COMMERCIAL METALS Co (CMC) FY 2021 MD&A

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.

Our discussion and analysis of fiscal year 2021 compared to fiscal year 2020 is included herein. Our discussion and analysis of fiscal year 2020 compared to fiscal year 2019 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, 2020, which was filed with the SEC on October 15, 2020.

OVERVIEW

As a vertically integrated organization, we manufacture, recycle and fabricate steel and metal products and provide related materials and services through a network including seven EAF mini mills, two EAF micro mills, one rerolling mill, steel fabrication and processing plants, construction-related product warehouses and metal recycling facilities in the U.S. and Poland. Our operations are conducted through two reportable segments: North America and Europe. See Part I, Item 1, "Business" for further information regarding our business and reportable segments.

When considering our results for the period, we evaluate our operating performance by comparing our net sales, in the aggregate and for both of our segments, in the current period to net sales in the corresponding period in the prior year. In doing so, we focus on changes in average selling price per ton and tons shipped for each of our product categories as these are the two variables that typically have the greatest impact on our results of operations. We group our products into three categories: raw materials, steel products and downstream products. Raw materials include ferrous and nonferrous scrap, steel products include rebar, merchant and other steel products, such as billets and wire rod, and downstream products include fabricated rebar and steel fence posts.

Key Performance Indicators

Adjusted EBITDA from continuing operations ("adjusted EBITDA") is used by management to compare and evaluate the period-over-period underlying business operational performance of our segments. Adjusted EBITDA is the sum of the Company's earnings from continuing operations 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 margin of our steel products and downstream products period-over-period is 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 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 due to competitive pressures. The metal margin for our downstream products is the difference between the average selling price per ton of fabricated rebar and steel fence post products and the scrap input costs to produce these products. The majority of our 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.

Impact of COVID-19

COVID-19 resulted in various government actions globally, including governmental actions in both the U.S. and Poland, designed to slow the spread of the virus. However, because we operate in a critical infrastructure industry, our facilities were allowed to remain open. While we implemented new procedures to support the safety of our employees, the costs were not material. Due to the impact of COVID-19 on the broader economy, average selling prices per ton and volumes decreased for certain product categories during the second half of 2020. However, net sales and volumes in the second half of 2020 were relatively consistent with, or higher than, net sales and volumes in the first half of 2020, and COVID-19 had limited impact on our operations during 2021.

We continue to evaluate the nature and extent of future impacts of the evolving pandemic on our operations and are complying with applicable state and local law and are taking into consideration relevant guidance, including the guidelines of the U.S. Centers for Disease Control and other authorities, to prioritize the health and safety of our employees, families, suppliers,

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customers and communities. Given the dynamic and uncertain nature and duration of the pandemic, we cannot reasonably estimate the long-term impact of COVID-19 on our business, results of operations and overall financial performance.

RESULTS OF OPERATIONS SUMMARY

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

2021 Compared to 2020

Net sales for 2021 increased $1.3 billion, or 23%, compared to 2020. Net sales in our North America segment increased in 2021 compared to 2020, primarily due to a year-over-year increase in steel products average selling prices and raw materials average selling prices, along with a corresponding increase in shipments of steel products and raw materials. Net sales in our Europe segment also increased due to a year-over-year increase in steel products average selling prices in 2021 compared to 2020, coupled with increased shipments of steel products.

Earnings from continuing operations for 2021 increased by $134.6 million, or 48%, compared to 2020, primarily due to year-over-year increases in steel products metal margin per ton in both our North America and Europe segments and an increase in raw materials margin per ton in our North America segment. This increase was partially offset by a year-over-year decrease in downstream products metal margin in our North America segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2021 decreased $6.5 million compared to 2020. Included in selling, general and administrative expenses in 2020 was a $32.1 million working capital adjustment related to the Acquisition, as defined in Note 2, Changes in Business, in Part II, Item 8 of this Annual Report, recorded subsequent to the end of the allowable one-year measurement period, with no such expense recorded during 2021. During 2021 we experienced a year-over-year increase of $26.5 million in labor-related expenses, which fluctuated due to our increased results in 2021.

