NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
Accounting Principles
The accompanying unaudited condensed 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, 2015
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 condensed consolidated balance sheets and the condensed consolidated statements of earnings, 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 included in the Annual Report on Form 10-K for the fiscal year ended
August 31, 2015
. 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.
As discussed in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2015
, the Company evaluates the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations, also known as a triggering event. Based on margin and volume pressure in the Americas Recycling segment, during the third quarter of fiscal 2016, the Company considered a triggering event to have occurred. As a result, the Company reviewed the undiscounted future cash flows for certain Americas Recycling long-lived asset groups. The results of the undiscounted future cash flow analyses indicated the carrying amounts for all long-lived asset groups subject to testing were expected to be recovered, with the exception of two long-lived asset groups. Fair value for these two long-lived asset groups was then estimated and compared to the carrying values of the long-lived asset groups, which resulted in no impairment for the current fiscal quarter. However, it is reasonably possible that market conditions could remain flat or deteriorate further, resulting in impairment of the carrying values of certain Americas Recycling long-lived assets. The primary factors that may affect estimates of future cash flows are (i) management's scrap price outlook, (ii) scrap demand, (iii) working capital changes, (iv) capital expenditures and (v) selling, general and administrative expenses.
In the first quarter of fiscal 2016, the Company elected to change its accounting method for valuing its U.S. inventories that used the last-in, first-out ("LIFO") method to the weighted average cost method for its Americas Mills, Americas Recycling, and Americas Fabrication segments and to the specific identification method for its steel trading division headquartered in the U.S. in its International Marketing and Distribution segment. At September 1, 2015,
51%
of the Company's total net inventories were valued using LIFO. The Company believes the changes are preferable because weighted average cost or specific identification (1) results in better matching of revenues and expenses and better reflects the current value of inventory in the Company's consolidated balance sheet, (2) more closely aligns with the physical flow of these inventories, (3) are the methods the Company uses to monitor the financial results of these segments and this division for operational and financial planning, (4) eliminates the manual LIFO calculation and quarterly LIFO estimation process resulting in greater precision in determining quarterly cost of goods sold and inventory balances and reducing the administrative burden to report inventories because the information systems calculate inventory using the weighted average cost or the specific identification methods, and (5) improves comparability with the Company's peers. Additionally, the Company believes that the change to using weighted average cost at its Americas Mills, Americas Recycling, and Americas Fabrication segments increases consistency in inventory costing as its International Mill segment currently uses the weighted average cost method. The Company applied this change in accounting principle retrospectively to all prior periods presented herein. The cumulative effect of these accounting changes resulted in a
$124.2 million
increase in retained earnings as of September 1, 2014.
Additionally, in the first quarter of fiscal 2016, the Company elected to change its accounting method for valuing its inventories in its International Marketing and Distribution segment, except for its steel trading division headquartered in the U.S., from the first-in, first-out ("FIFO") method to the specific identification method. At September 1, 2015,
38%
of the Company's total net inventories were valued using the FIFO method. The Company believes the change from FIFO to specific identification is preferable because it (1) results in better matching of revenues with expenses, (2) more closely aligns with the physical flow of these inventories, and (3) is the method the Company uses to monitor the financial results of the segment for operational and financial planning. Because this change in accounting principle was immaterial in all prior periods, it was not applied retrospectively. The change did not have a material impact on our condensed consolidated financial statements as of and for the
three and nine
months ended
May 31, 2016
.
As a result of the retrospective application of the change in accounting principle from LIFO to weighted average cost or specific identification, certain financial statement line items in the Company's condensed consolidated balance sheet as of August 31, 2015 and its condensed consolidated statements of earnings for the
three and nine
months ended
May 31, 2015
and condensed consolidated statement of cash flows for the nine months ended
May 31, 2015
were adjusted as presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
|
As Originally Reported
|
|
Effect of Change
|
|
As Adjusted
|
Condensed
Consolidated Statement of Earnings for the three months ended May 31, 2015:
|
Cost of goods sold
|
|
$
|
1,270,044
|
|
|
$
|
43,810
|
|
|
$
|
1,313,854
|
|
Income taxes
|
|
37,964
|
|
|
(15,838
|
)
|
|
22,126
|
|
Earnings from continuing operations
|
67,128
|
|
|
(27,972
|
)
|
|
39,156
|
|
Net earnings attributable to CMC
|
56,681
|
|
|
(27,972
|
)
|
|
28,709
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.58
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.34
|
|
Net earnings
|
|
0.49
|
|
|
(0.24
|
)
|
|
0.25
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.58
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.34
|
|
Net earnings
|
|
0.49
|
|
|
(0.24
|
)
|
|
0.25
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Earnings for the nine months ended May 31, 2015:
|
Cost of goods sold
|
|
$
|
3,933,516
|
|
|
$
|
124,447
|
|
|
$
|
4,057,963
|
|
Income taxes
|
|
84,252
|
|
|
(44,152
|
)
|
|
40,100
|
|
Earnings from continuing operations
|
167,181
|
|
|
(80,295
|
)
|
|
86,886
|
|
Net earnings attributable to CMC
|
147,385
|
|
|
(80,295
|
)
|
|
67,090
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
1.43
|
|
|
$
|
(0.69
|
)
|
|
$
|
0.74
|
|
Net earnings
|
|
1.26
|
|
|
(0.69
|
)
|
|
0.57
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
1.42
|
|
|
$
|
(0.68
|
)
|
|
$
|
0.74
|
|
Net earnings
|
|
1.25
|
|
|
(0.68
|
)
|
|
0.57
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet as of August 31, 2015:
|
Inventories, net
|
|
$
|
781,371
|
|
|
$
|
99,113
|
|
|
$
|
880,484
|
|
Current deferred tax assets
|
29,137
|
|
|
(25,827
|
)
|
|
3,310
|
|
Accrued expenses and other payables
|
279,415
|
|
|
11,262
|
|
|
290,677
|
|
Retained earnings
|
1,311,544
|
|
|
62,024
|
|
|
1,373,568
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows for the nine months ended May 31, 2015:
|
Net earnings
|
$
|
147,385
|
|
|
$
|
(80,295
|
)
|
|
$
|
67,090
|
|
Deferred income taxes
|
26,396
|
|
|
(45,990
|
)
|
|
(19,594
|
)
|
Inventories working capital change
|
(111,675
|
)
|
|
114,609
|
|
|
2,934
|
|
Accounts payable, accrued expenses and other payables working capital change
|
(129,322
|
)
|
|
1,257
|
|
|
(128,065
|
)
|
The effect of the change in accounting principle is net of the effect of lower of cost or market adjustments.
