Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
___________________________________
 
Delaware
75-0725338
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas 75039
(Address of Principal Executive Offices) (Zip Code)
(214) 689-4300
(Registrant's Telephone Number, Including Area Code)
 ___________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of common stock as of June 24, 2016 was 114,628,588.


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands, except share data)
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
1,227,390

 
$
1,506,002

 
$
3,401,946


$
4,577,109

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,051,910

 
1,313,854

 
2,934,028


4,057,963

Selling, general and administrative expenses
 
114,841

 
110,347

 
310,667


333,332

Loss on debt extinguishment
 
115

 
—

 
11,480

 
—

Interest expense
 
14,737

 
20,519

 
49,666

 
58,828

 
 
1,181,603

 
1,444,720

 
3,305,841


4,450,123

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
45,787

 
61,282

 
96,105


126,986

Income taxes
 
10,676

 
22,126

 
24,512


40,100

Earnings from continuing operations
 
35,111

 
39,156

 
71,593


86,886

 
 
 
 
 
 





Loss from discontinued operations before income tax benefit
 
(15,785
)
 
(10,871
)
 
(16,803
)

(20,241
)
Income tax benefit
 
(2
)
 
(424
)
 
(103
)

(445
)
Loss from discontinued operations
 
(15,783
)
 
(10,447
)
 
(16,700
)

(19,796
)
 
 
 
 
 
 





Net earnings
 
19,328

 
28,709

 
54,893


67,090

Less net earnings attributable to noncontrolling interests
 
—

 
—

 
—


—

Net earnings attributable to CMC
 
$
19,328

 
$
28,709

 
$
54,893


$
67,090

 
 
 
 
 
 



Basic earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.31

 
$
0.34

 
$
0.62


$
0.74

Loss from discontinued operations
 
(0.14
)
 
(0.09
)
 
(0.14
)

(0.17
)
Net earnings
 
$
0.17

 
$
0.25

 
$
0.48


$
0.57

 
 
 
 
 
 



Diluted earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.30

 
$
0.34

 
$
0.61


$
0.74

Loss from discontinued operations
 
(0.13
)
 
(0.09
)
 
(0.14
)

(0.17
)
Net earnings
 
$
0.17

 
$
0.25

 
$
0.47


$
0.57

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.36


$
0.36

Average basic shares outstanding
 
114,677,109

 
115,742,534

 
115,373,736


116,807,469

Average diluted shares outstanding
 
115,995,515

 
116,759,215

 
116,758,716


117,871,228

See notes to unaudited condensed consolidated financial statements.

3




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 
Three Months Ended May 31,

Nine Months Ended May 31,
(in thousands)
 
2016

2015

2016

2015
Net earnings
 
$
19,328


$
28,709


$
54,893


$
67,090

Other comprehensive income (loss), net of income taxes:
 







Foreign currency translation adjustment and other
 
3,817


(4,588
)

(13,967
)

(75,851
)
Net unrealized gain (loss) on derivatives:
 











Unrealized holding gain (loss), net of income taxes of $0, $(55), $74, and $(1,178)
 
(16
)

54


469


(2,371
)
Reclassification for (gain) loss included in net earnings, net of income taxes of $(11), $469, $(88), and $886
 
32


804


(142
)

1,570

Net unrealized gain (loss) on derivatives, net of income taxes of $(11), $414, $(14), and $(292)
 
16


858


327


(801
)
Defined benefit obligation:
 











Net gain, net of income taxes of $0, $0, $0, and $4
 
—


—


—


8

Amortization of prior services, net of income taxes of $0, $(1), $(1), and $(2)
 
(2
)

(3
)

(5
)

(9
)
Defined benefit obligation, net of income taxes of $0, $(1), $(1), and $2
 
(2
)

(3
)

(5
)

(1
)
Other comprehensive income (loss)
 
3,831


(3,733
)

(13,645
)

(76,653
)
Comprehensive income (loss)
 
$
23,159


$
24,976


$
41,248


$
(9,563
)
See notes to unaudited condensed consolidated financial statements.

4



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
May 31, 2016
 
August 31, 2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
483,855

 
$
485,323

Accounts receivable (less allowance for doubtful accounts of $7,544 and $9,033)
 
740,283

 
900,619

Inventories, net
 
661,563

 
880,484

Current deferred tax assets
 
—

 
3,310

Other current assets
 
144,967

 
93,643

Assets of businesses held for sale
 
587

 
17,008

Total current assets
 
2,031,255

 
2,380,387

Property, plant and equipment:
 
 
 
 
Land
 
74,999

 
75,086

Buildings and improvements
 
504,712

 
489,500

Equipment
 
1,680,657

 
1,670,755

Construction in process
 
82,532

 
59,241


 
2,342,900

 
2,294,582

Less accumulated depreciation and amortization
 
(1,452,815
)
 
(1,410,932
)

 
890,085

 
883,650

Goodwill
 
66,333

 
66,383

Other noncurrent assets
 
123,013

 
115,168

Total assets
 
$
3,110,686

 
$
3,445,588

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
235,385

 
$
260,984

Accounts payable-documentary letters of credit
 
1,327

 
41,473

Accrued expenses and other payables
 
236,009

 
290,677

Notes payable
 
—

 
20,090

Current maturities of long-term debt
 
10,929

 
10,110

Liabilities of businesses held for sale
 
3,704

 
5,276

Total current liabilities
 
487,354

 
628,610

Deferred income taxes
 
76,340

 
55,803

Other long-term liabilities
 
115,837

 
101,919

Long-term debt
 
1,067,693

 
1,277,882

Total liabilities
 
1,747,224

 
2,064,214

Commitments and contingencies (Note 14)
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 114,626,598 and 115,635,338 shares
 
1,290

 
1,290

Additional paid-in capital
 
355,311

 
365,863

Accumulated other comprehensive loss
 
(127,180
)
 
(113,535
)
Retained earnings
 
1,386,875

 
1,373,568

Less treasury stock, 14,434,066 and 13,425,326 shares at cost
 
(252,993
)
 
(245,961
)
Stockholders' equity attributable to CMC
 
1,363,303

 
1,381,225

Stockholders' equity attributable to noncontrolling interests
 
159

 
149

Total stockholders' equity
 
1,363,462

 
1,381,374

Total liabilities and stockholders' equity
 
$
3,110,686

 
$
3,445,588

See notes to unaudited condensed consolidated financial statements.

