant and equipment, finite-lived intangible assets and right-of-use ("ROU") assets that may be subject to impairment testing. Long-lived assets are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the net carrying value of the asset or group of assets exceeds our estimate of future undiscounted cash flows of the operations related to the asset, the excess of the net carrying value over estimated fair value is charged to impairment loss in the consolidated statements of earnings. The primary factors that affect estimates of future cash flows for these long-lived asset groups are (i) management's raw material price outlook; (ii) market demand; (iii) working capital changes; (iv) capital expenditures; and (v) selling, general and administrative ("SG&A") expenses. There can be no assurance that continued market conditions, demand for our products, facility utilization levels or other factors will not result in future impairment charges.
Competition from other materials may have a material adverse effect on our business, results of operations and financial condition.
In many applications, steel competes with other materials, such as aluminum and plastics (particularly in the automobile industry), cement, composites, glass and wood. Increased use of, or additional substitutes for, steel products could adversely affect future market prices and demand for steel products.
Our operations present significant risk of injury or death.
The industrial activities conducted at our facilities present significant risk of serious injury or death to our employees, customers or other visitors to our operations. Notwithstanding our safety precautions, including our material compliance with federal, state and local employee health and safety regulations, we may be unable to avoid material liabilities for injuries or deaths. We maintain workers' compensation insurance to address the risk of incurring material liabilities for injuries or deaths, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on the terms acceptable to us, or at all, which could result in material liabilities to us for any injuries or deaths.
Our business, financial condition, results of operations, cash flows, liquidity and stock price may be adversely affected by global public health epidemics.
Pandemics, epidemics, widespread illness or other health issues that interfere with the ability of our employees, suppliers, customers, financing sources or others to conduct business, or negatively affect consumer confidence or the global economy, could adversely affect our business, financial condition, results of operations, cash flows, liquidity and stock price.
Additionally, such global public health epidemics could negatively impact our operations, supply chain, transportation networks and customers, which may compress our margins, including as a result of preventative and precautionary measures that we, other businesses and governments are taking. Any economic downturn resulting from the widespread public health impacts of any future public health epidemic could adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products and raw materials.
Fluctuations in the value of the U.S. dollar relative to other currencies may adversely affect our business, results of operations and financial condition.
Fluctuations in the value of the U.S. dollar, including, in particular, the increased strength of the U.S. dollar as compared to Turkey's lira, China's renminbi or the euro, may adversely affect our business, results of operations and financial condition. A strong U.S. dollar makes imported metal products less expensive, resulting in more imports of steel products into the U.S. by our foreign competitors, while a weak U.S. dollar may have the opposite impact on imports. With the exception of exports of nonferrous scrap metal by certain recycling facilities in our North America Steel Group segment, we have not recently been a significant exporter of metal products from the U.S. Economic difficulties in some large steel-producing regions of the world, resulting in lower local demand for steel products, have historically encouraged greater steel exports to the U.S. at depressed prices which can be exacerbated by a strong U.S. dollar. As a result, our products that are made in the U.S. may become
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relatively more expensive as compared to imported steel, which has had, and in the future could have, a negative impact on our business, results of operations and financial condition.
Operating internationally carries risks and uncertainties which could adversely affect our business, results of operations and financial condition.
We have significant recycling and fabrication facilities and a mini mill in Poland as well as Tensar facilities in China and the U.K. Our Europe Steel Group segment, which comprises the majority of our international operations, generated approximately 11% of 2024 consolidated net sales. Our stability, growth and profitability are subject to a number of risks inherent in doing business internationally in addition to the currency exchange risk and operating risks discussed above, including:
•political, military, terrorist or major pandemic events;
•differences in demand, production and energy costs;
•local labor and social issues;
•legal and regulatory requirements or limitations imposed by foreign governments (particularly those with significant steel consumption or steel-related production including Turkey, China, Brazil, Russia and India), including quotas, tariffs or other protectionist trade barriers, adverse tax law changes, nationalization or currency restrictions, and efforts to reduce carbon dioxide emissions;
•disruptions or delays in shipments caused by customs compliance or government agencies; and
•potential difficulties in staffing and managing local operations.
These factors may adversely affect our business, results of operations and financial condition.
Hedging transactions may expose us to losses or limit our potential gains.
Our product lines and global operations expose us to risks associated with fluctuations in foreign currency exchange rates, commodity prices and interest rates. As part of our risk management program, we sometimes use financial instruments, including metals commodity futures, natural gas, electricity and other energy forward contracts, freight forward contracts, foreign currency exchange forward contracts and interest rate swap contracts. While intended to reduce the effects of fluctuations in these prices and rates, these transactions may limit our potential gains or expose us to losses. If our counterparties to such transactions or the sponsors of the exchanges through which these transactions are offered, such as the London Metal Exchange, fail to honor their obligations due to financial distress, we would be exposed to potential losses or the inability to recover anticipated gains from these transactions.
We enter into the foreign currency exchange forward contracts as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. These foreign exchange commitments are dependent on timely performance by our counterparties. Their failure to perform could result in us having to close these hedges without the anticipated underlying transaction and could result in losses if foreign currency exchange rates have changed.
There can be no assurance that we will repurchase shares of our common stock at all or in any particular amounts.
The stock markets in general have experienced substantial price and trading fluctuations, which have resulted in volatility in the market prices of securities that often are unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the trading price of our common stock. Price volatility over a given period may also cause the average price at which we repurchase our own common stock to exceed the stock's price at a given point in time. In addition, significant changes in the trading price of our common stock and our ability to access capital on terms favorable to us could impact our ability to repurchase shares of our common stock. The timing and amount of any repurchases will be determined by the Company's management based on its evaluation of market conditions, capital allocation alternatives and other factors beyond our control. Our share repurchase program may be modified, suspended, extended or terminated by the Company at any time and without notice. See Note 15, Capital Stock, in Part II, Item 8 of this Annual Report for additional information on our share repurchase program.
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RISKS RELATED TO OUR INDUSTRY
Our industry and the industries we serve are vulnerable to global economic conditions.
Metals industries and commodity products have historically been vulnerable to significant declines in consumption, global overcapacity and depressed product pricing during prolonged periods of economic downturn. Our business supports cyclical industries such as commercial, government and residential construction, energy, metals service center, petrochemical and original equipment manufacturing. We may experience significant fluctuations in demand for our products from these industries based on global or regional economic conditions, geo-political conflicts, energy prices, consumer demand and decisions by governments to fund infrastructure projects such as highways, schools, energy plants and airports. Commercial and infrastructure construction activities related to the residential housing market, such as shopping centers, schools and roads, could be adversely impacted by a prolonged slump in new housing construction. Our business, results of operations and financial condition are adversely affected when the industries we serve suffer a prolonged downturn or anemic growth. Because we do not have unlimited backlogs, our business, results of operations and financial condition are promptly affected by short-term economic fluctuations.
We are unable to predict the duration of current economic conditions that are contributing to current demand for our products. Future economic downturns or a prolonged period of slow growth or economic stagnation could materially adversely affect our business, results of operations and financial condition.
Excess capacity and over-production by foreign producers in the steel industry as well as the startup of new steelmaking capacity in the U.S. could result in lower domestic steel prices, which would adversely affect our sales, margins and profitability.
Global steelmaking capacity exceeds demand for steel products in many regions around the world. Rather than reducing employment by rationalizing capacity with consumption, steel manufacturers in these countries (often with local government assistance or subsidies in various forms) have traditionally exported steel at prices significantly below their home market prices, which prices may not reflect their costs of production or capital. For example, steel production in China, the world's largest producer and consumer of steel, has continued to exceed Chinese demand. This excess capacity in China has resulted in a further increase in imports of artificially low-priced steel and steel products to the U.S. and world steel markets. A continuation of this trend or a significant decrease in China's rate of economic expansion could result in increasing steel imports from China. Excessive imports of steel into the U.S. have exerted, and may continue to exert, downward pressure on U.S. steel prices, which negatively affects our ability to increase our sales, margins and profitability. The excess capacity may create downward pressure on our steel prices and lead to reduced sales volumes as imports absorb market share that would otherwise be filled by domestic supply, all of which would adversely affect our sales, margins and profitability and could subject us to possible renegotiation of contracts or increases in bad debt. Excess capacity has also led to greater protectionism as is evident in raw material and finished product border tariffs put in place by China, Brazil and other countries.
We believe the downward pressure on, and periodically depressed levels of, U.S. steel prices in some recent years have been further exacerbated by imports of steel involving dumping and subsidy abuses by foreign steel producers. While some tariffs and quotas are periodically put into effect for certain steel products imported from a number of countries that have been found to have been unfairly pricing steel imports to the U.S., there is no assurance that tariffs and quotas will always be levied, even if otherwise justified, and even when imposed many of these are short-lived or ineffective.
On March 8, 2018, the President signed a proclamation imposing a 25% tariff or quota limits on all imported steel products for an indefinite period of time under Section 232. The tariff or quota limits are imposed on all steel imports with the exception of steel imports originating from Australia, Canada and Mexico, though pursuant to a U.S. Presidential Proclamation issued July 10, 2024, this exclusion no longer covers steel imports from Mexico that are melted and poured in a country other than Mexico, Canada or the U.S. During 2022, the current administration converted the tariff on steel imports from the European Union, U.K. and Japan to a tariff rate quota. When the Section 232 or other import tariffs, quotas or duties expire or if others are further relaxed or repealed, or if relatively higher U.S. steel prices make it attractive for foreign steelmakers to export their steel products to the U.S., despite the presence of import tariffs, quotas or duties, the resurgence of substantial imports of foreign steel could create downward pressure on U.S. steel prices.