The following table shows the effect of the change in accounting principle from LIFO to weighted average cost or specific identification on earnings from continuing operations, net earnings attributable to CMC and the related basic and diluted earnings per share attributable to CMC for the
three and nine
months ended
May 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
|
As Computed Under LIFO
|
|
As Reported Under New Inventory Costing Methodologies
|
|
Effect of Change
|
Condensed
Consolidated Statement of Earnings for the three months ended May 31, 2016:
|
Earnings from continuing operations
|
|
$
|
34,121
|
|
|
$
|
35,111
|
|
|
$
|
990
|
|
Net earnings attributable to CMC
|
|
18,338
|
|
|
19,328
|
|
|
990
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.01
|
|
Net earnings
|
|
0.16
|
|
|
0.17
|
|
|
0.01
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.01
|
|
Net earnings
|
|
0.16
|
|
|
0.17
|
|
|
0.01
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Earnings for the nine months ended May 31, 2016:
|
Earnings from continuing operations
|
|
$
|
99,843
|
|
|
$
|
71,593
|
|
|
$
|
(28,250
|
)
|
Net earnings attributable to CMC
|
|
83,143
|
|
|
54,893
|
|
|
(28,250
|
)
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
0.86
|
|
|
$
|
0.62
|
|
|
$
|
(0.24
|
)
|
Net earnings
|
|
0.72
|
|
|
0.48
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
0.85
|
|
|
$
|
0.61
|
|
|
$
|
(0.24
|
)
|
Net earnings
|
|
0.71
|
|
|
0.47
|
|
|
(0.24
|
)
|
Recently Adopted Accounting Pronouncements
In the second quarter of fiscal 2016, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This change in accounting principle simplifies the presentation of deferred income taxes. This change was applied prospectively and prior periods presented were not adjusted.
In the first quarter of fiscal 2016, the Company adopted guidance issued by the FASB 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 guidance changed the Company's practice of assessing discontinued operations and the presentation and disclosure in the Company's condensed consolidated financial statements. The guidance was adopted on a prospective basis.
In the first quarter of fiscal 2016, the Company adopted guidance issued by the FASB requiring entities to measure inventory, other than that measured using LIFO or the retail inventory method, 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. The guidance changes the Company's practice of measuring inventory at the lower of cost or market, which included net realizable value, replacement cost and net realizable value plus normal profit margin. The guidance was adopted on a prospective basis.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued guidance simplifying several aspects of accounting for share-based payment transactions, including recognizing excess tax benefits and deficiencies as income tax expense or benefit in the statement of earnings, classifying excess tax benefits and expenses as an operating activity within the statement of cash flows, and an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur. The provisions of this guidance related to excess tax benefits and deficiencies are to be applied on a prospective basis. If elected, the provisions of this guidance related to forfeitures are to be applied using a modified retrospective approach. This guidance is effective for fiscal years, and interim periods therein, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued guidance requiring a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In January 2016, the FASB issued guidance to improve the accounting models for financial instruments. Specifically, the new guidance (i) requires equity investments be measured at fair value, or at cost adjusted for changes in observable prices less impairment for equity investments without readily determinable fair values, with changes in fair value recognized in net income; (ii) requires a qualitative assessment to identify impairment for equity investments without readily determinable fair values; (iii) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requires use of the exit price notion when measuring the fair value of financial instruments; (v) requires entities that elect the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk in other comprehensive income; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that entities must assess valuation allowances for deferred taxes related to available-for-sale debt securities in combination with their other deferred tax assets. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017. Early adoption is permissible, but limited in application. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued guidance requiring the acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Additionally, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, must be calculated as if the accounting had been completed at the acquisition date. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In February 2015, the FASB issued guidance modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities. This guidance also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. Entities may elect to apply this guidance either on a retrospective or a modified retrospective basis. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In January 2015, the FASB issued guidance eliminating the concept of extraordinary items. Under this guidance an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years, and
interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company plans to adopt this guidance prospectively. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In August 2014, the FASB issued guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern and to provide disclosures in certain circumstances. The new guidance was issued to reduce diversity in the timing and content of footnote disclosures. This guidance is effective for fiscal years ending after December 15, 2016, and all annual and interim periods thereafter. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In August 2014, the FASB issued guidance providing a measurement alternative to the existing fair value measurement guidance for reporting entities that consolidate a collateralized financing entity in which (1) the financial assets and financial liabilities are measured at fair value except for those incidental financial assets and financial liabilities with their carrying values that approximate fair values and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. When the measurement alternative is elected, the financial assets and liabilities of a collateralized financing entity will be measured using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. This guidance is effective for public business entities for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In June 2014, the FASB issued guidance requiring entities to account for a performance target as a performance condition if the target affects vesting and could be achieved after the requisite service period. The new guidance did not introduce additional disclosure requirements and was issued to resolve diversity in practice. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015. The Company currently accounts for such performance targets in a manner consistent with the new guidance and does not expect this guidance to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued guidance requiring entities to recognize revenue from contracts with customers 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. In August 2015, the FASB issued guidance deferring the effective date of this guidance to annual periods beginning after December 15, 2017, including interim reporting periods therein. 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.
NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"), net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, February 29, 2016
|
|
$
|
(130,865
|
)
|
|
$
|
2,616
|
|
|
$
|
(2,762
|
)
|
|
$
|
(131,011
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
3,817
|
|
|
(16
|
)
|
|
—
|
|
|
3,801
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
32
|
|
|
(2
|
)
|
|
30
|
|
Net other comprehensive income (loss)
|
|
3,817
|
|
|
16
|
|
|
(2
|
)
|
|
3,831
|
|
Balance, May 31, 2016
|
|
$
|
(127,048
|
)
|
|
$
|
2,632
|
|
|
$
|
(2,764
|
)
|
|
$
|
(127,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2016
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance at August 31, 2015
|
|
$
|
(113,081
|
)
|
|
$
|
2,305
|
|
|
$
|
(2,759
|
)
|
|
$
|
(113,535
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(13,967
|
)
|
|
469
|
|
|
—
|
|
|
(13,498
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(142
|
)
|
|
(5
|
)
|
|
(147
|
)
|
Net other comprehensive income (loss)
|
|
(13,967
|
)
|
|
327
|
|
|
(5
|
)
|
|
(13,645
|
)
|
Balance, May 31, 2016
|
|
$
|
(127,048
|
)
|
|
$
|
2,632
|
|
|
$
|
(2,764
|
)
|
|
$
|
(127,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2015
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, February 28, 2015
|
|
$
|
(91,154
|
)
|
|
$
|
1,355
|
|
|
$
|
(2,630
|
)
|
|
$
|
(92,429
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(4,588
|
)
|
|
54
|
|
|
—
|
|
|
(4,534
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
804
|
|
|
(3
|
)
|
|
801
|
|
Net other comprehensive income (loss)
|
|
(4,588
|
)
|
|
858
|
|
|
(3
|
)
|
|
(3,733
|
)
|
Balance, May 31, 2015
|
|
$
|
(95,742
|
)
|
|
$
|
2,213
|
|
|
$
|
(2,633
|
)
|
|
$
|
(96,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2015
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance at August 31, 2014
|
|
$
|
(19,891
|
)
|
|
$
|
3,014
|
|
|
$
|
(2,632
|
)
|
|
$
|
(19,509
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(75,851
|
)
|
|
(2,371
|
)
|
|
8
|
|
|
(78,214
|
)
|
Amounts reclassified from AOCI
|
|
—
|
|
|
1,570
|
|
|
(9
|
)
|
|
1,561
|
|
Net other comprehensive loss
|
|
(75,851
|
)
|
|
(801
|
)
|
|
(1
|
)
|
|
(76,653
|
)
|
Balance, May 31, 2015
|
|
$
|
(95,742
|
)
|
|
$
|
2,213
|
|
|
$
|
(2,633
|
)
|
|
$
|
(96,162
|
)
|
The significant items reclassified out of AOCI and the corresponding line items in the condensed consolidated statements of earnings 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
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Unrealized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
Cost of goods sold
|
|
$
|
(263
|
)
|
|
$
|
(269
|
)
|
|
$
|
(373
|
)
|
|
$
|
(429
|
)
|
Foreign exchange
|
|
Net sales
|
|
(168
|
)
|
|
(111
|
)
|
|
(561
|
)
|
|
(37
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
223
|
|
|
(1,044
|
)
|
|
641
|
|
|
(2,447
|
)
|
Foreign exchange
|
|
SG&A expenses
|
|
53
|
|
|
17
|
|
|
123
|
|
|
57
|
|
Interest rate
|
|
Interest expense
|
|
134
|
|
|
134
|
|
|
400
|
|
|
400
|
|
|
|
|
|
(21
|
)
|
|
(1,273
|
)
|
|
230
|
|
|
(2,456
|
)
|
Income tax effect
|
|
Income taxes benefit (expense)
|
|
(11
|
)
|
|
469
|
|
|
(88
|
)
|
|
886
|
|
Net of income taxes
|
|
|
|
$
|
(32
|
)
|
|
$
|
(804
|
)
|
|
$
|
142
|
|
|
$
|
(1,570
|
)
|
Defined benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior services
|
|
SG&A expenses
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
11
|
|
Income tax effect
|
|
Income taxes expense
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Net of income taxes
|
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
9
|
|
Amounts in parentheses reduce earnings.
