NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Nature of Operations
As a vertically integrated organization, Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") manufactures, recycles, and markets steel and metal products, related materials and services through a network including eight electric arc furnace ("EAF") mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses and metal recycling facilities in the United States ("U.S.") and Poland.
The Company has four reportable segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill.
Americas Recycling
The Americas Recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. This segment sells scrap metals to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers and other consumers.
Americas Mills
The Americas Mills segment, through its seven EAF mini mills, two EAF micro mills and rerolling mill, manufactures finished long steel products including reinforcing bar ("rebar"), merchant bar, light structural and other special sections as well as semi-finished billets for re-rolling and forging applications. This segment's products are sold to the construction, service center, transportation, steel warehousing, fabrication, energy, petrochemical and original equipment manufacturing industries. The Americas Mills segment also includes eight scrap metal processing facilities and two scrap metal shredders that directly support the steel mills.
Americas Fabrication
The Americas Fabrication segment consists of the Company's rebar fabrication operations, fence post manufacturing facilities, construction-related product facilities and facilities that heat-treat steel to strengthen and provide flexibility. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, bridges, arenas, stadiums and dams.
International Mill
The International Mill segment is comprised of the Company's EAF mini mill, recycling and fabrication operations in Poland. This segment manufactures rebar, merchant bar and wire rod as well as semi-finished billets. In addition, this segment's fabrication operations sell fabricated rebar, fabricated mesh, assembled rebar cages and other rebar by-products. The International Mill's products are sold primarily to fabricators, manufacturers, distributors and construction companies.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned subsidiaries and certain variable interest entities ("VIEs") for which the Company is the primary beneficiary. Intercompany account balances and transactions have been eliminated.
Upon inception of an arrangement with a potential VIE, the Company performs an assessment of the contractual agreements that define the ownership structure, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties when determining whether it is the primary beneficiary of the entity. The Company concludes that it is the primary beneficiary and consolidates the VIE if it has both (i) the power to direct the activities that most significantly impact the economic performance
of the VIE and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that potentially could be significant to the VIE.
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of net sales and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of assets acquired and liabilities assumed in acquisitions; the carrying value of inventory and long-lived assets, including goodwill; valuation allowances for receivables and deferred income taxes; revenue recognized over time; share-based compensation; potential litigation claims and settlements; environmental liabilities; and the carrying value of assets held for sale. Actual results could differ significantly from these estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with original maturities of three months or less at the date of purchase.
Revenue Recognition and Allowance for Doubtful Accounts
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration received or expected to be received in exchange for those goods or services. The Company's performance obligations arise from (i) sales of steel products, ferrous and nonferrous scrap metals, and construction materials and (ii) services such as steel fabrication and installation. The shipment of products to customers is considered a fulfillment activity and amounts billed to customers for shipping and freight are included in net sales, and the related costs are included in cost of goods sold. Net sales are presented net of taxes. In the Americas Mills, Americas Recycling, and International Mill segments, revenue is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt. In the Americas Fabrication segment, each contract represents a single performance obligation. Revenue is either recognized over time or equal to billing under an available practical expedient. Refer to Note 6, Revenue Recognition, for further details.
The Company maintains an allowance for doubtful accounts to reflect its estimate of the uncollectability of accounts receivable. These reserves are based on historical trends, current market conditions and customers' financial condition. The Company reviews and sets credit limits for each customer. Some of the Company's divisions use credit insurance to ensure payment in accordance with the terms of sale. Generally, collateral is not required. Approximately 13% and 18% of total receivables at August 31, 2019 and 2018, respectively, were secured by credit insurance.
Inventories
At August 31, 2019, inventories were stated at the lower of cost or net realizable value and were determined by the weighted average cost method.
Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production supplies, maintenance, production, wages and transportation costs. Additionally, the costs of departments that support production, including materials management and quality control, are allocated to inventory.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance is expensed as incurred. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. Depreciation and amortization is recorded on a straight-line basis over the following estimated useful lives:
|
|
|
|
|
|
Buildings
|
7
|
to
|
40
|
years
|
Land improvements
|
3
|
to
|
25
|
years
|
Leasehold improvements
|
3
|
to
|
15
|
years
|
Equipment
|
3
|
to
|
25
|
years
|
The Company evaluates impairment of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For each asset or group of assets held for use with indicators of impairment, the Company compares the sum of the expected future cash flows generated by the asset or group of assets with its associated net carrying value. If the net carrying value of the asset or group of assets exceeds expected undiscounted future cash flows, the excess of the net book value over estimated fair value is charged to impairment loss in the accompanying consolidated statements of earnings. Properties held for sale are reported at the lower of their carrying amount or their estimated sales price, less estimated costs to sell.
Government Assistance
Government assistance, including non-monetary grants, herein collectively referred to as grants, are not recognized until there is reasonable assurance that the Company will comply with the conditions of the grant and the Company will receive the grant.
Generally, government grants fall into two categories: grants related to assets and grants related to income. Grants related to assets are government grants for the purchase, construction or other acquisition of long-lived assets. The Company accounts for grants related to assets as deferred income with the offset to an asset account, such as fixed assets, on the consolidated balance sheets. Non-monetary grants are recognized at fair value. The Company recognizes the deferred income in profit or loss on a systematic basis over the useful life of the asset; which, consistent with the Company's fixed assets policy, is straight-line. The period over which grants are recognized depends on the terms of the agreement. Grants related to specific expenses already incurred are recognized in profit or loss in the period in which the grant becomes receivable. A grant related to depreciable assets is recognized in profit or loss over the life of the depreciable asset. Grants related to non-depreciable assets may require the fulfillment of certain obligations. In such cases, these grants are recognized in profit or loss over the periods that bear the cost of meeting the obligations.
Grants related to income are any grants that are not considered grants related to assets, such as grants to compensate for certain expenses. Grants related to income are recognized as a reduction in the related expense in the period that the recognition criteria are met. See Note 11, New Markets Tax Credit Transactions.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment at the reporting unit level annually and whenever events or circumstances indicate that the carrying value may not be recoverable.
To evaluate goodwill for impairment, the Company utilizes a quantitative test that compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is indicated in the amount that the carrying value exceeds the fair value of the reporting unit, not to exceed the goodwill value for the reporting unit. The Company's reporting units represent an operating segment or one level below an operating segment.
The Company estimates the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. Under the income approach, the Company determines the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into account industry and market conditions. The discount rate is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the Company. The market approach, on the other hand, estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. The determination of fair value involves a number of significant assumptions and estimates, including discount rates, volumes, prices, capital expenditures and the impact of current market conditions. These estimates could be materially impacted by adverse changes in these assumptions. See Note 9, Goodwill and Other Intangible Assets, for additional information on the Company's annual goodwill impairment analysis.
Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment charges are recorded on finite-lived intangible assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.
Contingencies
The Company accrues for claims and litigation, including environmental investigation and remediation costs, when they are both probable and the amount can be reasonably estimated. Environmental costs are based upon estimates regarding the sites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is typically recorded.
Stock-Based Compensation
The Company recognizes stock-based equity and liability awards at fair value. The fair value of each stock-based equity award is estimated at the grant date using the Black-Scholes or Monte Carlo pricing model. Total compensation cost of the stock-based equity award is amortized over the requisite service period using the accelerated method of amortization for grants with graded vesting or the straight-line method for grants with cliff vesting. Stock-based liability awards are measured at fair value at the end of each reporting period and will fluctuate based on the price of CMC common stock and performance relative to the targets.
Income Taxes
CMC and its U.S. subsidiaries file a consolidated federal income tax return. Deferred income taxes are provided for temporary differences between financial statement and income tax bases of assets and liabilities. The principal differences are described in Note 14, Income Tax. Benefits from income tax credits are reflected currently in earnings. The Company records income tax positions based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information.
Foreign Currencies
The functional currency of the Company's Polish operations is the local currency. Translation adjustments are reported as a component of accumulated other comprehensive loss. Transaction gains (losses) from transactions denominated in currencies other than the functional currency related to continuing operations were immaterial for 2019, 2018 and 2017.
Derivative Financial Instruments
The Company recognizes derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Derivatives that are not designated as hedges are adjusted to fair value through net earnings. Changes in the fair value of derivatives that are designated as hedges are recognized depending on the nature of the hedge. In the case of fair value hedges, changes are recognized as an offset against the change in fair value of the hedged balance sheet item. When the derivative is designated as a cash flow hedge and is highly effective, changes are recognized in other comprehensive income. The ineffective portion of a change in fair value for derivatives designated as hedges is recognized in net earnings.
When a derivative instrument is sold, terminated, exercised, or expires, the gain or loss is recorded in the consolidated statement of earnings for fair value hedges, and the cumulative unrealized gain or loss, which had been recognized in the statement of comprehensive income, is reclassified to the consolidated statement of earnings for cash flow hedges. Additionally, when hedged items are sold or extinguished, or the anticipated transaction being hedged is no longer expected to occur, the Company recognizes the gain or loss on the designated hedged financial instrument.
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. Level 1 represents unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 represents quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly. Level 3 represents valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Recently Adopted Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 provides guidance on eight specific cash flow issues, including the statement of cash flows treatment of beneficial interests in securitized financial
transactions, which encompasses activities under the Company's accounts receivable programs in the U.S. and Poland prior to the program amendment as described in Note 7, Accounts Receivable Programs. The Company adopted the standard, which requires retrospective application to all periods presented, in the first quarter of 2019. As a result of adoption, the Company reported reductions in operating cash flows of $367.5 million, $670.5 million and $616.0 million, with offsetting increases in investing cash flows related to the collection of previously sold trade accounts receivable in the consolidated statements of cash flows for the years ended August 31, 2019, 2018 and 2017, respectively. Additionally, upon adoption, the $90.0 million repayment during 2018 of advances outstanding at August 31, 2017, originally recorded as an outflow from operating activities, was reclassified to investing activities.
On September 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, including the related amendments. The Company adopted ASC 606 under the modified retrospective approach and applied the guidance only to contracts that were not completed as of the date of adoption. The Company recognized a total cumulative effect of $2.7 million, net of tax, as a reduction to the opening balance of retained earnings as of September 1, 2018. There was no impact to the consolidated statement of cash flows or other comprehensive income.
In accordance with ASC 606, the disclosure below reflects the impact of adoption to the consolidated statement of earnings, as compared to what the results would have been under ASC 605, Revenue Recognition. The impact to the consolidated balance sheet was immaterial.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2019
|
(in thousands)
|
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change - Higher (Lower)
|
Net sales
|
|
$
|
5,829,002
|
|
|
$
|
5,838,092
|
|
|
$
|
(9,090
|
)
|
Net earnings
|
|
198,093
|
|
|
205,147
|
|
|
(7,054
|
)
|
Accounting Pronouncements Not Yet Adopted
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. The Company adopted the standard effective September 1, 2019 using a modified retrospective approach that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods, and elected the three packaged transition practical expedients under ASC 842-10-65-1(f). While the Company is in the process of final evaluation, it expects to recognize a lease liability and related right-of-use asset of approximately $100 million to $120 million. The Company is in the process of implementing a new lease management, accounting and administration system, and determining appropriate changes to internal processes and controls to support recognition and disclosure under the new standard.
NOTE 3. ACQUISITION
On November 5, 2018 (the "Acquisition Date"), the Company completed the acquisition of 33 rebar fabrication facilities in the U.S., as well as four EAF mini mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California from Gerdau S.A., hereinafter collectively referred to as the "Acquired Businesses." The total cash purchase price, including working capital adjustments, was $701.2 million, subject to customary purchase price adjustments, and was funded through a combination of domestic cash on-hand and borrowings under the 2018 Term Loan, as defined in Note 10, Credit Arrangements.
