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, 2017
("
2017
Form 10-K") 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 unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of earnings, comprehensive income, 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
2017
Form 10-K. The results of operations for the
three and nine
month periods are not necessarily indicative of the results to be expected for the full fiscal year.
Recently Issued Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815). The ASU better aligns accounting rules with a company's risk management activities; better reflects economic results of hedging in financial statements; and simplifies hedge accounting treatment. For public companies, this standard is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. The standard must be applied to hedging relationships existing on the date of adoption, and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements as well as determining the Company's planned adoption date.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018. The Company plans to early adopt ASU 2016-18 in the fourth quarter of fiscal 2018. The provisions of this guidance are to be applied using a retrospective approach, 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted. The Company plans to adopt ASU 2016-15 no later than the required adoption date of September 1, 2018. The provisions of this guidance are to be adopted retrospectively. The Company is continuing to evaluate the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and has modified the standard thereafter. The standard requires 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 longer. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and will be effective for the Company beginning September 1, 2019, at which point the Company plans to adopt the standard. 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 has a project plan in place to address the effects of ASU 2016-02 and any modifications thereafter, including evaluation of the impact of this guidance on internal processes and systems, internal controls, and its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has modified the standard thereafter. Under the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018, at which point the Company plans to adopt the standard. The standard permits the use of either the retrospective or cumulative effect transition method. The Company currently expects to adopt the standard using the modified retrospective method. Upon adoption of ASU 2014-09, for certain contracts within the Americas
Fabrication segment in which revenue is currently recognized on a percentage of completion basis using a cost-to-cost measure of progress, the measure of progress will change to an output measure to align with the pattern of transfer of control on these contracts. In addition, the standard includes expanded disclosure requirements, which the Company continues to analyze. The Company believes the adoption of this standard will not have a material impact on its statement of financial position, results of operations or cash flows. As part of the overall evaluation of the standard, the Company is also identifying and preparing to implement changes to its accounting policies, practices, and internal controls over financial reporting to support the standard both in the transition period as well as on an on-going basis.
NOTE 2. CHANGES IN BUSINESS
Pending Acquisition
On December 29, 2017, the Company entered into a definitive purchase agreement to acquire certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. (the "Business"), a producer of long and specialty steel products in the Americas for a cash purchase price of
$600.0 million
, subject to customary purchase price adjustments. The acquisition includes
33
rebar fabrication facilities in the U.S. as well as steel mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California, with annual melt capacity of
2.7 million
tons, bringing the Company’s global melt capacity to approximately
7.2 million
tons at the close of the transaction. The closing of the transaction is expected before calendar year-end 2018 and is subject to the satisfaction or waiver of customary closing conditions, including customary regulatory review.
The Company expects to fund the purchase price for the acquisition, including related fees and expenses, with proceeds from the offering of the 2026 Notes (as defined in Note 7, Credit Arrangements), together with the proceeds from the incurrence of a new term loan under the Company's existing Credit Agreement (as defined in Note 7, Credit Arrangements) and cash on hand.
Dispositions and Businesses Held for Sale
During the third quarter of fiscal 2018, the Company sold substantially all of the assets of its structural steel fabrication operations, which were part of the Americas Fabrication segment. This disposition did not meet the criteria for discontinued operations. As a result of the disposition, during the nine months ended May 31, 2018, the Company recognized impairment charges of
$13.0 million
, of which
$0.9 million
was recognized during the third quarter of fiscal 2018. The assets and liabilities related to these operations were included as assets and liabilities of businesses held for sale & discontinued operations in the condensed consolidated balance sheet at August 31, 2017, and consisted of the following:
|
|
|
|
|
|
(in thousands)
|
|
August 31, 2017*
|
Assets:
|
|
|
Accounts receivable
|
|
$
|
38,279
|
|
Inventories
|
|
10,676
|
|
Other current assets
|
|
77
|
|
Assets of businesses held for sale & discontinued operations
|
|
$
|
49,032
|
|
|
|
|
Liabilities:
|
|
|
Accounts payable-trade
|
|
$
|
13,108
|
|
Accrued expenses and other payables
|
|
16,785
|
|
Liabilities of businesses held for sale & discontinued operations
|
|
$
|
29,893
|
|
_________________
* At
August 31, 2017
,
$8.8 million
of property, plant, and equipment, net of accumulated depreciation and amortization was included in other noncurrent assets on the consolidated balance sheets.
Discontinued Operations
In June 2017, the Company announced a plan to exit its International Marketing and Distribution segment, including its trading operations in the U.S., Asia, and Australia. As an initial step in this plan, on August 31, 2017, the Company completed the sale of its raw materials business, CMC Cometals. Additionally, during the second quarter of fiscal 2018, the remaining operations related to the Company's steel trading business in the U.S. and Asia were substantially wound down. Finally, during the third quarter of fiscal 2018, the Company sold certain assets and liabilities of its Australian steel trading business, resulting in an overall transaction loss, including selling costs, of
$5.3 million
. Such loss was primarily due to impairment charges related to accumulated
foreign currency translation,
$4.2 million
of which the Company recorded during fiscal 2017. The results of these activities are included in discontinued operations in the unaudited condensed consolidated statements of earnings for all periods presented. With the conclusion of operations in this segment, any activities carried out within the segment are no longer of ongoing significance; accordingly, segment data with respect to International Marketing and Distribution activities will no longer be reported. See Note 14, Business Segments, for further discussion of the exit of the International Marketing and Distribution segment.
The major classes of line items constituting earnings from discontinued operations in the unaudited condensed consolidated statements of earnings, which primarily relate to International Marketing and Distribution activities, are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
3,262
|
|
|
$
|
337,903
|
|
|
$
|
304,384
|
|
|
$
|
847,338
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
4,233
|
|
|
312,917
|
|
|
276,371
|
|
|
784,836
|
|
Selling, general and administrative expenses
|
|
2,418
|
|
|
15,740
|
|
|
23,078
|
|
|
42,919
|
|
Interest expense
|
|
—
|
|
|
(79
|
)
|
|
(86
|
)
|
|
(104
|
)
|
Earnings (loss) before income taxes
|
|
(3,389
|
)
|
|
9,325
|
|
|
5,021
|
|
|
19,687
|
|
Income taxes (benefit)
|
|
(1,029
|
)
|
|
1,626
|
|
|
2,052
|
|
|
4,059
|
|
Earnings (loss) from discontinued operations
|
|
$
|
(2,360
|
)
|
|
$
|
7,699
|
|
|
$
|
2,969
|
|
|
$
|
15,628
|
|
There were no material operating or investing non-cash items for discontinued operations for the
nine
months ended
May 31, 2018
and
2017
.