The adverse effects of excess capacity and over-production by foreign producers could be exacerbated by the startup of new steelmaking capacity in the U.S. Any of these adverse effects could have a material adverse effect on our business, results of operations and financial condition.
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Rapid and significant changes in the price of metals could adversely impact our business, results of operations and financial condition.
Prices for most metals in which we deal have experienced increased volatility over the last several years, and such increased price volatility impacts us in several ways. While our downstream products may benefit from metal margin expansion as rapidly decreasing input costs for previously contracted fixed price work declines, our steel products would likely experience reduced metal margin and may be forced to liquidate high-cost inventory at reduced metal margins or losses until prices stabilize. Sudden increases in input costs could have the opposite effect in each case. Overall, we believe that rapid substantial price changes are not to our industry's benefit. Our customer and supplier base would be impacted due to uncertainty as to future prices. A reluctance to purchase inventory in the face of extreme price decreases or to sell quickly during a period of rapid price increases would likely reduce our volume of business. Marginal industry participants or speculators may attempt to participate to an unhealthy extent during a period of rapid price escalation with a substantial risk of contract default if prices suddenly reverse. Risks of default in contract performance by customers or suppliers as well as an increased risk of bad debts and customer credit exposure could increase during periods of rapid and substantial price changes.
Physical impacts of climate change could have a material adverse effect on our costs and results of operations.
The physical impacts of climate change may result in, among other things, increasing temperatures and an increase in extreme weather events such as droughts, wildfires, thunderstorms, snow or ice storms, earthquakes, floods, hurricanes and rising sea levels. Extreme weather conditions and natural disasters may increase our costs, limit the availability of materials, cause damage to our facilities or result in a prolonged disruption to our operations, and any damage resulting from extreme weather may not be fully insured.
Many of our facilities are located near coastal areas or waterways where rising sea levels or flooding could disrupt our operations or adversely impact our facilities. Additionally, two of our micro mills are located in an arid desert climate, where drought may restrict available water supplies and increase the risk of wildfires. Furthermore, major changes in weather patterns, periods of extended inclement weather or associated flooding may inhibit construction activity utilizing our products, result in project cancellations, delay or hinder shipments of our products to customers or reduce scrap metal inflows to our recycling facilities or disrupt the availability of electricity to our facilities. Any such events could have a material adverse effect on our costs or results of operations.
RISKS RELATED TO THE REGULATORY ENVIRONMENT
Compliance with and changes in environmental laws and regulations and remediation requirements could result in substantially increased capital obligations and operating costs; violations of environmental laws and regulations could result in costs that have a material adverse effect on our business, results of operations and financial condition.
Existing environmental laws or regulations, as currently interpreted or reinterpreted in the future, and future laws and regulations, may have a material adverse effect on our business, results of operations and financial condition. Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, federal and international environmental laws and regulations concerning, among other matters, waste disposal, air emissions, waste and storm water effluent and disposal and employee health. Federal and state regulatory agencies can impose administrative, civil and criminal penalties and may seek injunctive relief impacting continuing operations for non-compliance with environmental requirements.
New facilities that we may build, especially steel mills, are required to obtain several environmental permits before significant construction or commencement of operations. Delays in obtaining permits or unanticipated conditions in such permits could delay the project or increase construction costs or operating expenses. Our manufacturing and recycling operations produce significant amounts of by-products, some of which are handled as industrial waste or hazardous waste. For example, our EAF mills generate electric arc furnace dust ("EAF dust"), which the EPA and other regulatory authorities classify as hazardous waste. EAF dust and other industrial waste and hazardous waste require special handling, recycling or disposal.
In addition, the primary feed materials for the shredders operated by our recycling facilities are automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hull consists of material known as shredder fluff. After the segregation of ferrous scrap metal and saleable nonferrous metals, shredder fluff remains. We, along with others in the recycling industry, interpret federal regulations to require shredder fluff to meet certain criteria and pass a toxic leaching test to avoid classification as a hazardous waste. We also endeavor to remove hazardous contaminants from the feed material prior to shredding. As a result, we believe the shredder fluff we generate is not normally considered or properly classified as hazardous
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waste. If the laws, regulations or testing methods change with regard to EAF dust or shredder fluff or other by-products, we may incur additional significant costs.
Changes to National Ambient Air Quality Standards ("NAAQS") or other requirements on our air emissions could make it more difficult to obtain new permits or to modify existing permits and could require changes to our operations or emissions control equipment. Such difficulties and changes could result in operational delays and capital and ongoing compliance expenditures. These regulations can also increase our costs of energy, primarily electricity, which we use extensively in the steelmaking process. Moreover, in July 2021, the EPA issued a public statement regarding Clean Air Act violations at metal recycling facilities that operate auto and scrap metal shredders, noting that noncompliant shredders can have an impact on overburdened communities, and in August 2023, the EPA released federal enforcement priorities, which affirmed the EPA’s continued focus on reducing air toxins. The EPA uses alerts such as this to signal its intention to focus enforcement activity on a particular industry sector.
Legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate pollution control levels, testing and sampling procedures, new pollution control technology and cost/benefit analysis based on market conditions along with changing interpretations, stricter enforcement and expanding scope of regulation to emerging contaminants are all factors that may increase our future expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations. We cannot predict whether such costs would be able to be passed on to customers through product price increases. Competitors in various regions or countries where environmental regulation is less restrictive, subject to different interpretation or generally not enforced, may enjoy a competitive advantage.
We may also be required to conduct additional cleanup (and pay for associated natural resource damages) at sites where we have already participated in remediation efforts or take remediation action with regard to sites formerly used in connection with our operations in response to new information or new regulatory requirements. We may be required to pay for a portion or all of the costs of cleanup or remediation at sites we never owned or on which we never operated if we are found to have arranged for treatment or disposal of hazardous substances on the sites. In cases of joint and several liability, we may be obligated to pay a disproportionate share of cleanup costs if other responsible parties are financially insolvent.
Increased regulation associated with climate change could impose significant additional costs on both our steelmaking and metals recycling operations.
Energy used by our steelmaking operations is a significant input and the largest contributor to our GHG emissions and there is growing belief that consumption of energy derived from fossil fuels is a major contributor to climate change. The U.S. government and various governmental agencies have introduced or are contemplating regulatory changes in response to the potential impact of climate change, including legislation regarding carbon emission pricing, GHG emissions and renewable energy targets. International treaties or agreements may also result in increasing regulation of GHG emissions, including the introduction of carbon emissions trading mechanisms. Therefore, any such regulation regarding climate change and GHG emissions could impose significant costs on our steelmaking and metals recycling operations and on the operations of our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with current or future laws or regulations and limitations imposed on our operations. The potential costs of "allowances," "offsets" or "credits" that may be part of potential cap-and-trade programs or similar future regulatory measures are still uncertain. Any adopted future climate change and GHG regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations. From a medium and long-term perspective, as a result of these regulatory initiatives, we may see an increase in costs relating to our assets that emit significant amounts of GHGs. Additionally, although we are focused on water conservation and reuse in our operations, steel manufacturing is a water intensive industry. There may be an increase in costs to respond to future water laws and regulations, and operations in areas with limited water availability may be impacted if droughts become more frequent or severe.
Regulatory initiatives in these areas will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our business, results of operations or financial condition, but such effect could be materially adverse to our business, results of operations and financial condition.
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We are subject to governmental regulatory and compliance risks that expose us to potential litigation and disputes regarding violations, which could adversely affect our business, results of operations and financial condition.
As noted above, existing laws or regulations, as currently interpreted or reinterpreted in the future, and future laws and regulations, may have a material adverse effect on our business, results of operations and financial condition. See the risk factor "Compliance with and changes in environmental laws and regulations and remediation requirements could result in substantially increased capital obligations and operating costs; violations of environmental laws and regulations could result in costs that have a material adverse effect on our business, results of operations and financial condition" of this Annual Report for a description of such risks relating to environmental laws and regulations. In addition to such environmental laws and regulations, complex foreign and U.S. laws and regulations that apply to our international operations, including without limitation the Foreign Corrupt Practices Act and similar laws in other countries, which generally prohibit companies and those acting on their behalf from making improper payments to foreign government officials for the purpose of obtaining or retaining business, regulations related to import-export controls, the Office of Foreign Assets Control sanctions program and antiboycott provisions, may increase our cost of doing business in international jurisdictions and expose us and our employees to elevated risk. While we believe that we have adopted appropriate risk management and compliance programs, the nature of our operations means that legal and compliance risks will continue to exist. A negative outcome in an unusual or significant legal proceeding or compliance investigation could adversely affect our business, results of operations and financial condition.
We are involved, and may in the future become involved, in various environmental matters that may result in fines, penalties or judgments being assessed against us or liability imposed upon us which we cannot presently estimate or reasonably foresee, and which may have a material impact on our business, results of operations and financial condition.
Under CERCLA or similar state statutes, we may have obligations to conduct investigation and remediation activities associated with alleged releases of hazardous substances or other materials or to reimburse the EPA (or state agencies as applicable) for such activities and to pay for natural resource damages associated with alleged releases. We have been named a PRP at several federal and state Superfund sites because the EPA or an equivalent state agency contends that we and other potentially responsible scrap metal suppliers are liable for the cleanup of those sites as a result of having sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacture of new products. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites.
We are presently participating in PRP organizations at several sites, which are paying for certain remediation expenses. Although we are unable to precisely estimate the ultimate dollar amount of exposure to loss in connection with various environmental matters or the effect on our consolidated financial position, we make accruals as warranted. In addition, although we do not believe that a reasonably possible range of loss in excess of amounts accrued for pending lawsuits, claims or proceedings would be material to our financial statements, additional developments may occur, and due to inherent uncertainties, including evolving remediation technology, changing regulations, possible third-party contributions, the inherent uncertainties of the estimation process, the uncertainties involved in litigation and other factors, the amounts we ultimately are required to pay could vary significantly from the amounts we accrue, and this could have a material adverse effect on our business, results of operations and financial condition.