The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the Acquisition Date fair value. The purchase price paid was allocated between the acquired mills and fabrication facilities. The fair value for each business was estimated by the Company using valuation techniques and Level 3 inputs, including expected future cash flows and discount rates. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the Acquisition Date, the Company’s estimates are subject to refinement. Adjustments to provisional amounts identified during the allowable one-year measurement period (the "Measurement Period") are recorded in the reporting period in which the adjustment was determined. The results of operations of the Acquired Businesses are reflected in the Company’s consolidated financial statements from the Acquisition Date.
The table below presents the preliminary fair value that was allocated to the Acquired Businesses' assets and liabilities based upon fair values as determined by the Company, as well as any Measurement Period adjustments made since the Acquisition Date. Final determination of the fair values may result in further adjustments to the values presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Estimated Fair Value as of Acquisition Date
|
|
Measurement Period Adjustments
|
|
Estimated Fair Value
|
Cash and cash equivalents
|
|
$
|
6,399
|
|
|
$
|
—
|
|
|
$
|
6,399
|
|
Accounts receivable
|
|
308,074
|
|
|
(11,615
|
)
|
|
296,459
|
|
Inventories
|
|
207,648
|
|
|
(5,566
|
)
|
|
202,082
|
|
Other current assets
|
|
11,788
|
|
|
14,502
|
|
|
26,290
|
|
Property, plant and equipment
|
|
424,541
|
|
|
(2,572
|
)
|
|
421,969
|
|
Intangible assets
|
|
10,252
|
|
|
(10,252
|
)
|
|
—
|
|
Deferred income taxes
|
|
10,567
|
|
|
(1,412
|
)
|
|
9,155
|
|
Accounts payable-trade, accrued expenses and other payables
|
|
(128,183
|
)
|
|
(6,519
|
)
|
|
(134,702
|
)
|
Acquired unfavorable contract backlog
|
|
(133,600
|
)
|
|
23,434
|
|
|
(110,166
|
)
|
Other long-term liabilities
|
|
(9,920
|
)
|
|
—
|
|
|
(9,920
|
)
|
Pension and other post retirement employment benefits
|
|
(6,365
|
)
|
|
—
|
|
|
(6,365
|
)
|
Total assets acquired and liabilities assumed
|
|
$
|
701,201
|
|
|
$
|
—
|
|
|
$
|
701,201
|
|
Inventories
The acquired inventory is comprised of finished goods, work in process and raw materials. The fair value of finished goods was calculated as the estimated selling price, adjusted for the selling costs and a reasonable profit margin. The fair value of semi-finished goods was calculated as the estimated selling price, adjusted for estimated costs to complete manufacturing, estimated selling costs and a reasonable profit margin. The fair value of raw materials was determined to approximate the historical carrying value as it represented market cost. The inventory step-up recognized for the year ended August 31, 2019 was $10.3 million, which has been reflected in the Company's Americas Mills segment as cost of goods sold as the related inventory has been sold.
Property, Plant and Equipment
The cost approach was used to determine the fair value for buildings, improvements and equipment, and the market approach was used to determine the fair value for land. The cost approach measures the value by estimating the cost to acquire or construct comparable assets and adjusts for age and condition. The Company assigned building and improvements a useful life ranging from 1 to 35 years and equipment a useful life ranging from 1 to 25 years.
Deferred Income Taxes
Deferred income tax assets include the expected future federal and state tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating the deferred tax assets represent a consolidated tax rate as the Company applies the appropriate tax rate for each legal entity.
Pension and Other Postretirement Liabilities
The Company recognized a net liability of $6.4 million, representing the unfunded portion of the acquired defined-benefit pension plan and other postretirement-benefit plan.
Acquired Unfavorable Contract Backlog
The Company determined that the backlog associated with existing contracts at the acquired fabrication facilities in which the selling price was less than estimated costs to fulfill the contracts using market participant assumptions represented a separable intangible liability. The unfavorable contract backlog was valued using the income approach. Amortization of the backlog will correspond with completion of the acquired contracts, which is estimated to be between 1 to 2 years.
Other Assets Acquired and Liabilities Assumed
The Company used historical carrying values for trade accounts receivable and payables, as well as certain other current and non-current assets and liabilities, as their carrying values represented the fair value of those items as of the Acquisition Date.
Financial Results
The following table summarizes the financial results of the Acquired Businesses from the Acquisition Date for 2019 included in the Company’s consolidated statement of earnings and consolidated statement of comprehensive income.
|
|
|
|
|
|
(in thousands)
|
|
Year Ended August 31, 2019
|
Net sales
|
|
$
|
1,379,455
|
|
Earnings before income taxes
|
|
132,733
|
|
Pro Forma Supplemental Information
Supplemental information on an unaudited pro forma basis is presented below as if the acquisition of the Acquired Businesses (the "Acquisition") occurred on September 1, 2017. The pro forma financial information is presented for comparative purposes only, based on certain estimates and assumptions, which the Company believes to be reasonable, but not necessarily indicative of future results of operations or the results that would have been reported if the Acquisition had been completed on September 1, 2017. These results were not used as part of management analysis of the financial results and performance of the Company. These results are adjusted, where possible, for transaction and integration related costs. These results involve significant estimates.
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|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended August 31,
|
|
|
2019
|
|
2018
|
Pro forma net sales (1)
|
|
$
|
6,033,908
|
|
|
$
|
6,303,812
|
|
Pro forma net earnings (2)
|
|
162,255
|
|
|
105,377
|
|
_________________
(1) Pro forma net sales for the year ended August 31, 2018 includes estimated fair value adjustments related to amortization of unfavorable contract backlog. The impact of the amortization of unfavorable contract backlog has been removed from the pro forma net sales for the year ended August 31, 2019.
(2) Pro forma net earnings for the year ended August 31, 2018 reflects the impact of fair value adjustments related to the amortization of unfavorable contract backlog described above and includes estimated fair value adjustments related to inventory step-up, as well as non-recurring acquisition and integration costs of approximately $51.7 million.
NOTE 4. CHANGES IN BUSINESS
Other Acquisitions
On October 26, 2017, the Company completed the purchase of substantially all of the assets of MMFX Technologies Corporation ("MMFX"). MMFX markets, sells, and licenses the production of proprietary specialty steel products. The operating results of MMFX are included in the Americas Mills reporting segment. This acquisition was not material to the Company's financial position or results of operations.
On March 6, 2017, the Company completed the purchase of certain assets from OmniSource Corporation, a wholly-owned subsidiary of Steel Dynamics, Inc., consisting of seven recycling facilities located in the southeast United States (the "Recycling Assets"), which are in close proximity to the Company’s mini mill in Cayce, South Carolina. These facilities provide synergies with the Company's other operations in the region. The operating results of these facilities are included in the Americas Recycling reporting segment.
On January 9, 2017, the Company completed the purchase of substantially all of the assets of Associated Steel Workers, Limited ("ASW"), a steel fabrication facility in Kapolei, Hawaii. This acquisition continues the vertical integration model of the Company by extending its geographic reach, establishing a fabrication operation in Hawaii and expanding its presence in the Hawaiian market. The operating results of this facility are included in the Americas Fabrication reporting segment.
On December 12, 2016, the Company completed the purchase of substantially all of the assets of Continental Concrete Structures, Inc. ("CCS"), a fabricator of post-tensioning cable and related products for commercial and public construction projects with a facility in Alpharetta, Georgia. In addition, CCS provides professional design and value engineering services to the construction industry throughout North America. This acquisition complements the Company’s current rebar fabrication business and continues its strategy of creating value for customers. The operating results of this facility are included in the Americas Fabrication reporting segment.
For the year ended August 31, 2017, the acquisitions of CCS, ASW and the Recycling Assets were not material, individually or in the aggregate, to the Company's financial position or results of operations; therefore, pro forma operating results for the acquisitions are not presented since the results would not be significantly different than reported results.
Dispositions
During the third quarter of 2018, the Company sold substantially all of the assets of its structural steel fabrication operations, which were part of the Americas Fabrication segment. The disposition did not meet the criteria for discontinued operations. Proceeds associated with the sale were $20.3 million. As a result of the sale of these assets, the Company recorded impairment charges of $13.7 million. 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.
Discontinued Operations
On June 13, 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 2018, the remaining operations related to the Company's steel trading businesses in the U.S. and Asia were substantially wound down and the Company sold certain assets and liabilities of its Australian steel trading business. As a result of the Company's exit of its trading and distribution businesses in Australia, the Company prepared an impairment analysis on the asset disposal groups. Indicators of value from other recent sales of similar businesses within the segment (Level 3) were the basis for the determination of fair value of this component. As a result of this analysis, the Company recorded impairment charges of $2.1 million and $4.2 million in 2018 and 2017, respectively, resulting in an overall transaction loss, including selling costs, of $5.3 million. This loss was primarily due to accumulated foreign currency translation losses. The results of these activities are included in discontinued operations in the 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 is no longer reported. See Note 21, Business Segments, for further discussion of the exit of the International Marketing and Distribution segment.
The major classes of line items constituting earnings (loss) from discontinued operations in the consolidated statements of earnings for 2018 and 2017 are presented in the table below. Earnings (loss) from discontinued operations in the consolidated statements of earnings were immaterial in 2019.
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|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
304,650
|
|
|
$
|
1,155,046
|
|
Costs and expenses:
|
|
|
|
|
Cost of goods sold
|
|
276,184
|
|
|
1,089,837
|
|
Selling, general and administrative expenses
|
|
25,317
|
|
|
75,153
|
|
Interest expense
|
|
(86
|
)
|
|
(104
|
)
|
Earnings (loss) before income taxes
|
|
3,235
|
|
|
(9,840
|
)
|
Income taxes (benefit)
|
|
(34
|
)
|
|
(5,997
|
)
|
Earnings (loss) from discontinued operations
|
|
$
|
3,269
|
|
|
$
|
(3,843
|
)
|
Non-cash operating and investing activities related to discontinued operations include the following: inventory write-downs were $1.2 million and $20.7 million for 2018 and 2017, respectively, and provision for losses on receivables of $5.1 million in 2017. There were no other material non-cash operating or investing items related to discontinued operations for the periods ended August 31, 2019, 2018 and 2017.
Exit Costs
The Company recorded severance expense of $0.9 million, $6.7 million and $17.5 million related to discontinued operations for 2019, 2018 and 2017, respectively. These costs related to the Company's closure of marketing and distribution offices that resulted in involuntary employee termination benefits.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) ("AOCI") was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign Currency Translation
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Defined Benefit Obligation
|
|
Total AOCI
|
Balance at September 1, 2016
|
|
$
|
(112,255
|
)
|
|
$
|
2,186
|
|
|
$
|
(2,845
|
)
|
|
$
|
(112,914
|
)
|
Other comprehensive income before reclassifications
|
|
30,509
|
|
|
1,003
|
|
|
678
|
|
|
32,190
|
|
Amounts reclassified from AOCI
|
|
968
|
|
|
(1,845
|
)
|
|
115
|
|
|
(762
|
)
|
Income taxes
|
|
—
|
|
|
243
|
|
|
(270
|
)
|
|
(27
|
)
|
Net other comprehensive income (loss)
|
|
31,477
|
|
|
(599
|
)
|
|
523
|
|
|
31,401
|
|
Balance at August 31, 2017
|
|
(80,778
|
)
|
|
1,587
|
|
|
(2,322
|
)
|
|
(81,513
|
)
|
Other comprehensive income before reclassifications
|
|
(13,938
|
)
|
|
59
|
|
|
(575
|
)
|
|
(14,454
|
)
|
Amounts reclassified from AOCI
|
|
2,079
|
|
|
(365
|
)
|
|
849
|
|
|
2,563
|
|
Income taxes
|
|
—
|
|
|
75
|
|
|
(348
|
)
|
|
(273
|
)
|
Net other comprehensive loss
|
|
(11,859
|
)
|
|
(231
|
)
|
|
(74
|
)
|
|
(12,164
|
)
|
Balance at August 31, 2018
|
|
(92,637
|
)
|
|
1,356
|
|
|
(2,396
|
)
|
|
(93,677
|
)
|
Other comprehensive loss before reclassifications
|
|
(29,718
|
)
|
|
(7
|
)
|
|
(3,346
|
)
|
|
(33,071
|
)
|
Amounts reclassified from AOCI
|
|
857
|
|
|
(301
|
)
|
|
1,666
|
|
|
2,222
|
|
Income taxes
|
|
—
|
|
|
58
|
|
|
342
|
|
|
400
|
|
Net other comprehensive loss
|
|
(28,861
|
)
|
|
(250
|
)
|
|
(1,338
|
)
|
|
(30,449
|
)
|
Balance at August 31, 2019
|
|
$
|
(121,498
|
)
|
|
$
|
1,106
|
|
|
$
|
(3,734
|
)
|
|
$
|
(124,126
|
)
|
The items reclassified out of AOCI were not material for 2019, 2018 and 2017.