Components of the International Marketing and Distribution segment meeting the criteria for discontinued operations have been re-classified as assets and liabilities of business held for sale & discontinued operations in the unaudited condensed consolidated balance sheets for all periods presented, the major components of which are presented in the table below.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
May 31, 2018
|
|
August 31, 2017*
|
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
6,954
|
|
|
$
|
106,905
|
|
Inventories, net
|
|
—
|
|
|
141,135
|
|
Other current assets
|
|
4,111
|
|
|
38
|
|
Property, plant and equipment, net
|
|
217
|
|
|
—
|
|
Assets of businesses held for sale & discontinued operations
|
|
$
|
11,282
|
|
|
$
|
248,078
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable-trade
|
|
$
|
—
|
|
|
$
|
42,563
|
|
Accrued expenses and other payables
|
|
2,843
|
|
|
15,372
|
|
Liabilities of businesses held for sale & discontinued operations
|
|
$
|
2,843
|
|
|
$
|
57,935
|
|
|
|
|
|
|
_________________
* Property, plant, and equipment, net of accumulated depreciation and amortization of
$0.8 million
at
August 31, 2017
was included in other noncurrent assets on the unaudited condensed consolidated balance sheets.
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2018
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, February 28, 2018
|
|
$
|
(66,000
|
)
|
|
$
|
1,432
|
|
|
$
|
(1,898
|
)
|
|
$
|
(66,466
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(26,434
|
)
|
|
16
|
|
|
—
|
|
|
(26,418
|
)
|
Amounts reclassified from AOCI
|
|
1,328
|
|
|
(70
|
)
|
|
(9
|
)
|
|
1,249
|
|
Income taxes
|
|
—
|
|
|
11
|
|
|
2
|
|
|
13
|
|
Net other comprehensive (loss)
|
|
(25,106
|
)
|
|
(43
|
)
|
|
(7
|
)
|
|
(25,156
|
)
|
Balance, May 31, 2018
|
|
$
|
(91,106
|
)
|
|
$
|
1,389
|
|
|
$
|
(1,905
|
)
|
|
$
|
(91,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2018
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, August 31, 2017
|
|
$
|
(80,778
|
)
|
|
$
|
1,587
|
|
|
$
|
(2,322
|
)
|
|
$
|
(81,513
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(11,656
|
)
|
|
47
|
|
|
—
|
|
|
(11,609
|
)
|
Amounts reclassified from AOCI
|
|
1,328
|
|
|
(314
|
)
|
|
647
|
|
|
1,661
|
|
Income taxes (benefit)
|
|
—
|
|
|
69
|
|
|
(230
|
)
|
|
(161
|
)
|
Net other comprehensive income (loss)
|
|
(10,328
|
)
|
|
(198
|
)
|
|
417
|
|
|
(10,109
|
)
|
Balance, May 31, 2018
|
|
$
|
(91,106
|
)
|
|
$
|
1,389
|
|
|
$
|
(1,905
|
)
|
|
$
|
(91,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2017
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, February 28, 2017
|
|
$
|
(124,235
|
)
|
|
$
|
2,108
|
|
|
$
|
(2,863
|
)
|
|
$
|
(124,990
|
)
|
Other comprehensive income before reclassifications
|
|
27,109
|
|
|
368
|
|
|
—
|
|
|
27,477
|
|
Amounts reclassified from AOCI
|
|
968
|
|
|
(459
|
)
|
|
(11
|
)
|
|
498
|
|
Income taxes
|
|
—
|
|
|
12
|
|
|
2
|
|
|
14
|
|
Net other comprehensive income (loss)
|
|
28,077
|
|
|
(79
|
)
|
|
(9
|
)
|
|
27,989
|
|
Balance, May 31, 2017
|
|
$
|
(96,158
|
)
|
|
$
|
2,029
|
|
|
$
|
(2,872
|
)
|
|
$
|
(97,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2017
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance, August 31, 2016
|
|
$
|
(112,255
|
)
|
|
$
|
2,186
|
|
|
$
|
(2,845
|
)
|
|
$
|
(112,914
|
)
|
Other comprehensive income before reclassifications
|
|
15,129
|
|
|
926
|
|
|
—
|
|
|
16,055
|
|
Amounts reclassified from AOCI
|
|
968
|
|
|
(1,090
|
)
|
|
(33
|
)
|
|
(155
|
)
|
Income taxes
|
|
—
|
|
|
7
|
|
|
6
|
|
|
13
|
|
Net other comprehensive income (loss)
|
|
16,097
|
|
|
(157
|
)
|
|
(27
|
)
|
|
15,913
|
|
Balance, May 31, 2017
|
|
$
|
(96,158
|
)
|
|
$
|
2,029
|
|
|
$
|
(2,872
|
)
|
|
$
|
(97,001
|
)
|
Items reclassified out of AOCI were not material for the
three and nine
months ended
May 31, 2018
and
2017
, thus the corresponding line items in the unaudited condensed consolidated statements of earnings to which the items were reclassified are not presented.
NOTE 4. SALES OF ACCOUNTS RECEIVABLE
For added flexibility with the Company's liquidity, we may sell certain trade accounts receivable both in the U.S. and internationally. CMC has a
$200.0 million
U.S. sale of trade accounts receivable program which expires in August 2019. Under the program, CMC contributes, and certain 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 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. Under the U.S. sale of trade 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 trade accounts receivable sold. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied 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 from operating activities on the Company's unaudited condensed consolidated statements of cash flows. Additionally, the U.S. sale of trade 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 Agreement described in Note 7, Credit Arrangements.
At
May 31, 2018
and
August 31, 2017
, under its U.S. sale of trade accounts receivable program, the Company had sold
$272.9 million
and
$226.9 million
of trade accounts receivable, respectively, to the financial institutions. At
May 31, 2018
, the Company had
no
advance payments outstanding on the sale of its U.S. trade accounts receivable. At
August 31, 2017
, the Company had
$90.0 million
in advance payments outstanding on the sale of its U.S. trade accounts receivable.