5



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended May 31,
(in thousands)
 
2016
 
2015
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
54,893

 
$
67,090

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
95,423

 
99,829

Provision for losses on receivables, net
 
3,748

 
2,525

Stock-based compensation
 
19,889

 
18,288

Amortization of interest rate swaps termination gain
 
(5,698
)
 
(5,698
)
Loss on debt extinguishment
 
11,480

 
—

Deferred income taxes
 
9,744

 
(19,594
)
Tax benefit from stock plans
 
(666
)
 
(122
)
Net gain on sale of assets and other
 
(1,802
)
 
(1,737
)
Write-down of inventories
 
9,567

 
21,535

Asset impairment
 
15,842

 
3,390

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
146,166

 
90,412

Advance payments on sale of accounts receivable program, net
 
1,473

 
(98,033
)
Inventories
 
205,717

 
2,934

Other assets
 
(6,729
)
 
11,636

Accounts payable, accrued expenses and other payables
 
(64,676
)
 
(128,065
)
Other long-term liabilities
 
12,497

 
(5,601
)
Net cash flows from operating activities
 
506,868

 
58,789

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(104,481
)
 
(75,976
)
Increase in restricted cash
 
(49,094
)
 
—

Proceeds from the sale of property, plant and equipment and other
 
3,470

 
10,143

Proceeds from the sale of subsidiaries
 
—

 
2,354

Net cash flows used by investing activities
 
(150,105
)
 
(63,479
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Repayments on long-term debt
 
(208,605
)
 
(8,038
)
Cash dividends
 
(41,586
)
 
(42,073
)
Increase (decrease) in documentary letters of credit, net
 
(40,145
)
 
51,722

Treasury stock acquired
 
(30,595
)
 
(41,806
)
Short-term borrowings, net change
 
(20,090
)
 
(7,492
)
Debt extinguishment costs
 
(11,127
)
 
—

Stock issued under incentive and purchase plans, net of forfeitures
 
(6,036
)
 
(1,389
)
Decrease in restricted cash
 
1

 
3,630

Contribution from noncontrolling interests
 
29

 
38

Tax benefit from stock plans
 
666

 
122

Net cash flows used by financing activities
 
(357,488
)
 
(45,286
)
Effect of exchange rate changes on cash
 
(743
)
 
(3,943
)
Decrease in cash and cash equivalents
 
(1,468
)
 
(53,919
)
Cash and cash equivalents at beginning of year
 
485,323

 
434,925

Cash and cash equivalents at end of period
 
$
483,855

 
$
381,006

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
18,066

 
$
11,882

See notes to unaudited condensed consolidated financial statements.

6



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2014
129,060,664

$
1,290

$
359,338

$
(19,509
)
$
1,350,070

(11,231,402
)
$
(218,494
)
$
111

$
1,472,806

Net earnings
 
 
 
 
67,090

 
 
 
67,090

Other comprehensive loss
 
 
 
(76,653
)
 
 
 
 
(76,653
)
Cash dividends ($0.36 per share)
 
 
 
 
(42,073
)
 
 
 
(42,073
)
Treasury stock acquired
 
 
 
 
 
(2,902,218
)
(41,806
)
 
(41,806
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(15,077
)
 
 
673,993

13,688

 
(1,389
)
Stock-based compensation
 
 
15,127

 
 
 
 
 

15,127

Tax benefit from stock plans
 
 
122

 
 
 
 
 

122

Contribution of noncontrolling interest
 
 
 
 
 
 
 
38

38

Reclassification of share-based liability awards
 
 
3,948

 
 
 
 
 
3,948

Balance, May 31, 2015
129,060,664

$
1,290

$
363,458

$
(96,162
)
$
1,375,087

(13,459,627
)
$
(246,612
)
$
149

$
1,397,210

 
 
 
 
 
 
 
 
 
 
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2015
129,060,664

$
1,290

$
365,863

$
(113,535
)
$
1,373,568

(13,425,326
)
$
(245,961
)
$
149

$
1,381,374

Net earnings
 
 
 
 
54,893

 
 
 
54,893

Other comprehensive loss
 
 
 
(13,645
)
 
 
 
 
(13,645
)
Cash dividends ($0.36 per share)
 
 
 
 
(41,586
)
 
 
 
(41,586
)
Treasury stock acquired
 
 
 
 
 
(2,255,069
)
(30,595
)
 
(30,595
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(29,599
)
 
 
1,246,329

23,563

 
(6,036
)
Stock-based compensation
 
 
15,327

 
 
 
 
 
15,327

Tax benefit from stock plans
 
 
666

 
 
 
 
 
666

Contribution of noncontrolling interest
 
 
19

 
 
 
 
10

29

Reclassification of share-based liability awards
 
 
3,035

 
 
 
 
 
3,035

Balance, May 31, 2016
129,060,664

$
1,290

$
355,311

$
(127,180
)
$
1,386,875

(14,434,066
)
$
(252,993
)
$
159

$
1,363,462

See notes to unaudited condensed consolidated financial statements.

7




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES

Accounting Principles
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the fiscal year ended August 31, 2015 filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the condensed consolidated balance sheets and the condensed consolidated statements of earnings, comprehensive income (loss), cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2015. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for the full year.

As discussed in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2015, the Company evaluates the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations, also known as a triggering event. Based on margin and volume pressure in the Americas Recycling segment, during the third quarter of fiscal 2016, the Company considered a triggering event to have occurred. As a result, the Company reviewed the undiscounted future cash flows for certain Americas Recycling long-lived asset groups. The results of the undiscounted future cash flow analyses indicated the carrying amounts for all long-lived asset groups subject to testing were expected to be recovered, with the exception of two long-lived asset groups. Fair value for these two long-lived asset groups was then estimated and compared to the carrying values of the long-lived asset groups, which resulted in no impairment for the current fiscal quarter. However, it is reasonably possible that market conditions could remain flat or deteriorate further, resulting in impairment of the carrying values of certain Americas Recycling long-lived assets. The primary factors that may affect estimates of future cash flows are (i) management's scrap price outlook, (ii) scrap demand, (iii) working capital changes, (iv) capital expenditures and (v) selling, general and administrative expenses.