NOTE 6. REVENUE RECOGNITION
Revenue from Contracts with Customers
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration received or expected to be received in exchange for those goods or services. The Company's performance obligations arise from (i) sales of steel products, ferrous and nonferrous scrap metals, and construction materials and (ii) services such as steel fabrication and installation. The shipment of products to customers is considered a fulfillment activity and amounts billed to customers for shipping and freight are included in net sales, and the related costs are included in cost of goods sold. Net sales are presented net of taxes.
In the Americas Mills, Americas Recycling, and International Mill segments, revenue is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt.
In the Americas Fabrication segment, each contract represents a single performance obligation. Revenue is either recognized over time or equal to billing under an available practical expedient. For contracts where the Company provides fabricated product and installation services, revenue is recognized over time using an input method. For 2019, these contracts represent approximately 27% of net sales in the Americas Fabrication segment. For these contracts, the measure of progress is based on contract costs incurred to date compared to total estimated contract costs, which provides a reasonable depiction of the Company’s progress towards satisfaction of the performance obligation as there is a direct relationship between costs incurred by the Company and the transfer of the fabricated product and installation services. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method. For 2019, these contracts represent approximately 21% of net sales in the Americas Fabrication segment. For these contracts, the Company uses tons shipped compared to total estimated tons, which provides a reasonable depiction of the transfer of contract value to the customer, as there is a direct relationship between
the units shipped by the Company and the transfer of the fabricated product. Significant judgment is required to evaluate total estimated costs used in the input method and total estimated tons in the output method. If estimated total consolidated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete, or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgment in determining the transaction price. For 2019, the remaining 52% of net sales in the Americas Fabrication segment is recognized as amounts are billed to the customer.
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing and a liability when revenue is recognized subsequent to invoicing. Payment terms and conditions vary by contract type, although the Company generally requires customers to pay 30 days after the Company satisfies the performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined the contracts do not include a significant financing component.
The following table provides information about assets and liabilities from contracts with customers.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Contract assets (included in other current assets)
|
|
$
|
103,805
|
|
|
$
|
49,221
|
|
Contract liabilities (included in accrued expenses and other payables)
|
|
37,165
|
|
|
6,679
|
|
The majority of the increase in contract asset and liability balances was attributable to the Acquisition. The entire contract liability as of August 31, 2018 was recognized as revenue during 2019.
Remaining Performance Obligations
As of August 31, 2019, a total of $809.5 million has been allocated to remaining performance obligations in the Americas Fabrication segment, excluding those contracts where revenue is recognized equal to billing under an available practical expedient. Of this amount, the Company estimates the remaining performance obligations will be recognized as revenue as follows: 40% in the first twelve months, 49% in the following twelve months, and 11% thereafter. The duration of contracts in the Americas Mills, Americas Recycling, and International Mill segments are typically less than one year.
Disaggregation of Revenue
The following tables display revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2019
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Total
|
Steel products
|
|
$
|
814
|
|
|
$
|
1,763,017
|
|
|
$
|
1,936,994
|
|
|
$
|
780,797
|
|
|
$
|
—
|
|
|
$
|
4,481,622
|
|
Ferrous scrap
|
|
412,456
|
|
|
33,716
|
|
|
8
|
|
|
1,350
|
|
|
—
|
|
|
447,530
|
|
Nonferrous scrap
|
|
493,225
|
|
|
14,453
|
|
|
—
|
|
|
11,009
|
|
|
—
|
|
|
518,687
|
|
Construction materials
|
|
—
|
|
|
—
|
|
|
259,685
|
|
|
—
|
|
|
—
|
|
|
259,685
|
|
Other
|
|
1,956
|
|
|
71,808
|
|
|
12,984
|
|
|
22,567
|
|
|
12,163
|
|
|
121,478
|
|
Total
|
|
$
|
908,451
|
|
|
$
|
1,882,994
|
|
|
$
|
2,209,671
|
|
|
$
|
815,723
|
|
|
$
|
12,163
|
|
|
$
|
5,829,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2018*
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Total
|
Steel products
|
|
$
|
1,166
|
|
|
$
|
1,099,286
|
|
|
$
|
1,160,373
|
|
|
$
|
853,402
|
|
|
$
|
—
|
|
|
$
|
3,114,227
|
|
Ferrous scrap
|
|
516,133
|
|
|
33,154
|
|
|
27
|
|
|
1,288
|
|
|
—
|
|
|
550,602
|
|
Nonferrous scrap
|
|
598,970
|
|
|
17,714
|
|
|
—
|
|
|
13,925
|
|
|
—
|
|
|
630,609
|
|
Construction materials
|
|
—
|
|
|
—
|
|
|
249,538
|
|
|
—
|
|
|
—
|
|
|
249,538
|
|
Other
|
|
1,445
|
|
|
54,027
|
|
|
6,634
|
|
|
17,304
|
|
|
19,337
|
|
|
98,747
|
|
Total
|
|
$
|
1,117,714
|
|
|
$
|
1,204,181
|
|
|
$
|
1,416,572
|
|
|
$
|
885,919
|
|
|
$
|
19,337
|
|
|
$
|
4,643,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2017*
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Total
|
Steel products
|
|
$
|
470
|
|
|
$
|
825,778
|
|
|
$
|
1,126,919
|
|
|
$
|
603,925
|
|
|
$
|
27,267
|
|
|
$
|
2,584,359
|
|
Ferrous scrap
|
|
383,164
|
|
|
29,193
|
|
|
4
|
|
|
1,080
|
|
|
—
|
|
|
413,441
|
|
Nonferrous scrap
|
|
480,676
|
|
|
15,917
|
|
|
—
|
|
|
9,627
|
|
|
—
|
|
|
506,220
|
|
Construction materials
|
|
—
|
|
|
—
|
|
|
228,910
|
|
|
—
|
|
|
—
|
|
|
228,910
|
|
Other
|
|
1,152
|
|
|
46,801
|
|
|
8,993
|
|
|
21,770
|
|
|
32,423
|
|
|
111,139
|
|
Total
|
|
$
|
865,462
|
|
|
$
|
917,689
|
|
|
$
|
1,364,826
|
|
|
$
|
636,402
|
|
|
$
|
59,690
|
|
|
$
|
3,844,069
|
|
_________________
* Prior period amounts have been reported under ASC 605.
NOTE 7. ACCOUNTS RECEIVABLE PROGRAMS
As an additional source of liquidity, the Company sells certain trade accounts receivable both in the U.S. and Poland (hereinafter referred to as the "Programs"). For years prior to 2019, the Company accounted for transfers of the trade accounts receivable under the Programs as sales of financial assets, and the trade accounts receivable balances sold were removed from the consolidated balance sheets. On September 1, 2018, the Company amended certain terms of the Programs, disqualifying the sale of such receivables from being accounted for as sales of financial assets. For activity in the Programs occurring prior to the September 1, 2018 amendment, disclosures required under ASC 860-20-50 are provided below. See Note 10, Credit Arrangements for further details regarding the Programs after September 1, 2018.
Prior to September 1, 2018, in exchange for trade receivables transferred into the Programs, the Company received either cash (referred to as a cash purchase prior or "CPP") or a deferred purchase price ("DPP"). Upon adoption of ASU 2016-15, the CPP received was reflected as cash provided by operating activities in the Company's consolidated statements of cash flows, and cash received to settle the DPP related to the transfer of receivables was included as part of investing activities in the Company's consolidated statement of cash flows. For periods prior to 2019, DPP on the Programs was included in accounts receivable on the Company's consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
U.S.*
|
|
Poland
|
|
Australia**
|
Deferred purchase price
|
|
|
|
|
|
|
|
|
Balance at September 1, 2016
|
|
$
|
289,748
|
|
|
$
|
212,762
|
|
|
$
|
50,324
|
|
|
$
|
26,662
|
|
Transfers of trade receivables
|
|
2,646,513
|
|
|
2,251,118
|
|
|
378,481
|
|
|
16,914
|
|
Less: CPP
|
|
(1,899,088
|
)
|
|
(1,635,701
|
)
|
|
(249,850
|
)
|
|
(13,537
|
)
|
Non-cash increase to DPP
|
|
747,425
|
|
|
615,417
|
|
|
128,631
|
|
|
3,377
|
|
Cash collections of DPP
|
|
(616,017
|
)
|
|
(512,171
|
)
|
|
(99,455
|
)
|
|
(4,391
|
)
|
Net repayments (advances)
|
|
(81,731
|
)
|
|
(90,000
|
)
|
|
—
|
|
|
8,269
|
|
Exit from Programs
|
|
(124,302
|
)
|
|
(90,385
|
)
|
|
—
|
|
|
(33,917
|
)
|
Net collections of DPP
|
|
(822,050
|
)
|
|
(692,556
|
)
|
|
(99,455
|
)
|
|
(30,039
|
)
|
Balance at August 31, 2017
|
|
215,123
|
|
|
135,623
|
|
|
79,500
|
|
|
—
|
|
Transfers of trade receivables
|
|
2,932,379
|
|
|
2,396,780
|
|
|
535,599
|
|
|
—
|
|
Less: CPP
|
|
(2,187,377
|
)
|
|
(1,818,781
|
)
|
|
(368,596
|
)
|
|
—
|
|
Non-cash increase to DPP
|
|
745,002
|
|
|
577,999
|
|
|
167,003
|
|
|
—
|
|
Cash collections of DPP
|
|
(670,457
|
)
|
|
(531,541
|
)
|
|
(138,916
|
)
|
|
—
|
|
Net repayments (advances)
|
|
77,853
|
|
|
90,000
|
|
|
(12,147
|
)
|
|
—
|
|
Net collections of DPP
|
|
(592,604
|
)
|
|
(441,541
|
)
|
|
(151,063
|
)
|
|
—
|
|
Balance at August 31, 2018
|
|
$
|
367,521
|
|
|
$
|
272,081
|
|
|
$
|
95,440
|
|
|
$
|
—
|
|
_________________
* Includes the sale of trade accounts receivable activities related to discontinued operations. See Note 4, Changes in Business, for further discussion. For 2017, transfers of trade accounts receivable were $354.5 million, and collections were $325.7 million. Redemptions of trade accounts receivable associated with the exit from the program were $83.7 million for 2017.
** Includes the sale of trade accounts receivable activities related to the Company's former Australian steel distribution business. See Note 4, Changes in Business, for further discussion. For 2017, there were no transfers of trade accounts receivable, collections were $3.7 million and redemptions of trade accounts receivable associated with the exit from the program were $1.6 million.
At August 31, 2018, the Company transferred $381.1 million of trade accounts receivable to the financial institutions and had no advance payments outstanding under the U.S. Program and $12.1 million outstanding under the Polish Program.
NOTE 8. INVENTORIES
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. As such, at August 31, 2019 and 2018, work in process inventories were not material. At August 31, 2019 and 2018, the Company's raw materials inventories were $143.7 million and $177.7 million, respectively.