In addition to the U.S. sale of trade accounts receivable program described above, the Company's international subsidiaries in Poland sell, and previously in Australia have sold, 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 and are removed from the consolidated balance sheets. The Polish program has a facility limit of
220.0 million
Polish zloty ("PLN") (
$59.6 million
as of
May 31, 2018
) and allows the Company's Polish subsidiaries to obtain an advance of up to
90%
of eligible trade accounts receivable sold under the terms of the arrangement. Under the Polish and Australian programs, the cash advances received were reflected as cash from operating activities on the Company's unaudited condensed consolidated statements of cash flows. During the first quarter of fiscal 2017, the Company's Australian program expired, and the Company did not enter into a new program.
At
May 31, 2018
and
August 31, 2017
, under its Polish program, the Company sold
$79.3 million
and
$79.5 million
of trade accounts receivable, respectively, to the third-party financial institution. At
May 31, 2018
, the Company had
$18.1 million
of advance payments outstanding on the sales of its Polish trade accounts receivable. At
August 31, 2017
, there were
no
advance payments outstanding under the Polish program.
During the
nine
months ended
May 31, 2018
and
2017
, cash proceeds from the U.S. and international sale of trade accounts receivable programs were
$145.5 million
and
$246.0 million
, respectively, and cash payments to the owners of trade accounts receivable were
$217.4 million
and
$250.3 million
, respectively. For a nominal servicing fee, the Company is responsible for servicing the trade accounts receivable for the U.S. program. Discounts on U.S. and international sales of trade accounts receivable were
$0.3 million
and
$0.7 million
for the
three and nine
months ended
May 31, 2018
, respectively, and
$0.2 million
and
$0.7 million
for the
three and nine
months ended
May 31, 2017
, respectively, and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statements of earnings.
As of
May 31, 2018
and
August 31, 2017
, the deferred purchase price on the Company's U.S. and international sale of trade accounts receivable programs was included in accounts receivable on the Company's unaudited condensed consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of trade accounts receivable programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2018
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Poland
|
Beginning balance
|
|
$
|
336,212
|
|
|
$
|
244,884
|
|
|
$
|
91,328
|
|
Transfers of accounts receivable
|
|
770,596
|
|
|
653,801
|
|
|
116,795
|
|
Collections
|
|
(774,154
|
)
|
|
(627,271
|
)
|
|
(146,883
|
)
|
Ending balance
|
|
$
|
332,654
|
|
|
$
|
271,414
|
|
|
$
|
61,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2018
|
(in thousands)
|
|
Total
|
|
U.S.
|
|
Poland
|
Beginning balance
|
|
$
|
215,123
|
|
|
$
|
135,623
|
|
|
$
|
79,500
|
|
Transfers of accounts receivable
|
|
2,116,243
|
|
|
1,741,451
|
|
|
374,792
|
|
Collections
|
|
(1,998,712
|
)
|
|
(1,605,660
|
)
|
|
(393,052
|
)
|
Ending balance
|
|
$
|
332,654
|
|
|
$
|
271,414
|
|
|
$
|
61,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2017
|
(in thousands)
|
|
Total
|
|
U.S.*
|
|
Poland
|
Beginning balance
|
|
$
|
312,446
|
|
|
$
|
258,719
|
|
|
$
|
53,727
|
|
Transfers of accounts receivable
|
|
777,104
|
|
|
671,429
|
|
|
105,675
|
|
Collections
|
|
(725,336
|
)
|
|
(626,182
|
)
|
|
(99,154
|
)
|
Ending balance
|
|
$
|
364,214
|
|
|
$
|
303,966
|
|
|
$
|
60,248
|
|
_________________
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of
$144.1 million
and collections of
$134.0 million
, for the
three
months ended
May 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2017
|
(in thousands)
|
|
Total
|
|
U.S.*
|
|
Australia**
|
|
Poland
|
Beginning balance
|
|
$
|
289,748
|
|
|
$
|
212,762
|
|
|
$
|
26,662
|
|
|
$
|
50,324
|
|
Transfers of accounts receivable
|
|
1,977,546
|
|
|
1,702,584
|
|
|
16,914
|
|
|
258,048
|
|
Collections
|
|
(1,869,163
|
)
|
|
(1,611,380
|
)
|
|
(9,659
|
)
|
|
(248,124
|
)
|
Program termination
|
|
(33,917
|
)
|
|
—
|
|
|
(33,917
|
)
|
|
—
|
|
Ending balance
|
|
$
|
364,214
|
|
|
$
|
303,966
|
|
|
$
|
—
|
|
|
$
|
60,248
|
|
_________________
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of
$354.5 million
and collections of
$325.7 million
, for the
nine
months ended
May 31, 2017
.
|
|
**
|
Includes collections of
$3.7 million
and program termination of
$1.6 million
related to discontinued operations and businesses sold, for the
nine
months ended
May 31, 2017
.
|
NOTE 5. INVENTORIES, NET
The majority of the Company's inventories are in the form of semi-finished and finished goods. Under the Company’s business model, products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. Work in process inventories were not material at
May 31, 2018
and
August 31, 2017
. At
May 31, 2018
and
August 31, 2017
,
$177.6 million
and
$116.8 million
, respectively, of the Company's inventories were in the form of raw materials.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table details the changes in the carrying amount of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other*
|
|
Consolidated
|
Goodwill, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2017
|
|
$
|
9,751
|
|
|
$
|
4,970
|
|
|
$
|
57,943
|
|
|
$
|
2,664
|
|
|
$
|
1,982
|
|
|
$
|
77,310
|
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(90
|
)
|
|
—
|
|
|
(90
|
)
|
|
Impairment
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
Reclassification to assets of discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,982
|
)
|
|
(1,982
|
)
|
Balance, May 31, 2018
|
|
$
|
9,751
|
|
|
$
|
4,970
|
|
|
$
|
57,429
|
|
|
$
|
2,574
|
|
|
$
|
—
|
|
|
$
|
74,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2017
|
|
$
|
(9,751
|
)
|
|
$
|
—
|
|
|
$
|
(493
|
)
|
|
$
|
(169
|
)
|
|
$
|
(1,982
|
)
|
|
$
|
(12,395
|
)
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
Reclassification to assets of discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,982
|
|
|
1,982
|
|
Balance, May 31, 2018
|
|
$
|
(9,751
|
)
|
|
$
|
—
|
|
|
$
|
(493
|
)
|
|
$
|
(164
|
)
|
|
$
|
—
|
|
|
$
|
(10,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2017
|
|
$
|
—
|
|
|
$
|
4,970
|
|
|
$
|
57,450
|
|
|
$
|
2,495
|
|
|
$
|
—
|
|
|
$
|
64,915
|
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(85
|
)
|
|
—
|
|
|
(85
|
)
|
|
Impairment
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
Balance, May 31, 2018
|
|
$
|
—
|
|
|
$
|
4,970
|
|
|
$
|
56,936
|
|
|
$
|
2,410
|
|
|
$
|
—
|
|
|
$
|
64,316
|
|
_________________
* Other relates to goodwill for the International Marketing and Distribution segment which was moved to discontinued operations during the second quarter of fiscal 2018.