In the first quarter of fiscal 2016, the Company elected to change its accounting method for valuing its U.S. inventories that used the last-in, first-out ("LIFO") method to the weighted average cost method for its Americas Mills, Americas Recycling, and Americas Fabrication segments and to the specific identification method for its steel trading division headquartered in the U.S. in its International Marketing and Distribution segment. At September 1, 2015, 51% of the Company's total net inventories were valued using LIFO. The Company believes the changes are preferable because weighted average cost or specific identification (1) results in better matching of revenues and expenses and better reflects the current value of inventory in the Company's consolidated balance sheet, (2) more closely aligns with the physical flow of these inventories, (3) are the methods the Company uses to monitor the financial results of these segments and this division for operational and financial planning, (4) eliminates the manual LIFO calculation and quarterly LIFO estimation process resulting in greater precision in determining quarterly cost of goods sold and inventory balances and reducing the administrative burden to report inventories because the information systems calculate inventory using the weighted average cost or the specific identification methods, and (5) improves comparability with the Company's peers. Additionally, the Company believes that the change to using weighted average cost at its Americas Mills, Americas Recycling, and Americas Fabrication segments increases consistency in inventory costing as its International Mill segment currently uses the weighted average cost method. The Company applied this change in accounting principle retrospectively to all prior periods presented herein. The cumulative effect of these accounting changes resulted in a $124.2 million increase in retained earnings as of September 1, 2014.

Additionally, in the first quarter of fiscal 2016, the Company elected to change its accounting method for valuing its inventories in its International Marketing and Distribution segment, except for its steel trading division headquartered in the U.S., from the first-in, first-out ("FIFO") method to the specific identification method. At September 1, 2015, 38% of the Company's total net inventories were valued using the FIFO method. The Company believes the change from FIFO to specific identification is preferable because it (1) results in better matching of revenues with expenses, (2) more closely aligns with the physical flow of these inventories, and (3) is the method the Company uses to monitor the financial results of the segment for operational and financial planning. Because this change in accounting principle was immaterial in all prior periods, it was not applied retrospectively. The change did not have a material impact on our condensed consolidated financial statements as of and for the three and nine months ended May 31, 2016.

8




As a result of the retrospective application of the change in accounting principle from LIFO to weighted average cost or specific identification, certain financial statement line items in the Company's condensed consolidated balance sheet as of August 31, 2015 and its condensed consolidated statements of earnings for the three and nine months ended May 31, 2015 and condensed consolidated statement of cash flows for the nine months ended May 31, 2015 were adjusted as presented below.

(in thousands, except share data)
 
As Originally Reported
 
Effect of Change
 
As Adjusted
Condensed Consolidated Statement of Earnings for the three months ended May 31, 2015:
Cost of goods sold
 
$
1,270,044

 
$
43,810

 
$
1,313,854

Income taxes
 
37,964

 
(15,838
)
 
22,126

Earnings from continuing operations
67,128

 
(27,972
)
 
39,156

Net earnings attributable to CMC
56,681

 
(27,972
)
 
28,709

 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
 
 
 
 
Earnings from continuing operations
$
0.58

 
$
(0.24
)
 
$
0.34

Net earnings
 
0.49

 
(0.24
)
 
0.25

 
 
 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
 
 
 
 
Earnings from continuing operations
$
0.58

 
$
(0.24
)
 
$
0.34

Net earnings
 
0.49

 
(0.24
)
 
0.25

 
 
 
 
 
 
 
Condensed Consolidated Statement of Earnings for the nine months ended May 31, 2015:
Cost of goods sold
 
$
3,933,516

 
$
124,447

 
$
4,057,963

Income taxes
 
84,252

 
(44,152
)
 
40,100

Earnings from continuing operations
167,181

 
(80,295
)
 
86,886

Net earnings attributable to CMC
147,385

 
(80,295
)
 
67,090

 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
 
 
 
 
Earnings from continuing operations
$
1.43

 
$
(0.69
)
 
$
0.74

Net earnings
 
1.26

 
(0.69
)
 
0.57

 
 
 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
 
 
 
 
Earnings from continuing operations
$
1.42

 
$
(0.68
)
 
$
0.74

Net earnings
 
1.25

 
(0.68
)
 
0.57

 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet as of August 31, 2015:
Inventories, net
 
$
781,371

 
$
99,113

 
$
880,484

Current deferred tax assets
29,137

 
(25,827
)
 
3,310

Accrued expenses and other payables
279,415

 
11,262

 
290,677

Retained earnings
1,311,544

 
62,024

 
1,373,568

 
 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows for the nine months ended May 31, 2015:
Net earnings
$
147,385

 
$
(80,295
)
 
$
67,090

Deferred income taxes
26,396

 
(45,990
)
 
(19,594
)
Inventories working capital change
(111,675
)
 
114,609

 
2,934

Accounts payable, accrued expenses and other payables working capital change
(129,322
)
 
1,257

 
(128,065
)
The effect of the change in accounting principle is net of the effect of lower of cost or market adjustments.

9



The following table shows the effect of the change in accounting principle from LIFO to weighted average cost or specific identification on earnings from continuing operations, net earnings attributable to CMC and the related basic and diluted earnings per share attributable to CMC for the three and nine months ended May 31, 2016.