NOTE 3. SALES OF ACCOUNTS RECEIVABLE
During the fourth quarter of fiscal 2014, the Company entered into a third amended
$200.0 million
U.S. sale of accounts receivable program which expires on August 15, 2017. Under the program, CMC contributes, and several of its subsidiaries sell without recourse, certain eligible 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 accounts receivable generated by the Company. CMCRV sells the accounts receivable in their entirety to
three
financial institutions. Under the amended U.S. sales of accounts receivable program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of
$300.0 million
for all accounts receivable sold. The remaining portion of the purchase price of the accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the accounts receivable as true sales, and the accounts receivable balances that are sold are removed from the condensed consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's condensed consolidated statements of cash flows. Additionally, the U.S. 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, 2016
and
August 31, 2015
, under its U.S. sale of accounts receivable program, the Company had sold
$211.6 million
and
$274.3 million
of accounts receivable, respectively, to the financial institutions. At
May 31, 2016
and
August 31, 2015
, the Company had
no
advance payments outstanding on the sale of its accounts receivable.
In addition to the U.S. sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy. In the third quarter of fiscal 2015, the Company phased out its existing European program and entered into a two year renewable accounts receivable sales program with a different financial institution. The new agreement increased the facility limit from PLN
200.0 million
to PLN
220.0 million
. The European program allows the Company's European subsidiaries to obtain an advance of up to
90%
of eligible 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 one year renewable accounts receivable sales program with a different financial institution. During the first quarter of fiscal 2015, the Company entered into a first amendment to its Australian program, which extended the maturity date to October 2016. Under the new Australian program, accounts receivable balances are sold to a special purpose vehicle, which in turn sells
100%
of the eligible accounts receivable of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. During the fourth quarter of fiscal 2015, the Company entered into a second amendment to its Australian program, which reduced the facility limit from
A$75.0 million
to
A$40.0 million
. The financial institution will fund up to the facility limit for all accounts receivable sold, and the remaining portion of the purchase price of the accounts receivable is in the form of a subordinated note from the financial institution. This note will be satisfied from the ultimate collection of the accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the accounts receivable as true sales, and the accounts receivable balances that are sold are removed from the condensed consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's condensed consolidated statements of cash flows.
At
May 31, 2016
and
August 31, 2015
, under its European and Australian programs, the Company had sold
$82.3 million
and
$97.9 million
of accounts receivable, respectively, to third-party financial institutions and received advance payments of
$29.2 million
and
$27.7 million
, respectively.
During the
nine
months ended
May 31, 2016
and
2015
, cash proceeds from the U.S. and international sale of accounts receivable programs were
$280.7 million
and
$441.6 million
, respectively, and cash payments to the owners of accounts receivable were
$279.2 million
and
$539.6 million
, respectively. For a nominal servicing fee, the Company is responsible for servicing the accounts receivable for the U.S. and Australian programs. Discounts on U.S. and international sales of accounts receivable were
$0.4 million
and
$1.2 million
for the
three
and
nine
months ended
May 31, 2016
, respectively, and
$0.4 million
and
$1.2 million
for the
three
and
nine
months ended
May 31, 2015
, respectively, and are included in selling, general and administrative expenses in the Company's condensed consolidated statements of earnings.
As of
May 31, 2016
, the deferred purchase price on the Company's U.S., European and Commercial Metals Pty. Ltd. sale of accounts receivable programs was included in accounts receivable on the Company's condensed consolidated balance sheets. As of
August 31, 2015
, the deferred purchase price on the Company's U.S., European, Commercial Metals Pty. Ltd. and CMC Steel Distribution Pty. Ltd. sale of accounts receivable programs was included in accounts receivable on the Company's condensed consolidated balance sheets. As of
May 31, 2016
and
August 31, 2015
, the deferred purchase price on the G.A.M. Steel Pty. Ltd.
sale of accounts receivable program was included in assets of businesses held for sale on the Company's condensed consolidated balance sheets.
The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of accounts receivable programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Australia*
|
|
Europe
|
Beginning balance
|
|
$
|
231,874
|
|
|
$
|
193,035
|
|
|
$
|
13,383
|
|
|
$
|
25,456
|
|
Transfers of accounts receivable
|
|
636,929
|
|
|
513,169
|
|
|
47,110
|
|
|
76,650
|
|
Collections
|
|
(608,292
|
)
|
|
(498,529
|
)
|
|
(41,522
|
)
|
|
(68,241
|
)
|
Ending balance
|
|
$
|
260,511
|
|
|
$
|
207,675
|
|
|
$
|
18,971
|
|
|
$
|
33,865
|
|
* Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of
$13.6 million
and collections of
$12.3 million
for the
three
months ended
May 31, 2016
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2016
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Australia*
|
|
Europe
|
Beginning balance
|
|
$
|
339,547
|
|
|
$
|
269,778
|
|
|
$
|
18,038
|
|
|
$
|
51,731
|
|
Transfers of accounts receivable
|
|
1,763,122
|
|
|
1,432,592
|
|
|
130,440
|
|
|
200,090
|
|
Collections
|
|
(1,842,158
|
)
|
|
(1,494,695
|
)
|
|
(129,507
|
)
|
|
(217,956
|
)
|
Ending balance
|
|
$
|
260,511
|
|
|
$
|
207,675
|
|
|
$
|
18,971
|
|
|
$
|
33,865
|
|
* Includes the sales of accounts receivable activities related to discontinued operations and businesses held for sale (transfers of accounts receivable of
$37.0 million
and collections of
$49.1 million
for the
nine
months ended
May 31, 2016
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2015
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Australia**
|
|
Europe
|
Beginning balance
|
|
$
|
386,447
|
|
|
$
|
327,009
|
|
|
$
|
21,680
|
|
|
$
|
37,758
|
|
Transfers of accounts receivable
|
|
892,387
|
|
|
724,309
|
|
|
79,173
|
|
|
88,905
|
|
Collections
|
|
(871,953
|
)
|
|
(727,077
|
)
|
|
(75,210
|
)
|
|
(69,666
|
)
|
Ending balance
|
|
$
|
406,881
|
|
|
$
|
324,241
|
|
|
$
|
25,643
|
|
|
$
|
56,997
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2015
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Australia**
|
|
Europe
|
Beginning balance
|
|
$
|
385,169
|
|
|
$
|
329,797
|
|
|
$
|
34,071
|
|
|
$
|
21,301
|
|
Transfers of accounts receivable
|
|
2,908,695
|
|
|
2,426,691
|
|
|
233,237
|
|
|
248,767
|
|
Collections
|
|
(2,886,983
|
)
|
|
(2,432,247
|
)
|
|
(241,665
|
)
|
|
(213,071
|
)
|
Ending balance
|
|
$
|
406,881
|
|
|
$
|
324,241
|
|
|
$
|
25,643
|
|
|
$
|
56,997
|
|
** Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of
$46.2 million
and
$148.3 million
and collections of
$47.5 million
and
$164.0 million
for the
three
and
nine
months ended
May 31, 2015
, respectively).