The total gross carrying amounts of the Company's intangible assets subject to amortization were
$21.0 million
and
$19.7 million
at
May 31, 2018
and
August 31, 2017
, respectively, and were included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. As part of the Company's purchase of substantially all of the assets of MMFX Technologies Corporation ("MMFX") during the first fiscal quarter of 2018, the Company acquired patents which were assigned a fair value of
$7.0 million
with a useful life of
7.5
years. See Note 2, Changes in Business, to the unaudited condensed consolidated financial statements included in the Company's November 30, 2017 Quarterly Report on Form 10-Q for more information with respect to the MMFX acquisition. Intangible amortization expense from continuing operations was
$0.6 million
and
$1.6 million
for the
three and nine
months ended
May 31, 2018
, respectively, and
$0.8 million
and
$1.8 million
for the
three and nine
months ended
May 31, 2017
, respectively. The nine months ended
May 31, 2018
included goodwill impairment charges of
$0.5 million
, recorded during the second fiscal quarter, related to the Company's sale of its structural steel fabrication operations as discussed in Note 2, Changes in Business. See Note 9, Fair Value, for further discussion related to the impairment. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives as of
May 31, 2018
.
NOTE 7. CREDIT ARRANGEMENTS
Long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Weighted Average
Interest Rate as of May 31, 2018
|
|
May 31, 2018
|
|
August 31, 2017
|
2027 Notes
|
|
5.375%
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
2026 Notes
|
|
5.750%
|
|
350,000
|
|
|
—
|
|
2023 Notes
|
|
4.875%
|
|
330,000
|
|
|
330,000
|
|
2022 Term Loan
|
|
3.103%
|
|
144,375
|
|
|
150,000
|
|
Other, including equipment notes
|
|
|
|
46,763
|
|
|
52,077
|
|
Total debt
|
|
|
|
1,171,138
|
|
|
832,077
|
|
Less debt issuance costs
|
|
|
|
12,161
|
|
|
7,315
|
|
Total amounts outstanding
|
|
|
|
1,158,977
|
|
|
824,762
|
|
Less current maturities
|
|
|
|
19,874
|
|
|
19,182
|
|
Long-term debt
|
|
|
|
$
|
1,139,103
|
|
|
$
|
805,580
|
|
In July 2017, the Company issued
$300.0 million
of
5.375%
Senior Notes due July 2027 (the "2027 Notes"). Interest on the 2027 Notes is payable semiannually.
In May 2018, the Company issued
$350.0 million
of
5.75%
Senior Notes due April 2026 (the "2026 Notes"). Issuance costs associated with the 2026 Notes were approximately
$5.3 million
. Interest on the 2026 Notes is payable semiannually.
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 semiannually.
The Company has a
$350.0 million
revolving credit facility (the "Revolver") pursuant to the Fourth Amended and Restated Credit Agreement (the "Credit Agreement") and a senior secured term loan in the maximum principal amount of
$150.0 million
(the "2022 Term Loan"), each with a maturity date in
June 2022
. The 2022 Term Loan was drawn upon on July 13, 2017. The Company is required to make quarterly payments on the 2022 Term Loan equal to
1.25%
of the original principal amount. The maximum availability under the Credit Agreement, together with the 2022 Term Loan, can be increased to
$750.0 million
with bank approval. The Company's obligations under the Credit Agreement are collateralized by its U.S. inventory and U.S. fabrication receivables. The Credit Agreement's capacity includes
$50.0 million
for the issuance of stand-by letters of credit.
On February 21, 2018, the Company entered into a Joinder Agreement and Fifth Amendment to the Credit Agreement, which allowed for a coterminous delayed draw Term Loan A facility in the maximum aggregate principal amount of up to
$200.0 million
(the "2018 Term Loan"). The proceeds of the 2018 Term Loan are required to be used to (i) finance the acquisition of the Business, (ii) repay certain existing indebtedness of Gerdau S.A. and its subsidiaries, and (iii) pay transaction fees and expenses related thereto. Once drawn, the Company is required to make quarterly payments on the 2018 Term Loan equal to
1.25%
of the original principal amount. The 2018 Term Loan has a maturity date of
June 2022
.
On December 29, 2017, the Company entered into a Fourth Amendment to the Credit Agreement providing for a Term Loan B Facility, as described in Note 7, Credit Arrangements, in the Company's Quarterly Report on Form 10-Q for the period ended February 28, 2018. During the third fiscal quarter of 2018, the Company terminated the commitment letter governing the Term Loan B Facility.
The Company had
no
amounts drawn under the Revolver at
May 31, 2018
and August 31, 2017. The availability under the Revolver was reduced by outstanding letters of credit of
$3.3 million
and
$3.0 million
at
May 31, 2018
and
August 31, 2017
, 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, each as 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, each as defined in the Credit Agreement) that does not exceed
0.60
to 1.00. At
May 31, 2018
, the Company's interest coverage ratio was
7.89
to 1.00, and the Company's debt to capitalization ratio was
0.45
to 1.00. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").
At
May 31, 2018
, the Company was in compliance with all covenants contained in its debt agreements.
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.