Inventory write-downs were immaterial for 2019 and 2018, and $21.5 million for 2017.
NOTE 9. 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 at September 1, 2017
|
|
$
|
9,751
|
|
|
$
|
4,970
|
|
|
$
|
57,943
|
|
|
$
|
2,664
|
|
|
$
|
1,982
|
|
|
$
|
77,310
|
|
|
Dispositions, impairments and foreign currency translation
|
|
(208
|
)
|
|
—
|
|
|
(515
|
)
|
|
(96
|
)
|
|
—
|
|
|
(819
|
)
|
|
Reclassification to assets of discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,982
|
)
|
|
(1,982
|
)
|
Balance at August 31, 2018
|
|
9,543
|
|
|
4,970
|
|
|
57,428
|
|
|
2,568
|
|
|
—
|
|
|
74,509
|
|
|
Dispositions, impairments and foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(184
|
)
|
|
—
|
|
|
(184
|
)
|
Balance at August 31, 2019
|
|
9,543
|
|
|
4,970
|
|
|
57,428
|
|
|
2,384
|
|
|
—
|
|
|
74,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 1, 2017
|
|
(9,751
|
)
|
|
—
|
|
|
(493
|
)
|
|
(169
|
)
|
|
(1,982
|
)
|
|
(12,395
|
)
|
|
Dispositions, impairments and foreign currency translation
|
|
208
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
214
|
|
|
Reclassification to assets of discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,982
|
|
|
1,982
|
|
Balance at August 31, 2018
|
|
(9,543
|
)
|
|
—
|
|
|
(493
|
)
|
|
(163
|
)
|
|
—
|
|
|
(10,199
|
)
|
|
Dispositions, impairments and foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Balance at August 31, 2019
|
|
(9,543
|
)
|
|
—
|
|
|
(493
|
)
|
|
(151
|
)
|
|
—
|
|
|
(10,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 1, 2017
|
|
—
|
|
|
4,970
|
|
|
57,450
|
|
|
2,495
|
|
|
—
|
|
|
64,915
|
|
|
Dispositions, impairments and foreign currency translation
|
|
—
|
|
|
—
|
|
|
(515
|
)
|
|
(90
|
)
|
|
—
|
|
|
(605
|
)
|
Balance at August 31, 2018
|
|
—
|
|
|
4,970
|
|
|
56,935
|
|
|
2,405
|
|
|
—
|
|
|
64,310
|
|
|
Dispositions, impairments and foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172
|
)
|
|
—
|
|
|
(172
|
)
|
Balance at August 31, 2019
|
|
$
|
—
|
|
|
$
|
4,970
|
|
|
$
|
56,935
|
|
|
$
|
2,233
|
|
|
$
|
—
|
|
|
$
|
64,138
|
|
_________________
*Corporate and Other in 2017 and 2018 includes goodwill for the International Marketing and Distribution segment which was reclassified as discontinued operations during 2018.
As of August 31, 2019 and 2018, one of the Company's reporting units within the Americas Fabrication reporting segment comprised $51.1 million of the Company's total goodwill. Based on the results of our 2019 annual goodwill impairment analysis, the fair value of this reporting unit exceeded its carrying value by 29.3%. For all other reporting units, the excess of the fair value over carrying value of each reporting unit was substantial. Goodwill impairment charges were not material for 2019, 2018, or 2017.
The following intangible assets subject to amortization are included in other noncurrent assets on the Company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
(in thousands)
|
|
Gross
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Customer base
|
|
$
|
6,088
|
|
|
$
|
4,081
|
|
|
$
|
2,007
|
|
|
$
|
6,254
|
|
|
$
|
3,416
|
|
|
$
|
2,838
|
|
Favorable land leases
|
|
4,146
|
|
|
749
|
|
|
3,397
|
|
|
4,476
|
|
|
755
|
|
|
3,721
|
|
Non-compete agreements
|
|
2,810
|
|
|
382
|
|
|
2,428
|
|
|
1,750
|
|
|
798
|
|
|
952
|
|
Brand name
|
|
628
|
|
|
454
|
|
|
174
|
|
|
928
|
|
|
662
|
|
|
266
|
|
Patents
|
|
6,993
|
|
|
1,709
|
|
|
5,284
|
|
|
6,993
|
|
|
777
|
|
|
6,216
|
|
Other
|
|
101
|
|
|
79
|
|
|
22
|
|
|
101
|
|
|
72
|
|
|
29
|
|
Total
|
|
$
|
20,766
|
|
|
$
|
7,454
|
|
|
$
|
13,312
|
|
|
$
|
20,502
|
|
|
$
|
6,480
|
|
|
$
|
14,022
|
|
Favorable land leases at August 31, 2019 are related to perpetual lease rights which have an estimated useful life of 85 years. All other intangible assets with definitive lives are amortized over estimated useful lives ranging from 3 to 15 years. Excluding goodwill, the Company does not have any other significant intangible assets with indefinite lives. Amortization expense for intangible assets from continuing operations was $2.2 million for 2019 and 2018, and $2.1 million for 2017. Estimated amounts of amortization expense for the next five years are as follows.
|
|
|
|
|
|
Year Ended August 31,
|
|
(in thousands)
|
2020
|
|
$
|
2,047
|
|
2021
|
|
2,025
|
|
2022
|
|
1,748
|
|
2023
|
|
1,289
|
|
2024
|
|
1,252
|
|
NOTE 10. CREDIT ARRANGEMENTS
Long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Interest Rate as of August 31, 2019
|
|
Year Ended August 31,
|
(in thousands)
|
|
|
2019
|
|
2018
|
2027 Notes
|
|
5.375%
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
2026 Notes
|
|
5.750%
|
|
350,000
|
|
|
350,000
|
|
2023 Notes
|
|
4.875%
|
|
330,000
|
|
|
330,000
|
|
Term Loan
|
|
4.111%
|
|
210,125
|
|
|
142,500
|
|
Short-term borrowings
|
|
*
|
|
3,929
|
|
|
—
|
|
Other, including equipment notes
|
|
|
|
60,867
|
|
|
47,629
|
|
Total debt
|
|
|
|
1,254,921
|
|
|
1,170,129
|
|
Less debt issuance costs
|
|
|
|
10,268
|
|
|
11,764
|
|
Total amounts outstanding
|
|
|
|
1,244,653
|
|
|
1,158,365
|
|
Less current maturities
|
|
|
|
13,510
|
|
|
19,746
|
|
Less short-term borrowings
|
|
|
|
3,929
|
|
|
—
|
|
Current maturities of long-term debt and short-term borrowings
|
|
|
|
17,439
|
|
|
19,746
|
|
Long-term debt
|
|
|
|
$
|
1,227,214
|
|
|
$
|
1,138,619
|
|
_________________
* As of August 31, 2019, the weighted average interest rates associated with the U.S. Program and Poland Program were 3.461% and 2.410%, respectively.
In July 2017, the Company issued $300.0 million of 5.375% Senior Notes due July 2027 (the "2027 Notes"). Interest on these 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 these 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 (as amended, the "Credit Agreement") and a term loan contemplated thereunder (the "Term Loan"). The Term Loan was funded in two tranches: one drawn on July 13, 2017 with an original principal amount of $150.0 million, and one drawn on November 1, 2018 with an original principal amount of $180.0 million. The Credit Agreement and the Term Loan are coterminous with a maturity date in June 2022. The Company was required to make quarterly payments on the Term Loan equal to 1.25% of the original principal amount. However, principal prepayments in 2019 have satisfied all contractually obligated quarterly principal payments through the maturity of the Term Loan. The maximum availability under the Revolver can be increased to $600.0 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 a $50.0 million sub-limit for the issuance of stand-by letters of credit.
The Company had no amounts drawn under the Revolver at August 31, 2019 or 2018. The availability under the Revolver was reduced by outstanding stand-by letters of credit of $3.0 million and $3.3 million at August 31, 2019 and 2018, 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. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate. At August 31, 2019, the Company's interest coverage ratio was 5.93 to 1.00 and the Company's debt to capitalization ratio was 0.44 to 1.00.
The Company also has credit facilities in Poland, through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP"), available to support working capital, short-term cash needs, letters of credit, financial assurance and other trade finance-related matters. At August 31, 2019 and 2018, CMCP's credit facilities totaled Polish zloty ("PLN") 275.0 million, or $69.0 million, and PLN 225.0 million, or $60.8 million, respectively. These facilities expire in March 2022. At August 31, 2019 and 2018, 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 $1.1 million at August 31, 2019 and August 31, 2018. During 2019, 2018 and 2017, CMCP had no borrowings or repayments under its credit facilities.
At August 31, 2019, the Company was in compliance with all of the covenants contained in its credit arrangements.
The scheduled maturities of the Company's long-term debt are as follows:
|
|
|
|
|
|
Year Ended August 31,
|
|
(in thousands)
|
2020
|
|
$
|
17,439
|
|
2021
|
|
10,827
|
|
2022
|
|
219,049
|
|
2023
|
|
337,264
|
|
2024
|
|
7,717
|
|
Thereafter
|
|
662,625
|
|
Total long-term debt
|
|
1,254,921
|
|
Less debt issuance costs
|
|
10,268
|
|
Total long-term debt outstanding
|
|
$
|
1,244,653
|
|
The Company capitalized $0.3 million, $7.3 million and $9.8 million of interest in the cost of property, plant and equipment during 2019, 2018 and 2017, respectively.
Accounts Receivable Programs
CMC has a $200.0 million U.S. trade accounts receivable program (the "U.S. Program"), which expires in August 2020. Under the U.S. Program, CMC contributes, and certain of its subsidiaries transfer 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 facilitating transfers of trade accounts receivable generated by the Company. CMCRV transfers the trade accounts receivable in their entirety to two financial institutions. Under the U.S. 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. 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 U.S. 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. Advances taken under the U.S. Program incur interest based on LIBOR plus a margin. The Company had no advance payments outstanding under the U.S. Program at August 31, 2019.
In addition to the U.S. Program, the Company's international subsidiary in Poland transfers trade accounts receivable to financial institutions without recourse (the "Poland Program"). The Poland Program has a facility limit of PLN 220.0 million ($55.2 million as of August 31, 2019) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable transferred under the terms of the arrangement. Advances taken under the Poland Program incur interest based on the Warsaw Interbank Offered Rate ("WIBOR") plus a margin. The Company had advance payments outstanding of $3.9 million under the Poland Program at August 31, 2019.
Prior to 2019, the Company accounted for transfers of trade accounts receivable as sales, and the trade accounts receivable balances transferred were removed from the consolidated balance sheets. On September 1, 2018, the Company amended certain terms of both the U.S. and Poland Programs, disqualifying the accounting of the transfer of such receivables as sales. As a result of the amendments, beginning in 2019, any advances outstanding under the U.S. and Poland Programs are recorded as debt on the Company's consolidated balance sheets.
NOTE 11. NEW MARKETS TAX CREDIT TRANSACTIONS
During 2016 and 2017, the Company entered into three New Markets Tax Credit (“NMTC”) transactions with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"). The NMTC transactions relate to the construction and equipping of our micro mill in Durant, Oklahoma, as well as a rebar spooler and automated T-post shop located on the same site.
The transactions qualified through the New Markets Tax Credit program provided for in the Community Renewal Tax Relief Act of 2000 (the "NMTC Program"), as the micro mill, spooler and T-post shop are located in an eligible zone designated by the Internal Revenue Service ("IRS") and are considered eligible business activities for the NMTC Program. Under the NMTC Program, an investor that makes a capital investment, which, in turn, together with leverage loan sources, is used to make a Qualifying Equity Investment (a "QEI") in an entity that (i) qualifies as a Community Development Entity ("CDE"), (ii) has applied for and been granted an allocation of a portion of the total federal funds available to fund the credits (an "NMTC Allocation") and (iii) uses a minimum specified portion of the QEI to make a Qualified Low Income Community Investment up to the maximum amount of the CDE’s NMTC Allocation will be entitled to claim, over a period of seven years, federal nonrefundable tax credits in an amount equal to 39% of the QEI amount (an "NMTC"). NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.