Interest Expense

Interest expense in 2021 decreased $9.9 million compared to 2020. Of the year-over-year decrease, $5.0 million resulted from the lower interest rate on the 2031 Notes, which were outstanding during the six months ended August 31, 2021, compared to the interest rate on the 2026 Notes, which were outstanding during the corresponding period in 2020. Additionally, during 2020 we incurred interest expense of $4.7 million related to a term loan which was repaid in the year ended August 31, 2020.

Income Taxes

Our effective income tax rate for 2021 was 22.7% compared to 24.9% for 2020. The year-over-year decrease was primarily due to tax benefits recorded during 2021 associated with the release of state valuation allowances as well as a release of uncertain tax positions due to a lapse in a statute of limitations. These decreases were partially offset by an increase to global intangible low-taxed income expense recorded in 2021 related to a global tax restructuring. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report, for further discussion of our effective tax rate.

SEGMENTS

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, Operating Segments, in Part II, Item 8 of this Annual Report, for further information on how we evaluate financial performance of our segments.

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2021 Compared to 2020

North America

Net sales in 2021 increased $901.0 million, or 19%, compared to 2020. The increase in net sales was due, in part, to increased demand in our end-use markets for steel products driven by greater construction and industrial activity in 2021 compared to 2020. Our external tons shipped for raw materials and steel products both increased 8% as a result of the rise in demand. Additionally, increasing ferrous scrap prices throughout 2021 contributed to year-over-year increases of 55% and 22% for raw materials average selling prices per ton and steel products average selling prices per ton, respectively. Net sales for 2021 and 2020 included amortization benefit of $6.0 million and $29.4 million, respectively, related to the unfavorable contract backlog of the Acquired Businesses.

Adjusted EBITDA in 2021 increased $85.4 million compared to 2020. The year-over-year increase in adjusted EBITDA was due to expansion in steel products metal margin per ton and raw materials margin per ton, coupled with the increase in shipments of these products as described above. While the fluctuation in scrap prices and increased demand positively impacted margins for sales of raw materials and steel products, downstream products average selling prices, many of which are fixed at the start of a project, did not keep pace with the increased input costs. Therefore, downstream products metal margin decreased in 2021 compared to 2020 and slightly offset the overall increase in year-over-year results. However, new contract bookings for downstream products during 2021 were reflective of increased input costs. Adjusted EBITDA did not include the $6.0 million or $29.4 million benefit of the amortization of the unfavorable contract backlog in 2021 or 2020, respectively. Adjusted EBITDA included non-cash stock compensation expense of $15.1 million and $12.4 million in 2021 and 2020, respectively.

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Europe

Net sales in 2021 increased $349.9 million, or 50%, compared to 2020. The increase in net sales was driven largely by growing demand for steel products from both construction and industrial end markets and a continued upturn in European manufacturing activity in 2021 compared to 2020. The increase in shipments of steel products was also due, in part, to the startup of a third rolling line during the fourth quarter of 2021. Steel products average selling prices increased $164 per ton year-over-year due to the increased demand in the market coupled with lower rebar imports into Poland in 2021 compared to 2020. Net sales in 2021 were impacted by a favorable foreign currency translation adjustment of $36.9 million due to the decrease in the average value of the U.S. dollar relative to the Polish zloty in 2021, as compared to 2020, which was impacted by an unfavorable foreign currency translation adjustment of $25.1 million.

Adjusted EBITDA in 2021 increased $86.3 million compared to 2020, primarily driven by a $53 per ton, or 26%, expansion in steel products metal margin per ton as the growing demand for steel products caused the average selling price of steel products to outpace the rising input costs of ferrous scrap utilized. Adjusted EBITDA included non-cash stock compensation expense of $2.9 million and $2.0 million in 2021 and 2020, respectively.

Corporate and Other

Corporate and Other adjusted EBITDA loss in 2021 decreased by $6.0 million compared to 2020. The year-over-year decrease was driven primarily by a $32.1 million charge in 2020 due to a working capital adjustment related to the Acquisition, with no such charge recorded during 2021. This decrease was offset in part by a $16.8 million loss on debt extinguishment recorded in 2021 related to the retirement of the 2026 Notes and a $6.4 million increase in labor-related expenses in 2021 compared to 2020. Adjusted EBITDA included non-cash stock compensation expense of $25.7 million and $17.5 million for 2021 and 2020, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity and Capital Resources

Our cash and cash equivalents position remained strong in 2021 with $497.7 million at August 31, 2021 compared to $542.1 million at August 31, 2020. Our cash flows from operations result primarily from sales of steel products and downstream products as described in Part I, Item 1, "Business." Historically, our North America operations have generated the majority of our cash. At August 31, 2021, cash and cash equivalents of $24.1 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 receivables (and those covered by export letters of credit) was approximately 17% of total receivables at August 31, 2021.