At
May 31, 2018
and
August 31, 2017
, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN
225.0 million
(
$61.0 million
) and PLN
175.0 million
(
$49.1 million
), respectively. As of
May 31, 2018
, the uncommitted credit facilities have expiration dates ranging from November 2018 to March 2019. At
May 31, 2018
and
August 31, 2017
, no amounts were outstanding under these facilities. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, guarantees, and/or other financial assurance instruments, which totaled
$1.7 million
and
$1.3 million
at
May 31, 2018
and
August 31, 2017
, respectively. During the
nine
months ended
May 31, 2018
and
2017
, CMCP had no borrowings and no repayments under its uncommitted credit facilities.
The Company capitalized
$0.5 million
and
$7.3 million
of interest in the cost of property, plant and equipment during the
three and nine
months ended
May 31, 2018
, respectively, and
$2.9 million
and
$6.6 million
for the
three and nine
months ended May 31,
2017
, respectively. Cash paid for interest during the nine months ended
May 31, 2018
and 2017 was
$30.2 million
and
$41.4 million
, 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, and (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies.
At
May 31, 2018
, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were
$140.4 million
and
$64.8 million
, respectively. At
May 31, 2017
, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were
$262.8 million
and
$36.9 million
, respectively.
The following table provides information regarding the Company's commodity contract commitments as of
May 31, 2018
:
|
|
|
|
|
|
|
|
Commodity
|
|
Long/Short
|
|
Total
|
Aluminum
|
|
Long
|
|
6,125
|
|
MT
|
Aluminum
|
|
Short
|
|
3,075
|
|
MT
|
Copper
|
|
Long
|
|
363
|
|
MT
|
Copper
|
|
Short
|
|
6,021
|
|
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 unaudited 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, 2018
and
May 31, 2017
. 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 unaudited condensed consolidated statements of earnings (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
Derivatives Not Designated as Hedging Instruments
|
|
Location
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Commodity
|
|
Cost of goods sold
|
|
$
|
1,498
|
|
|
$
|
1,654
|
|
|
$
|
2,071
|
|
|
$
|
(3,121
|
)
|
Foreign exchange
|
|
Net sales
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
—
|
|
|
(5
|
)
|
|
(50
|
)
|
|
(38
|
)
|
Foreign exchange
|
|
SG&A expenses
|
|
518
|
|
|
(1,076
|
)
|
|
1,169
|
|
|
2,295
|
|
Gain (loss) before income taxes
|
|
|
|
$
|
2,016
|
|
|
$
|
571
|
|
|
$
|
3,190
|
|
|
$
|
(866
|
)
|
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 and capital expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Recognized in Income on Derivatives
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended May 31,
|
|
Location of gain (loss) recognized in income on related hedged items
|
|
Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Three Months Ended May 31,
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
Foreign exchange
|
|
Net sales
|
|
$
|
163
|
|
|
$
|
(102
|
)
|
|
Net sales
|
|
$
|
(163
|
)
|
|
$
|
102
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
(429
|
)
|
|
1,042
|
|
|
Cost of goods sold
|
|
429
|
|
|
(1,042
|
)
|
Gain (loss) before income taxes
|
|
|
|
$
|
(266
|
)
|
|
$
|
940
|
|
|
|
|
$
|
266
|
|
|
$
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Recognized in Income on Derivatives
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended May 31,
|
|
Location of gain (loss) recognized in income on related hedged items
|
|
Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Nine Months Ended May 31,
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
Foreign exchange
|
|
Net sales
|
|
$
|
(66
|
)
|
|
$
|
(58
|
)
|
|
Net sales
|
|
$
|
66
|
|
|
$
|
58
|
|
Foreign exchange
|
|
Cost of goods sold
|
|
1,596
|
|
|
435
|
|
|
Cost of goods sold
|
|
(1,596
|
)
|
|
(435
|
)
|
Gain (loss) before income taxes
|
|
|
|
$
|
1,530
|
|
|
$
|
377
|
|
|
|
|
$
|
(1,530
|
)
|
|
$
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Commodity
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
208
|
|
Foreign exchange
|
|
13
|
|
|
263
|
|
|
38
|
|
|
488
|
|
Gain, net of income taxes
|
|
$
|
13
|
|
|
$
|
254
|
|
|
$
|
38
|
|
|
$
|
696
|
|
Refer to Note 3, Accumulated Other Comprehensive Income (Loss), for the effective portion of derivatives designated as cash flow hedging instruments reclassified from AOCI.
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 unaudited condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at
May 31, 2018
and
August 31, 2017
. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows (amounts are in thousands):
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
May 31, 2018
|
|
August 31, 2017
|
Commodity — not designated for hedge accounting
|
|
$
|
901
|
|
|
$
|
767
|
|
Foreign exchange — designated for hedge accounting
|
|
—
|
|
|
81
|
|
Foreign exchange — not designated for hedge accounting
|
|
1,573
|
|
|
1,286
|
|
Derivative assets (other current assets)*
|
|
$
|
2,474
|
|
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
May 31, 2018
|
|
August 31, 2017
|
Commodity — not designated for hedge accounting
|
|
$
|
80
|
|
|
$
|
3,251
|
|
Foreign exchange — designated for hedge accounting
|
|
—
|
|
|
1,549
|
|
Foreign exchange — not designated for hedge accounting
|
|
1,550
|
|
|
3,710
|
|
Derivative liabilities (accrued expenses and other payables)*
|
|
$
|
1,630
|
|
|
$
|
8,510
|
|
_________________
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.
As of
May 31, 2018
, 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 were 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, 2018
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Investment deposit accounts
(1)
|
|
$
|
522,971
|
|
|
$
|
522,971
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
(2)
|
|
901
|
|
|
901
|
|
|
|
|
—
|
|
Foreign exchange derivative assets
(2)
|
|
1,573
|
|
|
—
|
|
|
1,573
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities
(2)
|
|
80
|
|
|
80
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative liabilities
(2)
|
|
1,550
|
|
|
—
|
|
|
1,550
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(in thousands)
|
|
August 31, 2017
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Investment deposit accounts
(1)
|
|
$
|
43,553
|
|
|
$
|
43,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets
(2)
|
|
767
|
|
|
767
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative assets
(2)
|
|
1,367
|
|
|
—
|
|
|
1,367
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities
(2)
|
|
3,251
|
|
|
3,251
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative liabilities
(2)
|
|
5,259
|
|
|
—
|
|
|
5,259
|
|
|
—
|
|
_________________
(1) Investment deposit accounts are short-term in nature, and the value is determined by principal plus interest. 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 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.