In general, the three NMTC transactions were structured similarly. USBCDC made a capital contribution to an investment fund and Commonwealth Acquisition Holdings, Inc., a wholly-owned subsidiary of the Company (“Commonwealth”), made a loan to the investment fund. The investment fund used the proceeds from the capital contribution and the loan to make a QEI into a CDE, which, in turn, makes loans of the QEIs to the operating subsidiaries of the Company with terms similar to the loans by Commonwealth. The proceeds from the loans are initially recorded as restricted cash on the balance sheet of the Company until certain conditions are met.
The following table summarizes the key terms and conditions for each of the three NMTC transactions ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project
|
|
USBCDC Capital Contribution
|
|
Commonwealth Loan
|
|
Commonwealth Loan Rate / Maturity
|
|
Investment Fund(s)
|
|
QEI to CDE
|
|
CDE Loan
|
|
Ending Restricted Cash 8/31/2019
|
Micro mill
|
|
$17.7
|
|
$35.3
|
|
1.08% / December 24, 2045
|
|
USBCDC Investment Fund 156, LLC
|
|
$51.5
|
|
$50.7
|
|
$0.4
|
Spooler
|
|
6.7
|
|
14.0
|
|
1.39% / July 26, 2042
|
|
Twain Investment Fund 249, LLC
|
|
20.0
|
|
19.4
|
|
—
|
T-post shop
|
|
5.0
|
|
10.4
|
|
1.16% / March 23, 2047
|
|
Twain Investment Fund 219, LLC Twain Investment Fund 222
|
|
15.0
|
|
14.7
|
|
—
|
By its capital contributions to the investment funds (exclusive of Twain Investment Fund 222) (collectively the "Funds"), USBCDC is entitled to substantially all the benefits derived from the NMTCs. These transactions include a put/call provision whereby the Company may be obligated or entitled to repurchase USBCDC’s interest in the Funds at the end of a seven-year period, in the case of the USBCDC Investment Fund 156, LLC and Twain Investment Fund 249, LLC or an eight-year period, in the case of Twain Investment Fund 219, LLC (each of such periods an "Exercise Period"). The Company believes USBCDC will exercise the put options following the end of the respective Exercise Periods. The value attributed to the put/call is immaterial. The Company is required to follow various regulations and contractual provisions that apply to the NMTC transactions. Non-compliance with applicable requirements could result in unrealized projected tax benefits and, therefore, could require the Company to indemnify USBCDC for any loss or recapture of NMTCs related to the financing until the Company's obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with these transactions.
The Company has determined that the Funds are VIEs, of which the Company is the primary beneficiary and has consolidated them in accordance with ASC Topic 810, Consolidation. USBCDC’s contributions are included in other long-term liabilities in the accompanying consolidated balance sheets. Direct costs incurred in structuring the transactions were deferred and are recognized as expense over each Exercise Period. Incremental costs to maintain the structures during the compliance periods are recognized as incurred.
The Company has determined that Twain Investment Fund 222 is a VIE, of which the Company is not the primary beneficiary and has therefore treated the QEI of $2.1 million as debt. The obligation represents the Company's maximum exposure to loss and is included in long-term debt.
NOTE 12. 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 price volatility in these commodities and (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies.
The Company considers the total notional value of its futures and forward contracts as the best measure of the volume of derivative transactions. At August 31, 2019, the notional values of the Company's foreign currency and commodity contract commitments were $94.1 million and $42.6 million, respectively. At August 31, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $119.5 million and $55.2 million, respectively.
The following table provides information regarding the Company's commodity contract commitments as of August 31, 2019:
|
|
|
|
|
|
|
|
|
Commodity
|
|
Long/Short
|
|
Total
|
Aluminum
|
|
Long
|
|
2,125
|
|
|
MT
|
Copper
|
|
Long
|
|
510
|
|
|
MT
|
Copper
|
|
Short
|
|
6,158
|
|
|
MT
|
_________________
MT = Metric Ton
The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the years ended August 31, 2019, 2018 and
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 consolidated statements of earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
Derivatives Not Designated as Hedging Instruments (in thousands)
|
|
Location
|
|
2019
|
|
2018
|
|
2017
|
Commodity
|
|
Cost of goods sold
|
|
$
|
1,716
|
|
|
$
|
7,043
|
|
|
$
|
(9,095
|
)
|
Foreign exchange
|
|
Cost of goods sold
|
|
—
|
|
|
(50
|
)
|
|
(47
|
)
|
Foreign exchange
|
|
SG&A expenses
|
|
(543
|
)
|
|
110
|
|
|
(5,400
|
)
|
Gain (loss) before income taxes
|
|
|
|
$
|
1,173
|
|
|
$
|
7,103
|
|
|
$
|
(14,542
|
)
|
NOTE 13. 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)
|
|
August 31, 2019
|
|
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)
|
|
$
|
66,240
|
|
|
$
|
66,240
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets (2)
|
|
1,269
|
|
|
1,269
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative assets (2)
|
|
569
|
|
|
—
|
|
|
569
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities (2)
|
|
99
|
|
|
99
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative liabilities (2)
|
|
899
|
|
|
—
|
|
|
899
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(in thousands)
|
|
August 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)
|
|
$
|
541,101
|
|
|
$
|
541,101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivative assets (2)
|
|
1,881
|
|
|
1,881
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative assets (2)
|
|
407
|
|
|
—
|
|
|
407
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivative liabilities (2)
|
|
301
|
|
|
301
|
|
|
—
|
|
|
—
|
|
Foreign exchange derivative liabilities (2)
|
|
1,095
|
|
|
—
|
|
|
1,095
|
|
|
—
|
|
_________________
(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 the New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivative instruments and the classification of the assets and liabilities is included in Note 12, Derivatives and Risk Management.
Other than the Measurement Period adjustments made to the preliminary fair value allocated to the Acquired Businesses' assets and liabilities as described in Note 3, Acquisition and the impairment charges described in Note 4, Changes in Business, there were no other material non-recurring fair value remeasurements during 2019, 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 consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
(in thousands)
|
|
Fair Value Hierarchy
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
2027 Notes (1)
|
|
Level 2
|
|
$
|
300,000
|
|
|
$
|
303,810
|
|
|
$
|
300,000
|
|
|
$
|
281,655
|
|
2026 Notes (1)
|
|
Level 2
|
|
350,000
|
|
|
363,444
|
|
|
350,000
|
|
|
339,238
|
|
2023 Notes (1)
|
|
Level 2
|
|
330,000
|
|
|
342,098
|
|
|
330,000
|
|
|
326,090
|
|
Short-term borrowings (2)
|
|
Level 2
|
|
3,929
|
|
|
3,929
|
|
|
—
|
|
|
—
|
|
Term Loan (2)
|
|
Level 2
|
|
210,125
|
|
|
210,125
|
|
|
142,500
|
|
|
142,500
|
|
_________________
(1) The fair value of the notes is determined based on indicated market values.
(2) The short-term borrowings and Term Loan contain variable interest rates and their carrying value approximates fair value.
NOTE 14. 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. In connection with the enactment of the TCJA, the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 118 provided a one-year measurement period to complete the accounting under ASC 740. For the year ended August 31, 2018, the Company included provisional estimates of the impact of the TCJA. The Company completed its analysis of the impact of the TCJA during the second quarter of 2019.
Beginning in 2019, the Company is subject to the following provisions of the TCJA: (i) a new tax on global intangible low-taxed income ("GILTI"); (ii) a new deduction for foreign-derived intangible income ("FDII"); (iii) deductibility limitations on compensation for covered employees; and (iv) deductibility limitations on business interest expense. The U.S. Department of Treasury continues to release new and clarifying guidance with regard to interpretation of certain provisions of the TCJA, which the Company evaluates during the period of enactment. Based on enacted legislation through August 31, 2019, the Company has included in the effective tax rate estimates of the tax impacts related to GILTI and the deductibility limitation on compensation for covered employees. The Company has elected to treat the new GILTI tax as a current period cost in the year in which the tax is incurred. The Company's current assessment of FDII and the deductibility limitations on business interest expense did not result in an impact to the effective tax rate.
The components of earnings from continuing operations before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
194,986
|
|
|
$
|
86,731
|
|
|
$
|
25,506
|
|
Foreign
|
|
73,474
|
|
|
78,653
|
|
|
39,945
|
|
Total
|
|
$
|
268,460
|
|
|
$
|
165,384
|
|
|
$
|
65,451
|
|
The income taxes (benefit) included in the consolidated statements of earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
United States
|
|
$
|
621
|
|
|
$
|
20,210
|
|
|
$
|
11,345
|
|
Foreign
|
|
14,006
|
|
|
18,308
|
|
|
9,464
|
|
State and local
|
|
2,892
|
|
|
2,263
|
|
|
2,654
|
|
Current taxes
|
|
17,519
|
|
|
40,781
|
|
|
23,463
|
|
Deferred:
|
|
|
|
|
|
|
United States
|
|
46,922
|
|
|
(11,501
|
)
|
|
(13,548
|
)
|
Foreign
|
|
490
|
|
|
(169
|
)
|
|
(917
|
)
|
State and local
|
|
4,908
|
|
|
1,002
|
|
|
281
|
|
Deferred taxes
|
|
52,320
|
|
|
(10,668
|
)
|
|
(14,184
|
)
|
Total income taxes on income
|
|
69,839
|
|
|
30,113
|
|
|
9,279
|
|
Income taxes (benefit) on discontinued operations
|
|
158
|
|
|
(34
|
)
|
|
(5,997
|
)
|
Income taxes on continuing operations
|
|
$
|
69,681
|
|
|
$
|
30,147
|
|
|
$
|
15,276
|
|
A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations, including material items impacting the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Federal statutory rate
|
|
21.0
|
%
|
|
25.7
|
%
|
|
35.0
|
%
|
Income tax expense at statutory rate
|
|
$
|
56,377
|
|
|
$
|
42,471
|
|
|
$
|
22,908
|
|
TCJA - Toll charge and related foreign tax credits
|
|
7,410
|
|
|
29,466
|
|
|
—
|
|
TCJA - Remeasurement of deferred tax balances
|
|
(586
|
)
|
|
(25,515
|
)
|
|
—
|
|
Foreign tax impairment on valuation of subsidiaries (1)
|
|
(29,697
|
)
|
|
22,315
|
|
|
(92,321
|
)
|
Gain on international restructure (1)
|
|
—
|
|
|
18,926
|
|
|
—
|
|
Change in valuation allowance
|
|
36,167
|
|
|
(20,839
|
)
|
|
113,135
|
|
Nontaxable foreign interest (1)
|
|
(9,799
|
)
|
|
(17,414
|
)
|
|
(19,259
|
)
|
Worthless stock deduction (2)
|
|
—
|
|
|
(6,084
|
)
|
|
—
|
|
Foreign rate differential (3)
|
|
(1,466
|
)
|
|
(5,973
|
)
|
|
(7,518
|
)
|
Research and experimentation credits
|
|
(580
|
)
|
|
(4,707
|
)
|
|
(1,034
|
)
|
Audit settlement (4)
|
|
120
|
|
|
(3,187
|
)
|
|
(659
|
)
|
State and local taxes
|
|
6,085
|
|
|
2,317
|
|
|
1,490
|
|
Deferred compensation (5)
|
|
(395
|
)
|
|
(2,036
|
)
|
|
(2,101
|
)
|
Section 199 manufacturing deduction
|
|
—
|
|
|
—
|
|
|
(1,407
|
)
|
Other
|
|
6,045
|
|
|
407
|
|
|
2,042
|
|
Income tax expense on continuing operations
|
|
$
|
69,681
|
|
|
$
|
30,147
|
|
|
$
|
15,276
|
|
Effective income tax rate from continuing operations
|
|
26.0
|
%
|
|
18.2
|
%
|
|
23.3
|
%
|
_________________
|
|
(1)
|
Fully offset by a valuation allowance.
|
|
|
(2)
|
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.
|
|
|
(3)
|
The impact of 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%.
|
|
|
(4)
|
Includes the release of certain unrecognized tax benefits for which the accruals were greater than the amount assessed.
|
|
|
(5)
|
Nontaxable gain on assets related to the Company’s nonqualified Benefit Restoration Plan ("BRP").
|
In general, it has been the practice and intention of the Company to indefinitely reinvest earnings of non-U.S. subsidiaries. As a result of the deemed repatriation provisions of TCJA, our foreign earnings through December 31, 2017 were subject to U.S. taxation. As of August 31, 2019, the Company had undistributed earnings of its non-U.S. subsidiaries of approximately $623.5 million. The Company considers these undistributed earnings to be indefinitely reinvested in its foreign subsidiaries. However, as a result of the changes in U.S. taxation of dividends from foreign affiliates, the Company plans to repatriate future earnings from the International Mill segment. We expect that any incremental taxes associated with the future distribution of these earnings will be immaterial.