Changes in tax legislation and regulations in the jurisdictions in which we operate may adversely affect our financial condition or results of operations.
We are subject to taxation at the federal, state and local levels in the U.S., Poland, the U.K. and other countries and jurisdictions in which we operate, including income taxes, sales taxes, value-added taxes and similar taxes and assessments. New tax legislative initiatives may be proposed from time to time which may impact our effective tax rate and which could adversely affect our tax positions or tax liabilities. Our future effective tax rate could be adversely affected by, among other things, changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in interpretations of existing tax laws, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher taxes than would be incurred under existing tax law and which could adversely affect our financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 1C. CYBERSECURITY
Risk Management and Strategy
CMC has established a comprehensive cybersecurity risk management program to identify, assess and manage material risks from cybersecurity threats to our computer systems, outsourced services, communications systems, industrial processing equipment, hardware and software, and to safeguard our data and our customers’ data. Our risk management program includes a documented cybersecurity incident response plan and a data breach response plan (the “response plans”) that outline how to respond to and contain incidents and data breaches. Additionally, we maintain a cybersecurity incident disclosure and evaluation plan (the "disclosure plan") which would be used to assess the impact of a cybersecurity incident and promptly issue required SEC disclosures if needed. The response plans and disclosure plan are adapted depending on the type of incident or data breach and are tested at least once per year. We use the National Institute of Standards and Technology Cybersecurity Framework to guide our risk management program and utilize third parties to regularly review our response plans.
CMC recognizes the critical importance of a well-developed cybersecurity risk management program within an ever-changing threat landscape and has designed ongoing cybersecurity management protocols that are embedded into our global business processes and activities. These protocols include, but are not limited to, penetration testing, vulnerability scanning, attack simulations and appropriate internal controls, along with independent third-party audits conducted to evaluate compliance with security standards and best practices. The protocols are designed by our Chief Information Security Officer (“CISO”) and implemented by an experienced team including our information security and various technology departments. We engage expert consultants and third-party service providers to review our cybersecurity controls and readiness, alert us to potential improvements and provide incremental industry knowledge and expertise. Additionally, employees are required to complete cybersecurity training at the start of their employment and annually thereafter and are regularly exposed to phishing awareness campaigns that simulate real-world threats.
Our cybersecurity risk management program also addresses cybersecurity risks associated with our use of third-party service providers and our vendors. We proactively manage these risks by reviewing current and prospective third-party service providers’ compliance with our established relevant privacy and data security standards. We also require our key vendors to complete security questionnaires and we conduct audits and vulnerability scans related to them. Depending on the nature of the services provided and the sensitivity of the relevant data involved, our service provider and vendor management processes may involve different levels of assessment and impose additional obligations related to cybersecurity on the service provider or vendor.
While previous cybersecurity incidents and threats have not materially adversely affected our business strategy, results of operations or financial condition to date, any actual or perceived breach of our security could damage our reputation or subject us to third-party lawsuits, regulatory investigations and fines or other actions or liabilities, any of which could materially adversely affect our business strategy, results of operations, or financial condition. See Item 1A, Risk Factors, “Information technology interruptions and breaches in data security could adversely impact our business, results of operations and financial condition” for more information.
Governance
Both management and our Board understand that cybersecurity is crucial for securing our data and operations and defending the interests of our stakeholders. Our Board considers cybersecurity risk management as part of its general oversight function and receives an annual update on cybersecurity matters. The audit committee of our Board oversees management’s process for identifying and mitigating cybersecurity threats and implementing the cybersecurity risk management processes described above. On a quarterly basis, our Vice President and Chief Information Officer (“CIO”) and CISO update the audit committee regarding cybersecurity management initiatives, the status of ongoing cybersecurity threats CMC faces and other developments regarding our cybersecurity management protocols.
Our CISO has many years of experience in creating and implementing cybersecurity risk management programs and using cybersecurity management technologies and infrastructure solutions. Our CISO works under the supervision of our CIO, who has extensive experience in information technology and cybersecurity functions. Both the CISO and the CIO have daily responsibility for cybersecurity risk management and establishing risk management practices, and are involved in the execution of the response plans described above when a possible cybersecurity incident occurs. We engage a third-party service provider on a bi-annual basis to evaluate our cybersecurity risk management program and perform health checks on key applications. We also complete annual penetration testing to test our defenses against potential threats or risks.
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The response plans referenced above define a cross-functional cyber incident response team (the “CIRT”) that includes members of senior management, including the CISO and CIO, among other skilled employees. The CIRT plays an important role in the detection, mitigation, and remediation of cybersecurity incidents and in informing relevant members of management and the audit committee on cybersecurity threats and events. Select members of the CIRT actively participate in regular technical readiness exercises. Moreover, our executive officers participate in annual crisis tabletop exercises and attack simulations to prepare for a swift, effective, and thorough response to a potential cybersecurity incident.
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ITEM 2. PROPERTIES
The following table describes our principal properties as of August 31, 2024. These properties are either owned by us and not subject to any significant encumbrances or are leased by us. Refer to Part I, Item 1, Business included in this Annual Report for a discussion of the nature of our operations.
North America Steel Group
Steel mills 6.1
Mini mill Knoxville, Tennessee 76 — 460,000
Mini mill Sayreville, New Jersey 116 — 380,000
Rerolling mill Magnolia, Arkansas 123 — 280,000
Europe Steel Group
Fabrication facilities Five locations in Poland(4) 24 — 260,000 0.5
Emerging Businesses Group
CMC Anchoring Systems facilities (5) — 26 170,000
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(1) Consists of 43 scrap metal recycling facilities, with 17 locations in Texas, seven locations in South Carolina, four locations in Florida, three locations in Tennessee, two locations in each of Alabama, Georgia, Missouri and North Carolina and one location in each of California, Kansas, Louisiana and Oklahoma. The recycling facilities associated with the North America Steel Group segment are not individually material.
(2) Consists of 54 fabrication facilities, with 11 locations in Texas, five locations in Florida, three locations in each of California and Illinois, two locations in each of Arizona, Colorado, Georgia, Hawaii, Missouri, Nevada, New Jersey, North Carolina, Oklahoma, South Carolina, Tennessee, Utah and Virginia and one location in each of Alabama, Kentucky, Louisiana, New Mexico, Ohio and Washington. The fabrication facilities associated with the North America Steel Group segment are not individually material.
(3) Consists of three post-tension cable facilities, with two locations in Georgia and one location in California. The post-tension cable facilities are not individually material.
(4) The recycling facilities and fabrication facilities associated with the Europe Steel Group segment are not individually material.
(5) Consists of four CMC Anchoring Systems facilities, with one location in each of North Carolina, Tennessee, Texas and Utah. The CMC Anchoring Systems facilities are not individually material.
(6) Consists of two CMC Impact Metals facilities, with one location in Alabama and one location in Pennsylvania. The CMC Impact Metals facilities are not individually material.
(7) Consists of 24 CMC Construction Services facilities, with 18 locations in Texas, five locations in Louisiana and one location in Oklahoma. The CMC Construction Services facilities are not individually material.
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(8) Consists of four Tensar facilities, with one location in each of Georgia, Oklahoma, China and the U.K. The Tensar facilities are not individually material.
(9) Refer to Part 1, Item 1, Business, of this Annual Report for information about the calculation of capacity for our steel mills.
The extent to which we utilize our capacity varies by property and is highly dependent on the specific product mix manufactured. Our product mix is determined in response to market conditions, including pricing and demand. We believe our properties are appropriately utilized and suitable to meet the requirements of our present and foreseeable future operations, and our facilities are capable of producing increased volumes.
In addition to the owned facilities described above, we own 208 acres of land in Berkeley County, West Virginia, the site of the Company's fourth micro mill, which is currently under construction. We expect an operational start-up in late calendar 2025.
In addition to the leased facilities described above, we lease the 105,916 square foot office space occupied by our corporate headquarters in Irving, Texas. Generally, our leases expire on various dates over the next ten years, with the exception of the leased facilities in our Europe Steel Group segment, which have longer lease terms. Several of the leases have renewal options. We have generally been able to renew leases prior to their expiration. We estimate our minimum annual rental obligation for our real estate operating leases in effect at August 31, 2024, to be paid during 2025, to be approximately $13.2 million.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal and regulatory proceedings, lawsuits, claims and investigations (including those related to environmental laws and regulations) associated with the normal conduct of its businesses and operations. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company.
Legal Proceedings
On October 30, 2020, plaintiff Pacific Steel Group ("PSG") filed a suit in the United States District Court for the Northern District of California (the "Northern District Court") alleging that CMC, CMC Steel Fabricators, Inc. and CMC Steel US, LLC violated federal and California state antitrust laws and California common law by entering into an exclusivity agreement for certain steel mill equipment manufactured by one of the Company’s equipment suppliers. PSG seeks, among other things, a jury trial on its claims in addition to injunctive relief, compensatory damages, fees and costs. Fact and expert discovery are complete. Both the motion for summary judgment filed by CMC, CMC Steel Fabricators, Inc. and CMC Steel US, LLC and the cross-motion for summary judgment filed by PSG were denied by the Northern District Court on June 10, 2024. A jury trial is scheduled for late October 2024. The Company believes that it has substantial defenses and intends to vigorously defend against PSG's claims. The Company has not recorded any liability for this matter as it does not believe a loss is probable, and it cannot estimate any reasonably possible loss or range of possible loss. It is possible that an unfavorable resolution to this matter could have an adverse effect on the Company’s results of operations, financial position or cash flows.