In connection with the sale of assets related to the Company's structural steel fabrication operations, the Company recorded an impairment charge of
$0.9 million
and
$13.0 million
, for the
three and nine
months ended
May 31, 2018
, respectively. The signed definitive asset sale agreement and subsequent post-closing adjustments (Level 2) were the basis for the determination of fair value of these operations. There were no other material non-recurring fair value remeasurements during the
three and nine
months ended
May 31, 2018
and
2017
.
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 unaudited condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2018
|
|
August 31, 2017
|
(in thousands)
|
|
Fair Value Hierarchy
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
2027 Notes
(1)
|
|
Level 2
|
|
$
|
300,000
|
|
|
$
|
287,052
|
|
|
$
|
300,000
|
|
|
$
|
314,286
|
|
2026 Notes
(1)
|
|
Level 2
|
|
350,000
|
|
|
346,966
|
|
|
—
|
|
|
—
|
|
2023 Notes
(1)
|
|
Level 2
|
|
330,000
|
|
|
323,430
|
|
|
330,000
|
|
|
340,052
|
|
2022 Term Loan
(2)
|
|
Level 2
|
|
144,375
|
|
|
144,375
|
|
|
150,000
|
|
|
150,000
|
|
_________________
(1) The fair value of the notes was determined based on indicated market values.
(2) The 2022 Term Loan contains variable interest rates and its carrying value approximates fair value.
NOTE 10. INCOME TAX
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("TCJA") which, among other provisions, reduced the federal corporate tax rate to 21.0% effective January 1, 2018. Due to the Company’s August 31
st
fiscal year end, this provision will result in a blended statutory U.S. tax rate of
25.7%
for fiscal 2018 and a 21.0% statutory U.S. tax rate beginning September 1, 2018.
Accounting Standards Codification ("ASC") 740 requires the change in tax law to be accounted for in the period of enactment. Due to complexities involved in accounting for the TCJA, the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 118 provides a measurement period, which should not extend beyond one year from the date of enactment, to complete the accounting under ASC 740. The Company recognized additional income tax expense of
$9.9 million
during the
nine
months ended
May 31, 2018
for the effects of those provisions of the TCJA for which amounts are reasonably estimable, including (i) recognition of the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits, in order to transition from a worldwide system with deferral to a territorial-style tax system, and (ii) the remeasurement of the Company’s deferred tax balances as of
May 31, 2018
to the lower statutory rates. These provisions of the TCJA, as well as
100%
bonus depreciation for qualified assets acquired and placed in service after September 27, 2017, resulted in a
$45.8 million
reduction to the Company’s net deferred tax liabilities. The impacts of the legislation on the Company’s tax expense and/or the Company’s deferred tax balances may differ from these estimates, possibly materially, and may be adjusted accordingly over the SAB 118 measurement period.
The Company’s current analysis of the following provisions of the TCJA resulted in minimal or no impact on the Company’s financial statements, and as a result, the Company did not record any associated tax expense or benefit as of
May 31, 2018
: (i) the new tax on global intangible low-taxed income, (ii) the new tax on foreign-derived intangible income, (iii) the base erosion anti-abuse tax, (iv) deductibility limitations on performance-based compensation, (v) deductibility limitations on business interest under Section 163(j) and (vi) deductibility limitations on meal and entertainment related expenses. The Company will continue to evaluate the effect of these provisions and adjust its financial statements if necessary as new information becomes available.
The Company's effective income tax rate from continuing operations for the
three and nine
months ended
May 31, 2018
was
23.9%
and
21.8%
, respectively, compared with
25.9%
and
26.1%
for the
three and nine
months ended
May 31, 2017
, 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 subsidiaries with losses for which no tax benefit is available due to valuation allowances, audit-related adjustments, and the impact of permanent tax adjustments.
For the
three and nine
months ended
May 31, 2018
, the Company's effective tax rate was lower than the blended U.S. statutory income tax rate of
25.7%
. The statutory rate for fiscal 2018 was revised during the second quarter of fiscal 2018 due to the provisions of the TCJA, as discussed above. Items that impacted the effective tax rate included:
|
|
i.
|
the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits as a result of the TCJA;
|
|
|
ii.
|
the remeasurement of the Company’s deferred tax balances to the applicable reduced statutory income tax rates as a result of the TCJA;
|
|
|
iii.
|
a permanent tax benefit related to a worthless stock deduction from the reorganization and exit of the Company's steel trading business headquartered in the United Kingdom;
|
|
|
iv.
|
the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of
19.0%
;
|
|
|
v.
|
a permanent tax benefit recorded under ASU 2016-09 for stock awards that vested during the first
nine
months of fiscal 2018; and
|
|
|
vi.
|
a non-taxable gain on assets related to the Company's non-qualified Benefits Restoration Plan ("BRP").
|
For the
three and nine
months ended
May 31, 2017
, the Company's effective tax rate was lower than the U.S. statutory income tax rate of
35.0%
. Items that impacted the effective tax rate included:
|
|
i.
|
the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of
19.0%
;
|
|
|
ii.
|
a permanent tax benefit under Section 199 of the Internal Revenue Code related to domestic production activity;
|
|
|
iii.
|
a non-taxable gain on assets related to the Company's non-qualified BRP; and
|
|
|
iv.
|
losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses.
|
For the
three and nine
months ended
May 31, 2018
, the Company’s effective income tax rates from discontinued operations of
30.4%
and
40.9%
, respectively, were greater than the blended U.S. statutory income tax rate of
25.7%
primarily as a result of losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses. Additionally, the effective income tax rates were unfavorably impacted by state taxes imposed on income earned by the Company’s steel trading operations headquartered in the U.S.
For the
three and nine
months ended
May 31, 2017
, the Company’s effective income tax rate from discontinued operations of
17.4%
and
20.6%
, respectively, was less than the U.S. statutory income tax rate of
35.0%
primarily due to pre-tax income earned in foreign jurisdictions that benefit from group loss sharing provisions. Such losses, which carry a full valuation allowance, are utilized to absorb current period income earned in foreign jurisdictions; thus, there is no associated tax expense or benefit.