NOTE 4. INVENTORIES, NET
As of
May 31, 2016
, inventories were stated at the lower of cost or net realizable value. As of
August 31, 2015
, inventories were stated at the lower of cost or market. See Note 1, Accounting Policies, for further discussion of the adoption of the new accounting pronouncement.
Effective September 1, 2015, the Company elected to change its accounting method for valuing all of its inventories that used the LIFO method to either the weighted average or specific identification methods. The Company applied this change in accounting
principle retrospectively to all prior periods presented. See Note 1, Accounting Policies, for further disclosures regarding this change in accounting principle.
Additionally, effective September 1, 2015, the Company elected to change its accounting method for valuing all of its inventories in its International Marketing and Distribution segment, except for its steel trading division headquartered in the U.S., from the FIFO method to the specification identification method. Because this change in accounting principle was immaterial in all prior periods, it was not applied retrospectively. The change did not have a material impact on our condensed consolidated financial statements as of and for the
three and nine
months ended
May 31, 2016
. See Note 1, Accounting Policies, for further disclosures regarding this change in accounting principle.
The Company determines the inventory cost for its International Mill segment using the weighted average cost method.
At
May 31, 2016
,
59%
of the Company's total net inventories were valued using the weighted average cost method and
41%
of the Company's total net inventories were valued using the specification identification method.
The majority of the Company's inventories are in the form of finished goods. At
May 31, 2016
and
August 31, 2015
,
$82.0 million
and
$61.5 million
, respectively, of the Company's inventories were in the form of raw materials. Work in process inventories were
$32.6 million
at
May 31, 2016
and were
minimal
at
August 31, 2015
.
During the
three
and
nine
months ended
May 31, 2016
, inventory write-downs were
$1.6 million
and
$9.6 million
, respectively, and were
$17.4 million
and
$21.5 million
during the
three
and
nine
months ended
May 31, 2015
.
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 at August 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
9,751
|
|
|
$
|
4,970
|
|
|
$
|
57,637
|
|
|
$
|
2,517
|
|
|
$
|
1,912
|
|
|
$
|
76,787
|
|
|
Accumulated impairment losses
|
|
(9,751
|
)
|
|
—
|
|
|
(493
|
)
|
|
(160
|
)
|
|
—
|
|
|
(10,404
|
)
|
|
|
|
—
|
|
|
4,970
|
|
|
57,144
|
|
|
2,357
|
|
|
1,912
|
|
|
66,383
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(98
|
)
|
|
48
|
|
|
(50
|
)
|
Balance at May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
9,751
|
|
|
4,970
|
|
|
57,637
|
|
|
2,412
|
|
|
1,960
|
|
|
76,730
|
|
|
Accumulated impairment losses
|
|
(9,751
|
)
|
|
—
|
|
|
(493
|
)
|
|
(153
|
)
|
|
—
|
|
|
(10,397
|
)
|
|
|
|
$
|
—
|
|
|
$
|
4,970
|
|
|
$
|
57,144
|
|
|
$
|
2,259
|
|
|
$
|
1,960
|
|
|
$
|
66,333
|
|
The total gross carrying amounts of the Company's intangible assets that are subject to amortization were
$40.3 million
and
$47.8 million
at
May 31, 2016
and
August 31, 2015
, respectively, and are included in other noncurrent assets on the Company's condensed consolidated balance sheets. Intangible amortization expense from continuing operations was
$1.0 million
and
$3.1 million
for the
three
and
nine
months ended
May 31, 2016
, respectively, and
$1.6 million
and
$5.2 million
for the
three
and
nine
months ended
May 31, 2015
, respectively. Excluding goodwill, there are no significant intangible assets with indefinite lives.
NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
As of
May 31, 2016
and
August 31, 2015
, one component of the Australian steel distribution business remained for sale and continued to be classified as held for sale. The components of assets and liabilities of businesses held for sale on the Company's condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
May 31, 2016
|
|
August 31, 2015
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
5,133
|
|
|
$
|
3,244
|
|
Inventories, net
|
|
9,807
|
|
|
12,514
|
|
Other current assets
|
|
—
|
|
|
41
|
|
Property, plant and equipment, net of accumulated depreciation and amortization
|
|
1,412
|
|
|
1,209
|
|
Impairment of businesses held for sale
(1)
|
|
(15,765
|
)
|
|
—
|
|
Assets of businesses held for sale
|
|
$
|
587
|
|
|
$
|
17,008
|
|
Liabilities:
|
|
|
|
|
Accounts payable-trade
|
|
$
|
1,293
|
|
|
$
|
3,011
|
|
Accrued expenses and other payables
|
|
2,411
|
|
|
2,265
|
|
Liabilities of businesses held for sale
|
|
$
|
3,704
|
|
|
$
|
5,276
|
|
_________________
(1) See Note 10, Fair Value, for further discussion of the impairment of businesses held for sale.
Discontinued Operations
Despite focused efforts and substantial progress to stabilize and improve the results of the Australian steel distribution business, the Company determined that achieving acceptable financial returns would take additional time and investment. During the first quarter of fiscal
2015
, the Company decided to exit and sell its steel distribution business in Australia and determined that this decision met the definition of a discontinued operation. As a result, this business has been presented as a discontinued operation for all periods presented. During the
third
quarter of fiscal
2016
, the Company recorded an impairment charge of
$15.8 million
, including the impact of an approximate
$13.5 million
accumulated foreign currency translation loss, on its remaining component of the Australian steel distribution business that was classified as held for sale
at
May 31, 2016
and as discontinued operations during the
three
and
nine
months ended
May 31, 2016
. See Note 10, Fair Value, for further discussion of this impairment charge. Other expenses associated with exiting this business were not material for the
three and nine
months ended
May 31, 2016
and
May 31, 2015
. The Australian steel distribution business was previously an operating segment included in the International Marketing and Distribution reporting segment.
Financial information for discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
12,321
|
|
|
$
|
43,307
|
|
|
$
|
33,828
|
|
|
$
|
143,644
|
|
Loss from discontinued operations before income taxes
|
|
(15,785
|
)
|
|
(10,871
|
)
|
|
(16,803
|
)
|
|
(20,241
|
)
|
Dispositions
There were no material dispositions during the first
nine
months of fiscal
2016
or
2015
.
During the first quarter of fiscal 2014, the Company sold all of the outstanding capital stock of our wholly owned copper tube manufacturing operation, Howell Metal Company for
$58.5 million
,
$3.2 million
of which was held in escrow as of August 31, 2015. The full balance of escrow was released to the Company in the second quarter of fiscal 2016.
