NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
Accounting Principles
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the fiscal year ended
August 31, 2013
filed by Commercial Metals Company ("CMC", and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the consolidated balance sheets and the consolidated statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended
August 31, 2013
. The results of operations for the
three
and
nine
month periods are not necessarily indicative of the results to be expected for the full year.
In the accompanying consolidated statement of cash flows for the
nine
months ended
May 31, 2013
, the Company corrected the classification of
$25.5 million
of changes in certain documentary letters of credit from cash flows used by operating activities to cash flows used by financing activities, which increased cash flows from operating activities and decreased cash flows from financing activities for that period. The Company considers accounts payable - documentary letters of credit a short-term financing activity and accordingly made this correction in order to properly present the changes in these certain documentary letters of credit as a financing activity in the consolidated statement of cash flows allowing users of its financial statements to better understand the level at which the Company uses documentary letters of credit. This correction did not have an impact on the Company’s consolidated results of operations, earnings per share, balance sheet or net cash flows used by investing activities in the consolidated statement of cash flows for the
nine
months ended
May 31, 2013
.
Recent Accounting Pronouncements
In the first quarter of fiscal 2014, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to provide quantitative and qualitative disclosures about the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective is to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards. The new disclosures give financial statement users information about both gross and net exposures. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued guidance requiring entities to recognize revenue by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2016. Entities have the option to adopt this guidance either retrospectively or through a modified retrospective transition method. This new standard will supersede existing revenue guidance and affect the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In April 2014, the FASB issued guidance changing the requirements for reporting discontinued operations if the disposal of a component of an entity, or a group of components of an entity, represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The guidance requires expanded disclosures for discontinued operations and also requires entities to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. The guidance will affect the Company's current practice of assessing discontinued operations and the presentations or disclosures of the Company's consolidated financial statements and footnotes.
In July 2013, the FASB issued guidance requiring entities to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized
tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In April 2013, the FASB issued guidance requiring an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The new guidance is effective prospectively for entities that determine liquidation is imminent during fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In March 2013, the FASB issued guidance requiring an entity to release any related cumulative translation adjustment into net income when it either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the guidance resolves the diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The new guidance is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In February 2013, the FASB issued guidance requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The new guidance is effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), net of income taxes, for the three months ended May 31, 2014 and 2013 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
Balance, February 28, 2014
|
|
$
|
708
|
|
|
$
|
2,913
|
|
|
$
|
(2,747
|
)
|
|
$
|
874
|
|
Other comprehensive income before reclassifications
|
|
655
|
|
|
390
|
|
|
—
|
|
|
1,045
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(103
|
)
|
|
(2
|
)
|
|
(105
|
)
|
Net other comprehensive income (loss)
|
|
655
|
|
|
287
|
|
|
(2
|
)
|
|
940
|
|
Balance, May 31, 2014
|
|
$
|
1,363
|
|
|
$
|
3,200
|
|
|
$
|
(2,749
|
)
|
|
$
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
Balance, February 28, 2013
|
|
$
|
(1,777
|
)
|
|
$
|
3,688
|
|
|
$
|
(3,158
|
)
|
|
$
|
(1,247
|
)
|
Other comprehensive loss before reclassifications
|
|
(23,979
|
)
|
|
(210
|
)
|
|
—
|
|
|
(24,189
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(44
|
)
|
|
1
|
|
|
(43
|
)
|
Net other comprehensive income (loss)
|
|
(23,979
|
)
|
|
(254
|
)
|
|
1
|
|
|
(24,232
|
)
|
Balance, May 31, 2013
|
|
$
|
(25,756
|
)
|
|
$
|
3,434
|
|
|
$
|
(3,157
|
)
|
|
$
|
(25,479
|
)
|
Accumulated other comprehensive income (loss), net of income taxes, for the nine months ended May 31, 2014 and 2013 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
Balance, August 31, 2013
|
|
$
|
(27,477
|
)
|
|
$
|
3,594
|
|
|
$
|
(3,293
|
)
|
|
$
|
(27,176
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
28,840
|
|
|
(1,653
|
)
|
|
550
|
|
|
27,737
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
1,259
|
|
|
(6
|
)
|
|
1,253
|
|
Net other comprehensive income (loss)
|
|
28,840
|
|
|
(394
|
)
|
|
544
|
|
|
28,990
|
|
Balance, May 31, 2014
|
|
$
|
1,363
|
|
|
$
|
3,200
|
|
|
$
|
(2,749
|
)
|
|
$
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
Balance, August 31, 2012
|
|
$
|
(17,369
|
)
|
|
$
|
3,710
|
|
|
$
|
(4,477
|
)
|
|
$
|
(18,136
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(8,387
|
)
|
|
164
|
|
|
1,315
|
|
|
(6,908
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(440
|
)
|
|
5
|
|
|
(435
|
)
|
Net other comprehensive income (loss)
|
|
(8,387
|
)
|
|
(276
|
)
|
|
1,320
|
|
|
(7,343
|
)
|
Balance, May 31, 2013
|
|
$
|
(25,756
|
)
|
|
$
|
3,434
|
|
|
$
|
(3,157
|
)
|
|
$
|
(25,479
|
)
|
The significant items reclassified out of accumulated other comprehensive income (loss) and the corresponding line items in the consolidated statements of operations to which the items were reclassified were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
Components of AOCI (in thousands)
|
|
Location
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Unrealized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
Cost of goods sold
|
|
$
|
67
|
|
|
$
|
(95
|
)
|
|
$
|
(169
|
)
|
|
$
|
(86
|
)
|
Foreign exchange
|
|
Net sales
|
|
20
|
|
|
80
|
|
|
(213
|
)
|
|
141
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
(60
|
)
|
|
(29
|
)
|
|
(1,574
|
)
|
|
21
|
|
Foreign exchange
|
|
SG&A expenses
|
|
(8
|
)
|
|
(79
|
)
|
|
39
|
|
|
59
|
|
Interest rate
|
|
Interest expense
|
|
134
|
|
|
170
|
|
|
400
|
|
|
482
|
|
|
|
|
|
153
|
|
|
47
|
|
|
(1,517
|
)
|
|
617
|
|
Income tax effect
|
|
Income taxes (expense) benefit
|
|
(50
|
)
|
|
(3
|
)
|
|
258
|
|
|
(177
|
)
|
Net of income taxes
|
|
|
|
$
|
103
|
|
|
$
|
44
|
|
|
$
|
(1,259
|
)
|
|
$
|
440
|
|
Defined benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior services
|
|
SG&A expenses
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
8
|
|
|
$
|
(6
|
)
|
Income tax effect
|
|
Income taxes expense
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
1
|
|
Net of income taxes
|
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
$
|
(5
|
)
|
Amounts in parentheses reduce earnings.
