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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of June 26, 2017, 115,790,392 shares of the registrant's common stock, par value $0.01 per share, were outstanding.


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)
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
1,382,616

 
$
1,227,390

 
$
3,607,300


$
3,401,946

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,209,195

 
1,051,910

 
3,142,697


2,934,028

Selling, general and administrative expenses
 
108,803

 
114,841

 
324,789


310,667

Interest expense
 
12,368

 
14,737

 
38,108

 
49,666

Loss on debt extinguishment
 
—

 
115

 
—

 
11,480

 
 
1,330,366

 
1,181,603

 
3,505,594


3,305,841

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
52,250

 
45,787

 
101,706


96,105

Income taxes
 
12,641

 
10,676

 
25,284


24,512

Earnings from continuing operations
 
39,609

 
35,111

 
76,422


71,593

 
 
 
 
 
 





Loss from discontinued operations before income taxes (benefit)
 
(351
)
 
(15,785
)
 
(542
)

(16,803
)
Income taxes (benefit)
 
(8
)
 
(2
)
 
7


(103
)
Loss from discontinued operations
 
(343
)
 
(15,783
)
 
(549
)

(16,700
)
 
 
 
 
 
 





Net earnings
 
39,266

 
19,328

 
75,873

 
54,893

Less net earnings attributable to noncontrolling interests
 
—

 
—

 
—

 
—

Net earnings attributable to CMC
 
$
39,266

 
$
19,328

 
$
75,873


$
54,893

 
 
 
 
 
 



Basic earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.34

 
$
0.31

 
$
0.66


$
0.62

Loss from discontinued operations
 
—

 
(0.14
)
 
—


(0.14
)
Net earnings
 
$
0.34

 
$
0.17

 
$
0.66


$
0.48

 
 
 
 
 
 



Diluted earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.34

 
$
0.30

 
$
0.65


$
0.61

Loss from discontinued operations
 
—

 
(0.13
)
 
—


(0.14
)
Net earnings
 
$
0.34

 
$
0.17

 
$
0.65


$
0.47

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.36


$
0.36

Average basic shares outstanding
 
115,886,372

 
114,677,109

 
115,574,289


115,373,736

Average diluted shares outstanding
 
117,205,369

 
115,995,515

 
117,087,341


116,758,716

See notes to unaudited condensed consolidated financial statements.

3




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

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Net earnings attributable to CMC
 
$
39,266

 
$
19,328

 
$
75,873

 
$
54,893

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

 

Foreign currency translation adjustment:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment during the period
 
27,109

 
3,817

 
15,129

 
(13,967
)
Reclassification for translation loss realized upon liquidation of investment in foreign entity
 
968

 
—

 
968

 
—

Foreign currency translation adjustment
 
28,077

 
3,817

 
16,097

 
(13,967
)
Net unrealized gain (loss) on derivatives:
 
 
 
 
 


 


Unrealized holding gain (loss)
 
254

 
(16
)
 
696

 
469

Reclassification for (gain) loss included in net earnings
 
(333
)
 
32

 
(853
)
 
(142
)
Net unrealized gain (loss) on derivatives
 
(79
)
 
16

 
(157
)
 
327

Defined benefit obligation:
 
 
 
 
 


 


Amortization of prior services
 
(9
)
 
(2
)
 
(27
)
 
(5
)
Defined benefit obligation
 
(9
)
 
(2
)
 
(27
)
 
(5
)
Other comprehensive income (loss)
 
27,989

 
3,831

 
15,913

 
(13,645
)
Comprehensive income
 
$
67,255

 
$
23,159

 
$
91,786

 
$
41,248

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, 2017
 
August 31, 2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
275,778

 
$
517,544

Accounts receivable (less allowance for doubtful accounts of $4,986 and $6,427)
 
869,970

 
765,784

Inventories, net
 
798,013

 
652,754

Other current assets
 
108,248

 
112,043

Total current assets
 
2,052,009

 
2,048,125

Property, plant and equipment:
 