NOTE 7. CREDIT ARRANGEMENTS
On June 26, 2014, the Company entered into a fourth amended and restated credit agreement (the "Credit Agreement") for a revolving credit facility of
$350.0 million
with a maturity date of
June 26, 2019
. The maximum availability under the Credit Agreement can be increased to
$500.0 million
with bank approval. The Company's obligation under its Credit Agreement is collateralized by its U.S. inventory. The Credit Agreement's capacity includes
$50.0 million
for the issuance of stand-by letters of credit and was reduced by outstanding stand-by letters of credit which totaled
$1.7 million
and
$23.4 million
at
May 31, 2016
and
August 31, 2015
, respectively.
Under the Credit Agreement, the Company is 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 Credit 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 2017 Notes and 2018 Notes, as defined below, 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
$150.0 million
in excess of each of the outstanding aggregate principal amounts of the 2017 Notes and 2018 Notes. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate.
At
May 31, 2016
, the Company's interest coverage ratio was
4.70
to 1.00, and the Company's debt to capitalization ratio was
0.44
to 1.00. The Company had
no
amount drawn under the Credit Agreement at
May 31, 2016
and
August 31, 2015
.
In May 2013, the Company issued
$330.0 million
of
4.875%
Senior Notes due
May 2023
(the "2023 Notes"). Interest on the 2023 Notes is payable semi-annually.
In August 2008, the Company issued
$500.0 million
of
7.35%
senior unsecured notes due in
August 2018
(the "2018 Notes"). During the third quarter of fiscal 2010, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to
6.40%
per annum. Interest on these notes is payable semiannually. In February 2016, the Company accepted for purchase approximately
$100.2 million
of the outstanding principal amount of its 2018 Notes through a cash tender offer. The Company recognized expenses of approximately
$6.1 million
related to the early extinguishment of this debt, which are included in loss on debt extinguishment in the unaudited condensed consolidated statements of earnings for the
nine
months ended
May 31, 2016
.
In July 2007, the Company issued
$400.0 million
of
6.50%
senior unsecured notes due in
July 2017
(the "2017 Notes"). During the third quarter of fiscal 2011, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to
5.74%
per annum. Interest on these notes is payable semiannually. In February 2016, the Company accepted for purchase
$100.0 million
of the outstanding principal amount of its 2017 Notes though a cash tender offer. The Company recognized expenses of approximately
$5.4 million
related to the early extinguishment of this debt, which are included in loss on debt extinguishment in the unaudited condensed consolidated statements of earnings for the
nine
months ended
May 31, 2016
.
At
May 31, 2016
, 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, 2016
and
August 31, 2015
, the unamortized amounts were
$13.6 million
and
$19.2 million
, respectively. Amortization of the deferred gain for each of the
three
and
nine
months ended
May 31, 2016
and
2015
was
$1.9 million
and
$5.7 million
, respectively.
The Company has uncommitted credit facilities available from U.S. 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, 2016
|
|
May 31, 2016
|
|
August 31, 2015
|
2023 Notes
|
|
4.875%
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
2018 Notes
|
|
6.40%
|
|
410,030
|
|
|
513,680
|
|
2017 Notes
|
|
5.74%
|
|
303,344
|
|
|
405,573
|
|
Other, including equipment notes
|
|
|
|
35,248
|
|
|
38,739
|
|
|
|
|
|
1,078,622
|
|
|
1,287,992
|
|
Less current maturities
|
|
|
|
10,929
|
|
|
10,110
|
|
|
|
|
|
$
|
1,067,693
|
|
|
$
|
1,277,882
|
|
At
May 31, 2016
and
August 31, 2015
, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN
175 million
(
$44.4 million
) and PLN
215 million
(
$56.9 million
), respectively. The uncommitted credit facilities as of
May 31, 2016
have expiration dates ranging from November 2016 to March 2017, which CMCP intends to renew upon expiration. At
May 31, 2016
and
August 31, 2015
, no material amounts were outstanding under these facilities. During the
nine months ended May 31, 2016
, CMCP had
no
borrowings and
no
repayments under its uncommitted credit facilities. During the
nine months ended May 31, 2015
, CMCP had total borrowings of
$49.6 million
and total repayments of
$49.6 million
under its uncommitted 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, 2016
and
2015
, respectively. Cash paid for interest during the
three
and
nine
months ended
May 31, 2016
was
$9.1 million
and
$50.0 million
, respectively, and
$10.6 million
and
$53.5 million
during the
three
and
nine
months ended
May 31, 2015
, respectively.
NOTE 8. NEW MARKETS TAX CREDIT TRANSACTIONS
In the second quarter of fiscal 2016, the Company entered into a financing transaction with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"), related to the development, construction and equipping of a steel micro-mill in Durant, Oklahoma. To effect the transaction, USBCDC made a capital contribution to USBCDC Investment Fund 156, LLC, a Missouri limited liability company (the "Investment Fund"). Additionally, Commonwealth Acquisitions Holdings, Inc., a wholly owned subsidiary of CMC ("Commonwealth"), made a loan to the Investment Fund. The transaction qualified under the New Markets Tax Credit Program ("NMTC Program"), provided for in the Community Renewal Tax Relief Act of 2000 (the "Act"). The NMTC Program is intended to induce capital investment in qualified low-income communities. The Act permits taxpayers to claim credits against federal income taxes for up to 39% of qualified investments in certain community development entities ("CDEs"). CDEs are privately managed entities that are certified to make qualified low-income community investments to qualified projects.
Commonwealth loaned
$35.3 million
to the Investment Fund at an interest rate of approximately
1.08%
per year and with a maturity date of December 24, 2045 (the "Commonwealth Loan"). The Investment Fund also received capital contributions from USBCDC in the aggregate amount of
$17.7 million
(the "USBCDC Equity"). The Investment Fund used
$51.5 million
of the proceeds received from the Commonwealth Loan and the USBCDC Equity to make qualified equity investments ("QEIs") into certain CDEs, which, in turn, used
$50.7 million
of the QEIs to make loans to CMC Steel Oklahoma, LLC, a wholly owned subsidiary of CMC, with terms similar to the Commonwealth Loan and as partial financing for the construction, development and equipping of a new steel micro-mill in Durant, Oklahoma. The proceeds of the loans from the CDEs (including the portion of the loans representing the capital contribution made by USBCDC, net of syndication fees) were included in other current assets in the accompanying condensed consolidated balance sheet and will be used to partially fund the new steel micro-mill in Durant, Oklahoma.
By virtue of its capital contribution to the Investment Fund, USBCDC is entitled to substantially all of the benefits derived from the new markets tax credits ("NMTCs"). This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase USBCDC's interest in the Investment Fund. The Company believes USBCDC will exercise the put option in December 2022 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify
USBCDC for any loss or recapture of NMTCs related to the financing until such time as the Company's obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.
The Company has determined that the Investment Fund is a variable interest entity ("VIE"), of which the Company is the primary beneficiary and has consolidated it in accordance with the accounting standard for consolidation. USBCDC's contribution is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Direct costs incurred in structuring the financing arrangement are deferred and will be recognized as expense over the seven year recapture period. Incremental costs to maintain the structure during the compliance period are recognized as incurred.
NOTE 9. 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, 2016
, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were
$290.0 million
and
$23.0 million
, respectively. At
May 31, 2015
, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were
$399.8 million
and
$46.5 million
, respectively.