On March 13, 2022, PSG filed a second suit in the San Diego County Superior Court of California alleging that CMC Steel Fabricators, Inc., CMC Steel US, LLC, and CMC Rebar West (which later merged into CMC Steel Fabricators, Inc.) violated California state antitrust and unfair competition laws by bidding below their costs for rebar furnish-and-install projects in California to hamper PSG's ability to win jobs. These same allegations were initially brought in PSG's lawsuit pending in the Northern District Court but were dismissed without prejudice by the Northern District Court for lack of jurisdiction. This second lawsuit was later removed to the United States District Court for the Southern District of California (the "Southern District Court"). There, PSG seeks, among other things, a jury trial on its claims in addition to injunctive relief, compensatory damages, fees and costs. Fact discovery is substantially complete and expert discovery is underway. As of the date of this Annual Report, no motions for summary judgment have been filed nor has a trial been scheduled. The Company believes that it has substantial defenses and intends to vigorously defend against PSG's claims. The Company has not recorded any liability for this matter as it does not believe a loss is probable, and it cannot estimate any reasonably possible loss or range of possible loss. It is possible that an unfavorable resolution to this matter could have an adverse effect on the Company’s results of operations, financial position or cash flows.
Environmental Matters
We are the subject of civil actions regarding compliance with environmental law, or have received notices from the EPA or state agencies with similar responsibility, that we and numerous other parties are considered a PRP and may be obligated under CERCLA, or similar state statutes, to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at ten locations. The actions and notices refer to the following locations, none
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of which involve real estate we ever owned or upon which we ever conducted operations: the Sapp Battery site in Cottondale, Florida, the Interstate Lead Company site in Leeds, Alabama, the Peak Oil site in Tampa, Florida, the R&H Oil site in San Antonio, Texas, the SoGreen/Parramore site in Tifton, Georgia, the Jensen Drive site in Houston, Texas, the Chemetco site in Hartford, Illinois, the Ward Transformer site in Raleigh, North Carolina, the Bailey Metal Processors, Inc. site in Brady, Texas and the Poly-Cycle Industries, Inc. site in Tecula, Texas. We may contest our designation as a PRP with regard to certain sites, while at other sites we are participating with other named PRPs in agreements or negotiations that have resulted or that we expect will result in agreements to remediate the sites. During 2010, we acquired a 70% interest in the real property at Jensen Drive as part of the remediation of that site. We have periodically received information requests from government environmental agencies with regard to other sites that are apparently under consideration for designation as listed sites under CERCLA or similar state statutes. Often, we do not receive any further communication with regard to these sites, and as of the date of this Annual Report, we do not know if any of these inquiries will ultimately result in a demand for payment from us.
We believe that adequate provisions have been made in the financial statements for the potential impact of any loss in connection with the above-described environmental matters and other miscellaneous litigation and legal proceedings not referenced above. We believe that there are substantial defenses to these actions and, where appropriate, these actions are being vigorously contested. Management believes that the outcome of the above-described environmental matters and other miscellaneous litigation and proceedings not referenced above now pending will not have a material adverse effect on our business, results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET, STOCKHOLDERS AND DIVIDENDS
Our common stock is traded on the New York Stock Exchange under the symbol CMC. The number of stockholders of record of CMC common stock at October 14, 2024 was 1,905.
In March 2024, our Board authorized an increase of $0.02 to our quarterly cash dividend, resulting in a $0.18 cash dividend per share of CMC common stock paid during the third and fourth quarters of 2024, compared to a quarterly cash dividend of $0.16 per share of CMC common stock paid during the first and second quarters of 2024 and during the year ended August 31, 2023. On October 15, 2024, the Board declared CMC's 240th consecutive quarterly cash dividend. The dividend was declared at the rate of $0.18 per share of CMC common stock and is payable on November 14, 2024 to stockholders of record as of the close of business on October 31, 2024. While the Board currently intends to continue regular quarterly cash dividend payments, the Board's determination with respect to any future dividends will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that the Board deems relevant at the time of such determination. Based on its evaluation of these factors, the Board may determine not to declare a dividend, or to declare dividends at rates that are less than currently anticipated.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information about purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act, as amended, made by the Company during the quarter ended August 31, 2024.
Issuer Purchases of Equity Securities(1)
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(1) On October 13, 2021, the Company announced that the Board authorized a share repurchase program under which the Company may repurchase up to $350.0 million of the Company's outstanding common stock. On January 10, 2024, the Company announced that the Board authorized an increase of $500.0 million to the existing share repurchase program. The share repurchase program does not require the Company to purchase any dollar amount or number of shares of CMC common stock and may be modified, suspended, extended or terminated by the Company at any time without prior notice. See Note 15, Capital Stock, in Part II, Item 8 of this Annual Report for more information on the share repurchase program.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this Annual Report.
OVERVIEW
CMC is an innovative solutions provider helping build a stronger, safer and more sustainable world. Through an extensive manufacturing network principally located in the U.S. and Central Europe, the Company offers products and technologies to meet the critical reinforcement needs of the global construction sector. CMC’s solutions support construction across a wide variety of applications, including infrastructure, non-residential, residential, industrial and energy generation and transmission. Our operations are conducted through three reportable segments: North America Steel Group, Europe Steel Group and the Emerging Businesses Group. See Part I, Item 1, Business, of this Annual Report for further information regarding our business and reportable segments.
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Key Performance Indicators
When evaluating our results for the period, we compare net sales, in the aggregate and for each of our reportable segments, in the current period to net sales in the corresponding period of the prior year. Specifically, for the North America Steel Group segment and the Europe Steel Group segment we focus on changes in average selling price per ton and tons shipped compared to the prior year period for each of our vertically integrated product categories as these are the two variables that typically have the greatest impact on our net sales for these reportable segments. Of the products evaluated based on changes in average selling price per ton and tons shipped within the North America Steel Group and Europe Steel Group segments, raw materials include ferrous and nonferrous scrap, steel products include rebar, merchant bar and other steel products, such as billets and wire rod, and downstream products include fabricated rebar, steel fence posts and wire mesh. The evaluations of average selling price per ton and tons shipped for downstream products exclude post-tension cable, which is not measured on a per ton basis.
Adjusted EBITDA is used by management to compare and evaluate the period-over-period underlying business operational performance of our reportable segments. Adjusted EBITDA is the sum of the Company's earnings before interest expense, income taxes, depreciation and amortization and impairment expense. Although there are many factors that can impact a segment’s adjusted EBITDA and, therefore, our overall earnings, changes in metal margins of our steel products and downstream products period-over-period in the North America Steel Group and Europe Steel Group segments are a consistent area of focus for our Company and industry. Metal margin is a metric used by management to monitor the results of our vertically integrated organization. For our steel products, metal margin is the difference between the average selling price per ton of rebar, merchant bar and other steel products and the cost of ferrous scrap per ton utilized by our steel mills to produce these products. An increase or decrease in input costs can impact profitability of these products when there is no corresponding change in selling prices. The metal margin for the North America Steel Group and Europe Steel Group segments' downstream products is the difference between the average selling price per ton of our downstream products and the scrap input costs to produce these products. The majority of the North America Steel Group and Europe Steel Group segments' downstream products selling prices per ton are fixed at the beginning of a project and these projects last one to two years on average. Because the selling price generally remains fixed over the life of a project, changes in input costs over the life of the project can significantly impact profitability.
BUSINESS CONDITIONS AND DEVELOPMENTS
Change in Reportable Segments
During the first quarter of 2024, we changed our reportable segments to reflect a change in the manner in which our business is managed. Based on changes to our organizational structure, the evolution of our solutions offerings outside of traditional steel products, the growing importance of non-steel solutions to our financial results and future outlook and how our chief operating decision maker, our President and Chief Executive Officer, reviews operating results and makes decisions about resource allocation, we now have three reportable segments that represent the primary businesses reported in our consolidated financial statements: North America Steel Group, Europe Steel Group and Emerging Businesses Group. See the section titled "Results of Operations Summary" below and Part I, Item 1, Business for further information regarding our business and reportable segments. As a result of this change in reportable segments, certain prior year amounts have been recast to conform to the current year presentation. Throughout this Form 10-K, unless otherwise indicated, amounts and activity affected by the change in reportable segments have been reclassified.
2023 Acquisitions
On September 15, 2022, we completed the acquisition of Advanced Steel Recovery, LLC ("ASR"), a supplier of recycled ferrous scrap metals located in Southern California. ASR's primary operations include processing and brokering capabilities that source material for sale into both the domestic and export markets.
On November 14, 2022, we completed the acquisition of a Galveston, Texas area metals recycling facility and related assets (collectively, "Kodiak") from Kodiak Resources, Inc. and Kodiak Properties, L.L.C.
On March 3, 2023, we completed the acquisition of all of the assets of Roane Metals Group, LLC ("Roane"), a supplier of recycled metals with two facilities located in eastern Tennessee.
On March 17, 2023, we completed the acquisition of Tendon Systems, LLC ("Tendon"), a leading provider of post-tensioning, barrier cable and concrete restoration solutions to the southeastern U.S.
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On May 1, 2023, we completed the acquisition of all of the assets of BOSTD America, LLC ("BOSTD"), a geogrid manufacturing facility located in Blackwell, Oklahoma. Prior to the acquisition, BOSTD produced several product lines for our Tensar operations under a contract manufacturing arrangement.