NOTE 3. SALES OF ACCOUNTS RECEIVABLE
The Company has a domestic sale of accounts receivable program which expires on December 26, 2014. Under the program, Commercial Metals Company contributes, and several of its subsidiaries sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity and was formed for the sole purpose of buying and selling trade accounts receivable generated by the Company. CMCRV sells the trade accounts receivable in their entirety to
two
financial institutions. The financial institutions advance up to a maximum of
$200.0 million
for all trade accounts receivable sold, and the remaining portion of the purchase price of the trade accounts receivable will be paid to the Company from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. Additionally, the sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the credit facility described in Note 7, Credit Arrangements.
At
May 31, 2014
and
August 31, 2013
, under its domestic sale of accounts receivable program, the Company had sold
$353.9 million
and
$358.8 million
of trade accounts receivable, respectively, to the financial institutions and received
$70.0 million
of advance payments at
May 31, 2014
and
no
advance payments at
August 31, 2013
.
In addition to the domestic sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell trade accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the trade accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy. The European program allows the Company’s European subsidiaries to obtain an advance up to
90%
of eligible trade accounts receivable sold under the terms of the arrangement. During the first quarter of fiscal 2014, the Company phased out its existing Australian program and entered into a new trade accounts receivable sales program with a different financial institution. Under the new Australian program, trade accounts receivable balances are sold to a special purpose vehicle, which in turn sells
100%
of the eligible trade accounts receivable of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. Under the new Australian program, the financial institution will fund up to
A$75.0 million
for all trade accounts receivable sold, and the remaining portion of the purchase price of the trade accounts receivable will be paid to the Company from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows.
At
May 31, 2014
and
August 31, 2013
, under its European and Australian programs, the Company had sold
$163.9 million
and
$121.2 million
of accounts receivable, respectively, to third-party financial institutions and received advance payments of
$79.0 million
and
$24.5 million
, respectively.
During the
nine
months ended
May 31, 2014
and
2013
, cash proceeds from the domestic and international sale of accounts receivable programs were
$494.1 million
and
$828.6 million
, respectively, and cash payments to the owners of accounts receivable were
$369.7 million
and
$830.9 million
, respectively. For a nominal servicing fee, the Company is responsible for servicing the accounts receivable for the domestic and Australian programs. Discounts on domestic and international sales of accounts receivable were
$1.1 million
and
$2.6 million
for the
three
and
nine
months ended
May 31, 2014
, respectively, and
$1.0 million
and
$3.1 million
for the
three
and
nine
months ended
May 31, 2013
, respectively, and are included in selling, general and administrative expenses in the Company's consolidated statements of operations.
The deferred purchase price on the Company's domestic and international sale of accounts receivable programs are included in accounts receivable on the Company's consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the domestic and international sale of accounts receivable programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2014
|
(in thousands)
|
|
Total
|
|
Domestic
|
|
Australia
|
|
Europe
|
Beginning balance
|
|
$
|
313,117
|
|
|
$
|
273,714
|
|
|
$
|
29,635
|
|
|
$
|
9,768
|
|
Transfers of accounts receivable
|
|
1,039,136
|
|
|
808,886
|
|
|
120,350
|
|
|
109,900
|
|
Collections
|
|
(989,887
|
)
|
|
(803,592
|
)
|
|
(111,791
|
)
|
|
(74,504
|
)
|
Ending balance
|
|
$
|
362,366
|
|
|
$
|
279,008
|
|
|
$
|
38,194
|
|
|
$
|
45,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2014
|
(in thousands)
|
|
Total
|
|
Domestic
|
|
Australia
|
|
Europe
|
Beginning balance
|
|
$
|
453,252
|
|
|
$
|
358,822
|
|
|
$
|
64,996
|
|
|
$
|
29,434
|
|
Transfers of accounts receivable
|
|
3,115,437
|
|
|
2,423,990
|
|
|
374,170
|
|
|
317,277
|
|
Collections
|
|
(3,134,011
|
)
|
|
(2,503,804
|
)
|
|
(328,660
|
)
|
|
(301,547
|
)
|
Program termination
|
|
(72,312
|
)
|
|
—
|
|
|
(72,312
|
)
|
|
—
|
|
Ending balance
|
|
$
|
362,366
|
|
|
$
|
279,008
|
|
|
$
|
38,194
|
|
|
$
|
45,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2013
|
(in thousands)
|
|
Total
|
|
Domestic
|
|
Australia
|
|
Europe
|
Beginning balance
|
|
$
|
493,129
|
|
|
$
|
392,025
|
|
|
$
|
55,829
|
|
|
$
|
45,275
|
|
Transfers of accounts receivable
|
|
1,083,866
|
|
|
893,976
|
|
|
101,912
|
|
|
87,978
|
|
Collections
|
|
(1,124,001
|
)
|
|
(912,753
|
)
|
|
(87,376
|
)
|
|
(123,872
|
)
|
Ending balance
|
|
$
|
452,994
|
|
|
$
|
373,248
|
|
|
$
|
70,365
|
|
|
$
|
9,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2013
|
(in thousands)
|
|
Total
|
|
Domestic
|
|
Australia
|
|
Europe
|
Beginning balance
|
|
$
|
515,481
|
|
|
$
|
396,919
|
|
|
$
|
70,073
|
|
|
$
|
48,489
|
|
Transfers of accounts receivable
|
|
3,409,516
|
|
|
2,742,982
|
|
|
320,148
|
|
|
346,386
|
|
Collections
|
|
(3,472,003
|
)
|
|
(2,766,653
|
)
|
|
(319,856
|
)
|
|
(385,494
|
)
|
Ending balance
|
|
$
|
452,994
|
|
|
$
|
373,248
|
|
|
$
|
70,365
|
|
|
$
|
9,381
|
|
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost or market. Inventory cost for most domestic inventories is determined by the last-in, first-out ("LIFO") method. At
May 31, 2014
and
August 31, 2013
,
40%
and
43%
, respectively, of the Company's total net inventories were valued at LIFO. LIFO inventory reserves were
$200.4 million
and
$185.5 million
at
May 31, 2014
and
August 31, 2013
, respectively. Inventory cost for international inventories and the remaining domestic inventories are determined by
the first-in, first-out ("FIFO") m
ethod and consisted mainly of material dedicated to CMC Poland Sp. z.o.o. ("CMCP") and certain marketing and distribution businesses.