The following table provides information regarding the Company's commodity contract commitments as of
May 31, 2016
:
|
|
|
|
|
|
|
|
Commodity
|
|
Long/Short
|
|
Total
|
Aluminum
|
|
Long
|
|
3,429
|
|
MT
|
Aluminum
|
|
Short
|
|
175
|
|
MT
|
Copper
|
|
Long
|
|
238
|
|
MT
|
Copper
|
|
Short
|
|
3,425
|
|
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 condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the
three
and
nine
months ended
May 31, 2016
and
2015
. 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 condensed consolidated statements of earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
Derivatives Not Designated as Hedging Instruments (in thousands)
|
|
Location
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commodity
|
|
Cost of goods sold
|
|
$
|
224
|
|
|
$
|
(354
|
)
|
|
$
|
2,172
|
|
|
$
|
4,947
|
|
Foreign exchange
|
|
Net sales
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
3,005
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
(9
|
)
|
|
562
|
|
|
72
|
|
|
4,913
|
|
Foreign exchange
|
|
SG&A expenses
|
|
(6,304
|
)
|
|
2,405
|
|
|
9,410
|
|
|
22,479
|
|
Gain (loss) before income taxes
|
|
|
|
$
|
(6,089
|
)
|
|
$
|
2,613
|
|
|
$
|
11,650
|
|
|
$
|
35,344
|
|
The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
Location
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Foreign exchange
|
|
Net sales
|
|
$
|
(122
|
)
|
|
$
|
207
|
|
|
$
|
(39
|
)
|
|
$
|
566
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
901
|
|
|
(283
|
)
|
|
90
|
|
|
642
|
|
Gain (loss) before income taxes
|
|
|
|
$
|
779
|
|
|
$
|
(76
|
)
|
|
$
|
51
|
|
|
$
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
Location
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Foreign exchange
|
|
Net sales
|
|
$
|
122
|
|
|
$
|
(207
|
)
|
|
$
|
39
|
|
|
$
|
(565
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
(901
|
)
|
|
283
|
|
|
(90
|
)
|
|
(642
|
)
|
Gain (loss) before income taxes
|
|
|
|
$
|
(779
|
)
|
|
$
|
76
|
|
|
$
|
(51
|
)
|
|
$
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commodity
|
|
$
|
(56
|
)
|
|
$
|
(76
|
)
|
|
$
|
(280
|
)
|
|
$
|
(492
|
)
|
Foreign exchange
|
|
40
|
|
|
130
|
|
|
749
|
|
|
(1,879
|
)
|
Gain (loss), net of income taxes
|
|
$
|
(16
|
)
|
|
$
|
54
|
|
|
$
|
469
|
|
|
$
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commodity
|
|
Cost of goods sold
|
|
$
|
(263
|
)
|
|
$
|
(269
|
)
|
|
$
|
(373
|
)
|
|
$
|
(429
|
)
|
Foreign exchange
|
|
Net sales
|
|
(168
|
)
|
|
(111
|
)
|
|
(561
|
)
|
|
(37
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
223
|
|
|
(1,044
|
)
|
|
641
|
|
|
(2,447
|
)
|
Foreign exchange
|
|
SG&A expenses
|
|
53
|
|
|
17
|
|
|
123
|
|
|
57
|
|
Interest rate
|
|
Interest expense
|
|
134
|
|
|
134
|
|
|
400
|
|
|
400
|
|
Gain (loss) before income taxes
|
|
|
|
(21
|
)
|
|
(1,273
|
)
|
|
230
|
|
|
(2,456
|
)
|
Income tax (expense) benefit
|
|
|
|
(11
|
)
|
|
469
|
|
|
(88
|
)
|
|
886
|
|
Gain (loss), net of income taxes
|
|
|
|
$
|
(32
|
)
|
|
$
|
(804
|
)
|
|
$
|
142
|
|
|
$
|
(1,570
|
)
|
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 condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at
May 31, 2016
and
August 31, 2015
. The fair value of the Company's derivative instruments on the condensed consolidated balance sheets was as follows:
|
|
|
|
|
|
|
|
|
|
Derivative Assets (in thousands)
|
|
May 31, 2016
|
|
August 31, 2015
|
Commodity — designated for hedge accounting
|
|
$
|
8
|
|
|
$
|
19
|
|
Commodity — not designated for hedge accounting
|
|
447
|
|
|
846
|
|
Foreign exchange — designated for hedge accounting
|
|
1,719
|
|
|
1,500
|
|
Foreign exchange — not designated for hedge accounting
|
|
1,245
|
|
|
3,088
|
|
Derivative assets (other current assets)*
|
|
$
|
3,419
|
|
|
$
|
5,453
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities (in thousands)
|
|
May 31, 2016
|
|
August 31, 2015
|
Commodity — designated for hedge accounting
|
|
$
|
88
|
|
|
$
|
129
|
|
Commodity — not designated for hedge accounting
|
|
66
|
|
|
537
|
|
Foreign exchange — designated for hedge accounting
|
|
342
|
|
|
874
|
|
Foreign exchange — not designated for hedge accounting
|
|
987
|
|
|
1,263
|
|
Derivative liabilities (accrued expenses and other payables)*
|
|
$
|
1,483
|
|
|
$
|
2,803
|
|
_________________
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.
As of
May 31, 2016
, most 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 were not entered into for trading purposes.
NOTE 10. 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, 2016
|
|
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)
|
|
$
|
393,777
|
|
|
$
|
393,777
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
(2)
|
|
455
|
|
|
447
|
|
|
8
|
|
|
—
|
|
Foreign exchange derivative assets
(2)
|
|
2,964
|
|
|
—
|
|
|
2,964
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities
(2)
|
|
154
|
|
|
66
|
|
|
88
|
|
|
—
|
|
Foreign exchange derivative liabilities
(2)
|
|
1,329
|
|
|
—
|
|
|
1,329
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(in thousands)
|
|
August 31, 2015
|
|
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)
|
|
$
|
271,840
|
|
|
$
|
271,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
(2)
|
|
865
|
|
|
846
|
|
|
19
|
|
|
—
|
|
Foreign exchange derivative assets
(2)
|
|
4,588
|
|
|
—
|
|
|
4,588
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities
(2)
|
|
666
|
|
|
537
|
|
|
129
|
|
|
—
|
|
Foreign exchange derivative liabilities
(2)
|
|
2,137
|
|
|
—
|
|
|
2,137
|
|
|
—
|
|
_________________
(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 Commodity Exchange, Inc. 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 9, Derivatives and Risk Management.
On June 10, 2016, the Company, through its wholly owned Australian subsidiary, G.A.M. Steel Pty. Ltd., signed a definitive asset sale agreement to sell its remaining steel distribution assets located in Australia. For the
third
quarter of fiscal
2016
, the Company recorded an impairment charge of
$15.8 million
, including the impact of an approximate
$13.5 million
accumulated foreign currency translation loss, on this remaining component of the Australian steel distribution business that was classified as held for sale
at May 31, 2016 and as discontinued operations during the three and nine months ended May 31, 2016. After consideration
of the impairment charge, the fair value, less costs to sell, of this component was
$10.4 million
at May 31, 2016. The signed definitive asset sale agreement (Level 3) was the basis for the determination of fair value of this component. There were no other material non-recurring fair value measurements during the
three
and
nine
months ended
May 31, 2016
and
2015
.