On July 12, 2023, we completed the acquisition of EDSCO Fasteners, LLC ("EDSCO"), a leading provider of anchoring solutions for the electrical transmission market, with four manufacturing facilities located in North Carolina, Tennessee, Texas and Utah. Following the acquisition, EDSCO was rebranded as CMC Anchoring Systems.
Operating results for ASR, Kodiak, Roane and Tendon are presented within the North America Steel Group segment. Operating results for BOSTD and CMC Anchoring Systems are presented within the Emerging Businesses Group segment. The acquired operations of ASR, Kodiak, Roane, Tendon, BOSTD and CMC Anchoring Systems are collectively referred to as the "2023 Acquisitions."
Tensar Acquisition
On April 25, 2022 (the "Tensar Acquisition Date"), we completed the acquisition of TAC Acquisition Corp. ("Tensar") for approximately $550 million, net of cash acquired. Through its patented foundation systems, Tensar produces ground stabilization and soil reinforcement solutions that complement our existing concrete reinforcement product lines and broaden our ability to address multiple early phases of commercial and infrastructure construction, including subgrade, foundation and structures. End customers for these products include commercial, industrial and residential site developers, mining and oil and gas companies, transportation authorities, coastal and waterway authorities and waste management companies. The acquired operations are presented within our Emerging Businesses Group segment. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the Tensar acquisition.
Capital Expenditures
During the fourth quarter of 2023, our third micro mill was placed into service. The new facility, located in Mesa, Arizona, replaced the rebar capacity at our Rancho Cucamonga, California mill, which was sold during 2022, and allows us to meet underlying West Coast and Pacific Northwest demand for steel products. For further details on the sale of the Rancho Cucamonga, California mill, refer to Note 2, Changes in Business, in Part II, Item 8 of this Annual Report. Designed to produce both rebar and merchant bar, this micro mill is the first in the world to produce merchant bar quality products through a continuous production process. Initial commercial production of rebar commenced during commissioning, prior to the startup of merchant bar production, which commenced during the second quarter of 2024. The merchant bar products produced at this facility consist of a wide variety of shapes and sizes of long steel, and, combined with rebar production, the capacity of this micro mill is approximately 40% greater than that of the other micro mills we have constructed. The micro mill was designed with the latest technology in electric arc furnace ("EAF") power supply systems, which can allow us to directly connect the EAF and the ladle furnace to renewable energy sources such as solar and wind. Additionally, this micro mill is the Company’s first micro mill to utilize Q-ONE technology on an EAF, which provides energy efficiencies and precise electrical control during production, creating a stable and consistent output.
In December 2022, we announced that our planned fourth micro mill would be located in Berkeley County, West Virginia. This new micro mill will be geographically situated to serve the Northeast, Mid-Atlantic and Mid-Western U.S. markets and will be supported by our existing network of downstream fabrication plants. Site improvements and foundation work for the micro mill are complete, large portions of supporting infrastructure have been installed and equipment installation is underway. We expect an operational start-up in late calendar 2025.
Chief Executive Officer Transition
Effective September 1, 2023, our Board appointed Peter R. Matt, our then President, as President and Chief Executive Officer, immediately following the retirement of Barbara R. Smith, our then Chief Executive Officer and Chairman of the Board. The Chief Executive Officer transition from Ms. Smith to Mr. Matt followed our formal succession planning process. Mr. Matt has served as our President since April 9, 2023 and continues to serve as a member of the Board, which he joined in June 2020. Ms. Smith was appointed Executive Chairman of the Board, effective September 1, 2023, and retired from such position and from the Board effective August 31, 2024.
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Russian Invasion of Ukraine
The Russian invasion of Ukraine did not have a direct material adverse impact on our business, financial condition or results of operations during 2024, 2023 or 2022. Our Europe Steel Group segment has not experienced an interruption in energy supply and was able to identify alternate sources for a limited number of materials previously procured through Russia. However, the Russian invasion of Ukraine has led to economic slowdowns in Europe, including significant volatility in commodity prices and credit markets, reductions in demand, supply chain interruptions and higher global inflation. We will continue to monitor disruptions in supply of energy and materials and the indirect effects on our operations of inflationary pressures, reductions in demand, foreign exchange rate fluctuations, commodity pricing, potential cybersecurity risks and sanctions resulting from the invasion.
See Part I, Item 1A, Risk Factors, in this Annual Report for further discussion related to the above business conditions and developments.
RESULTS OF OPERATIONS SUMMARY
Year Ended August 31,
2024 Compared to 2023
Net sales during 2024 decreased $873.6 million, or 10%, compared to 2023. See discussions below, labeled North America Steel Group, Europe Steel Group and Emerging Businesses Group within the Segment Operating Data section, for further information on our net sales results.
During 2024, we achieved net earnings of $485.5 million, a decrease of $374.3 million, or 44%, compared to 2023. The year-over-year change in net earnings was primarily due to compression in steel products metal margins in both our North America Steel Group and Europe Steel Group segments during 2024 driven by declining steel products average selling prices per ton, while the cost of ferrous scrap utilized per ton decreased at a lesser rate. Net earnings includes $69.4 million of government assistance recognized in the Europe Steel Group segment during 2024, compared to $13.8 million of government assistance recognized in 2023.
Selling, General and Administrative Expenses
SG&A expenses increased $21.5 million in 2024 compared to 2023. Contributing to the year-over-year increase was $10.3 million of incremental SG&A expenses attributable to the 2023 Acquisitions incurred during 2024 compared to a partial year of expenses recorded during 2023 following their respective acquisition dates. The remaining increase in SG&A expenses in 2024 compared to 2023 was primarily due to $10.2 million of increased professional services expenses, $5.9 million of increased benefit restoration plan ("BRP") expenses and $6.1 million of increased information technology expenses. These increases were partially offset by $11.2 million of decreased labor-related expenses in 2024 compared to 2023. Additionally, the results for 2023 included a $4.2 million pension plan settlement charge, with no such settlement charge in 2024. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the 2023 Acquisitions and Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report for more information on the pension plan termination activity.
Interest Expense
Interest expense increased $7.8 million in 2024 compared to 2023. Although lower average balances of long-term debt outstanding resulted in a $9.2 million decrease in interest expense during 2024 compared to 2023, this decrease was offset by $16.1 million of reduced capitalized interest during 2024 compared to 2023. The decrease in capitalized interest was attributable to the timing of micro mill construction activities, as construction of our third micro mill was nearing completion
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during 2023 and placed into service at the end of 2023, whereas construction of our fourth micro mill was in the beginning stages during most of 2024.
Income Taxes
Our effective income tax rate for 2024 was 23.6%, which was relatively consistent with our effective income tax rate of 23.4% for 2023. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report for further discussion of our effective tax rate.
2023 Compared to 2022
Net sales during 2023 remained relatively flat compared to 2022. See discussions below, labeled North America Steel Group, Europe Steel Group and Emerging Businesses Group within the Segment Operating Data section, for further information on our net sales results.
During 2023, we achieved net earnings of $859.8 million, a decrease of $357.5 million, or 29%, compared to 2022. Included in net earnings during 2022 was a $273.3 million gain on the sale of the Rancho Cucamonga facilities. The remaining year-over-year change in net earnings was primarily due to compression in steel products metal margins in our Europe Steel Group segment during 2023, contrasted by significant expansion in downstream products metal margins over scrap in our North America Steel Group segment during 2023 compared to 2022. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information on the sale of the Rancho Cucamonga facilities.
Selling, General and Administrative Expenses
SG&A expenses increased $98.6 million in 2023 compared to 2022. Contributing to the year-over-year increase was $60.5 million of incremental SG&A expenses from Tensar operations' commercial and engineering support incurred during 2023, compared to the expenses recorded in the period following the Tensar Acquisition Date to August 31, 2022, as well as $12.8 million of SG&A expenses from the 2023 Acquisitions, with no such expenses in 2022. The remaining increase in SG&A expenses in 2023 compared to 2022 was primarily due to an $11.1 million increase in professional services expenses, a $10.7 million increase in expenses for our BRP and a $4.2 million pension plan settlement charge, with no such settlement charge in the corresponding period. These fluctuations were partially offset by a $16.6 million decrease in labor-related expenses during 2023 compared to 2022. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the Tensar acquisition and the 2023 Acquisitions and Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report for more information on the pension plan termination activity.
Interest Expense
Interest expense decreased $10.6 million in 2023 compared to 2022, which can be attributed primarily to an increase in capitalized interest of $9.6 million in 2023 compared to 2022 due to construction of our third micro mill, as well as lower average interest rates on the long-term debt outstanding during 2023 compared to 2022.
Income Taxes
Our effective income tax rate for 2023 was 23.4% compared to 19.7% for 2022. The year-over-year increase was primarily due to a tax benefit recorded during 2022 from a capital loss on a restructuring transaction that did not recur in 2023, as well as a reduction in research and development tax credits in 2023 compared to 2022. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report for further discussion of our effective tax rate.
SEGMENT OPERATING DATA
All amounts are computed and presented in a manner that is consistent with the basis in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 19, Segment Information, in Part II, Item 8 of this Annual Report for further information on how we evaluate financial performance of our segments. The operational data by product category presented in the North America Steel Group and Europe Steel Group tables below is calculated using averages during each period presented.
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2024 Compared to 2023
North America Steel Group
Year Ended August 31,
(in thousands, except per ton amounts) 2024 2023
External tons shipped
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 348 $ 349
Steel products metal margin per ton 534 628
Net sales to external customers in our North America Steel Group segment decreased $394.6 million, or 6%, in 2024 compared to 2023. Raw materials average selling price per ton increased slightly due to increases in the sales prices of both ferrous and nonferrous scrap metals, and raw materials tons shipped increased, in part, due to a full year of sales from the recycling operations acquired during 2023. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the acquired recycling operations. However, this increase in net sales to external customers from sales of raw materials was offset by decreases in net sales to external customers of steel products and downstream products, primarily due to reductions in steel products and downstream products average selling prices per ton of 10% and 6%, respectively, in 2024 compared to 2023. For both steel products and downstream products, the reductions in selling prices were due to increased competitive pricing in our key markets. Furthermore, the downstream products average selling price per ton during 2023 reflected contracts that were awarded during periods of heightened steel commodity pricing, which has since declined.