The Company’s income tax benefit from discontinued operations of $6.0 million for 2017 was largely due to tax benefits from net operating losses related to the exit of the International Marketing and Distribution segment.
The income tax effects of significant temporary differences giving rise to deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Net operating losses and credits
|
|
$
|
295,241
|
|
|
$
|
285,847
|
|
Deferred compensation and employee benefits
|
|
24,432
|
|
|
21,333
|
|
Reserves and other accrued expenses
|
|
40,296
|
|
|
12,704
|
|
Allowance for doubtful accounts
|
|
2,537
|
|
|
2,258
|
|
Inventory
|
|
8,446
|
|
|
974
|
|
Intangibles
|
|
480
|
|
|
906
|
|
Other
|
|
10,600
|
|
|
469
|
|
Total deferred tax assets
|
|
382,032
|
|
|
324,491
|
|
Valuation allowance for deferred tax assets
|
|
(283,560
|
)
|
|
(268,554
|
)
|
Deferred tax assets, net
|
|
98,472
|
|
|
55,937
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
|
168,701
|
|
|
83,879
|
|
Other
|
|
1,182
|
|
|
1,053
|
|
Total deferred tax liabilities
|
|
169,883
|
|
|
84,932
|
|
Net deferred tax liabilities
|
|
$
|
(71,411
|
)
|
|
$
|
(28,995
|
)
|
Net operating losses giving rise to deferred tax assets consist of $491.5 million of state net operating losses that expire during the tax years ending from 2020 to 2039 and foreign net operating losses of $820.8 million that expire in varying amounts beginning in 2020 (with certain amounts having indefinite carryforward periods). These assets will be reduced as income tax expense is recognized in future periods.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. The Company's valuation allowances primarily relate to net operating loss carryforwards in certain state and foreign jurisdictions and certain credit carryforwards for which utilization is uncertain.
A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Balance at September 1
|
|
$
|
3,121
|
|
|
$
|
9,283
|
|
|
$
|
9,522
|
|
Change for tax positions of prior years
|
|
5,531
|
|
|
3,121
|
|
|
—
|
|
Reductions due to settlements with taxing authorities
|
|
—
|
|
|
(8,028
|
)
|
|
(239
|
)
|
Reductions due to lapse of statute of limitations
|
|
—
|
|
|
(1,255
|
)
|
|
—
|
|
Balance at August 31 (1)
|
|
$
|
8,652
|
|
|
$
|
3,121
|
|
|
$
|
9,283
|
|
_________________
|
|
(1)
|
The full balance of unrecognized income tax benefits in each year, if recognized, would have impacted the Company’s effective income tax rate at the end of each respective year.
|
The Company's policy classifies interest and any statutory penalties recognized on a tax position as income tax expense. At August 31, 2019 and 2018, accrued interest and penalties related to uncertain tax positions was not material.
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, the Company and its subsidiaries are subject to examination by various taxing authorities. The Company is currently under examination with certain state revenue authorities for fiscal years 2015 through 2017. The following is a summary of all tax years that are open to examination.
U.S. Federal — 2016 and forward
U.S. States — 2015 and forward
Foreign — 2012 and forward
NOTE 15. STOCK-BASED COMPENSATION PLANS
The Company's stock-based compensation plans provide for the issuance of incentive and nonqualified stock options, restricted stock and units, stock appreciation rights and performance-based awards. The Compensation Committee of CMC's Board of Directors (the "Compensation Committee") approves all awards that are granted under the Company's stock-based compensation plans. Stock-based compensation expense for 2019, 2018 and 2017 of $25.1 million, $23.9 million and $30.3 million, respectively, was mainly included in selling, general and administrative expenses on the Company's consolidated statements of earnings. As of August 31, 2019, total unrecognized compensation cost related to unvested stock-based compensation arrangements was $15.9 million, which is expected to be recognized over a weighted-average period of three years.
The following table summarizes the total awards granted:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards/Units
|
|
Performance
Awards
|
2019 grants
|
|
889,238
|
|
|
483,984
|
|
2018 grants
|
|
667,341
|
|
|
367,514
|
|
2017 grants
|
|
1,303,976
|
|
|
576,286
|
|
As of August 31, 2019, the Company had 8,021,005 shares available for future grants.
Restricted Stock Units
Restricted stock units issued under the Company's stock-based compensation plans provide that units awarded may not be sold, transferred, pledged or assigned until service-based restrictions lapse. The restricted stock units granted to U.S. employees generally vest and are converted to shares of the Company's common stock in three equal installments on each of the first three anniversaries of the date of grant. The restricted stock units granted to non-U.S. employees generally vest and are settled in cash in three equal installments on each of the first three anniversaries of the date of grant. Generally, upon termination of employment, restricted stock units that have not vested are forfeited. Upon death, disability or qualifying retirement, a pro-rata portion of the unvested restricted stock awarded will vest and become payable.
The estimated fair value of the stock-settled restricted stock units is based on the closing price of the Company's common stock on the date of grant, discounted for the expected dividend yield through the vesting period. Compensation cost related to the stock-
settled restricted stock units is recognized ratably over the service period and is included in equity on the Company's consolidated balance sheets. During the first quarter of 2017, certain restricted stock units and performance stock units (the "modified stock units") that were previously accounted for under the equity method were modified to allow optionality related to the net share settlement feature, which resulted in accounting for these awards under the liability method. During the first quarter of 2018, the modified stock units were further modified, causing such units to revert back to equity method accounting. The liability related to the cash-settled restricted stock units and modified stock units was included in accrued expenses and other payables on the Company's consolidated balance sheets. The Company recorded mark-to-market income on liability-treated awards of $1.0 million for 2019, compared to expenses of $0.9 million and $2.8 million for 2018 and 2017, respectively, as a result of the modification and the impact of the change in stock value on liability-treated awards. The fair value of the cash-settled restricted stock units as well as the modified stock units is remeasured each reporting period and is recognized ratably over the service period.
Performance Stock Units
Performance stock units issued under the Company's stock-based compensation plans provide that units awarded may not be sold, transferred, pledged or assigned until service-based restrictions lapse and any performance objectives have been attained as established by the Compensation Committee. Recipients of these awards generally must be actively employed by and providing services to the Company on the last day of the performance period in order to receive an award payout. Upon death, disability or qualifying retirement, a pro-rata portion of the performance stock units will vest and become payable at the end of the performance period.
Compensation cost for performance stock units is accrued based on the probable outcome of specified performance conditions, net of estimated forfeitures. The Company accrues compensation cost if it is probable that the performance conditions will be met. The Company reassesses the probability of meeting the specified performance conditions at the end of each reporting period and adjusts compensation cost, as necessary, based on the probability of achieving the performance conditions. If the performance conditions are not met at the end of the performance period, the Company reverses the related compensation cost.
Performance targets established by the Compensation Committee for performance stock units awarded in 2019, 2018 and 2017 were weighted 75% based on the Company's cumulative EBITDA targets and positive return on invested capital for the fiscal year in which the awards were granted and the succeeding two fiscal years, as approved by CMC's Board of Directors in the respective year's business plan, and 25% based on a three year relative total stockholder return metric. Performance stock units awarded to U.S. participants will be settled in shares of the Company's common stock. Award payouts range from a threshold of 50% to a maximum of 200% for each portion of the target awards. The performance stock units awarded in 2019 and 2018 associated with the cumulative EBITDA targets have been classified as liability awards since the final EBITDA target will not be set until the third year of the performance period. Consequently, these awards were included in accrued expenses and other payables on the Company's consolidated balance sheets. The fair value of these performance stock units is remeasured each reporting period and is recognized ratably over the service period. The performance stock units associated with the total stockholder return metric were valued at fair value on the date of grant using the Monte Carlo pricing model and were included in equity on the Company's consolidated balance sheets.
Performance stock units awarded to non-U.S. participants in 2019 will be settled in stock while the performance stock units awarded to non-U.S. participants in 2018 and 2017 will be settled in cash. The fair value of the performance stock units is remeasured each reporting period and is recognized ratably over the service period. The liability related to these awards was included in accrued expenses and other payables on the Company's consolidated balance sheets.
Information for restricted stock units and performance stock units, excluding those expected to settle in cash, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted Average
Grant-Date
Fair Value
|
Outstanding as of September 1, 2016
|
|
2,700,230
|
|
|
$
|
16.49
|
|
Granted
|
|
1,462,442
|
|
|
16.17
|
|
Vested
|
|
(1,385,753
|
)
|
|
17.62
|
|
Forfeited
|
|
(323,339
|
)
|
|
16.58
|
|
Outstanding as of August 31, 2017
|
|
2,453,580
|
|
|
15.65
|
|
Granted
|
|
1,216,461
|
|
|
20.69
|
|
Vested
|
|
(1,685,898
|
)
|
|
18.00
|
|
Forfeited
|
|
(183,425
|
)
|
|
15.89
|
|
Outstanding as of August 31, 2018
|
|
1,800,718
|
|
|
16.82
|
|
Granted
|
|
1,505,449
|
|
|
17.75
|
|
Vested
|
|
(992,167
|
)
|
|
20.09
|
|
Forfeited
|
|
(34,432
|
)
|
|
17.90
|
|
Outstanding as of August 31, 2019
|
|
2,279,568
|
|
|
$
|
15.99
|
|
The total fair value of shares vested during 2019, 2018 and 2017 was $19.9 million, $30.3 million and $24.4 million, respectively.
The Company granted 374,281 and 322,695 equivalent shares of restricted stock units and performance stock units accounted for as liability awards during 2019 and 2018, respectively. As of August 31, 2019, the Company had 718,223 equivalent shares of awards outstanding and expects 683,921 equivalent shares to vest.
Stock Appreciation Rights
Stock appreciation rights are awarded to certain employees with an exercise price equal to the market value of the Company's common stock on the date of grant. No stock appreciation rights were granted during 2019, 2018 and 2017.