The table below reflects our sources, facilities and availability of liquidity as of August 31, 2021. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, for additional information.

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

We anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be sufficient to fund operations and meet our short-term and long-term cash requirements, including our scheduled debt repayments, payments for our contractual obligations, capital expenditures, working capital needs, dividends, share repurchases and other prudent uses of our capital, as needed. However, we will continue to assess our liquidity needs. In the event of sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

As of August 31, 2021 and 2020, 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.

Share Repurchase Program

Under our share repurchase program, we may repurchase shares from time to time for cash in the open market or privately negotiated transactions in accordance with applicable federal securities laws. The timing and the amount of repurchases, if any, will be determined by management based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require us to purchase any dollar amount or number of shares of our common stock and may be modified, suspended, extended or terminated at any time without prior notice. We did not purchase any shares of common stock during 2021, 2020 or 2019. See Note 15, Capital Stock, in Part II, Item 8 of this Annual Report for further information on the share repurchase program.

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2021 Compared to 2020

Operating Activities

Net cash flows from operating activities were $228.5 million and $791.2 million in 2021 and 2020, respectively. Net earnings increased by $133.4 million year-over-year, offset by a $651.2 million year-over-year net increase in cash used by operating assets and liabilities ("working capital") and an $89.5 million year-over-year decrease in cash flows from deferred income taxes and other long-term taxes. The increase in cash used by working capital is a result of rising volumes and values of inventory and average selling prices in both of our segments. These operating changes are reflected in increased cash outflow from inventories and a rise in accounts receivable, partially offset by increased accounts payable and a nine day decrease in operating working capital days from 2021 to 2020. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report, for more information on the change in deferred taxes. Also contributing to the offset of working capital was a $23.3 million year-over-year decrease in amortization of acquired unfavorable contract backlog and a $15.1 million increase in loss on debt extinguishment.

Investing Activities

Net cash flows used by investing activities were $162.1 million and $192.9 million during 2021 and 2020, respectively. The $30.8 million decrease in net cash flows used by investing activities was primarily due to changes in acquisition and disposition activity, which resulted in a $16.2 million decline in cash outflows for acquisitions year-over-year and a $14.6 million increase in cash proceeds from the sale of property, plant and equipment and other in 2021 compared to 2020.

We estimate that our 2022 capital spending will range from $450 million to $500 million, which is expected to cover certain construction costs for our third micro mill and normal capital expenditures. We regularly assess our capital spending based on current and expected results.

Financing Activities

Net cash flows used by financing activities were $109.4 million and $247.8 million during 2021 and 2020, respectively. The $138.4 million reduction in net cash flows used by financing activities is a result of decreased net debt repayments, which were $32.5 million in 2021 and $187.3 million in 2020. Partially offsetting this reduction in net cash flows used by financing activities was $13.1 million of debt extinguishment costs related to early retirement of our 2026 Notes in 2021. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, for additional information regarding long-term debt transactions.

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 associated with our long-term debt was approximately $45.3 million due in the twelve months following August 31, 2021 and $200.0 million due thereafter. Additionally, the Company has a U.S. federal repatriation tax obligation resulting from the repatriation tax provisions of the Tax Cuts and Jobs Act (“TCJA”), of which $2.2 million was due in the twelve months following August 31, 2021 and $18.8 million is due thereafter.

As of August 31, 2021, our undiscounted purchase obligations were approximately $638.5 million due in the next twelve months and $228.0 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, 2021, approximately 25% were for consumable production inputs, such as ferroalloys, 25% were for the construction of our third micro mill, 21% were for commodities and 10% were for capital expenditures on existing operating machinery and equipment. Of the purchase obligations due thereafter, 65% are for commodities and 25% are for the construction of our third micro mill. The remainder of the purchase obligations were for goods and services in the normal course of business.

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We provide certain eligible employees benefits pursuant to our nonqualified Benefit Restoration Plan ("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, 2021, we had committed $27.6 million under these arrangements, of which $3.0 million reduced availability under the Credit Agreement (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. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. See Note 17, Commitments and Contingencies, in Part II, Item 8 of this Annual Report, for more information.