(in thousands, except share data)
 
As Computed Under LIFO
 
As Reported Under New Inventory Costing Methodologies
 
Effect of Change
Condensed Consolidated Statement of Earnings for the three months ended May 31, 2016:
Earnings from continuing operations
 
$
34,121

 
$
35,111

 
$
990

Net earnings attributable to CMC
 
18,338

 
19,328

 
990

 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
 
 
 
 
 
Earnings from continuing operations
 
$
0.30

 
$
0.31

 
$
0.01

Net earnings
 
0.16

 
0.17

 
0.01

 
 
 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
 
 
 
 
 
Earnings from continuing operations
 
$
0.29

 
$
0.30

 
$
0.01

Net earnings
 
0.16

 
0.17

 
0.01

 
 
 
 
 
 
 
Condensed Consolidated Statement of Earnings for the nine months ended May 31, 2016:
Earnings from continuing operations
 
$
99,843

 
$
71,593

 
$
(28,250
)
Net earnings attributable to CMC
 
83,143

 
54,893

 
(28,250
)
 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
 
 
 
 
 
Earnings from continuing operations
 
$
0.86

 
$
0.62

 
$
(0.24
)
Net earnings
 
0.72

 
0.48

 
(0.24
)
 
 
 
 
 
 
 
Diluted earnings per share attributable to CMC:
 
 
 
 
 
 
Earnings from continuing operations
 
$
0.85

 
$
0.61

 
$
(0.24
)
Net earnings
 
0.71

 
0.47

 
(0.24
)

Recently Adopted Accounting Pronouncements

In the second quarter of fiscal 2016, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This change in accounting principle simplifies the presentation of deferred income taxes. This change was applied prospectively and prior periods presented were not adjusted.

In the first quarter of fiscal 2016, the Company adopted guidance issued by the FASB changing the requirements for reporting discontinued operations if the disposal of a component of an entity, or a group of components of an entity, represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The guidance requires expanded disclosures for discontinued operations and also requires entities to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The guidance changed the Company's practice of assessing discontinued operations and the presentation and disclosure in the Company's condensed consolidated financial statements. The guidance was adopted on a prospective basis.

In the first quarter of fiscal 2016, the Company adopted guidance issued by the FASB requiring entities to measure inventory, other than that measured using LIFO or the retail inventory method, at the lower of cost or net realizable value, which is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance changes the Company's practice of measuring inventory at the lower of cost or market, which included net realizable value, replacement cost and net realizable value plus normal profit margin. The guidance was adopted on a prospective basis.


10



Recently Issued Accounting Pronouncements

In March 2016, the FASB issued guidance simplifying several aspects of accounting for share-based payment transactions, including recognizing excess tax benefits and deficiencies as income tax expense or benefit in the statement of earnings, classifying excess tax benefits and expenses as an operating activity within the statement of cash flows, and an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur. The provisions of this guidance related to excess tax benefits and deficiencies are to be applied on a prospective basis. If elected, the provisions of this guidance related to forfeitures are to be applied using a modified retrospective approach. This guidance is effective for fiscal years, and interim periods therein, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued guidance requiring a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2016, the FASB issued guidance to improve the accounting models for financial instruments. Specifically, the new guidance (i) requires equity investments be measured at fair value, or at cost adjusted for changes in observable prices less impairment for equity investments without readily determinable fair values, with changes in fair value recognized in net income; (ii) requires a qualitative assessment to identify impairment for equity investments without readily determinable fair values; (iii) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requires use of the exit price notion when measuring the fair value of financial instruments; (v) requires entities that elect the fair value option for financial liabilities to recognize changes in fair value related to instrument-specific credit risk in other comprehensive income; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that entities must assess valuation allowances for deferred taxes related to available-for-sale debt securities in combination with their other deferred tax assets. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017. Early adoption is permissible, but limited in application. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2015, the FASB issued guidance requiring the acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Additionally, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, must be calculated as if the accounting had been completed at the acquisition date. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued guidance modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities. This guidance also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. Entities may elect to apply this guidance either on a retrospective or a modified retrospective basis. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued guidance eliminating the concept of extraordinary items. Under this guidance an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years, and

11



interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. The Company plans to adopt this guidance prospectively. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2014, the FASB issued guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern and to provide disclosures in certain circumstances. The new guidance was issued to reduce diversity in the timing and content of footnote disclosures. This guidance is effective for fiscal years ending after December 15, 2016, and all annual and interim periods thereafter. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2014, the FASB issued guidance providing a measurement alternative to the existing fair value measurement guidance for reporting entities that consolidate a collateralized financing entity in which (1) the financial assets and financial liabilities are measured at fair value except for those incidental financial assets and financial liabilities with their carrying values that approximate fair values and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. When the measurement alternative is elected, the financial assets and liabilities of a collateralized financing entity will be measured using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. This guidance is effective for public business entities for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued guidance requiring entities to account for a performance target as a performance condition if the target affects vesting and could be achieved after the requisite service period. The new guidance did not introduce additional disclosure requirements and was issued to resolve diversity in practice. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015. The Company currently accounts for such performance targets in a manner consistent with the new guidance and does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued guidance requiring entities to recognize revenue from contracts with customers by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. In August 2015, the FASB issued guidance deferring the effective date of this guidance to annual periods beginning after December 15, 2017, including interim reporting periods therein. Entities have the option to adopt this guidance either retrospectively or through a modified retrospective transition method. This new standard will supersede existing revenue guidance and affect the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

12



NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"), net of income taxes:
 
 
Three Months Ended May 31, 2016
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, February 29, 2016
 
$
(130,865
)
 
$
2,616

 
$
(2,762
)
 
$
(131,011
)
Other comprehensive income (loss) before reclassifications
 
3,817

 
(16
)
 
—

 
3,801

Amounts reclassified from AOCI
 
—

 
32

 
(2
)
 
30

Net other comprehensive income (loss)
 
3,817

 
16

 
(2
)
 
3,831

Balance, May 31, 2016
 
$
(127,048
)
 
$
2,632

 
$
(2,764
)
 
$
(127,180
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2016
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance at August 31, 2015
 
$
(113,081
)
 
$
2,305

 
$
(2,759
)
 
$
(113,535
)
Other comprehensive income (loss) before reclassifications
 
(13,967
)
 
469

 
—

 
(13,498
)
Amounts reclassified from AOCI
 
—

 
(142
)
 
(5
)
 
(147
)
Net other comprehensive income (loss)
 
(13,967
)
 
327

 
(5
)
 
(13,645
)
Balance, May 31, 2016
 
$
(127,048
)
 
$
2,632

 
$
(2,764
)
 
$
(127,180
)

 
 
Three Months Ended May 31, 2015
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, February 28, 2015
 
$
(91,154
)
 
