SMM Releases Findings of Inventory Problems

Sims Metal Management Ltd. has released its report on the previously announced investigation of inventory valuation issues at two of the company’s facilities in the U.K. The report has determined that a write-down of inventory of $78 million will be required, versus a preliminary assessment of around $60 million. The write-down adjustment has been independently verified by SMM's external auditor PricewaterhouseCoopers (PwC), with $16 million of the inventory write-down to impact the company’s first half fiscal 2013 results, and the balance to be reflected in restatement for prior periods results.

Additionally, the report found that due to the losses, the company’s impairment charges related to goodwill and other intangible assets are, in the aggregate, $354 million. About $291 million of this impairment charge relates to North America Metals and will be recorded against the fiscal 2013 result; $63 million of the impairment charge related to U.K. Metals and Sims Recycling Solutions (SRS) U.K. and will be reflected in the restatement of results for prior periods.

According the committee, the company undertook a thorough investigation at SMM’s Newport and Long Marston facilities in the U.K. A full physical count of inventory was performed at the Newport facility of which 85 percent of all the inventory was re-weighed and evaluated. At Long Marston, a physical count was completed, which was supplemented by comparing production results with yield recovery assumptions. Based on the procedures, the committee concluded that a write-down of inventory of $78 million will be required, versus the preliminary $60 million assessment. The write-down adjustment has been independently verified by the company's external auditor.

The write-down represents around 29 percent of the value of inventories in the U.K. and 9 percent of inventory on a group-wide basis before the write-down.

In addition to the verification procedures completed at Newport and Long Marston, the Committee oversaw inventory valuation processes, accomplished via stock take and other verification procedures, at all other sites in the U.K. and principal SRS sites in Continental Europe and North America. At the conclusion of the investigations, the committee determined that the overstatement of inventory was unique to circumstances at the U.K. locations in Newport and Long Marston. The committee found no evidence of control deficiencies or inventory miscalculation at any locations other than Newport and Long Marston. This assessment has been independently verified by PwC.

According to a release, the committee's investigations have revealed that the primary root cause for breakdowns in the company's control environment can be attributed to the company’s failure to adequately supervise operations (including inventories), responsibly safeguard assets and failure to maintain adequate controls over financial reporting relating to inventory.

SMM notes that the U.K. operations did not properly implement well-established group internal controls for its SRS business in the UK. Internal audits failed to perform end-to-end walk-throughs involving transactions associated with new plants and technologies in the U.K. Additional control failures identified include the failure to test inventory adjustments, failure to identify and halt accumulations of excessive levels of inventories and failure to successfully integrate IT systems in the U.K. The committee also identified allegations of potential fraud in the U.K., which are being further investigated.