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. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications.

We incurred environmental expenses of $49.8 million, $46.6 million and $42.5 million for 2021, 2020 and 2019, 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 2021, we spent $3.1 million in capital expenditures related to costs directly associated with environmental compliance. Our accrued environmental liabilities were $7.1 million and $3.4 million, of which $2.3 million and $2.7 million, respectively, were classified as other long-term liabilities, as of August 31, 2021 and 2020, 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.

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We currently own or lease, and in the past we have owned or leased, properties that have been used 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 we have been named as a PRP at a number of contaminated sites, none of which involve real estate we ever owned or upon which we have ever conducted operations.

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 $0.5 million and $0.7 million accrued as of August 31, 2021 and 2020, respectively, in connection with CERCLA sites. We have accrued for these liabilities based upon our best estimates. The amounts paid and the expenses incurred on these sites for 2021, 2020 and 2019 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.

Management believes that adequate provisions have been made in the Company's 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 the business, results of operations or financial condition of the Company.

Clean Water Act

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 the Company’s business and results of operations and potential future climate change regulations in the jurisdictions in which the Company operates 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 operations" in Part I, Item 1A, "Risk Factors" of this Annual Report.

DIVIDENDS

We have paid quarterly cash dividends for 228 consecutive quarters. We paid quarterly dividends in 2021 and 2020 at the rate of $0.12 per share of CMC common stock, and our dividend for the fourth quarter of 2021 will be paid at $0.14 per share of CMC common stock.

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, long-lived assets 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.

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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, 2021 and 2020, we had a valuation allowance of $278.1 million and $281.8 million, respectively, against our deferred tax assets. Of these amounts, $7.7 million and $28.6 million at August 31, 2021 and 2020, 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.

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, 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. Based on our review of inventories, obsolete or slow-moving inventories are not significant as of August 31, 2021 and current market conditions are favorable in our end-use markets.

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.

Goodwill

Goodwill is tested for impairment at the reporting unit level annually and whenever events or circumstances indicate that the carrying value may not be recoverable. Our reporting units represent an operating segment or one level below an operating segment. We use an income and a market approach to calculate the fair value of our reporting units. To calculate the fair value of our reporting units 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. These estimates could be materially impacted by adverse changes in market conditions.

For 2021 and 2020, the annual goodwill impairment analysis did not result in any impairment charges. The Company has goodwill of $66.1 million, of which $51.1 million relates to a reporting unit within the North America operating segment. As of August 31, 2021, based on the results of the Company’s annual impairment testing, the fair value of this reporting unit exceeded its carrying value by 41%. An increase or decrease of 1% to the discount rate or terminal growth rate would not result in an impairment charge for this reporting unit. Management does not believe that it is reasonably likely that our reporting units will fail the goodwill impairment test in the near term, as the determined fair value of all reporting units with goodwill substantially exceeded their carrying value.

See Note 6, Goodwill and Other Intangible Assets, in Part II, Item 8 of this Annual Report, for additional information.

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Long-Lived Assets

We evaluate the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the net carrying value may not be recoverable from the undiscounted future cash flows from operations. Events or circumstances that could trigger an impairment review of a long-lived asset or asset group include, but are not limited to: (i) a significant decrease in the market price of the asset, (ii) a significant adverse change in the extent or manner that the asset is used or in its physical condition, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of the asset, (iv) an accumulation of costs significantly in excess of original expectation for the acquisition or construction of the asset, (v) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast of continuing losses associated with the use of the asset and (vi) a more-likely-than-not expectation that the asset will be sold or disposed of significantly before the end of its previously estimated useful life. If an impairment exists, the net carrying values are reduced to fair values. Our operations are capital intensive. The estimates of undiscounted future cash flows used during an impairment review of a long-lived asset or asset group require judgments and assumptions of future cash flows that are expected to arise as a direct result of the use and eventual disposition of the asset or asset group. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer's perspective on future cash flows. For the long-lived asset groups that were tested for recoverability as a result of current period operating or cash flow loss combined with a history of operating or cash flow losses, the undiscounted cash flows would require a decrease of at least 24% to result in an impairment.