The majority of the Company's inventories are in the form of finished goods with minimal work in process. At
May 31, 2014
and
August 31, 2013
,
$95.4 million
and
$66.7 million
, respectively, of the Company's inventories were in the form of raw materials.
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table details the changes in the carrying amount of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
International
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Consolidated
|
Balance, August 31, 2013
|
|
$
|
7,267
|
|
|
$
|
295
|
|
|
$
|
57,144
|
|
|
$
|
2,755
|
|
|
$
|
2,118
|
|
|
$
|
69,579
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
172
|
|
|
35
|
|
|
207
|
|
Balance, May 31, 2014
|
|
$
|
7,267
|
|
|
$
|
295
|
|
|
$
|
57,144
|
|
|
$
|
2,927
|
|
|
$
|
2,153
|
|
|
$
|
69,786
|
|
The total gross carrying amounts of the Company's intangible assets that are subject to amortization were
$43.5 million
and
$42.9 million
at
May 31, 2014
and
August 31, 2013
, respectively, and are included in other noncurrent assets on the Company's consolidated balance sheets. Excluding goodwill, there are no other significant intangible assets with indefinite lives. Amortization expense for intangible assets was
$1.2 million
and
$3.6 million
for the
three
and
nine
months ended
May 31, 2014
, respectively, and
$1.2 million
and
$3.7 million
for the
three
and
nine
months ended
May 31, 2013
, respectively.
NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
The assets and liabilities of businesses classified as held for sale are included in other current assets and accrued expenses on the Company's consolidated balance sheets. The components of assets and liabilities of businesses held for sale are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
May 31, 2014
|
|
August 31, 2013
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
—
|
|
|
$
|
20,313
|
|
Inventories, net
|
|
—
|
|
|
8,713
|
|
Other current assets
|
|
—
|
|
|
3,683
|
|
Property, plant and equipment, net of accumulated depreciation and amortization
|
|
1,085
|
|
|
10,459
|
|
Assets of businesses held for sale
|
|
$
|
1,085
|
|
|
$
|
43,168
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable-trade
|
|
$
|
—
|
|
|
$
|
7,615
|
|
Accrued expenses and other payables
|
|
—
|
|
|
3,251
|
|
Liabilities of businesses held for sale
|
|
$
|
—
|
|
|
$
|
10,866
|
|
Discontinued Operations
During the fourth quarter of fiscal 2013, the Company decided to sell all of the stock of its wholly owned copper tube manufacturing operation, Howell Metal Company ("Howell"). The Company determined that the decision to sell this business met the definition of a discontinued operation. As a result, the Company included Howell in discontinued operations for all periods presented.
During fiscal 2012, the Company announced its decision to exit the steel pipe manufacturing operations in Croatia ("CMCS") by closure of the facility and sale of the assets. The Company determined that the decision to exit this business met the definition of a discontinued operation. As a result, the Company included CMCS in discontinued operations for all periods presented. The Company sold a majority of CMCS' assets during fiscal 2012. The remaining assets were sold during
the first quarter of fiscal 2013
for
$3.9 million
with no impact to the consolidated statements of operations.
Financial information for discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net sales
|
|
$
|
(113
|
)
|
|
$
|
41,764
|
|
|
$
|
17,298
|
|
|
$
|
122,492
|
|
Earnings (loss) from discontinued operations before income taxes
|
|
(417
|
)
|
|
956
|
|
|
22,529
|
|
|
3,243
|
|
Dispositions
On October 17, 2013, the Company sold all of the outstanding capital stock of Howell for
$58.5 million
, of which
$4.2 million
was held in escrow, subject to customary purchase price adjustments. During the second quarter of fiscal 2014, the Company made a
$3.0 million
working capital adjustment, which is included in the Company's estimated pre-tax gain of
$23.8 million
. Howell was previously an operating segment included in the Americas Mills reporting segment.
During
the first quarter of fiscal 2013
, the Company completed the sale of its
11%
ownership interest in Trinecke Zelezarny, a.s. ("Trinecke"), a Czech Republic joint-stock company, for
$29.0 million
resulting in a pre-tax gain of
$26.1 million
. The Trinecke investment was included in the International Marketing and Distribution reporting segment.