$
1,355

 
$
(2,630
)
 
$
(92,429
)
Other comprehensive income (loss) before reclassifications
 
(4,588
)
 
54

 
—

 
(4,534
)
Amounts reclassified from AOCI
 
—

 
804

 
(3
)
 
801

Net other comprehensive income (loss)
 
(4,588
)
 
858

 
(3
)
 
(3,733
)
Balance, May 31, 2015
 
$
(95,742
)
 
$
2,213

 
$
(2,633
)
 
$
(96,162
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2015
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance at August 31, 2014
 
$
(19,891
)
 
$
3,014

 
$
(2,632
)
 
$
(19,509
)
Other comprehensive income (loss) before reclassifications
 
(75,851
)
 
(2,371
)
 
8

 
(78,214
)
Amounts reclassified from AOCI
 
—

 
1,570

 
(9
)
 
1,561

Net other comprehensive loss
 
(75,851
)
 
(801
)
 
(1
)
 
(76,653
)
Balance, May 31, 2015
 
$
(95,742
)
 
$
2,213

 
$
(2,633
)
 
$
(96,162
)


13



The significant items reclassified out of AOCI and the corresponding line items in the condensed consolidated statements of earnings to which the items were reclassified were as follows:
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Components of AOCI (in thousands)
 
Location
 
2016
 
2015
 
2016
 
2015
Unrealized gain (loss) on derivatives:
 

 


 
 
 


 
 
Commodity
 
Cost of goods sold
 
$
(263
)
 
$
(269
)
 
$
(373
)
 
$
(429
)
Foreign exchange
 
Net sales
 
(168
)
 
(111
)
 
(561
)
 
(37
)
Foreign exchange
 
Cost of goods sold
 
223

 
(1,044
)
 
641

 
(2,447
)
Foreign exchange
 
SG&A expenses
 
53

 
17

 
123

 
57

Interest rate
 
Interest expense
 
134

 
134

 
400

 
400

 
 
 
 
(21
)
 
(1,273
)
 
230

 
(2,456
)
Income tax effect
 
Income taxes benefit (expense)
 
(11
)
 
469

 
(88
)
 
886

Net of income taxes
 
 
 
$
(32
)
 
$
(804
)
 
$
142

 
$
(1,570
)
Defined benefit obligation:
 

 
 
 
 
 
 
 
 
Amortization of prior services
 
SG&A expenses
 
$
2

 
$
4

 
$
6

 
$
11

Income tax effect
 
Income taxes expense
 
—

 
(1
)
 
(1
)
 
(2
)
Net of income taxes
 

 
$
2

 
$
3

 
$
5

 
$
9

Amounts in parentheses reduce earnings.

14



NOTE 3. SALES OF ACCOUNTS RECEIVABLE

During the fourth quarter of fiscal 2014, the Company entered into a third amended $200.0 million U.S. sale of accounts receivable program which expires on August 15, 2017. Under the program, CMC contributes, and several of its subsidiaries sell without recourse, certain eligible accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity and was formed for the sole purpose of buying and selling accounts receivable generated by the Company. CMCRV sells the accounts receivable in their entirety to three financial institutions. Under the amended U.S. sales of accounts receivable program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all accounts receivable sold. The remaining portion of the purchase price of the accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the accounts receivable as true sales, and the accounts receivable balances that are sold are removed from the condensed consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's condensed consolidated statements of cash flows. Additionally, the U.S. sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the credit facility described in Note 7, Credit Arrangements.

At May 31, 2016 and August 31, 2015, under its U.S. sale of accounts receivable program, the Company had sold $211.6 million and $274.3 million of accounts receivable, respectively, to the financial institutions. At May 31, 2016 and August 31, 2015, the Company had no advance payments outstanding on the sale of its accounts receivable.
 
In addition to the U.S. sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy. In the third quarter of fiscal 2015, the Company phased out its existing European program and entered into a two year renewable accounts receivable sales program with a different financial institution. The new agreement increased the facility limit from PLN 200.0 million to PLN 220.0 million. The European program allows the Company's European subsidiaries to obtain an advance of up to 90% of eligible accounts receivable sold under the terms of the arrangement. During the first quarter of fiscal 2014, the Company phased out its existing Australian program and entered into a one year renewable accounts receivable sales program with a different financial institution. During the first quarter of fiscal 2015, the Company entered into a first amendment to its Australian program, which extended the maturity date to October 2016. Under the new Australian program, accounts receivable balances are sold to a special purpose vehicle, which in turn sells 100% of the eligible accounts receivable of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. During the fourth quarter of fiscal 2015, the Company entered into a second amendment to its Australian program, which reduced the facility limit from A$75.0 million to A$40.0 million. The financial institution will fund up to the facility limit for all accounts receivable sold, and the remaining portion of the purchase price of the accounts receivable is in the form of a subordinated note from the financial institution. This note will be satisfied from the ultimate collection of the accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the accounts receivable as true sales, and the accounts receivable balances that are sold are removed from the condensed consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's condensed consolidated statements of cash flows.

At May 31, 2016 and August 31, 2015, under its European and Australian programs, the Company had sold $82.3 million and $97.9 million of accounts receivable, respectively, to third-party financial institutions and received advance payments of $29.2 million and $27.7 million, respectively.

During the nine months ended May 31, 2016 and 2015, cash proceeds from the U.S. and international sale of accounts receivable programs were $280.7 million and $441.6 million, respectively, and cash payments to the owners of accounts receivable were $279.2 million and $539.6 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the accounts receivable for the U.S. and Australian programs. Discounts on U.S. and international sales of accounts receivable were $0.4 million and $1.2 million for the three and nine months ended May 31, 2016, respectively, and $0.4 million and $1.2 million for the three and nine months ended May 31, 2015, respectively, and are included in selling, general and administrative expenses in the Company's condensed consolidated statements of earnings.

As of May 31, 2016, the deferred purchase price on the Company's U.S., European and Commercial Metals Pty. Ltd. sale of accounts receivable programs was included in accounts receivable on the Company's condensed consolidated balance sheets. As of August 31, 2015, the deferred purchase price on the Company's U.S., European, Commercial Metals Pty. Ltd. and CMC Steel Distribution Pty. Ltd. sale of accounts receivable programs was included in accounts receivable on the Company's condensed consolidated balance sheets. As of May 31, 2016 and August 31, 2015, the deferred purchase price on the G.A.M. Steel Pty. Ltd.