The Company made net cash payments of
$14.8 million
and
$28.2 million
for income taxes during the
nine
months ended
May 31, 2018
and
2017
, respectively.
As of
May 31, 2018
and
August 31, 2017
, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was
$8.0 million
and
$9.3 million
, respectively, exclusive of interest and penalties. The decrease in the reserve for unrecognized income tax benefits resulted from the expiration of the statute of limitations for the Company’s fiscal 2014 federal income tax return.
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. For the
three and nine
months ended
May 31, 2018
, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.
During the twelve months ending
May 31
, 2019, 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, as well as the provision for income taxes, may decrease by approximately
$8.0 million
.
The Company files income tax returns in the U.S. 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 — 2015 and forward, with the exception of the R&D credit matter discussed below
U.S. States — 2009 and forward
Foreign — 2011 and forward
During the fiscal year ended August 31, 2016, the Company completed an IRS examination for the years 2009 through 2011 and received confirmation from the United States Congress Joint Committee on Taxation that all matters were settled with the exception of R&D credits, which are still under review. In addition, the Company is under examination by certain state revenue authorities for the years 2009 through 2015. Management believes the Company's recorded income tax liabilities as of
May 31, 2018
sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. 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 audited consolidated financial statements in the
2017
Form 10-K. In general, the restricted stock units granted during fiscal
2018
vest ratably over a period of
three years
. However, certain restricted stock units granted during fiscal
2018
cliff vest after a period of three years. 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
2018
will vest after a period of three years.
During the
nine
months ended
May 31, 2018
and
2017
, the Company granted the following awards under its stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(in thousands, except per share data)
|
|
Shares Granted
|
|
Weighted Average Grant Date Fair Value
|
|
Shares Granted
|
|
Weighted Average Grant Date Fair Value
|
Equity Method
|
|
1,216
|
|
|
$
|
20.69
|
|
|
916
|
|
|
$
|
16.04
|
|
Liability Method
|
|
323
|
|
|
N/A
|
|
|
915
|
|
|
N/A
|
|
During the
three and nine
months ended
May 31, 2018
, the Company recorded a benefit of
$0.1 million
and an expense of
$1.6 million
for mark-to-market adjustments on liability awards, respectively, compared to a benefit of
$2.0 million
and an expense of
$2.7 million
recorded for the
three and nine
months ended
May 31, 2017
, respectively, which includes the impact of the modification of certain restricted stock and performance stock units that occurred during the first quarter of fiscal 2017. As of
May 31, 2018
, the Company had
769 thousand
equivalent shares accounted for under the liability method outstanding. The Company expects
733 thousand
equivalent shares to vest.
The following table summarizes total stock-based compensation expense, including fair value remeasurements, which was mainly included in selling, general and administrative expenses on the Company's unaudited condensed consolidated statements of earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Stock-based compensation expense
|
|
$
|
4,910
|
|
|
$
|
3,560
|
|
|
$
|
18,247
|
|
|
$
|
19,716
|
|
NOTE 12. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The calculations of basic and diluted earnings per share from continuing operations for the
three and nine
months ended
May 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands, except share data)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
|
$
|
42,325
|
|
|
$
|
31,567
|
|
|
$
|
83,977
|
|
|
$
|
60,245
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,111,799
|
|
|
115,886,372
|
|
|
116,722,504
|
|
|
115,574,289
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.72
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,111,799
|
|
|
115,886,372
|
|
|
116,722,504
|
|
|
115,574,289
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock-based incentive/purchase plans
|
|
1,142,992
|
|
|
1,318,997
|
|
|
1,328,360
|
|
|
1,513,052
|
|
Shares outstanding for diluted earnings per share
|
|
118,254,791
|
|
|
117,205,369
|
|
|
118,050,864
|
|
|
117,087,341
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.71
|
|
|
$
|
0.51
|
|
CMC had 26,886 shares that were anti-dilutive for the three months ended May 31, 2018. There are no anti-dilutive shares for the other periods presented.
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 share repurchase program under which CMC may repurchase up to
$100.0 million
of shares of common stock. During the
nine
months ended
May 31, 2018
and
2017
, CMC did not repurchase any shares of common stock. CMC had remaining authorization to repurchase
$27.6 million
shares of common stock at
May 31, 2018
.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal and Environmental Matters
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 audited consolidated financial statements in the
2017
Form 10-K.
On April 28, 2016, the Company was served with a lawsuit filed by Ector County, Texas and the State of Texas by and through the Texas Commission on Environmental Quality ("TCEQ") alleging violations of the Texas Solid Waste Disposal Act, the Texas Water Code, the Texas Clean Air Act, and TCEQ rules on spill prevention and control. The Plaintiffs amended their petition in February 2017 to include violations of TCEQ rules on recycling and storm water permits. The Plaintiffs further amended their petition in April 2017, broadening their allegations. The lawsuit, filed in the 201st Judicial District Court of Travis County, Texas, alleged improper disposal of solid waste and unauthorized outdoor burning activity at the Company’s recycling facility located in Odessa, Texas. The lawsuit sought a penalty for each day of alleged violation under the Texas Health & Safety Code, the Texas Water Code, or the Texas Administrative Code. The parties agreed to a mediated settlement on December 1, 2017 and entered into an Agreed Final Judgment on June 12, 2018. The Agreed Final Judgment is subject to the formal approval process of the State of Texas. Under the mediated settlement, the Company will pay
$1.1 million
, net of insurance recoveries. The Company denies any wrongdoing in connection with the alleged claims, and the settlement does not contain an admission of liability from the Company.