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 condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
August 31, 2015
|
(in thousands)
|
|
Fair Value Hierarchy
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
2023 Notes
(1)
|
|
Level 2
|
|
$
|
330,000
|
|
|
$
|
315,150
|
|
|
$
|
330,000
|
|
|
$
|
300,630
|
|
2018 Notes
(1)
|
|
Level 2
|
|
410,030
|
|
|
423,807
|
|
|
513,680
|
|
|
530,000
|
|
2017 Notes
(1)
|
|
Level 2
|
|
303,344
|
|
|
309,735
|
|
|
405,573
|
|
|
419,400
|
|
_________________
(1) The fair values of the 2023 Notes, 2018 Notes and 2017 Notes are estimated based on readily available market prices of these notes at
May 31, 2016
and
August 31, 2015
, or similar notes with the same maturities, rating and interest rates.
NOTE 11. INCOME TAX
The Company's effective income tax rate from continuing operations for the
three
and
nine
months ended
May 31, 2016
was
23.3%
and
25.5%
, respectively, compared with
36.1%
and
31.6%
for the
three
and
nine
months ended
May 31, 2015
, respectively. The effective tax rate is determined by computing the estimated annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the appropriate period. Several factors determine the Company's effective tax rate, including the mix and amount of global earnings, the impact of loss companies for which no tax benefit is available due to valuation allowances, audit related adjustments, and the impact of permanent tax adjustments. For the
three
months ended
May 31, 2016
, the tax rate was lower than the statutory income tax rate of
35%
, in part due to income from operations earned in jurisdictions with lower statutory tax rates than the United States and a benefit under Section 199 of the Internal Revenue Code related to domestic production activity income. Discrete items recorded during the
three
months ended
May 31, 2016
that impact the tax rate include (1) a benefit for a non-taxable gain on assets related to the Company's non-qualified benefit restoration plan and (2) a benefit associated with passage of the Protecting Americans from Tax Hikes Act of 2015 recognized upon filing of the Company's fiscal year 2015 U.S. federal tax return. For the
nine
months ended
May 31, 2016
, the tax rate was lower than the statutory income tax rate of
35%
because the Company had income from operations in countries which have lower tax rates than the United States, a tax benefit under Section 199 of the Internal Revenue Code related to domestic production activity income, and discrete items benefiting the rate disclosed above and in prior periods, including favorable adjustments recognized during the second quarter of fiscal 2016 related to our current IRS exam.
The Company's effective income tax rate from discontinued operations for the
three
and
nine
months ended
May 31, 2016
was
0.0%
and
0.6%
, respectively, compared with
3.9%
and
2.2%
for the
three
and
nine
months ended
May 31, 2015
, respectively. The Company's effective income tax rate from discontinued operations for the
three
and
nine
months ended
May 31, 2016
reflected the fact that earnings from discontinued operations before income taxes included a loss in Australia, a jurisdiction in which all tax losses created a deferred tax asset that was subject to a full valuation allowance, and thus no tax benefit is recorded. The tax benefit related to discontinued operations was the result of nominal pre-tax losses from discontinued operations which are subject to U.S. tax.
The Company made net payments of
$36.0 million
and
$46.7 million
for income taxes during the
nine
months ended
May 31, 2016
and
2015
, respectively.
As of
May 31, 2016
and
August 31, 2015
, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was
$17.8 million
and
$27.3 million
, respectively, exclusive of interest and penalties.
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, 2016
, 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
, 2017, 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
$8.3 million
, which would reduce the provision for income taxes by
$2.5 million
.
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, CMC and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:
U.S. Federal — 2009 and forward
U.S. States — 2009 and forward
Foreign — 2009 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, 2016
sufficiently reflect the anticipated outcome of these examinations.
NOTE 12. STOCK-BASED COMPENSATION PLANS
The Company's stock-based compensation plans are described, and informational disclosures provided, in Note 15, Stock-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, 2015
. During the
nine
months ended
May 31, 2016
and
2015
, restricted stock units and performance stock units totaling
1.6 million
and
1.1 million
, respectively, were granted at a weighted-average fair value of
$15.83
and
$15.92
, respectively.
During the
nine
months ended
May 31, 2016
and
2015
, the Company granted
464,782
and
392,517
equivalent shares, respectively, of performance stock units and restricted stock units accounted for as liability awards. The fair value of these liability awards is remeasured each reporting period and is recognized ratably over the service period. As of
May 31, 2016
, the Company had
914,215
equivalent shares in liability awards outstanding. The Company expects
870,224
equivalent shares to vest.
In general, the restricted stock units granted during fiscal
2016
and
2015
vest ratably over a period of three years. However, certain restricted stock units granted during fiscal 2015 either vest after a period of three years or vest after a specified service period. One-third of each such award vests on the second anniversary of the grant date, and the remaining two-thirds of each such award vest on the third anniversary of the grant date. In addition, certain restricted stock units granted during fiscal 2014 vest after a specified service period. For each such award, 25% vests on the second anniversary of the grant date; 25% vests on the third anniversary of the grant date and the remaining 50% vests on the fourth anniversary of the grant date. Subject to the achievement of performance targets established by the Compensation Committee of CMC's Board of Directors, the performance stock units granted during fiscal
2016
and fiscal
2015
will vest after a period of three years.
Stock-based compensation expense for the
three
and
nine
months ended
May 31, 2016
of
$6.8 million
and
$19.9 million
, respectively, and
$6.5 million
and
$18.3 million
for the
three
and
nine
months ended
May 31, 2015
, respectively, was included in selling, general and administrative expenses on the Company's condensed consolidated statements of earnings.
NOTE 13. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE ATTRIBUTABLE TO CMC
The calculations of basic and diluted earnings per share from continuing operations for the
three
and
nine
months ended
May 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands, except share data)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Earnings from continuing operations attributable to CMC
|
|
$
|
35,111
|
|
|
$
|
39,156
|
|
|
$
|
71,593
|
|
|
$
|
86,886
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
114,677,109
|
|
|
115,742,534
|
|
|
115,373,736
|
|
|
116,807,469
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to CMC:
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.62
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
114,677,109
|
|
|
115,742,534
|
|
|
115,373,736
|
|
|
116,807,469
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock-based incentive/purchase plans
|
|
1,318,406
|
|
|
1,016,681
|
|
|
1,384,980
|
|
|
1,063,759
|
|
Shares outstanding for diluted earnings per share
|
|
115,995,515
|
|
|
116,759,215
|
|
|
116,758,716
|
|
|
117,871,228
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to CMC:
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
$
|
0.61
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not included above
|
|
295,107
|
|
|
378,006
|
|
|
295,107
|
|
|
245,542
|
|
_______________________
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.
During the first quarter of fiscal 2015, CMC's Board of Directors authorized a new share repurchase program under which the Company may repurchase up to
$100.0 million
of shares of CMC common stock. This new program replaced the existing program, which was terminated by CMC's Board of Directors in connection with the approval of the new program. The Company did not purchase any shares of CMC common stock during the
three
months ended
May 31, 2016
. During the
nine
months ended
May 31, 2016
, the Company purchased
2,255,069
shares of CMC common stock at an average purchase price of
$13.57
per share. During the
three and nine
months ended
May 31, 2015
, the Company purchased
139,383
and
2,902,218
shares of CMC common stock, respectively, at an average purchase price of
$15.97
and
$14.40
per share, respectively. The Company had remaining authorization to purchase
$27.6 million
of common stock at
May 31, 2016
pursuant to its share repurchase program.