NOTE 7. CREDIT ARRANGEMENTS
In May 2013, the Company issued
$330.0 million
of
4.875%
Senior Notes due
May 15, 2023
(the "2023 Notes") and received proceeds of
$325.0 million
, net of underwriting discounts and debt issuance costs. The Company used
$205.3
million of the proceeds from the 2023 Notes to purchase all of its outstanding
$200.0 million
of 5.625% Notes due 2013. Interest on the 2023 Notes is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2013. The Company may, at any time, redeem the 2023 Notes at a redemption price equal to
100 percent
of the principal amount, plus a "make-whole" premium described in the indenture pursuant to which the 2023 Notes were issued. Additionally, if a change of control triggering event occurs, as defined by the terms of the indenture governing the 2023 Notes, holders of the 2023 Notes may require the Company to repurchase the 2023 Notes at a purchase price equal to
101%
of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The Company is generally not limited under the indenture governing the 2023 Notes in its ability to incur additional indebtedness provided the Company is in compliance with certain restrictive covenants, including restrictions on liens, sale and leaseback transactions, mergers, consolidations and transfers of substantially all of the Company's assets.
As a result of redeeming the 2013 Notes, the Company recognized expenses of
$1.5 million
related to loss on early extinguishment of debt and write-off of unamortized debt issuance costs, discounts and premiums, all of which were included in selling, general and administrative expenses in the consolidated statements of operations for each of the
three
and
nine
months ended
May 31, 2013
.
In December 2011, the Company entered into a third amended and restated
$300.0 million
revolving credit facility that matures on
December 27, 2016
. The maximum availability under this facility can be increased to
$400.0 million
with the consent of both CMC and the lenders. The program's capacity, with a sublimit of
$50.0 million
for letters of credit, is reduced by outstanding stand-by letters of credit, which totaled
$35.5 million
and
$28.3 million
at
May 31, 2014
and
August 31, 2013
, respectively. Under the credit facility, the Company was required to maintain a minimum interest coverage ratio (adjusted EBITDA to interest expense, as each is defined in the facility) of not less than
3.00
to
1.00
for the twelve month cumulative period ended November 30, 2012 and for each fiscal quarter on a rolling twelve month cumulative period thereafter. At
May 31, 2014
, the Company's interest coverage ratio was
4.84
to
1.00
. The credit facility also requires the Company to maintain a debt to capitalization ratio that does not exceed
0.60
to
1.00
. At
May 31, 2014
, the Company's debt to capitalization ratio was
0.50
to
1.00
. The credit facility provides for interest based on the LIBOR, the Eurodollar rate or Bank of America's prime rate.
On June 26, 2014, the Company entered into a fourth amended and restated credit agreement with a revolving credit facility of
$350.0 million
and a maturity date of
June 2019
. The maximum availability under the new credit facility can be increased to
$500.0 million
. Consistent with the Company's previous revolving credit facility, the new facility's capacity includes
$50.0 million
for the issuance of stand-by letters of credit.
Under the new credit facility, the Company will be required to comply with certain financial and non-financial covenants, including covenants to maintain: (i) an interest coverage ratio (consolidated EBITDA to consolidated interest expense, as each is defined in the agreement) of not less than
2.50
to 1.00 and (ii) a debt to capitalization ratio (consolidated funded debt to total capitalization, as each is defined in the credit agreement) that does not exceed
0.60
to 1.00. In addition, beginning on the date three months prior to each maturity date of the Company’s $400 million of 6.50% Senior Notes due July 2017 (“2017 Notes”) and its $500 million of 7.35% Senior Notes due August 2018 (“2018 Notes”) and each day thereafter that the 2017 Notes and the 2018 Notes are outstanding, the Company will be required to maintain liquidity of at least
$150 million
in excess of each of the outstanding aggregate principal amounts of the 2017 Notes and 2018 Notes. Loans under the new credit facility bear interest at (i) the Eurocurrency rate, (ii) a base rate, or (iii) the LIBOR rate.
At
May 31, 2014
, the Company was in compliance with all covenants contained in its debt agreements.
During fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately
$52.7 million
, net of customary finance charges. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. At
May 31, 2014
and
August 31, 2013
, the unamortized portion was
$28.7 million
and
$34.4 million
, respectively. Amortization of the deferred gain was
$1.9 million
and
$5.7 million
for the
three
and
nine months ended May 31, 2014
, respectively, and
$2.9 million
and
$8.7 million
for the
three
and
nine
months ended
May 31, 2013
, respectively.
The Company has uncommitted credit facilities available from domestic and international banks. In general, these credit facilities are used to support trade letters of credit (including accounts payable settled under bankers' acceptances), foreign exchange transactions and short-term advances which are priced at market rates.
Long-term debt, including the deferred gain from the termination of the interest rate swaps, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Weighted Average
Interest Rate as of May 31, 2014
|
|
May 31, 2014
|
|
August 31, 2013
|
$400 million notes at 6.50% due July 2017
|
|
5.7%
|
|
$
|
409,289
|
|
|
$
|
411,518
|
|
$500 million notes at 7.35% due August 2018
|
|
6.4%
|
|
519,461
|
|
|
522,930
|
|
$330 million notes at 4.875% due May 2023
|
|
4.9%
|
|
330,000
|
|
|
330,000
|
|
Other, including equipment notes
|
|
|
|
25,126
|
|
|
19,594
|
|
|
|
|
|
1,283,876
|
|
|
1,284,042
|
|
Less current maturities
|
|
|
|
7,147
|
|
|
5,228
|
|
|
|
|
|
$
|
1,276,729
|
|
|
$
|
1,278,814
|
|
Interest on these notes is payable semiannually.
CMCP has uncommitted credit facilities of
$67.4 million
with several banks with expiration dates ranging from October 2014 to March 2015. During the
nine months ended May 31, 2014
, CMCP had total borrowings of
$89.5 million
and total repayments of
$89.5 million
under these credit facilities. At
May 31, 2014
, no material amounts were outstanding under these credit facilities.
The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the
three
and
nine
months ended
May 31, 2014
and
2013
, respectively. Cash paid for interest during the
three
and
nine
months ended
May 31, 2014
was
$9.6 million
and
$51.9 million
, respectively, and
$7.5 million
and
$45.8 million
during the
three
and
nine
months ended
May 31, 2013
, respectively.