15



sale of accounts receivable program was included in assets of businesses held for sale on the Company's condensed consolidated balance sheets.

The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of accounts receivable programs:
 
 
Three Months Ended May 31, 2016
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Europe
Beginning balance
 
$
231,874

 
$
193,035

 
$
13,383

 
$
25,456

Transfers of accounts receivable
 
636,929

 
513,169

 
47,110

 
76,650

Collections
 
(608,292
)
 
(498,529
)
 
(41,522
)
 
(68,241
)
Ending balance
 
$
260,511

 
$
207,675

 
$
18,971

 
$
33,865

                                      
* Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of $13.6 million and collections of $12.3 million for the three months ended May 31, 2016).
 
 
Nine Months Ended May 31, 2016
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Europe
Beginning balance
 
$
339,547

 
$
269,778

 
$
18,038

 
$
51,731

Transfers of accounts receivable
 
1,763,122

 
1,432,592

 
130,440

 
200,090

Collections
 
(1,842,158
)
 
(1,494,695
)
 
(129,507
)
 
(217,956
)
Ending balance
 
$
260,511

 
$
207,675

 
$
18,971

 
$
33,865

                                      
* Includes the sales of accounts receivable activities related to discontinued operations and businesses held for sale (transfers of accounts receivable of $37.0 million and collections of $49.1 million for the nine months ended May 31, 2016).
 
 
Three Months Ended May 31, 2015
(in thousands)
 
Total
 
U.S.
 
Australia**
 
Europe
Beginning balance
 
$
386,447

 
$
327,009

 
$
21,680

 
$
37,758

Transfers of accounts receivable
 
892,387

 
724,309

 
79,173

 
88,905

Collections
 
(871,953
)
 
(727,077
)
 
(75,210
)
 
(69,666
)
Ending balance
 
$
406,881

 
$
324,241

 
$
25,643

 
$
56,997

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2015
(in thousands)
 
Total
 
U.S.
 
Australia**
 
Europe
Beginning balance
 
$
385,169

 
$
329,797

 
$
34,071

 
$
21,301

Transfers of accounts receivable
 
2,908,695

 
2,426,691

 
233,237

 
248,767

Collections
 
(2,886,983
)
 
(2,432,247
)
 
(241,665
)
 
(213,071
)
Ending balance
 
$
406,881

 
$
324,241

 
$
25,643

 
$
56,997

                                      
** Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of $46.2 million and $148.3 million and collections of $47.5 million and $164.0 million for the three and nine months ended May 31, 2015, respectively).
NOTE 4. INVENTORIES, NET

As of May 31, 2016, inventories were stated at the lower of cost or net realizable value. As of August 31, 2015, inventories were stated at the lower of cost or market. See Note 1, Accounting Policies, for further discussion of the adoption of the new accounting pronouncement.

Effective September 1, 2015, the Company elected to change its accounting method for valuing all of its inventories that used the LIFO method to either the weighted average or specific identification methods. The Company applied this change in accounting

16




principle retrospectively to all prior periods presented. See Note 1, Accounting Policies, for further disclosures regarding this change in accounting principle.

Additionally, effective September 1, 2015, the Company elected to change its accounting method for valuing all of its inventories in its International Marketing and Distribution segment, except for its steel trading division headquartered in the U.S., from the FIFO method to the specification identification method. Because this change in accounting principle was immaterial in all prior periods, it was not applied retrospectively. The change did not have a material impact on our condensed consolidated financial statements as of and for the three and nine months ended May 31, 2016. See Note 1, Accounting Policies, for further disclosures regarding this change in accounting principle.

The Company determines the inventory cost for its International Mill segment using the weighted average cost method.

At May 31, 2016, 59% of the Company's total net inventories were valued using the weighted average cost method and 41% of the Company's total net inventories were valued using the specification identification method.

The majority of the Company's inventories are in the form of finished goods. At May 31, 2016 and August 31, 2015, $82.0 million and $61.5 million, respectively, of the Company's inventories were in the form of raw materials. Work in process inventories were $32.6 million at May 31, 2016 and were minimal at August 31, 2015.

During the three and nine months ended May 31, 2016, inventory write-downs were $1.6 million and $9.6 million, respectively, and were $17.4 million and $21.5 million during the three and nine months ended May 31, 2015.
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table details the changes in the carrying amount of goodwill by reportable segment:

 
 
 
Americas
 
International
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Consolidated
Balance at August 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
9,751

 
$
4,970

 
$
57,637

 
$
2,517

 
$
1,912

 
$
76,787

 
Accumulated impairment losses
 
(9,751
)
 
—

 
(493
)
 
(160
)
 
—

 
(10,404
)
 
 
 
—

 
4,970

 
57,144

 
2,357

 
1,912

 
66,383

Foreign currency translation
 
—

 
—

 
—

 
(98
)
 
48

 
(50
)
Balance at May 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
9,751

 
4,970

 
57,637

 
2,412

 
1,960

 
76,730

 
Accumulated impairment losses
 
(9,751
)
 
—

 
(493
)
 
(153
)
 
—

 
(10,397
)
 
 
 
$
—

 
$
4,970

 
$
57,144

 
$
2,259

 
$
1,960

 
$
66,333


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $40.3 million and $47.8 million at May 31, 2016 and August 31, 2015, respectively, and are included in other noncurrent assets on the Company's condensed consolidated balance sheets. Intangible amortization expense from continuing operations was $1.0 million and $3.1 million for the three and nine months ended May 31, 2016, respectively, and $1.6 million and $5.2 million for the three and nine months ended May 31, 2015, respectively. Excluding goodwill, there are no significant intangible assets with indefinite lives.