During 2024, we achieved adjusted EBITDA of $946.4 million, a decrease of 29% compared to adjusted EBITDA of $1.3 billion in 2023. The decrease in adjusted EBITDA in 2024 compared to 2023 was caused by metal margin compression for both steel products and downstream products. The cost of ferrous scrap utilized per ton, the largest single driver of cost of goods sold for both steel products and downstream products, remained stable year-over-year. However, average selling prices decreased for both steel products and downstream products, as explained above.
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Europe Steel Group
Year Ended August 31,
(in thousands, except per ton amounts) 2024 2023
External tons shipped
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 383 $ 395
Steel products metal margin per ton 280 354
Net sales to external customers in our Europe Steel Group segment decreased $480.2 million, or 36%, in 2024 compared to 2023. This decrease was primarily due to a 29% year-over-year reduction in steel products shipment volumes and a reduction in steel products average selling price per ton of 11% in 2024 as compared to 2023. The slowdown in demand was driven by the sustained indirect impacts of macroeconomic factors affecting the business climate in European end markets, which resulted in lower construction and industrial activity. Additionally, increased imports from neighboring countries contributed to the reduced steel products average selling price per ton in 2024 as compared to 2023. During 2024, overall, the U.S. dollar weakened compared to the Polish zloty. The effect of foreign currency translation was an increase in net sales to external customers of approximately $64.0 million for 2024, determined by using actual results for 2024 measured at the average currency rate during 2023.
Adjusted EBITDA decreased $26.0 million, or 54%, in 2024 compared to 2023, primarily driven by a contraction in steel products metal margin per ton of $74 per ton, or 21%, in 2024 compared to 2023, due to the decline in steel products average selling prices described above, which outpaced the decrease in the cost of ferrous scrap utilized per ton. Adjusted EBITDA was also negatively impacted by lower shipment volumes during 2024 compared to 2023, as described above. Offsetting the impact of the decrease in steel products metal margin per ton and lower shipment volumes, results during 2024 benefited from government assistance programs established to offset the rising costs of electricity and natural gas and the indirect costs of rising carbon emission rights included in energy costs. The government assistance recognized under the programs during 2024 was $69.4 million, compared to $13.8 million of government assistance recognized in 2023. The effect of foreign currency translation was an increase in adjusted EBITDA of approximately $3.8 million during 2024.
Emerging Businesses Group
Year Ended August 31,
Net sales to external customers in our Emerging Businesses Group segment remained relatively flat in 2024 compared to 2023. The acquired CMC Anchoring Systems operations provided $38.5 million of incremental net sales to external customers during 2024 compared to the net sales to external customers in 2023 following the acquisition date. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information on the acquisition of CMC Anchoring Systems. CMC Construction Services' operations experienced a decline in net sales to external customers of $42.6 million, or 13%, in 2024 compared to 2023, due to reduced selling prices across many product lines.
Adjusted EBITDA decreased $9.5 million, or 7%, in 2024 compared to 2023. The year-over-year decrease in adjusted EBITDA was primarily a result of the decline in net sales to external customers for CMC Construction Services caused by reduced
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selling prices as described above, which impacted fixed cost leverage, and more than offset the positive contribution from the acquired CMC Anchoring Systems operations.
Corporate and Other
Year Ended August 31,
Corporate and Other adjusted EBITDA loss decreased by $3.4 million in 2024 compared to 2023. Contributing to the decrease in adjusted EBITDA loss during 2024 compared to 2023 was $13.5 million of increased interest income on short-term investments and $7.7 million of decreased labor-related expenses. Additionally, in 2023 we recognized a $4.2 million pension plan settlement charge, with no such settlement charge in 2024. In contrast to these reductions to adjusted EBITDA loss, we incurred $12.4 million of increased professional services expenses and recognized $6.7 million of other revenue from our New Markets Tax Credit (“NMTC”) transactions in 2024, compared to $17.7 million of other revenue from NMTC transactions in 2023. See Note 9, New Markets Tax Credit Transactions, in Part II, Item 8 of this Annual Report, for more information on the NMTC transactions and Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report, for more information on the pension plan termination activity.
2023 Compared to 2022
North America Steel Group
Year Ended August 31,
(in thousands, except per ton amounts) 2023 2022
External tons shipped
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 349 $ 431
Steel products metal margin per ton 628 628
Net sales to external customers in our North America Steel Group segment remained relatively flat in 2023 compared to 2022. While downstream products average selling prices experienced a significant increase of $207 per ton, or 17%, year-over-year, this fluctuation was offset by decreases in steel products average selling prices and raw materials average selling prices due to a falling scrap price environment. The increases in average selling prices for downstream products, many of which are fixed at the beginning of the project, reflected the increased input costs from rising scrap and energy prices during 2022 when we entered into the contracts. Additionally, the 2023 Acquisitions that are reported in the North America Steel Group segment contributed $152.1 million to net sales to external customers in 2023.
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During 2023, we achieved adjusted EBITDA of $1.3 billion compared to $1.5 billion in 2022. Included in adjusted EBITDA during 2022 was a $273.3 million gain on the sale of the Rancho Cucamonga facilities. The remaining year-over-year change was an increase in adjusted EBITDA due to significant expansion in downstream products margin over scrap per ton, driven by a combination of the high downstream products average selling prices mentioned above and sharp decreases in the cost of ferrous scrap utilized per ton. Additionally, the 2023 Acquisitions that are reported in the North America Steel Group segment contributed $13.2 million to adjusted EBITDA in 2023. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the sale of the Rancho Cucamonga facilities.
Europe Steel Group
Year Ended August 31,
(in thousands, except per ton amounts) 2023 2022
External tons shipped
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 395 $ 463
Steel products metal margin per ton 354 433
Net sales to external customers in our Europe Steel Group segment decreased $263.5 million, or 17%, in 2023 compared to 2022. This decrease was primarily due to a $147 per ton, or 16%, year-over-year decrease in steel products average selling price per ton, while volumes remained relatively flat year-over-year, as well as unfavorable impacts of foreign currency translation described below. The decrease in steel products average selling price per ton was driven by the indirect impacts of macroeconomic factors affecting the overall business climate in Europe, such as inflation and rising interest rates, which resulted in consumer uncertainties and delayed construction starts across our European end markets near the end of 2023. During 2023, overall, the U.S. dollar strengthened compared to the Polish zloty. The effect of foreign currency translation was a decrease in net sales to external customers of approximately $75.7 million during 2024, determined by using actual results for 2023 measured at the average currency rate during 2022.
Adjusted EBITDA decreased $296.2 million, or 86%, in 2023 compared to 2022, primarily driven by a contraction in steel products metal margin per ton, increased energy costs used in production and unfavorable impacts of foreign currency translation. Steel products metal margin per ton decreased $79 per ton, or 18%, in 2023 compared to 2022, due to the decline in steel products average selling prices per ton described above, which outpaced the decrease in cost of ferrous scrap utilized per ton. In addition to the change in steel products metal margin per ton, our Europe Steel Group segment continued to face an environment of heightened energy costs. The cost of energy increased $51 per ton during 2023 compared to 2022, net of the benefit from our electricity commodity derivative. The electricity commodidty derivative resulted in an $11.8 million realized gain in 2023, recorded as a reduction to cost of goods sold, compared to a $21.7 million realized gain in 2022. See Note 10, Derivatives, in Part II, Item 8 of this Annual Report for further information on the electricity commodity derivative. The effect of foreign currency translation was a decrease in adjusted EBITDA of approximately $18.2 million during 2024.
Emerging Businesses Group
Year Ended August 31,
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Net sales to external customers in our Emerging Businesses Group segment increased $196.2 million in 2023 compared to 2022. The acquired Tensar operations provided $159.3 million of incremental net sales to external customers during 2023 compared to the net sales to external customers in 2022 following the Tensar Acquisition Date, and CMC Anchoring Systems' operations contributed $7.6 million of net sales to external customers following their acquisition during 2023. See Note 2, Changes in Business, in Part II, Item 8, of this Annual Report for more information on the acquisitions of Tensar and CMC Anchoring Systems. The remaining increase in net sales to external customers included a $17.0 million increase from CMC Impact Metals in 2023 compared to 2022, due to favorable market conditions that led to both increased shipments and selling prices.
Adjusted EBITDA increased $66.4 million in 2023 compared to 2022. The acquired Tensar operations provided $44.9 million of incremental adjusted EBITDA during 2023 compared to the adjusted EBITDA in 2022 following the Tensar Acquisition Date. Additionally, CMC Anchoring Systems' operations contributed to the year-over-year changes by providing $1.1 million of adjusted EBITDA during 2023, with no such activity in the corresponding period. The remaining growth in adjusted EBITDA in 2023 compared to 2022 was experienced across all product offerings in the Emerging Businesses Group segment, including CMC Impact Metals, which provided an adjusted EBITDA increase of $7.5 million, or 47%, during 2023 compared to 2022.