NOTE 8. DERIVATIVES AND RISK MANAGEMENT
The Company's global operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. One objective of the Company's risk management program is to mitigate these risks using derivative instruments. The Company enters into (i) metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in gross margin due to the volatility of the commodities' prices, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) natural gas forward contracts to mitigate the risk of unanticipated changes in operating cost due to the volatility of natural gas prices. When sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to reduce the effects of the volatility of ocean freight rates.
At
May 31, 2014
, the notional value of the Company's foreign currency contract commitments and its commodity contract commitments was
$457.7 million
and
$41.5 million
, respectively. At
May 31, 2013
, the notional value of the Company's foreign currency contract commitments and its commodity contract commitments was
$307.0 million
and
$52.4 million
, respectively.
The following table provides information regarding the Company's commodity contract commitments as of
May 31, 2014
:
|
|
|
|
|
|
|
|
Commodity
|
|
Long/Short
|
|
Total
|
Aluminum
|
|
Long
|
|
2,375
|
|
MT
|
Aluminum
|
|
Short
|
|
325
|
|
MT
|
Copper
|
|
Long
|
|
940
|
|
MT
|
Copper
|
|
Short
|
|
4,445
|
|
MT
|
Zinc
|
|
Long
|
|
22
|
|
MT
|
MT = Metric Ton
The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's consolidated statements of operations, and there were no components excluded from the assessment of hedge effectiveness for the
three
and
nine
months ended
May 31, 2014
and
2013
. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.
The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
Derivatives Not Designated as Hedging Instruments (in thousands)
|
|
Location
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Commodity
|
|
Cost of goods sold
|
|
$
|
1,346
|
|
|
$
|
1,469
|
|
|
$
|
1,985
|
|
|
$
|
1,775
|
|
Foreign exchange
|
|
Net sales
|
|
(351
|
)
|
|
23
|
|
|
(736
|
)
|
|
12
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
(326
|
)
|
|
3
|
|
|
(697
|
)
|
|
3
|
|
Foreign exchange
|
|
SG&A expenses
|
|
1,183
|
|
|
1,336
|
|
|
(5,632
|
)
|
|
4,216
|
|
Other
|
|
Cost of goods sold
|
|
—
|
|
|
4
|
|
|
—
|
|
|
9
|
|
Gain (loss) before income taxes
|
|
|
|
$
|
1,852
|
|
|
$
|
2,835
|
|
|
$
|
(5,080
|
)
|
|
$
|
6,015
|
|
The Company's fair value hedges are designated for accounting purposes with gains and losses on the hedged items offsetting the gain or loss on the related derivative transaction. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
Location
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Foreign exchange
|
|
Net sales
|
|
$
|
(55
|
)
|
|
$
|
38
|
|
|
$
|
(28
|
)
|
|
$
|
(190
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
(1,053
|
)
|
|
2,291
|
|
|
(2,133
|
)
|
|
2,839
|
|
Gain (loss) before income taxes
|
|
|
|
$
|
(1,108
|
)
|
|
$
|
2,329
|
|
|
$
|
(2,161
|
)
|
|
$
|
2,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
Location
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Foreign exchange
|
|
Net sales
|
|
$
|
62
|
|
|
$
|
(19
|
)
|
|
$
|
25
|
|
|
$
|
232
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
1,053
|
|
|
(2,291
|
)
|
|
2,133
|
|
|
(2,839
|
)
|
Gain (loss) before income taxes
|
|
|
|
$
|
1,115
|
|
|
$
|
(2,310
|
)
|
|
$
|
2,158
|
|
|
$
|
(2,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Commodity
|
|
$
|
65
|
|
|
$
|
(193
|
)
|
|
$
|
(48
|
)
|
|
$
|
(192
|
)
|
Foreign exchange
|
|
325
|
|
|
(17
|
)
|
|
(1,605
|
)
|
|
356
|
|
Gain (loss), net of income taxes
|
|
$
|
390
|
|
|
$
|
(210
|
)
|
|
$
|
(1,653
|
)
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
Location
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Commodity
|
|
Cost of goods sold
|
|
$
|
43
|
|
|
$
|
(62
|
)
|
|
$
|
(110
|
)
|
|
$
|
(56
|
)
|
Foreign exchange
|
|
Net sales
|
|
20
|
|
|
80
|
|
|
(213
|
)
|
|
141
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
(57
|
)
|
|
(37
|
)
|
|
(1,231
|
)
|
|
13
|
|
Foreign exchange
|
|
SG&A expenses
|
|
10
|
|
|
(47
|
)
|
|
35
|
|
|
29
|
|
Interest rate
|
|
Interest expense
|
|
87
|
|
|
110
|
|
|
260
|
|
|
313
|
|
Gain (loss), net of income taxes
|
|
|
|
$
|
103
|
|
|
$
|
44
|
|
|
$
|
(1,259
|
)
|
|
$
|
440
|
|
The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at
May 31, 2014
and
August 31, 2013
. The fair value of the Company's derivative instruments on the consolidated balance sheets was as follows:
|
|
|
|
|
|
|
|
|
|
Derivative Assets (in thousands)
|
|
May 31, 2014
|
|
August 31, 2013
|
Commodity — designated for hedge accounting
|
|
$
|
15
|
|
|
$
|
—
|
|
Commodity — not designated for hedge accounting
|
|
397
|
|
|
1,066
|
|
Foreign exchange — designated for hedge accounting
|
|
130
|
|
|
1,626
|
|
Foreign exchange — not designated for hedge accounting
|
|
1,076
|
|
|
1,238
|
|
Derivative assets (other current assets and other assets)*
|
|
$
|
1,618
|
|
|
$
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities (in thousands)
|
|
May 31, 2014
|
|
August 31, 2013
|
Commodity — designated for hedge accounting
|
|
$
|
18
|
|
|
$
|
129
|
|
Commodity — not designated for hedge accounting
|
|
508
|
|
|
1,268
|
|
Foreign exchange — designated for hedge accounting
|
|
907
|
|
|
432
|
|
Foreign exchange — not designated for hedge accounting
|
|
878
|
|
|
1,738
|
|
Derivative liabilities (accrued expenses, other payables and long-term liabilities)*
|
|
$
|
2,311
|
|
|
$
|
3,567
|
|
_________________
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.