 
 
 
Land
 
82,137

 
70,291

Buildings and improvements
 
512,843

 
487,305

Equipment
 
1,717,576

 
1,655,909

Construction in process
 
218,724

 
111,156


 
2,531,280

 
2,324,661

Less accumulated depreciation and amortization
 
(1,514,405
)
 
(1,429,612
)

 
1,016,875

 
895,049

Goodwill
 
66,764

 
66,373

Other noncurrent assets
 
138,951

 
121,322

Total assets
 
$
3,274,599

 
$
3,130,869

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
345,974

 
$
243,532

Accounts payable-documentary letters of credit
 
566

 
5

Accrued expenses and other payables
 
258,288

 
264,112

Current maturities of long-term debt
 
311,654

 
313,469

Total current liabilities
 
916,482

 
821,118

Deferred income taxes
 
61,492

 
63,021

Other long-term liabilities
 
126,864

 
121,351

Long-term debt
 
751,676

 
757,948

Total liabilities
 
1,856,514

 
1,763,438

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 115,788,992 and 114,635,596 shares, respectively
 
1,290

 
1,290

Additional paid-in capital
 
338,548

 
358,745

Accumulated other comprehensive loss
 
(97,001
)
 
(112,914
)
Retained earnings
 
1,407,242

 
1,372,988

Less treasury stock, 13,271,672 and 14,425,068 shares at cost
 
(232,167
)
 
(252,837
)
Stockholders' equity attributable to CMC
 
1,417,912

 
1,367,272

Stockholders' equity attributable to noncontrolling interests
 
173

 
159

Total stockholders' equity
 
1,418,085

 
1,367,431

Total liabilities and stockholders' equity
 
$
3,274,599

 
$
3,130,869

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)
 
2017
 
2016
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
75,873

 
$
54,893

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
93,049

 
95,423

Stock-based compensation
 
19,716

 
19,889

Amortization of interest rate swaps termination gain
 
(5,698
)
 
(5,698
)
Deferred income taxes
 
(2,538
)
 
9,744

Write-down of inventories
 
1,820

 
9,567

Provision for losses on receivables, net
 
856

 
3,748

Asset impairment
 
622

 
15,842

Net gain on disposals of assets and other
 
(343
)
 
(1,802
)
Loss on debt extinguishment
 
—

 
11,480

Tax benefit from stock plans
 
—

 
(666
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(86,668
)
 
146,166

Proceeds (payments) on sales of accounts receivable programs, net
 
(4,327
)
 
1,473

Inventories
 
(134,720
)
 
205,717

Accounts payable, accrued expenses and other payables
 
83,355

 
(64,676
)
Changes in other operating assets and liabilities
 
(22,083
)
 
5,768

Net cash flows from operating activities
 
18,914

 
506,868

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(162,082
)
 
(104,481
)
Acquisitions
 
(54,425
)
 
—

Decrease (increase) in restricted cash, net
 
7,492

 
(49,094
)
Proceeds from the sale of property, plant and equipment and other
 
1,884

 
3,470

Net cash flows used by investing activities
 
(207,131
)
 
(150,105
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Cash dividends
 
(41,619
)
 
(41,586
)
Repayments on long-term debt
 
(8,775
)
 
(208,605
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(5,516
)
 
(6,036
)
Proceeds from New Markets Tax Credit transactions
 
2,141

 
—

Increase (decrease) in documentary letters of credit, net
 
569

 
(40,145
)
Contribution from noncontrolling interests
 
14

 
29

Short-term borrowings, net change
 
—

 
(20,090
)
Treasury stock acquired
 
—

 
(30,595
)
Debt extinguishment costs
 
—

 
(11,127
)
Tax benefit from stock plans
 
—

 
666

Decrease in restricted cash
 
—

 
1

Net cash flows used by financing activities
 
(53,186
)
 