17



NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
As of May 31, 2016 and August 31, 2015, one component of the Australian steel distribution business remained for sale and continued to be classified as held for sale. The components of assets and liabilities of businesses held for sale on the Company's condensed consolidated balance sheets were as follows:
(in thousands)
 
May 31, 2016
 
August 31, 2015
Assets:
 
 
 
 
Accounts receivable
 
$
5,133

 
$
3,244

Inventories, net
 
9,807

 
12,514

Other current assets
 
—

 
41

Property, plant and equipment, net of accumulated depreciation and amortization
 
1,412

 
1,209

Impairment of businesses held for sale(1)
 
(15,765
)
 
—

Assets of businesses held for sale
 
$
587

 
$
17,008

Liabilities:
 
 
 
 
Accounts payable-trade
 
$
1,293

 
$
3,011

Accrued expenses and other payables
 
2,411

 
2,265

Liabilities of businesses held for sale
 
$
3,704

 
$
5,276

 _________________ 
(1) See Note 10, Fair Value, for further discussion of the impairment of businesses held for sale.

Discontinued Operations
Despite focused efforts and substantial progress to stabilize and improve the results of the Australian steel distribution business, the Company determined that achieving acceptable financial returns would take additional time and investment. During the first quarter of fiscal 2015, the Company decided to exit and sell its steel distribution business in Australia and determined that this decision met the definition of a discontinued operation. As a result, this business has been presented as a discontinued operation for all periods presented. During the third quarter of fiscal 2016, the Company recorded an impairment charge of $15.8 million, including the impact of an approximate $13.5 million accumulated foreign currency translation loss, on its remaining component of the Australian steel distribution business that was classified as held for sale at May 31, 2016 and as discontinued operations during the three and nine months ended May 31, 2016. See Note 10, Fair Value, for further discussion of this impairment charge. Other expenses associated with exiting this business were not material for the three and nine months ended May 31, 2016 and May 31, 2015. The Australian steel distribution business was previously an operating segment included in the International Marketing and Distribution reporting segment.

Financial information for discontinued operations was as follows:
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2016
 
2015
 
2016
 
2015
Net sales
 
$
12,321

 
$
43,307

 
$
33,828

 
$
143,644

Loss from discontinued operations before income taxes
 
(15,785
)
 
(10,871
)
 
(16,803
)
 
(20,241
)

Dispositions
There were no material dispositions during the first nine months of fiscal 2016 or 2015.

During the first quarter of fiscal 2014, the Company sold all of the outstanding capital stock of our wholly owned copper tube manufacturing operation, Howell Metal Company for $58.5 million, $3.2 million of which was held in escrow as of August 31, 2015. The full balance of escrow was released to the Company in the second quarter of fiscal 2016.

18



NOTE 7. CREDIT ARRANGEMENTS

On June 26, 2014, the Company entered into a fourth amended and restated credit agreement (the "Credit Agreement") for a revolving credit facility of $350.0 million with a maturity date of June 26, 2019. The maximum availability under the Credit Agreement can be increased to $500.0 million with bank approval. The Company's obligation under its Credit Agreement is collateralized by its U.S. inventory. The Credit Agreement's capacity includes $50.0 million for the issuance of stand-by letters of credit and was reduced by outstanding stand-by letters of credit which totaled $1.7 million and $23.4 million at May 31, 2016 and August 31, 2015, respectively.

Under the Credit Agreement, the Company is required to comply with certain financial and non-financial covenants, including covenants to maintain: (i) an interest coverage ratio (consolidated EBITDA to consolidated interest expense, as each is defined in the Credit Agreement) of not less than 2.50 to 1.00 and (ii) a debt to capitalization ratio (consolidated funded debt to total capitalization, as each is defined in the Credit Agreement) that does not exceed 0.60 to 1.00. In addition, beginning on the date three months prior to each maturity date of the Company's 2017 Notes and 2018 Notes, as defined below, and each day thereafter that the 2017 Notes and the 2018 Notes are outstanding, the Company will be required to maintain liquidity of at least $150.0 million in excess of each of the outstanding aggregate principal amounts of the 2017 Notes and 2018 Notes. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate.

At May 31, 2016, the Company's interest coverage ratio was 4.70 to 1.00, and the Company's debt to capitalization ratio was 0.44 to 1.00. The Company had no amount drawn under the Credit Agreement at May 31, 2016 and August 31, 2015.

In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 2023 (the "2023 Notes"). Interest on the 2023 Notes is payable semi-annually.

In August 2008, the Company issued $500.0 million of 7.35% senior unsecured notes due in August 2018 (the "2018 Notes"). During the third quarter of fiscal 2010, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to 6.40% per annum. Interest on these notes is payable semiannually. In February 2016, the Company accepted for purchase approximately $100.2 million of the outstanding principal amount of its 2018 Notes through a cash tender offer. The Company recognized expenses of approximately $6.1 million related to the early extinguishment of this debt, which are included in loss on debt extinguishment in the unaudited condensed consolidated statements of earnings for the nine months ended May 31, 2016.

In July 2007, the Company issued $400.0 million of 6.50% senior unsecured notes due in July 2017 (the "2017 Notes"). During the third quarter of fiscal 2011, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to 5.74% per annum. Interest on these notes is payable semiannually. In February 2016, the Company accepted for purchase $100.0 million of the outstanding principal amount of its 2017 Notes though a cash tender offer. The Company recognized expenses of approximately $5.4 million related to the early extinguishment of this debt, which are included in loss on debt extinguishment in the unaudited condensed consolidated statements of earnings for the nine months ended May 31, 2016.

At May 31, 2016, the Company was in compliance with all covenants contained in its debt agreements.

During fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately $52.7 million, net of customary finance charges. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. At May 31, 2016 and August 31, 2015, the unamortized amounts were $13.6 million and $19.2 million, respectively. Amortization of the deferred gain for each of the three and nine months ended May 31, 2016 and 2015 was $1.9 million and $5.7 million, respectively.

The Company has uncommitted credit facilities available from U.S. and international banks. In general, these credit facilities are used to support trade letters of credit (including accounts payable settled under bankers' acceptances), foreign exchange transactions and short-term advances which are priced at market rates.