Corporate and Other
Year Ended August 31,
Corporate and Other adjusted EBITDA loss decreased by $22.9 million in 2023 compared to 2022. Contributing to the year-over-year decrease in adjusted EBITDA loss was $18.9 million of increased interest income on short-term investments, compared to 2022, $17.7 million in other revenue from our NMTC transactions, with no such activity in 2022, and $16.1 million in debt extinguishment costs incurred during 2022, compared to immaterial activity in 2023. In contrast to these reductions to adjusted EBITDA loss, during 2023 compared to 2022 we incurred $12.1 million of increased labor-related expenses, $10.6 million of increased professional services expenses and $3.0 million of increased information technology expenses. Additionally, in 2023 we recognized a $4.2 million pension plan settlement charge, with no such settlement charge in 2022. See Note 9, New Markets Tax Credit Transactions, in Part II, Item 8 of this Annual Report, for more information on the NMTC transactions and Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report, for more information on the pension plan termination activity.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
Our cash flows from operating activities are our principal sources of liquidity and result primarily from sales of products offered by the vertically integrated operations in the North America Steel Group segment and the Europe Steel Group segment, products offered by our Emerging Businesses Group segment and related materials and services, as described in Part I, Item 1, Business, of this Annual Report. Historically, our U.S. operations have generated the majority of our cash. At August 31, 2024, cash and cash equivalents of $30.9 million were held by our non-U.S. subsidiaries. We use futures or forward contracts to mitigate the risks from fluctuations in metal commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy commodity prices. See Note 10, Derivatives, in Part II, Item 8 of this Annual Report for further information.
We have a diverse and generally stable customer base, and regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, record allowances when we believe accounts are uncollectible. We use credit insurance internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit-insured or financially assured receivables was approximately 13% of total receivables at August 31, 2024.
The table below reflects our sources, facilities and availability of liquidity as of August 31, 2024. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report for additional information.
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(in thousands) Total Facility Availability
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(1) We believe we have access to additional financing and refinancing, if needed, although we can make no assurances as to the form or terms of such financing.
We continually review our capital resources to determine whether we can meet our short and long-term goals. For at least the next twelve months, we anticipate our current cash balances, cash flows from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, invest in the development of our fourth micro mill, pay dividends and opportunistically repurchase shares. Additionally, we expect our long-term liquidity position will be sufficient to meet our long-term liquidity needs with cash flows from operations and financing arrangements. However, in the event of changes in business conditions or other developments, including a sustained market deterioration, unanticipated regulatory developments, significant acquisitions, competitive pressures, or to the extent our liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, we may need additional liquidity. To the extent we elect to finance our long-term liquidity needs, we believe that the potential financing capital available to us in the future will be sufficient.
We aim to execute a capital allocation strategy that prioritizes both value-accretive growth and competitive cash returns to stockholders. We estimate that our 2025 capital spending will range from $630 million to $680 million. We regularly assess our capital spending based on current and expected results and the amount is subject to change.
In January 2024, our Board authorized an increase of $500.0 million to the existing share repurchase program. During 2024, 2023 and 2022, we repurchased $182.9 million, $101.4 million and $161.9 million, respectively, of shares of CMC common stock. We had remaining authorization to repurchase $403.8 million of shares of CMC common stock at August 31, 2024. See Note 15, Capital Stock, in Part II, Item 8, of this Annual Report for more information on the share repurchase program.
In March 2024, our Board authorized an increase of $0.02 to our quarterly cash dividend, resulting in a $0.18 per share cash dividend paid during the third and fourth quarters of 2024, compared to a $0.16 per share quarterly cash dividend paid during the first and second quarters of 2024 and during 2023. On October 15, 2024, our Board declared CMC's 240th quarterly cash dividend. The dividend was declared at the rate of $0.18 per share of CMC common stock and is payable on November 14, 2024 to stockholders of record as of the close of business on October 31, 2024. During 2024, 2023 and 2022 we paid $78.9 million, $74.9 million and $67.7 million, respectively, of cash dividends to our stockholders.
Our credit arrangements require compliance with certain non-financial and financial covenants, including an interest coverage ratio and a debt to capitalization ratio. At August 31, 2024, we believe we were in compliance with all covenants contained in our credit arrangements.
As of August 31, 2024 and 2023, we had no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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2024 Compared to 2023
Operating Activities
Net cash flows from operating activities were $899.7 million and $1.3 billion in 2024 and 2023, respectively. Contributing to the year-over-year change was a $374.3 million decrease in net earnings and a $55.7 million decrease in cash from operating assets and liabilities. In general, the fluctuations in cash flows from accounts receivable and inventory were largely driven by continued decreases in the pricing and scrap cost environment during 2024 compared to 2023 as described in the Segment Operating Data section above. Partially offsetting the decreases in cash flows from accounts receivable and inventory was a reduction in cash flows used by accounts payable, accrued expenses and other payables in 2024 compared to 2023. While both periods were affected by declining inventory values and reductions in accrued labor-related expenses, the fluctuations in accounts payable, accrued expenses and other payables were greater in 2023 compared to 2024. Additional changes include a $67.2 million decrease in deferred income taxes and other long-term taxes, partially offset by $61.5 million of additional depreciation and amortization expense. The additional depreciation and amortization expense in 2024 compared to 2023 was largely attributable to placing our third micro mill into service during the fourth quarter of 2023. Lastly, we recorded $6.7 million of non-cash other revenue from the settlement of NMTC transactions during 2024, compared to $17.7 million in 2023. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report for more information on the change in deferred income taxes and Note 9, New Markets Tax Credit Transactions, in Part II, Item 8 of this Annual Report for more information on the NMTC transactions.
Investing Activities
Net cash flows used by investing activities were $323.0 million and $835.2 million in 2024 and 2023, respectively. During 2023, cash flows used by investing activities included $234.7 million of cash used for acquisitions, with no such acquisitions during 2024. Additionally, capital expenditures decreased year-over-year by $282.4 million. The decrease in capital expenditures was largely driven by the timing of micro mill construction, which resulted in greater cash outflows as we neared the completion of our third micro mill during 2023, compared to the expenditures in the early days of construction of our fourth micro mill during 2024. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report, for more information about our acquisitions completed in 2023.
Financing Activities
Net cash flows used by financing activities were $313.8 million and $599.5 million in 2024 and 2023, respectively. The decrease in net cash flows used by financing activities during 2024 compared to 2023 included a $353.4 million decrease in repayments of long-term debt and a $10.9 million decrease in net repayments under our Polish accounts receivable facility, offset, in part, by an $81.5 million increase in treasury stock acquired under the share repurchase program. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report for more information regarding our credit arrangements and accounts receivable facility and Note 15, Capital Stock, in Part II, Item 8 of this Annual Report for more information on the share repurchase program.
2023 Compared to 2022
Our discussion and analysis of cash flows due to and from operating, investing and financing activities during 2023 as compared to 2022 can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended August 31, 2023, which was filed with the SEC on October 12, 2023. The change in reportable segments during the first quarter of 2024 did not alter the discussion previously provided.
Contractual Obligations and Commitments
Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, leases for properties and equipment and purchase obligations as part of normal operations. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report for more information regarding scheduled maturities of our long-term debt. See Note 7, Leases, in Part II, Item 8 of this Annual Report for additional information on leases. Interest payable on our long-term debt was $43.4 million due in the twelve months following August 31, 2024 and $343.4 million due thereafter. Additionally, we have a U.S. federal repatriation tax obligation resulting from the repatriation tax provisions of the Tax Cuts and Jobs Act ("TCJA"), of which $5.5 million was due in the twelve months following August 31, 2024 and $6.9 million is due thereafter.
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As of August 31, 2024, our undiscounted purchase obligations were approximately $720 million due in the next twelve months and $340 million due thereafter under purchase orders and "take or pay" arrangements. These purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement, and exclude agreements with variable terms for which we are unable to estimate the minimum amounts. The "take or pay" arrangements are multi-year commitments with minimum annual purchase requirements and are entered into primarily for purchases of commodities used in operations such as electrodes and natural gas.
Of the purchase obligations due within the twelve months following August 31, 2024, approximately 23% were for consumable production inputs, such as alloys, 21% were for the construction of our fourth micro mill, 19% were for commodities and 14% were for capital expenditures in connection with normal business operations. Of the purchase obligations due thereafter, 69% were for commodities and 9% were for the construction of our fourth micro mill. The remainder of the purchase obligations are for goods and services in the normal course of business.
We provide certain eligible employees benefits pursuant to our nonqualified BRP equal to amounts that would have been available under our tax qualified plans under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), but for limitations of ERISA, tax laws and regulations. We did not include estimated payments related to the BRP in the above description of contractual obligations and commitments. Refer to Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report for more information on the BRP.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that governmental agencies, our insurance providers and suppliers require. At August 31, 2024, we had committed $44.8 million under these arrangements, of which $0.9 million reduced availability under the Revolver (as defined in Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report).
CONTINGENCIES
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. See Note 17, Commitments and Contingencies, in Part II, Item 8 of this Annual Report for more information on pending litigation and other matters.
Environmental and Other Matters
The information set forth in Note 17, Commitments and Contingencies, in Part II, Item 8 of this Annual Report is hereby incorporated by reference.
General
We are subject to federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.
Metals recycling was our original business, and it has been one of our core businesses for over a century. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well-intentioned, may expose us and our industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value and thus should be treated like products rather than wastes. They are identified, purchased, sorted, processed and sold by us in accordance with carefully established industry specifications.
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We incurred environmental expenses of approximately $54.9 million, $49.3 million and $44.2 million for 2024, 2023 and 2022, respectively. The expenses included the cost of disposal, environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. In addition, during 2024, we spent approximately $5.0 million in capital expenditures related to costs directly associated with environmental compliance. Our accrued environmental liabilities were $3.4 million and $4.5 million as of August 31, 2024 and 2023, respectively, of which $1.9 million and $2.0 million were classified as other noncurrent liabilities within the Company's consolidated balance sheets as of August 31, 2024 and 2023, respectively.