As of
May 31, 2014
, all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months.
All of the instruments are highly liquid and not entered into for trading purposes.
NOTE 9. FAIR VALUE
The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into
three
levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities;
Level 2 - Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(in thousands)
|
|
May 31, 2014
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Money market investments (1)
|
|
$
|
191,415
|
|
|
$
|
191,415
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets (2)
|
|
412
|
|
|
412
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative assets (2)
|
|
1,206
|
|
|
—
|
|
|
1,206
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities (2)
|
|
526
|
|
|
508
|
|
|
18
|
|
|
—
|
|
Foreign exchange derivative liabilities (2)
|
|
1,785
|
|
|
—
|
|
|
1,785
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(in thousands)
|
|
August 31, 2013
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Money market investments (1)
|
|
$
|
236,727
|
|
|
$
|
236,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets (2)
|
|
1,066
|
|
|
1,066
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative assets (2)
|
|
2,864
|
|
|
—
|
|
|
2,864
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities (2)
|
|
1,397
|
|
|
1,268
|
|
|
129
|
|
|
—
|
|
Foreign exchange derivative liabilities (2)
|
|
2,170
|
|
|
—
|
|
|
2,170
|
|
|
—
|
|
_________________
(1) Money market investments are short-term in nature, and the value is determined by broker quoted prices in active markets. The investment portfolio mix can change each period based on the Company's assessment of investment options.
(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or the New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivative instruments and the classification of the assets and liabilities is included in Note 8, Derivatives and Risk Management.
Fair value of property, plant and equipment held for sale (Level 3) was
$3.9 million
based on appraised values at
May 31, 2014
. CMC does not have other assets or intangible assets measured at fair value on a non-recurring basis at
May 31, 2014
.
The carrying values of the Company's short-term items, including the deferred purchase price of accounts receivable, documentary letters of credit and notes payable, approximate fair value due to their short-term nature.
The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2014
|
|
August 31, 2013
|
(in thousands)
|
|
Fair Value Hierarchy
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
$400 million notes at 6.50% due July 2017 (1)
|
|
Level 2
|
|
$
|
409,289
|
|
|
$
|
445,796
|
|
|
$
|
411,518
|
|
|
$
|
443,646
|
|
$500 million notes at 7.35% due August 2018 (1)
|
|
Level 2
|
|
519,461
|
|
|
569,375
|
|
|
522,930
|
|
|
570,429
|
|
$330 million notes at 4.875% due May 2023 (1)
|
|
Level 2
|
|
330,000
|
|
|
325,463
|
|
|
330,000
|
|
|
298,650
|
|
(1) The fair value of the notes is calculated based on indicated market values.
NOTE 10. INCOME TAX
The Company's effective income tax rate from continuing operations for the
three
and
nine
months ended
May 31, 2014
was
36.5%
and
32.8%
, respectively, compared with
48.6%
and
38.1%
for the
three
and
nine
months ended
May 31, 2013
, respectively. The decrease in our effective income tax rate from continuing operations was attributed to the improvement in our international segments' operating results for the
three
and
nine
months ended
May 31, 2014
. The Company's effective income tax rate from discontinued operations for the
three
and
nine
months ended
May 31, 2014
was
32.9%
and
38.9%
, respectively, compared with
37.4%
and
37.4%
for the
three
and
nine
months ended
May 31, 2013
, respectively.
The Company made net payments of
$12.9 million
and received net refunds of
$0.6 million
for income taxes during the
nine
months ended
May 31, 2014
and
2013
, respectively.
The reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was
$28.6 million
and
$27.4 million
, exclusive of interest and penalties, as of
May 31, 2014
and
2013
, respectively.
The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as income tax expense, and the balances at the end of a reporting period are recorded as part of the current or noncurrent reserve for uncertain income tax positions. For the
three
and
nine
months ended
May 31, 2014
, before any income tax benefits, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.
During the twelve months ending
May 31,
2015, it is reasonably possible that the statute of limitations pertaining to positions taken by the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately
$18.1 million
, which would reduce the provision for income taxes on earnings by an immaterial amount.
The Company files income tax returns in the United States and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:
US Federal — 2009 and forward
US States — 2009 and forward
Foreign — 2006 and forward
The Company is currently under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded tax liabilities as of
May 31, 2014
sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. SHARE-BASED COMPENSATION PLANS
The Company's share-based compensation plans are described, and informational disclosures provided, in Note 15, Share-Based Compensation Plans, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013. During the
nine
months ended
May 31, 2014
and
2013
, restricted stock units ("RSUs") and performance stock units ("PSUs") totaling
1.2 million
and
1.6 million
, respectively, were granted at a weighted-average fair value of
$16.90
and
$13.44
, respectively. Stock appreciation rights ("SARs") were not granted during the
nine
months ended
May 31, 2014
. The Company granted
0.2 million
in SARs at a weighted average exercise price of
$14.25
during the
nine
months ended
May 31, 2013
.
During the
nine
months ended
May 31, 2014
and
2013
, the Company granted
59,565
equivalent shares of cash-settled RSUs and PSUs and
234,109
equivalent shares of cash-settled RSUs, PSUs and SARs, respectively. The fair value of these cash-settled awards is remeasured each reporting period and is recognized ratably over the service period. As of
May 31, 2014
, the Company had
1,707,279
equivalent shares in awards outstanding. The Company expects
1,622,964
equivalent shares to vest.