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 at several sites (none of which are 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 both
May 31, 2018
and
August 31, 2017
, the Company had accrued
$0.7 million
for estimated 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. As of
May 31, 2018
and
August 31, 2017
, total environmental liabilities, including with respect to CERCLA sites, were
$4.0 million
and
$4.3 million
, respectively, of which
$2.0 million
and
$2.1 million
, respectively, was classified as other long-term liabilities. These amounts have not been discounted to their present values. 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 14. BUSINESS SEGMENTS
The Company's operating segments earn revenues and incur expenses 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
four
reporting segments: Americas Recycling, Americas Mills, Americas Fabrication, and International Mill. See Note 1, Nature of Operations, of the audited consolidated financial statements included in the
2017
Form 10-K for more information about the reporting segments, including the types of products and services from which each reporting segment derives its net sales. During the second quarter of fiscal 2018, the Company substantially completed the exit of the International Marketing and Distribution segment. See Note 2, Changes in Business, for further information. Certain components of the International Marketing and Distribution segment which were wound down in prior periods, including the Company's steel trading operations based in the United Kingdom, did not meet the criteria for discontinued operations and thus, are included in continuing operations for all periods presented. Such activities are included in the results of Corporate and Other, and are immaterial for the
three and nine
months ended
May 31, 2018
. Corporate and Other also contains earnings or losses on assets and liabilities related to the BRP assets and short-term investments as well as expenses of the Company's corporate headquarters and interest expense related to its long-term debt.
The Company uses adjusted operating profit (loss) from continuing operations to compare and evaluate the financial performance of its segments. Adjusted operating profit (loss) is the sum of the Company's earnings from continuing operations before interest expense, income taxes 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
2017
Form 10-K.
The following is a summary of certain financial information from continuing operations by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2018
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
292,679
|
|
|
$
|
332,459
|
|
|
$
|
375,183
|
|
|
$
|
201,438
|
|
|
$
|
2,725
|
|
|
$
|
—
|
|
|
$
|
1,204,484
|
|
Intersegment sales
|
|
71,419
|
|
|
220,604
|
|
|
3,058
|
|
|
299
|
|
|
—
|
|
|
(295,380
|
)
|
|
—
|
|
Net sales
|
|
364,098
|
|
|
553,063
|
|
|
378,241
|
|
|
201,737
|
|
|
2,725
|
|
|
(295,380
|
)
|
|
1,204,484
|
|
Adjusted operating profit (loss) from continuing operations
|
|
14,350
|
|
|
70,404
|
|
|
(16,096
|
)
|
|
24,370
|
|
|
(22,678
|
)
|
|
(2,941
|
)
|
|
67,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2018
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
832,448
|
|
|
$
|
841,895
|
|
|
$
|
1,015,934
|
|
|
$
|
633,134
|
|
|
$
|
11,874
|
|
|
$
|
—
|
|
|
$
|
3,335,285
|
|
Intersegment sales
|
|
171,618
|
|
|
550,573
|
|
|
8,059
|
|
|
846
|
|
|
—
|
|
|
(731,096
|
)
|
|
—
|
|
Net sales
|
|
1,004,066
|
|
|
1,392,468
|
|
|
1,023,993
|
|
|
633,980
|
|
|
11,874
|
|
|
(731,096
|
)
|
|
3,335,285
|
|
Adjusted operating profit (loss) from continuing operations
|
|
36,580
|
|
|
142,639
|
|
|
(47,995
|
)
|
|
72,297
|
|
|
(65,648
|
)
|
|
(4,413
|
)
|
|
133,460
|
|
Total assets as of May 31, 2018*
|
|
310,513
|
|
|
1,078,308
|
|
|
684,929
|
|
|
476,946
|
|
|
1,128,360
|
|
|
(467,603
|
)
|
|
3,211,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2017
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
247,896
|
|
|
$
|
243,934
|
|
|
$
|
377,188
|
|
|
$
|
167,409
|
|
|
$
|
8,286
|
|
|
$
|
—
|
|
|
$
|
1,044,713
|
|
Intersegment sales
|
|
46,270
|
|
|
183,342
|
|
|
2,788
|
|
|
230
|
|
|
3
|
|
|
(232,633
|
)
|
|
—
|
|
Net sales
|
|
294,166
|
|
|
427,276
|
|
|
379,976
|
|
|
167,639
|
|
|
8,289
|
|
|
(232,633
|
)
|
|
1,044,713
|
|
Adjusted operating profit (loss) from continuing operations
|
|
9,247
|
|
|
50,734
|
|
|
1,808
|
|
|
12,971
|
|
|
(20,281
|
)
|
|
772
|
|
|
55,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31, 2017
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Eliminations
|
|
Continuing Operations
|
Net sales-unaffiliated customers
|
|
$
|
590,760
|
|
|
$
|
667,872
|
|
|
$
|
1,013,847
|
|
|
$
|
436,413
|
|
|
$
|
51,047
|
|
|
$
|
—
|
|
|
$
|
2,759,939
|
|
Intersegment sales
|
|
103,442
|
|
|
483,162
|
|
|
8,355
|
|
|
621
|
|
|
643
|
|
|
(596,223
|
)
|
|
—
|
|
Net sales
|
|
694,202
|
|
|
1,151,034
|
|
|
1,022,202
|
|
|
437,034
|
|
|
51,690
|
|
|
(596,223
|
)
|
|
2,759,939
|
|
Adjusted operating profit (loss) from continuing operations
|
|
11,981
|
|
|
139,002
|
|
|
9,025
|
|
|
32,517
|
|
|
(72,176
|
)
|
|
(22
|
)
|
|
120,327
|
|
Total assets as of August 31, 2017*
|
|
240,371
|
|
|
933,022
|
|
|
683,609
|
|
|
464,428
|
|
|
687,984
|
|
|
(327,883
|
)
|
|
2,681,531
|
|
_________________
* Excludes total assets from discontinued operations of
$34.0 million
at
May 31, 2018
and
$293.6 million
at
August 31, 2017
.
Reconciliations of earnings from continuing operations to adjusted operating profit from continuing operations are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
|
$
|
42,325
|
|
|
$
|
31,567
|
|
|
$
|
83,977
|
|
|
$
|
60,245
|
|
Income taxes
|
|
13,312
|
|
|
11,006
|
|
|
23,465
|
|
|
21,231
|
|
Interest expense
|
|
11,511
|
|
|
12,448
|
|
|
25,303
|
|
|
38,212
|
|
Discounts on sales of accounts receivable
|
|
261
|
|
|
230
|
|
|
715
|
|
|
639
|
|
Adjusted operating profit from continuing operations
|
|
$
|
67,409
|
|
|
$
|
55,251
|
|
|
$
|
133,460
|
|
|
$
|
120,327
|
|