NOTE 14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental 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, 2015
.
The Company has received notices from the U.S. Environmental Protection Agency ("EPA") or state agencies with similar responsibility that it is considered a potentially responsible party ("PRP") at several sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. At
May 31, 2016
and
August 31, 2015
, the Company had
$0.8 million
and
$1.0 million
, respectively, accrued for cleanup and remediation costs in connection with CERCLA sites. The estimation process is based on currently available information, which is in many cases preliminary and incomplete. Total environmental liabilities, including CERCLA sites, were
$3.3 million
and
$4.3 million
as of
May 31, 2016
and
August 31, 2015
, respectively, of which
$2.2 million
and
$2.4 million
were classified as other long-term liabilities as of
May 31, 2016
and
August 31, 2015
. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation
process and other factors, amounts accrued could vary significantly from amounts paid. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material.
Management believes that adequate provisions have been made in the Company's unaudited condensed 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.
NOTE 15. BUSINESS SEGMENTS
The Company's operating segments engage in business activities from which they may earn revenues and incur expenses and for which discrete financial information is available. Operating results for the operating segments are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segments and to assess performance. The Company's chief operating decision maker is identified as the Chief Executive Officer. Operating segments are aggregated for reporting purposes when the operating segments are identified as similar in accordance with the basic principles and aggregation criteria in the accounting standards. The Company's reporting segments are based primarily on product lines and secondarily on geographic area. The reporting 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
reporting 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 reinforcing 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 marketing and distribution divisions headquartered in the U.S. 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 debt.
The financial information presented for the International Marketing and Distribution segment excludes the steel distribution business in Australia. This operation has been classified as discontinued operations in the condensed consolidated statements of earnings. 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 the Company's earnings 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 the 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, 2015
.
The following is a summary of certain financial information from continuing operations by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
156,352
|
|
|
$
|
227,736
|
|
|
$
|
382,607
|
|
|
$
|
141,043
|
|
|
$
|
315,067
|
|
|
$
|
4,585
|
|
|
$
|
—
|
|
|
$
|
1,227,390
|
|
Intersegment sales
|
|
26,125
|
|
|
168,745
|
|
|
2,473
|
|
|
395
|
|
|
4,537
|
|
|
—
|
|
|
(202,275
|
)
|
|
—
|
|
Net sales
|
|
182,477
|
|
|
396,481
|
|
|
385,080
|
|
|
141,438
|
|
|
319,604
|
|
|
4,585
|
|
|
(202,275
|
)
|
|
1,227,390
|
|
Adjusted operating profit (loss)
|
|
(1,978
|
)
|
|
54,976
|
|
|
22,794
|
|
|
5,467
|
|
|
892
|
|
|
(22,542
|
)
|
|
1,331
|
|
|
60,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2015
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
194,081
|
|
|
$
|
244,632
|
|
|
$
|
415,763
|
|
|
$
|
156,286
|
|
|
$
|
494,639
|
|
|
$
|
601
|
|
|
$
|
—
|
|
|
$
|
1,506,002
|
|
Intersegment sales
|
|
31,015
|
|
|
202,189
|
|
|
2,132
|
|
|
32
|
|
|
23,605
|
|
|
—
|
|
|
(258,973
|
)
|
|
—
|
|
Net sales
|
|
225,096
|
|
|
446,821
|
|
|
417,895
|
|
|
156,318
|
|
|
518,244
|
|
|
601
|
|
|
(258,973
|
)
|
|
1,506,002
|
|
Adjusted operating profit (loss)
|
|
(3,651
|
)
|
|
63,320
|
|
|
13,720
|
|
|
6,146
|
|
|
25,615
|
|
|
(19,502
|
)
|
|
(3,480
|
)
|
|
82,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2016
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
430,829
|
|
|
$
|
634,926
|
|
|
$
|
1,096,049
|
|
|
$
|
368,949
|
|
|
$
|
867,084
|
|
|
$
|
4,109
|
|
|
$
|
—
|
|
|
$
|
3,401,946
|
|
Intersegment sales
|
|
79,201
|
|
|
482,516
|
|
|
7,489
|
|
|
395
|
|
|
12,433
|
|
|
—
|
|
|
(582,034
|
)
|
|
—
|
|
Net sales
|
|
510,030
|
|
|
1,117,442
|
|
|
1,103,538
|
|
|
369,344
|
|
|
879,517
|
|
|
4,109
|
|
|
(582,034
|
)
|
|
3,401,946
|
|
Adjusted operating profit (loss)
|
|
(16,171
|
)
|
|
164,739
|
|
|
58,964
|
|
|
10,189
|
|
|
(3,570
|
)
|
|
(69,415
|
)
|
|
2,233
|
|
|
146,969
|
|
Total assets at May 31, 2016*
|
|
229,557
|
|
|
758,336
|
|
|
656,055
|
|
|
360,734
|
|
|
591,105
|
|
|
1,015,991
|
|
|
(504,018
|
)
|
|
3,107,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2015
|
|
|
Americas
|
|
International
|
|
|
|
|
|
|
(in thousands)
|
|
Recycling
|
|
Mills
|
|
Fabrication
|
|
Mill
|
|
Marketing and Distribution
|
|
Corporate
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
691,382
|
|
|
$
|
796,218
|
|
|
$
|
1,165,679
|
|
|
$
|
472,364
|
|
|
$
|
1,447,316
|
|
|
$
|
4,150
|
|
|
$
|
—
|
|
|
$
|
4,577,109
|
|
Intersegment sales
|
|
108,852
|
|
|
604,299
|
|
|
9,114
|
|
|
32
|
|
|
73,972
|
|
|
—
|
|
|
(796,269
|
)
|
|
—
|
|
Net sales
|
|
800,234
|
|
|
1,400,517
|
|
|
1,174,793
|
|
|
472,396
|
|
|
1,521,288
|
|
|
4,150
|
|
|
(796,269
|
)
|
|
4,577,109
|
|
Adjusted operating profit (loss)
|
|
(15,260
|
)
|
|
195,438
|
|
|
3,770
|
|
|
11,188
|
|
|
49,669
|
|
|
(55,513
|
)
|
|
(2,248
|
)
|
|
187,044
|
|
Total assets at August 31, 2015*
|
|
261,676
|
|
|
738,669
|
|
|
713,860
|
|
|
403,706
|
|
|
798,914
|
|
|
1,049,815
|
|
|
(552,577
|
)
|
|
3,414,063
|
|
* Excludes total assets from discontinued operations of
$2.9 million
at
May 31, 2016
and
$31.5 million
at
August 31, 2015
.
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)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Earnings from continuing operations
|
|
$
|
35,111
|
|
|
$
|
39,156
|
|
|
$
|
71,593
|
|
|
$
|
86,886
|
|
Income taxes
|
|
10,676
|
|
|
22,126
|
|
|
24,512
|
|
|
40,100
|
|
Interest expense
|
|
14,737
|
|
|
20,519
|
|
|
49,666
|
|
|
58,828
|
|
Discounts on sales of accounts receivable
|
|
416
|
|
|
367
|
|
|
1,198
|
|
|
1,230
|
|
Adjusted operating profit
|
|
$
|
60,940
|
|
|
$
|
82,168
|
|
|
$
|
146,969
|
|
|
$
|
187,044
|
|