19



Long-term debt, including the deferred gain from the termination of the interest rate swaps, was as follows: 
(in thousands)
 
Weighted Average
Interest Rate as of May 31, 2016
 
May 31, 2016
 
August 31, 2015
2023 Notes
 
4.875%
 
$
330,000

 
$
330,000

2018 Notes
 
6.40%
 
410,030

 
513,680

2017 Notes
 
5.74%
 
303,344

 
405,573

Other, including equipment notes
 
 
 
35,248

 
38,739

 
 
 
 
1,078,622

 
1,287,992

Less current maturities
 
 
 
10,929

 
10,110

 
 
 
 
$
1,067,693

 
$
1,277,882

 

At May 31, 2016 and August 31, 2015, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN 175 million ($44.4 million) and PLN 215 million ($56.9 million), respectively. The uncommitted credit facilities as of May 31, 2016 have expiration dates ranging from November 2016 to March 2017, which CMCP intends to renew upon expiration. At May 31, 2016 and August 31, 2015, no material amounts were outstanding under these facilities. During the nine months ended May 31, 2016, CMCP had no borrowings and no repayments under its uncommitted credit facilities. During the nine months ended May 31, 2015, CMCP had total borrowings of $49.6 million and total repayments of $49.6 million under its uncommitted credit facilities.

The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the three and nine months ended May 31, 2016 and 2015, respectively. Cash paid for interest during the three and nine months ended May 31, 2016 was $9.1 million and $50.0 million, respectively, and $10.6 million and $53.5 million during the three and nine months ended May 31, 2015, respectively.
NOTE 8. NEW MARKETS TAX CREDIT TRANSACTIONS

In the second quarter of fiscal 2016, the Company entered into a financing transaction with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"), related to the development, construction and equipping of a steel micro-mill in Durant, Oklahoma. To effect the transaction, USBCDC made a capital contribution to USBCDC Investment Fund 156, LLC, a Missouri limited liability company (the "Investment Fund"). Additionally, Commonwealth Acquisitions Holdings, Inc., a wholly owned subsidiary of CMC ("Commonwealth"), made a loan to the Investment Fund. The transaction qualified under the New Markets Tax Credit Program ("NMTC Program"), provided for in the Community Renewal Tax Relief Act of 2000 (the "Act"). The NMTC Program is intended to induce capital investment in qualified low-income communities. The Act permits taxpayers to claim credits against federal income taxes for up to 39% of qualified investments in certain community development entities ("CDEs"). CDEs are privately managed entities that are certified to make qualified low-income community investments to qualified projects.

Commonwealth loaned $35.3 million to the Investment Fund at an interest rate of approximately 1.08% per year and with a maturity date of December 24, 2045 (the "Commonwealth Loan"). The Investment Fund also received capital contributions from USBCDC in the aggregate amount of $17.7 million (the "USBCDC Equity"). The Investment Fund used $51.5 million of the proceeds received from the Commonwealth Loan and the USBCDC Equity to make qualified equity investments ("QEIs") into certain CDEs, which, in turn, used $50.7 million of the QEIs to make loans to CMC Steel Oklahoma, LLC, a wholly owned subsidiary of CMC, with terms similar to the Commonwealth Loan and as partial financing for the construction, development and equipping of a new steel micro-mill in Durant, Oklahoma. The proceeds of the loans from the CDEs (including the portion of the loans representing the capital contribution made by USBCDC, net of syndication fees) were included in other current assets in the accompanying condensed consolidated balance sheet and will be used to partially fund the new steel micro-mill in Durant, Oklahoma.

By virtue of its capital contribution to the Investment Fund, USBCDC is entitled to substantially all of the benefits derived from the new markets tax credits ("NMTCs"). This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase USBCDC's interest in the Investment Fund. The Company believes USBCDC will exercise the put option in December 2022 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify

20



USBCDC for any loss or recapture of NMTCs related to the financing until such time as the Company's obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.

The Company has determined that the Investment Fund is a variable interest entity ("VIE"), of which the Company is the primary beneficiary and has consolidated it in accordance with the accounting standard for consolidation. USBCDC's contribution is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Direct costs incurred in structuring the financing arrangement are deferred and will be recognized as expense over the seven year recapture period. Incremental costs to maintain the structure during the compliance period are recognized as incurred.
NOTE 9. DERIVATIVES AND RISK MANAGEMENT

The Company's global operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. One objective of the Company's risk management program is to mitigate these risks using derivative instruments. The Company enters into (i) metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in gross margin due to the volatility of the commodities' prices, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) natural gas forward contracts to mitigate the risk of unanticipated changes in operating cost due to the volatility of natural gas prices. When sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to reduce the effects of the volatility of ocean freight rates.

At May 31, 2016, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $290.0 million and $23.0 million, respectively. At May 31, 2015, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $399.8 million and $46.5 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2016:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
3,429

 MT
Aluminum
 
Short
 
175

 MT
Copper
 
Long
 
238

 MT
Copper
 
Short
 
3,425

 MT
                                      
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 2016 and 2015. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the condensed consolidated statements of earnings: 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2016
 
2015
 
2016
 
2015
Commodity
 
Cost of goods sold
 
$
224

 
$
(354
)
 
$
2,172

 
$
4,947

Foreign exchange
 
Net sales
 
—

 
—

 
(4
)
 
3,005

Foreign exchange
 
Cost of goods sold
 
(9
)
 
562

 
72

 
4,913

Foreign exchange
 
SG&A expenses
 
(6,304
)
 
2,405

 
9,410

 
22,479

Gain (loss) before income taxes
 
 
 
$
(6,089
)
 
$
2,613

 
$
11,650

 
$
35,344



21



The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2016
 
2015
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
(122
)
 
$
207

 
$
(39
)
 
$
566

Foreign exchange
 
Cost of goods sold
 
901

 
(283
)
 
90

 
642

Gain (loss) before income taxes
 
 
 
$
779

 
$
(76
)
 
$
51

 
$
1,208


Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2016
 
2015
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
122

 
$
(207
)
 
$
39

 
$
(565
)
Foreign exchange
 
Cost of goods sold
 
(901
)
 
283

 
(90
)
 
(642
)
Gain (loss) before income taxes
 
 
 
$
(779
)
 
$
76

 
$
(51
)
 
$
(1,207
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2016
 
2015
 
2016
 
2015
Commodity
 
$
(56