In general, the RSUs and PSUs granted during fiscal
2014
will vest over a period of
three years
; however, certain RSUs granted during fiscal
2014
will vest over a period of
four years
. The RSUs granted during fiscal
2013
will vest over a period of
three years
. Subject to the achievement of performance targets established by the Compensation Committee of CMC's Board of Directors, the PSUs granted during fiscal
2014
and fiscal
2013
will vest after a period of
three years
. The SARs granted during fiscal
2013
vest ratably over a period of
three years
. The SARs have a contractual term of
seven years
.
Share-based compensation expense for the
three
and
nine
months ended
May 31, 2014
of
$5.3 million
and
$16.1 million
, respectively, and for the
three
and
nine
months ended
May 31, 2013
of
$5.5 million
and
$13.5 million
, respectively, is included in selling, general and administrative expenses on the Company's consolidated statements of operations.
NOTE 12. EARNINGS PER SHARE ATTRIBUTABLE TO CMC
The calculations of the basic and diluted earnings per share for the
three
and
nine
months ended
May 31, 2014
and
2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands, except share data)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net earnings attributable to CMC
|
|
$
|
23,563
|
|
|
$
|
18,964
|
|
|
$
|
80,625
|
|
|
$
|
73,258
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,705,133
|
|
|
116,845,542
|
|
|
117,400,198
|
|
|
116,589,382
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.69
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,705,133
|
|
|
116,845,542
|
|
|
117,400,198
|
|
|
116,589,382
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based incentive/purchase plans
|
|
1,064,542
|
|
|
858,048
|
|
|
1,121,618
|
|
|
867,374
|
|
Shares outstanding for diluted earnings per share
|
|
118,769,675
|
|
|
117,703,590
|
|
|
118,521,816
|
|
|
117,456,756
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
$
|
0.68
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not included above
|
|
1,248,330
|
|
|
1,726,374
|
|
|
1,248,330
|
|
|
1,726,374
|
|
All stock options and SARs expire during fiscal 2020.
CMC's restricted stock is included in the number of shares of common stock issued and outstanding, but is omitted from the basic earnings per share calculation until the shares vest.
The Company did not purchase any shares during the first
nine
months of fiscal
2014
and had remaining authorization to purchase
8,259,647
shares of its common stock at
May 31, 2014
pursuant to its share repurchase plan.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and government investigations, including environmental matters. See Note 18, Commitments and Contingencies, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
On
September 18, 2008
, the Company was served with a class action antitrust lawsuit alleging violations of Section 1 of the Sherman Act, brought by Standard Iron Works of Scranton, Pennsylvania, against
nine
steel manufacturing companies, including CMC. The lawsuit, filed in the United States District Court for the Northern District of Illinois, alleged that the defendants conspired to fix, raise, maintain and stabilize the price at which steel products were sold in the United States by artificially restricting the supply of such steel products. The lawsuit, which purported to be brought on behalf of a class consisting of all purchasers of steel products directly from the defendants between January 1, 2005 and September 2008 (collectively, the "Direct Purchaser Plaintiffs"), sought treble damages and costs, including reasonable attorney fees and pre- and post-judgment interest.
On March 14, 2014, the Company entered into a final settlement agreement with the Direct Purchaser Plaintiffs. As part of that final settlement, in April 2014, the Company paid approximately
$4 million
to the Direct Purchaser Plaintiffs in consideration for the full and final release of all claims of the Direct Purchaser Plaintiffs. The Company continues to maintain that the claims lack merit and that it has full and complete defenses to all of the claims asserted against it. However, the Company agreed to enter
into the settlement agreement to avoid further expense, inconvenience, and distraction of burdensome and protracted litigation. The settlement received preliminary court approval and is now only subject to final court approval.
Since the filing of the direct purchaser lawsuit, a case has been filed in federal court in the Northern District of Illinois on behalf of a class of indirect purchasers in approximately
28
states naming the same defendants and containing allegations substantially identical to those of the Standard Iron Works complaint. That case has in effect been stayed. Another indirect purchaser action was filed in Tennessee state court, again naming the same defendants but contending that the conspiracy continued through 2010. The case has been removed to federal court, and plaintiffs have moved to remand. The motion to remand has not yet been decided, and no motion practice or discovery has taken place. The Company believes that the lawsuits are without merit and plans to defend them vigorously. Due to the uncertainty and the information available at this time, the Company cannot reasonably estimate a range of loss relating to these cases.
Guarantees
During fiscal 2012, the Company entered into a guarantee agreement with a bank in connection with a credit facility granted by the bank to a supplier of the Company. The fair value of the guarantee is negligible. The maximum credit facility with the bank was
$4.0 million
, and the Company had
no
exposure as of
May 31, 2014
.
NOTE 14. BUSINESS SEGMENTS
The Company's reporting segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise.
The Company structures its business into the following
five
segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. The Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. The Americas Mills segment manufactures finished long steel products including reinforcement bar ("rebar"), merchant bar, light structural, some special bar quality ("SBQ") and other special sections as well as semi-finished billets for re-rolling and forging applications. The Americas Fabrication segment consists of the Company's rebar and structural fabrication operations, fence post manufacturing plants, construction-related product facilities and plants that heat-treat steel to strengthen and provide flexibility. The International Mill segment includes the Company's minimill and the Company's recycling and fabrication operations in Poland. The International Marketing and Distribution segment includes international operations for the sale, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products. Additionally, this segment includes the Company's U.S.-based marketing and distribution divisions and also operates a recycling facility in Singapore. Corporate contains expenses of the Company's corporate headquarters and interest expense related to its long-term public debt.
The financial information presented for the International Mill segment excludes CMCS operations. Additionally, the financial information presented for the Americas Mills segment excludes Howell. These operations have been classified as discontinued operations in the consolidated statements of operations. See Note 6, Businesses Held for Sale, Discontinued Operations and Dispositions, for more information.
The Company uses adjusted operating profit (loss), a non-GAAP financial measure, to compare and to evaluate the financial performance of its segments. Adjusted operating profit (loss) is the sum of our earnings (loss) from continuing operations before income taxes, interest expense and discounts on sales of accounts receivable. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2013.