Combined activity for the Company's stock appreciation rights, excluding the cash component, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Aggregate
Intrinsic Value
|
Outstanding as of September 1, 2016
|
|
358,994
|
|
|
$
|
14.39
|
|
|
|
|
|
Exercised
|
|
(235,687
|
)
|
|
14.72
|
|
|
|
|
|
Forfeited/Expired
|
|
(14,000
|
)
|
|
14.05
|
|
|
|
|
|
Outstanding as of August 31, 2017
|
|
109,307
|
|
|
$
|
13.72
|
|
|
1.3
|
|
$
|
564,826
|
|
Exercised
|
|
(51,961
|
)
|
|
15.03
|
|
|
|
|
|
Forfeited/Expired
|
|
(9,107
|
)
|
|
13.17
|
|
|
|
|
|
Outstanding as of August 31, 2018
|
|
48,239
|
|
|
$
|
12.42
|
|
|
0.5
|
|
$
|
442,962
|
|
Exercised
|
|
(38,182
|
)
|
|
11.60
|
|
|
|
|
|
Forfeited/Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of August 31, 2019
|
|
10,057
|
|
|
$
|
14.12
|
|
|
0.2
|
|
$
|
15,588
|
|
Exercisable at August 31, 2019
|
|
10,057
|
|
|
$
|
14.12
|
|
|
0.2
|
|
$
|
15,588
|
|
Remaining unvested stock appreciation rights expected to vest
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
The total intrinsic value of stock appreciation rights exercised was immaterial for 2019, 2018 and 2017.
As of August 31, 2019, the Company had no equivalent shares of cash-settled stock appreciation rights outstanding.
Stock Purchase Plan
Almost all U.S. resident employees with one year of service at the beginning of each calendar year may participate in the Company's employee stock purchase plan. Each eligible employee may purchase up to 400 shares annually. The Board of Directors established a 15% purchase discount based on market prices on specified dates for 2019, 2018 and 2017. Yearly activity of the stock purchase plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Shares subscribed
|
|
446,950
|
|
|
289,040
|
|
|
173,420
|
|
Price per share
|
|
$
|
13.80
|
|
|
$
|
17.84
|
|
|
$
|
18.99
|
|
Shares purchased
|
|
226,860
|
|
|
123,930
|
|
|
166,220
|
|
Price per share
|
|
$
|
17.84
|
|
|
$
|
18.99
|
|
|
$
|
12.04
|
|
Shares available for future issuance
|
|
2,753,214
|
|
|
|
|
|
NOTE 16. EMPLOYEES' RETIREMENT PLANS
Substantially all employees in the U.S. are covered by a defined contribution 401(k) retirement plan. The tax qualified defined contribution plan is maintained, and contributions are made, in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Company also provides certain eligible executives benefits pursuant to its BRP equal to amounts that would have been available under the tax qualified ERISA plan, but were subject to the limitations of ERISA, tax laws and regulations. Company expenses for these plans, a portion of which are discretionary, are primarily recorded in both cost of goods sold and selling, general and administrative expenses, with an immaterial portion included in earnings (loss) from discontinued operations before income taxes, and totaled $32.9 million, $27.3 million and $28.3 million for 2019, 2018 and 2017, respectively.
The deferred compensation liability under the BRP was $45.7 million and $49.3 million at August 31, 2019 and 2018, respectively, with $39.9 million and $42.8 million, respectively, included in other long-term liabilities on the Company's consolidated balance sheets. At August 31, 2019 and 2018, $5.8 million and $6.5 million, respectively, of the deferred compensation liability related to the BRP was included in accrued expenses and other payables on the Company's consolidated balance sheets. Though under no obligation to fund the BRP, the Company has segregated assets in a trust with a current value of $56.3 million and $56.2 million at August 31, 2019 and 2018, respectively, and such assets were included in other long-term assets on the Company's consolidated balance sheets. The net holding gain on these segregated assets was $3.3 million, $9.3 million, and $7.5 million for 2019, 2018 and 2017, respectively, and was included in net sales in the Company's consolidated statements of earnings.
In 2019, the Company acquired certain assets, including a partially funded defined benefit pension plan, from Gerdau S.A., (the "Plan") as part of the Acquisition. Upon acquisition, the excess of projected Plan benefit obligations over the Plan assets was recognized as a liability and previously existing deferred actuarial gains and losses and unrecognized service costs or benefits were eliminated. Pension benefits associated with the Plan are generally based on each participant’s years of service, compensation, and age at retirement or termination. The Plan was closed to new participants prior to acquisition. The following tables include a reconciliation of the beginning and ending balances of pension benefit obligation and the fair value of plan assets as well as a summary of the related amounts recognized in the Company’s consolidated balance sheet as of August 31, 2019. No information is presented for prior periods as the Plan was acquired in 2019.
|
|
|
|
|
|
(in thousands)
|
|
2019
|
Benefit obligation at beginning of year
|
|
$
|
—
|
|
Acquisition
|
|
26,336
|
|
Service cost
|
|
354
|
|
Interest cost
|
|
926
|
|
Actuarial loss
|
|
4,883
|
|
Benefits paid
|
|
(838
|
)
|
Benefit obligation at end of year
|
|
$
|
31,661
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
Acquisition
|
|
21,023
|
|
Actual return on plan assets
|
|
2,887
|
|
Administrative expenses
|
|
(69
|
)
|
Employer contributions
|
|
432
|
|
Benefits paid
|
|
(838
|
)
|
Fair value of plan assets at end of year
|
|
23,435
|
|
Funded status at end of year (net liability recognized in balance sheet as of August 31)
|
|
$
|
(8,226
|
)
|
|
|
|
Amounts recognized in accumulated other comprehensive income as of August 31
|
|
|
Net actuarial loss
|
|
$
|
2,823
|
|
The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and compensation as of the measurement date and does not include an assumption about future compensation levels.
The service cost component of net periodic benefit cost is recorded in cost of goods sold. Components of net periodic benefit cost and other supplemental information are detailed below.
|
|
|
|
|
|
(in thousands)
|
|
2019
|
Service cost
|
|
$
|
354
|
|
Expected administrative expenses
|
|
250
|
|
Interest cost
|
|
926
|
|
Expected return on plan assets
|
|
(1,008
|
)
|
Total net periodic benefit cost
|
|
522
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income
|
|
|
Net actuarial loss arising during measurement period
|
|
2,823
|
|
Total recognized in other comprehensive income
|
|
2,823
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
3,345
|
|
Weighted-average assumptions used to determine benefit obligations as of August 31, 2019 are detailed below.
|
|
|
|
|
|
|
2019
|
Effective discount rate for benefit obligations
|
|
3.2
|
%
|
Weighted-average assumptions used to determine net periodic benefit cost for 2019 are detailed below.
|
|
|
|
|
|
|
2019
|
Effective rate for interest on benefit obligations
|
|
4.3
|
%
|
Effective rate for service cost
|
|
4.7
|
%
|
Expected long-term rate of return
|
|
6.0
|
%
|
The Company determines the discount rate used to measure plan liabilities as of the August 31 measurement date for the Plan, which is also the date used for the related annual measurement assumptions. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, corporate bonds that would produce cash flows sufficient in timing and amount to settle projected future benefits.
The Company measures service cost and interest cost separately using the full yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The full yield curve approach does not affect the measurement of the total benefit obligations.
The Company’s assumption for the expected return on plan assets was 6% in 2019. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking estimates. As of August 31, 2019, the Company’s expected long-term rate of return on plan assets for 2020 is 6%. The expected return assumption is based on the strategic asset allocation of the plan and long term capital market return expectations.
The Company expects to contribute $1.0 million to meet minimum cash funding requirements in 2020. Future contributions will depend on market conditions, interest rates and other factors.
Plan Assets
Plan assets consist primarily of public equity and corporate bonds. The principal investment objectives are to maximize total return without assuming undue risk exposure. Each asset class has broadly diversified characteristics. Asset and benefit obligation forecasting studies are conducted periodically, generally every two to three years, or when significant changes have occurred in market conditions, benefits, participant demographics or funded status.
The plan's weighted-average asset targets and actual allocations as a percentage of plan assets, including the notional exposure of future contracts by asset categories, are detailed below.
|
|
|
|
|
|
|
|
|
|
Pension Assets
|
|
|
Target Percent
|
|
2019
|
Fixed income securities
|
|
50%
|
—
|
55%
|
|
50.1%
|
Equity securities:
|
|
|
|
|
|
|
Domestic
|
|
25.0
|
—
|
30.0
|
|
26.0
|
International
|
|
10.0
|
—
|
15.0
|
|
12.7
|
Mutual funds
|
|
5.0
|
—
|
10.0
|
|
9.5
|
Cash
|
|
—
|
—
|
5.0
|
|
1.7
|
Total
|
|
|
|
|
|
100.0%
|
Investment Valuation
Investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
Investments in securities traded on a national securities exchange are valued at the last reported sales price on the final business day of the year.
Fixed income securities are valued at the yields currently available on comparable securities of issues with similar credit ratings.
Purchases and sales of securities are recorded as of the trade date. Realized gains and losses on sales of securities are determined based on average cost. Interest income is recognized on the accrual basis. Dividend income is recognized on the ex-dividend date.
Non-interest bearing cash is valued at cost, which approximates fair value.
Fair Value Measurements
See Note 13, Fair Value, for a discussion of fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The following table sets forth the plan assets by asset class as of August 31, 2019. All securities are traded on a national securities exchange and therefore are Level 1 assets in the fair value hierarchy.
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at Measurement Date
|
Asset Class
|
|
August 31, 2019
|
Fixed income securities
|
|
$
|
11,738
|
|
Equity securities:
|
|
|
Domestic
|
|
6,090
|
|
International
|
|
2,981
|
|
Mutual funds
|
|
2,232
|
|
Total equity securities
|
|
11,303
|
|
Cash
|
|
411
|
|
Total
|
|
23,452
|
|
Other
|
|
(17
|
)
|
Fair value of plan assets
|
|
$
|
23,435
|
|
Future Pension Benefit Payments
The table provides the estimated pension benefit payments that are payable from the plans to participants in the following years:
|
|
|
|
|
|
Year Ended August 31,
|
|
(in thousands)
|
2020
|
|
$
|
1,265
|
|
2021
|
|
1,343
|
|
2022
|
|
1,408
|
|
2023
|
|
1,464
|
|
2024
|
|
1,515
|
|
Next five years
|
|
8,146
|
|
NOTE 17. CAPITAL STOCK
Treasury Stock
During the first quarter of 2015, the Board of Directors authorized a share repurchase program under which the Company may repurchase up to $100.0 million of the Company's common stock. The share repurchase program does not require the Company to acquire any dollar amount or number of shares of common stock and may be modified, suspended, extended or terminated at any time without prior notice. During 2019, 2018 and 2017, the Company did not purchase any shares of common stock. The Company had remaining authorization to purchase $27.6 million of common stock at August 31, 2019.
Preferred Stock
The Company has 2,000,000,000 shares of preferred stock, par value of $1.00 per share, authorized. The Company may issue preferred stock in series, and the shares of each series may have such rights and preferences as are fixed by the Board of Directors when authorizing the issuance of that particular series. There are no shares of preferred stock outstanding.
NOTE 18. EARNINGS PER SHARE
The calculations of basic and diluted earnings per share from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
|
$
|
198,779
|
|
|
$
|
135,237
|
|
|
$
|
50,175
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,834,558
|
|
|
116,822,583
|
|
|
115,654,466
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
|
|
$
|
1.69
|
|
|
$
|
1.16
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
117,834,558
|
|
|
116,822,583
|
|
|
115,654,466
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock-based incentive/purchase plans
|
|
1,290,070
|
|
|
1,323,265
|
|
|
1,709,942
|
|
Shares outstanding for diluted earnings per share
|
|
119,124,628
|
|
|
118,145,848
|
|
|
117,364,408
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
1.67
|
|
|
$
|
1.14
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not included above
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares of the Company's restricted stock are included in the number of shares of common stock issued and outstanding, but omitted from the basic earnings per share calculation until the shares vest.