Solid and Hazardous Waste
We generate wastes, including hazardous wastes, that are subject to the Federal Resource Conservation and Recovery Act and comparable state and local statutes where we operate. These statutes, regulations and laws may limit our disposal options with respect to certain wastes.
We currently own or lease, and in the past we have owned or leased, properties for use in our operations. Although we have used operating and disposal practices that were industry standard at the time, wastes may have been disposed of or released on or under the properties or on or under locations where such wastes have been taken for disposal in a manner that is now understood to pose a contamination threat. We are currently involved in the investigation and remediation of several such properties, and we have been named as a PRP by governmental entities at a number of contaminated sites.
State and federal laws applicable to wastes and contaminated properties have gradually become more strict over time. There is no guarantee that the EPA or individual states will not adopt more stringent requirements for the handling of, or make changes to the exemptions upon which we rely, for the wastes that we generate. Similarly, some materials which are not currently classified as waste may be deemed solid or hazardous waste in the future. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. Any such change could result in an increase in our costs to manage and dispose of waste which could have a material adverse effect on our business, results of our operations and financial condition.
Superfund
The EPA, or an equivalent state agency, has notified us that we are considered a PRP at several sites, none of which involve real estate we ever owned or upon which we have ever conducted operations. We may be obligated under CERCLA, or similar state statutes, to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA or third parties for such activities and pay costs for associated damages to natural resources. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs, and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. Based on currently available information, which is in many cases preliminary and incomplete, we had immaterial amounts accrued as of both August 31, 2024 and 2023, in connection with CERCLA sites. We have accrued for these liabilities based upon our best estimates. The amounts paid and the expenses incurred on these sites for 2024, 2023 and 2022 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.
We believe that adequate provisions have been made in the consolidated financial statements for the potential impact of these contingencies, and that the outcomes of the suits and proceedings described above, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on our business, results of operations or financial condition.
Clean Water Regulation
The Clean Water Act ("CWA") imposes restrictions and strict controls regarding the discharge of wastes into waters of the U.S., a term broadly defined, or into publicly owned treatment works. These controls have become more stringent over time, and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into federal waters or into publicly owned treatment works and comparable permits may be required at the state level. The CWA and many state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA's regulations and comparable state statutes may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge or non-compliance with permit requirements, we may be liable for penalties, costs and injunctive relief.
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Clean Air Act
Our operations are subject to regulations at the federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increase scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources may be required to construct emission sources using what is referred to as the Best Available Control Technology, or in any areas that are not meeting NAAQS, using methods that satisfy requirements for the Lowest Achievable Emission Rate. Additionally, the EPA has implemented, and is continuing to implement, new, more stringent standards for NAAQS, including fine particulate matter. Compliance with new standards could require additional expenditures.
Climate Change
The potential impacts of climate change on our business and results of operations and potential future climate change regulations in the jurisdictions in which we operate are highly uncertain. See the risk factors entitled "Increased regulation associated with climate change could impose significant additional costs on both our steelmaking and metals recycling operations" and "Physical impacts of climate change could have a material adverse effect on our costs and results of operations" in Part I, Item 1A, Risk Factors, of this Annual Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preceding discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimates and assumptions, including those related to revenue recognition, income taxes, inventory cost, acquisitions, goodwill and other intangible assets, long-lived assets, derivative financial instruments and contingencies, on an ongoing basis. Estimates and assumptions are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these estimates. Judgments and estimates related to critical accounting policies used in the preparation of the consolidated financial statements include the following:
Revenue Recognition
Revenue from contracts where the Company provides fabricated rebar and installation services is recognized over time using an input method based on costs incurred compared to total estimated costs. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method based on tons shipped compared to total estimated tons. Significant judgment is required to evaluate total estimated costs used in the input method and total estimated tons in the output method. If total estimated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgment in determining the transaction price. See Note 4, Revenue Recognition, in Part II, Item 8 of this Annual Report for further details.
Income Taxes
We periodically assess the likelihood of realizing our deferred tax assets and maintain a valuation allowance to reduce certain deferred tax assets to amounts that we believe are more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings, prudent and feasible tax planning strategies and current and future ownership changes. At August 31, 2024 and 2023, we had valuation allowances of $256.8 million and $280.5 million, respectively, against our deferred tax assets. Of these amounts, $10.0 million and $13.3 million at August 31, 2024 and 2023, respectively, relate to net operating loss and credit carryforwards in certain state jurisdictions that are subject to estimation. The remaining valuation allowance primarily relates to net operating loss carryforwards in certain foreign jurisdictions, which the Company does not expect to realize.
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Inventory Cost
We state inventories at the lower of cost or net realizable value, which is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adjustments to inventory may be due to changes in price levels, assumptions about market conditions, obsolescence, damage, physical deterioration and other causes. Any adjustments required to reduce the carrying value of inventory to net realizable value are recorded as a charge to cost of goods sold within the consolidated statements of earnings. In fiscal 2024, we recorded $5.1 million of inventory write-downs within our Europe Steel Group segment resulting from changes in future demand and market conditions impacting the vertically integrated operations in Poland. A hypothetical 10% decrease to the estimated selling prices used in the calculation of net realizable value of inventory within these operations in Poland would have resulted in a $3.9 million increase to the inventory write-downs recorded as of August 31, 2024.
Acquisitions
The Company accounts for business combinations under the acquisition method of accounting, which requires assets acquired and liabilities assumed to be recorded at their estimated fair value at the date of acquisition. The fair value is estimated by the Company using valuation techniques and Level 3 inputs, including expected future cash flows and discount rates. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions. See Note 2, Changes in Business, in Part II, Item 8 of this Annual Report for more information about the Company's acquisitions.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually as of the first day of the Company’s fourth quarter (the "annual impairment test date"), and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit, including goodwill, or of an indefinite-lived intangible asset exceeds its fair value. Goodwill is tested at the reporting unit level, which represents an operating segment or one level below an operating segment. When evaluating goodwill and other indefinite-lived intangible assets for impairment, the Company may first assess qualitative factors in determining whether it is more likely than not that the respective fair value is less than its carrying amount. The qualitative evaluation is an assessment of multiple factors, including the current operating environment, historical and future financial performance and industry and market considerations. The Company may elect to bypass this qualitative assessment for some or all of its reporting units or other indefinite-lived intangible assets and perform a quantitative test, based on management's judgment. If the Company chooses to bypass the qualitative assessment, it performs a quantitative test by comparing the fair value of the reporting units or indefinite-lived intangible assets to their respective carrying amounts and records an impairment charge if the carrying amount exceeds the fair value; however, the loss recognized, if any, will not exceed the total amount of the intangible asset or the goodwill allocated to a reporting unit.
When assessing the recoverability of goodwill using a quantitative approach we use an income and a market approach to calculate the fair value of the reporting unit. To calculate the fair value of a reporting unit using the income approach, management uses a discounted cash flow model, which includes a number of significant assumptions and estimates regarding future cash flows such as discount rates, volumes, prices, capital expenditures and the impact of current market conditions. The market approach estimates fair value based on market multiples of earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The estimates used during a quantitative approach to test goodwill could be materially impacted by adverse changes in market conditions.
For 2024 and 2023, the annual goodwill impairment analyses did not result in impairment charges. As of the 2024 annual impairment test date, the Company had goodwill of $383.9 million related to three reporting units within the North America Steel Group segment, one reporting unit within the Europe Steel Group segment and four reporting units within the Emerging Businesses Group segment. Six reporting units, which, as of the 2024 annual impairment test date, comprised $5.0 million of goodwill within the North America Steel Group segment, $4.1 million of goodwill within the Europe Steel Group segment and $262.4 million of goodwill within the Emerging Businesses Group segment, were assessed for impairment using a qualitative approach. Management determined it was more likely than not that the fair values of the reporting units which were assessed using a qualitative approach exceeded their respective carrying values.
The remaining two reporting units, both within the North America Steel Group segment, were tested for impairment using a quantitative approach. The fair values of these two reporting units consisting of $71.7 million and $40.7 million of goodwill as of the 2024 annual impairment test date exceeded their carrying values by greater than 30%. The Company believes the fair values of the reporting units tested using a quantitative approach are substantially in excess of their carrying values. An increase
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or decrease of 2% to the discount rate or terminal growth rate used in the quantitative impairment tests for these reporting units would not result in impairment charges. The difference in the value of goodwill between the 2024 annual impairment test date and August 31, 2024 was due to the foreign currency translation adjustments.
As of the 2024 annual impairment test date, the Company had $57.3 million of other indefinite-lived intangible assets within the Emerging Businesses Group segment, of which $54.1 million were tested for impairment using a quantitative approach. To perform the quantitative impairment tests, the Company used an income approach to calculate the fair value of each intangible asset using a relief from royalty method. Significant inputs to measure the fair value of the indefinite-lived intangible assets included projected revenue growth rates, royalty rates and discount rates. The fair values of the indefinite-lived intangible assets exceeded their carrying values in excess of 30%. The difference in the value of indefinite-lived intangible assets between the 2024 annual impairment test date and August 31, 2024 was due to foreign currency translation adjustments. Based on the Company’s annual impairment testing of the indefinite-lived intangible assets, we concluded it was more likely than not that their fair values exceeded the respective carrying values.
Based on the results of impairment tests performed in 2024, management does not believe that it is reasonably likely that our reporting units or indefinite-lived intangible assets will fail their respective impairment tests in the near term. See Note 6, Goodwill and Other Intangible Assets, in Part II, Item 8 of this Annual Report for additional information.
Long-Lived Assets