The following is a summary of certain financial information from continuing operations by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2014
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
287,533
|
|
|
$
|
308,878
|
|
|
$
|
406,066
|
|
|
$
|
207,364
|
|
|
$
|
594,740
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
1,804,774
|
|
Intersegment sales
|
|
47,571
|
|
|
218,696
|
|
|
3,359
|
|
|
194
|
|
|
9,305
|
|
|
—
|
|
|
(279,125
|
)
|
|
—
|
|
Net sales
|
|
335,104
|
|
|
527,574
|
|
|
409,425
|
|
|
207,558
|
|
|
604,045
|
|
|
193
|
|
|
(279,125
|
)
|
|
1,804,774
|
|
Adjusted operating profit (loss)
|
|
(1,085
|
)
|
|
74,063
|
|
|
1,244
|
|
|
2,047
|
|
|
1,548
|
|
|
(18,227
|
)
|
|
(1,930
|
)
|
|
57,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2013
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
300,866
|
|
|
$
|
273,421
|
|
|
$
|
380,629
|
|
|
$
|
200,750
|
|
|
$
|
592,988
|
|
|
$
|
3,888
|
|
|
$
|
—
|
|
|
$
|
1,752,542
|
|
Intersegment sales
|
|
40,877
|
|
|
188,351
|
|
|
3,171
|
|
|
2
|
|
|
816
|
|
|
—
|
|
|
(233,217
|
)
|
|
—
|
|
Net sales
|
|
341,743
|
|
|
461,772
|
|
|
383,800
|
|
|
200,752
|
|
|
593,804
|
|
|
3,888
|
|
|
(233,217
|
)
|
|
1,752,542
|
|
Adjusted operating profit (loss)
|
|
3,155
|
|
|
46,556
|
|
|
13,499
|
|
|
(3,831
|
)
|
|
7,728
|
|
|
(14,834
|
)
|
|
2,524
|
|
|
54,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2014
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
874,155
|
|
|
$
|
878,013
|
|
|
$
|
1,082,630
|
|
|
$
|
617,101
|
|
|
$
|
1,673,320
|
|
|
$
|
11,544
|
|
|
$
|
—
|
|
|
$
|
5,136,763
|
|
Intersegment sales
|
|
141,419
|
|
|
587,561
|
|
|
10,903
|
|
|
969
|
|
|
13,690
|
|
|
—
|
|
|
(754,542
|
)
|
|
—
|
|
Net sales
|
|
1,015,574
|
|
|
1,465,574
|
|
|
1,093,533
|
|
|
618,070
|
|
|
1,687,010
|
|
|
11,544
|
|
|
(754,542
|
)
|
|
5,136,763
|
|
Adjusted operating profit (loss)
|
|
(1,109
|
)
|
|
183,939
|
|
|
(1,869
|
)
|
|
25,647
|
|
|
4,544
|
|
|
(51,340
|
)
|
|
88
|
|
|
159,900
|
|
Total assets at May 31, 2014*
|
|
273,730
|
|
|
608,953
|
|
|
654,385
|
|
|
542,290
|
|
|
889,718
|
|
|
1,060,897
|
|
|
(420,536
|
)
|
|
3,609,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2013
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
909,372
|
|
|
$
|
784,811
|
|
|
$
|
1,047,765
|
|
|
$
|
596,450
|
|
|
$
|
1,841,968
|
|
|
$
|
10,348
|
|
|
$
|
—
|
|
|
$
|
5,190,714
|
|
Intersegment sales
|
|
135,706
|
|
|
569,276
|
|
|
10,593
|
|
|
6,134
|
|
|
10,360
|
|
|
—
|
|
|
(732,069
|
)
|
|
—
|
|
Net sales
|
|
1,045,078
|
|
|
1,354,087
|
|
|
1,058,358
|
|
|
602,584
|
|
|
1,852,328
|
|
|
10,348
|
|
|
(732,069
|
)
|
|
5,190,714
|
|
Adjusted operating profit (loss)
|
|
9,892
|
|
|
145,902
|
|
|
19,879
|
|
|
(7,108
|
)
|
|
51,837
|
|
|
(51,398
|
)
|
|
780
|
|
|
169,784
|
|
Total assets at August 31, 2013*
|
|
309,599
|
|
|
598,478
|
|
|
631,510
|
|
|
487,613
|
|
|
838,413
|
|
|
1,075,594
|
|
|
(496,946
|
)
|
|
3,444,261
|
|
* Excludes total assets from discontinued operations of
$9.0 million
at
May 31, 2014
and
$50.5 million
at
August 31, 2013
.
Reconciliations of earnings from continuing operations to adjusted operating profit are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Earnings from continuing operations
|
|
$
|
23,843
|
|
|
$
|
18,365
|
|
|
$
|
66,863
|
|
|
$
|
71,229
|
|
Income taxes
|
|
13,700
|
|
|
17,379
|
|
|
32,657
|
|
|
43,876
|
|
Interest expense
|
|
18,999
|
|
|
18,043
|
|
|
57,756
|
|
|
51,557
|
|
Discounts on sales of accounts receivable
|
|
1,118
|
|
|
1,010
|
|
|
2,624
|
|
|
3,122
|
|
Adjusted operating profit
|
|
$
|
57,660
|
|
|
$
|
54,797
|
|
|
$
|
159,900
|
|
|
$
|
169,784
|
|
NOTE 15. SUBSEQUENT EVENTS
On June 13, 2014, the Company completed the purchase of substantially all of the assets of a small recycling facility in San Antonio, Texas. This acquisition continues the vertical integration model of the Company by providing raw materials for its CMC Steel Texas location, establishes a larger recycling presence in San Antonio, Texas, and provides an opportunity for continued growth of the Company’s recycling operations in the central Texas area. The operating results of this facility will be included in the Americas Mills reporting segment.