NOTE 19. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has operating leases with varying terms principally relating to transportation, real estate and equipment. Certain of the Company's lease agreements include renewal options to extend the agreements and certain leases include escalation clauses and/or purchase options. These leases do not contain any financial covenants for the Company. Minimum lease commitments payable by the Company for noncancelable operating leases are as follows:
|
|
|
|
|
|
Year Ending August 31,
|
|
(in thousands)
|
2020
|
|
$
|
34,511
|
|
2021
|
|
27,383
|
|
2022
|
|
22,074
|
|
2023
|
|
17,433
|
|
2024
|
|
10,478
|
|
Thereafter
|
|
12,938
|
|
Total
|
|
$
|
124,817
|
|
Total rental expense was $58.2 million, $38.0 million and $37.3 million in 2019, 2018 and 2017, respectively.
See Note 2, Summary of Significant Accounting Policies, for discussion on the impact of adopting ASU 2016-02, Leases, to the consolidated financial statements in 2020.
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.
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 statutes 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 August 31, 2019 and 2018, the Company had $0.7 million 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 $3.6 million and $4.0 million as of August 31, 2019 and 2018, respectively, of which $1.8 million and $1.9 million were classified as other long-term liabilities as of August 31, 2019 and 2018, respectively. 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 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 20. ACCRUED EXPENSES AND OTHER PAYABLES
Significant accrued expenses and other payables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Salaries and incentive compensation
|
|
$
|
133,705
|
|
|
$
|
106,123
|
|
Advance billings on contracts
|
|
41,631
|
|
|
7,109
|
|
Taxes other than income taxes
|
|
38,660
|
|
|
26,946
|
|
Worker's compensation and general liability insurance
|
|
38,485
|
|
|
23,462
|
|
NOTE 21. 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 four reporting segments: Americas Recycling, Americas Mills, Americas Fabrication and International Mill. See Note 1, Nature of Operations, for more information about the reporting segments, including the types of products and services from which each reporting segment derives its net sales.
During 2018, the Company substantially completed the exit of the International Marketing and Distribution segment. See Note 4, 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, were included in continuing operations for all periods presented. These activities were included in the results of Corporate and Other, and were immaterial in 2018. Corporate and Other contains earnings or losses on assets and liabilities related to the Company's BRP and short-term investments, expenses of the Company's corporate headquarters, interest expense related to its long-term debt and intercompany eliminations.
The Company uses adjusted EBITDA from continuing operations to compare and evaluate the financial performance of its segments. Adjusted EBITDA is the sum of the Company's earnings from continuing operations before interest expense, income taxes, depreciation and amortization expense, and impairment expense. 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.
The following table summarizes certain financial information from continuing operations by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Americas Recycling
|
|
Americas Mills
|
|
Americas Fabrication
|
|
International Mill
|
|
Corporate and Other
|
|
Continuing Operations
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales-unaffiliated customers
|
|
$
|
908,451
|
|
|
$
|
1,882,994
|
|
|
$
|
2,209,671
|
|
|
$
|
815,723
|
|
|
$
|
12,163
|
|
|
$
|
5,829,002
|
|
Intersegment sales
|
|
238,095
|
|
|
1,185,280
|
|
|
13,708
|
|
|
1,325
|
|
|
(1,438,408
|
)
|
|
—
|
|
Net sales
|
|
1,146,546
|
|
|
3,068,274
|
|
|
2,223,379
|
|
|
817,048
|
|
|
(1,426,245
|
)
|
|
5,829,002
|
|
Adjusted EBITDA
|
|
42,124
|
|
|
545,215
|
|
|
(123,014
|
)
|
|
100,102
|
|
|
(140,342
|
)
|
|
424,085
|
|
Interest expense*
|
|
3,097
|
|
|
16,186
|
|
|
27,656
|
|
|
2,493
|
|
|
21,941
|
|
|
71,373
|
|
Capital expenditures
|
|
22,560
|
|
|
54,069
|
|
|
12,490
|
|
|
40,337
|
|
|
9,380
|
|
|
138,836
|
|
Depreciation and amortization
|
|
16,825
|
|
|
91,326
|
|
|
17,567
|
|
|
25,993
|
|
|
6,941
|
|
|
158,652
|
|
Impairment of assets
|
|
—
|
|
|
—
|
|
|
369
|
|
|
15
|
|
|
—
|
|
|
384
|
|
Total assets**
|
|
257,517
|
|
|
1,667,366
|
|
|
1,106,420
|
|
|
464,177
|
|
|
263,291
|
|
|
3,758,771
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales-unaffiliated customers
|
|
$
|
1,117,714
|
|
|
$
|
1,204,181
|
|
|
$
|
1,416,572
|
|
|
$
|
885,919
|
|
|
$
|
19,337
|
|
|
$
|
4,643,723
|
|
Intersegment sales
|
|
247,715
|
|
|
792,722
|
|
|
11,310
|
|
|
1,119
|
|
|
(1,052,866
|
)
|
|
—
|
|
Net sales
|
|
1,365,429
|
|
|
1,996,903
|
|
|
1,427,882
|
|
|
887,038
|
|
|
(1,033,529
|
)
|
|
4,643,723
|
|
Adjusted EBITDA
|
|
68,694
|
|
|
301,805
|
|
|
(39,394
|
)
|
|
131,720
|
|
|
(110,604
|
)
|
|
352,221
|
|
Interest expense*
|
|
3,605
|
|
|
5,317
|
|
|
14,295
|
|
|
2,699
|
|
|
15,041
|
|
|
40,957
|
|
Capital expenditures
|
|
8,592
|
|
|
121,029
|
|
|
14,386
|
|
|
23,552
|
|
|
3,808
|
|
|
171,367
|
|
Depreciation and amortization
|
|
17,246
|
|
|
61,512
|
|
|
13,537
|
|
|
27,255
|
|
|
11,958
|
|
|
131,508
|
|
Impairment of assets
|
|
180
|
|
|
8
|
|
|
14,157
|
|
|
27
|
|
|
—
|
|
|
14,372
|
|
Total assets**
|
|
291,838
|
|
|
1,115,339
|
|
|
739,151
|
|
|
485,548
|
|
|
696,428
|
|
|
3,328,304
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales-unaffiliated customers
|
|
$
|
865,462
|
|
|
$
|
917,689
|
|
|
$
|
1,364,826
|
|
|
$
|
636,402
|
|
|
$
|
59,690
|
|
|
$
|
3,844,069
|
|
Intersegment sales
|
|
146,038
|
|
|
647,765
|
|
|
11,102
|
|
|
871
|
|
|
(805,776
|
)
|
|
—
|
|
Net sales
|
|
1,011,500
|
|
|
1,565,454
|
|
|
1,375,928
|
|
|
637,273
|
|
|
(746,086
|
)
|
|
3,844,069
|
|
Adjusted EBITDA
|
|
33,541
|
|
|
224,183
|
|
|
27,259
|
|
|
76,068
|
|
|
(125,229
|
)
|
|
235,822
|
|
Interest expense*
|
|
2,979
|
|
|
(3,394
|
)
|
|
9,899
|
|
|
3,079
|
|
|
31,588
|
|
|
44,151
|
|
Capital expenditures
|
|
7,148
|
|
|
172,738
|
|
|
15,495
|
|
|
12,603
|
|
|
5,090
|
|
|
213,074
|
|
Depreciation and amortization
|
|
15,501
|
|
|
49,419
|
|
|
13,400
|
|
|
25,830
|
|
|
20,340
|
|
|
124,490
|
|
Impairment of assets
|
|
559
|
|
|
—
|
|
|
—
|
|
|
150
|
|
|
1,021
|
|
|
1,730
|
|
Total assets**
|
|
240,371
|
|
|
933,022
|
|
|
683,609
|
|
|
464,428
|
|
|
653,701
|
|
|
2,975,131
|
|
________________________
* Includes intercompany interest expense (income) in the segments, which is eliminated within Corporate and Other.
** Total assets listed in Corporate and Other includes assets from discontinued operations.
The following table presents a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Earnings from continuing operations
|
|
$
|
198,779
|
|
|
$
|
135,237
|
|
|
$
|
50,175
|
|
Interest expense
|
|
71,373
|
|
|
40,957
|
|
|
44,151
|
|
Income taxes
|
|
69,681
|
|
|
30,147
|
|
|
15,276
|
|
Depreciation and amortization
|
|
158,652
|
|
|
131,508
|
|
|
124,490
|
|
Amortization of acquired unfavorable contract backlog
|
|
(74,784
|
)
|
|
—
|
|
|
—
|
|
Impairment of assets
|
|
384
|
|
|
14,372
|
|
|
1,730
|
|
Adjusted EBITDA from continuing operations
|
|
$
|
424,085
|
|
|
$
|
352,221
|
|
|
$
|
235,822
|
|
The following table present the Company's external net sales from continuing operations by major geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
Geographic area:
|
|
|
|
|
|
|
North America
|
|
$
|
4,843,985
|
|
|
$
|
3,535,499
|
|
|
$
|
3,015,481
|
|
Europe
|
|
833,627
|
|
|
892,452
|
|
|
666,396
|
|
Asia and other
|
|
151,390
|
|
|
215,772
|
|
|
162,192
|
|
Net sales
|
|
$
|
5,829,002
|
|
|
$
|
4,643,723
|
|
|
$
|
3,844,069
|
|
The following table presents long-lived assets, net of accumulated depreciation and amortization, by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
1,426,131
|
|
|
$
|
1,001,102
|
|
|
$
|
971,881
|
|
Europe and other
|
|
173,087
|
|
|
171,505
|
|
|
187,995
|
|
Total long-lived assets
|
|
$
|
1,599,218
|
|
|
$
|
1,172,607
|
|
|
$
|
1,159,876
|
|
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Fiscal 2019
|
(in thousands except per share data)
|
|
Nov. 30
|
|
Feb. 28
|
|
May 31
|
|
Aug. 31
|
Net sales*
|
|
$
|
1,277,342
|
|
|
$
|
1,402,783
|
|
|
$
|
1,605,872
|
|
|
$
|
1,543,005
|
|
Gross profit*
|
|
158,909
|
|
|
150,290
|
|
|
241,630
|
|
|
252,659
|
|
Net earnings from continuing operations
|
|
19,420
|
|
|
14,928
|
|
|
78,551
|
|
|
85,880
|
|
Net earnings
|
|
19,742
|
|
|
13,850
|
|
|
78,390
|
|
|
86,111
|
|
Basic EPS from continuing operations
|
|
0.17
|
|
|
0.13
|
|
|
0.67
|
|
|
0.73
|
|
Diluted EPS from continuing operations
|
|
0.16
|
|
|
0.13
|
|
|
0.66
|
|
|
0.72
|
|
Basic EPS
|
|
0.17
|
|
|
0.12
|
|
|
0.66
|
|
|
0.73
|
|
Diluted EPS
|
|
0.17
|
|
|
0.12
|
|
|
0.66
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Fiscal 2018
|
(in thousands except per share data)
|
|
Nov. 30
|
|
Feb. 28
|
|
May 31
|
|
Aug. 31
|
Net sales*
|
|
$
|
1,076,533
|
|
|
$
|
1,054,268
|
|
|
$
|
1,204,484
|
|
|
$
|
1,308,438
|
|
Gross profit*
|
|
143,017
|
|
|
127,167
|
|
|
168,570
|
|
|
183,411
|
|
Net earnings from continuing operations
|
|
31,871
|
|
|
9,781
|
|
|
42,325
|
|
|
51,260
|
|
Net earnings
|
|
36,810
|
|
|
10,169
|
|
|
39,965
|
|
|
51,560
|
|
Basic EPS from continuing operations
|
|
0.27
|
|
|
0.08
|
|
|
0.36
|
|
|
0.44
|
|
Diluted EPS from continuing operations
|
|
0.27
|
|
|
0.08
|
|
|
0.36
|
|
|
0.43
|
|
Basic EPS
|
|
0.32
|
|
|
0.09
|
|
|
0.34
|
|
|
0.44
|
|
Diluted EPS
|
|
0.31
|
|
|
0.09
|
|
|
0.34
|
|
|
0.44
|
|
_________________________
*Excludes discontinued operations.