Contingencies

In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments in connection with some of these matters. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals when a loss is probable and the amount can be reasonably estimated. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent uncertainties of the estimation process and the uncertainties involved in litigation. We believe that we have adequately provided for these contingencies in our consolidated financial statements. We also believe that the outcomes will not materially affect our results of operations, our financial position or our cash flows.

Other Accounting Policies and New Accounting Pronouncements

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, in Part II, Item 8 of this Annual Report.

FORWARD-LOOKING STATEMENTS

This Annual Report contains "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies and organic growth provided by acquisitions and strategic investments, demand for our products, metal margins, the effect of COVID-19 and related governmental and economic responses thereto, the ability to operate our steel mills at full capacity, future availability and cost of supplies of raw materials and energy for our operations, share repurchases, legal proceedings, the undistributed earnings of our non-U.S. subsidiaries, U.S. non-residential construction activity, international trade, capital expenditures, our liquidity and our ability to satisfy future liquidity requirements, estimated contractual obligations and our expectations or beliefs concerning future events. The statements in this report that are not historical statements, are forward-looking statements. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "future," "intends," "may," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases, as well as by discussions of strategy, plans, or intentions.

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Our forward-looking statements are based on management's expectations and beliefs as of the time this Annual Report is filed with the SEC or, with respect to any document incorporated by reference, as of the time such document was prepared. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or any other changes. Important factors that could cause actual results to differ materially from our expectations include those described in Part I, Item 1A, "Risk Factors" of this Annual Report as well as the following:

•changes in economic conditions which affect demand for our products or construction activity generally, and the impact of such changes on the highly cyclical steel industry;

•rapid and significant changes in the price of metals, potentially impairing our inventory values due to declines in commodity prices or reducing the profitability of our downstream contracts due to rising commodity pricing;

•impacts from COVID-19 on the economy, demand for our products, global supply chain and on our operations, including the responses of governmental authorities to contain COVID-19 and the impact of various COVID-19 vaccines;

•excess capacity in our industry, particularly in China, and product availability from competing steel mills and other steel suppliers including import quantities and pricing;

•compliance with and changes in existing and future laws, regulations and other legal requirements and judicial decisions that govern our business, including increased environmental regulations associated with climate change and greenhouse gas emissions;

•involvement in various environmental matters that may result in fines, penalties or judgments;

•potential limitations in our or our customers' abilities to access credit and non-compliance by our customers;

•activity in repurchasing shares of our common stock under our repurchase program;

•financial covenants and restrictions on the operation of our business contained in agreements governing our debt;

•our inability to close the sale of our Rancho Cucamonga property, including if the buyer were to terminate the purchase agreement during its 60 day due diligence review period;

•our ability to successfully identify, consummate and integrate acquisitions, and the effects that acquisitions may have on our financial leverage;

•risks associated with acquisitions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable antitrust legislation and other regulatory and third party consents and approvals;

•operating and startup risks, as well as market risks associated with the commissioning of new projects could prevent us from realizing anticipated benefits and could result in a loss of all or a substantial part of our investments;

•lower than expected future levels of revenues and higher than expected future costs;

•failure or inability to implement growth strategies in a timely manner;

•impact of goodwill impairment charges;

•impact of long-lived asset impairment charges;

•currency fluctuations;

•global factors, such as trade measures, military conflicts and political uncertainties, including the impact of the Biden administration on current trade regulations, such as Section 232 trade tariffs and quotas, tax legislation and other regulations which might adversely impact our business;

•availability and pricing of electricity, electrodes and natural gas for mill operations;

•ability to hire and retain key executives and other employees;

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•competition from other materials or from competitors that have a lower cost structure or access to greater financial resources;

•information technology interruptions and breaches in security;

•ability to make necessary capital expenditures;

•availability and pricing of raw materials and other items over which we exert little influence, including scrap metal, energy and insurance;

•unexpected equipment failures;

•losses or limited potential gains due to hedging transactions;

•litigation claims and settlements, court decisions, regulatory rulings and legal compliance risks;

•risk of injury or death to employees, customers or other visitors to our operations; and

•civil unrest, protests and riots.

You should refer to the "Risk Factors" disclosed in our periodic and current reports filed with the SEC for information regarding additional risks which would cause actual results to be significantly different from those expressed or implied by these forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. Accordingly, readers of this Annual Report are cautioned not to place undue reliance on any forward-looking statements.