(357,488
)
Effect of exchange rate changes on cash
 
(363
)
 
(743
)
Decrease in cash and cash equivalents
 
(241,766
)
 
(1,468
)
Cash and cash equivalents at beginning of year
 
517,544

 
485,323

Cash and cash equivalents at end of period
 
$
275,778

 
$
483,855

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
31,024

 
$
18,066

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
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

 
 
 
 
 
 
 
 
 
 
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Loss
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2016
129,060,664

$
1,290

$
358,745

$
(112,914
)
$
1,372,988

(14,425,068
)
$
(252,837
)
$
159

$
1,367,431

Net earnings
 
 
 
 
75,873

 
 
 
75,873

Other comprehensive income
 
 
 
15,913

 
 
 
 
15,913

Cash dividends ($0.36 per share)
 
 
 
 
(41,619
)
 
 
 
(41,619
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(26,269
)
 
 
1,153,396

20,670

 
(5,599
)
Stock-based compensation
 
 
9,731

 
 
 
 
 
9,731

Contribution of noncontrolling interest
 
 


 
 
 
 
14

14

Reclassification of share-based liability awards
 
 
1,780

 
 
 
 
 
1,780

Reclassification of share-based equity awards
 
 
(5,439
)
 
 
 
 
 
(5,439
)
Balance, May 31, 2017
129,060,664

$
1,290

$
338,548

$
(97,001
)
$
1,407,242

(13,271,672
)
$
(232,167
)
$
173

$
1,418,085

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, 2016 filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2016. 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.

Recently Adopted Accounting Pronouncements

In the second quarter of fiscal 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718), issued by the Financial Accounting Standards Board (the "FASB") requiring that the Company recognize all excess tax benefits and tax deficiencies as an income tax expense or benefit when stock awards vest or are settled. Additionally, the guidance allows for an increase in the threshold for net share settlement up to the maximum statutory rate in employees’ applicable jurisdictions without triggering liability classification. The adoption of this guidance had an immaterial impact on income taxes on the Company’s unaudited condensed consolidated statements of earnings for the three and nine months ended May 31, 2017. Additionally, the Company has elected to continue to estimate forfeitures. As such, this adoption has no cumulative effect on retained earnings. The Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively, which had an immaterial impact on both net cash from operating activities and net cash used in financing activities for the nine months ended May 31, 2017. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods presented on the Company’s consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-16, Business Combinations (Topic 805), issued by the FASB 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. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), issued by the FASB requiring an entity to account for fees paid in a cloud computing arrangement as a license of internal-use software. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-02, Consolidation (Topic 810), issued by the FASB modifying the evaluation of whether limited partnerships and similar legal entities are voting interest entities ("VIEs"). The guidance was adopted on a retrospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), issued by the FASB eliminating the concept of extraordinary items. Under this guidance, an entity is no longer allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2014-13, Consolidation (Topic 810), issued by the FASB providing a measurement alternative to the existing fair value measurement guidance. When the measurement alternative is elected, the financial assets and liabilities are measured using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The guidance was adopted on a retrospective basis and did not have an impact on the Company's consolidated financial statements.


8



In the first quarter of fiscal 2017, the Company adopted ASU 2014-12, Compensation - Stock Compensation (Topic 718), issued by the FASB 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 guidance was followed by the Company prior to its adoption and therefore had no impact on the Company's consolidated financial statements upon adoption.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 805). The standard simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. This guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The standard must be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to early adopt the standard in the fourth quarter of fiscal 2017. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The standard must be applied prospectively on or after the effective date. Early application of the amendments is allowed with certain restrictions. The Company is currently evaluating the effect that this standard will have on its consolidated financial statements as well as determining the Company's planned adoption date.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements as well as determining the Company's planned adoption date.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 longer. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and will be effective for the Company beginning September 1, 2019, at which point the Company plans to adopt the standard. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has modified the standard thereafter. Under the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018, at which point the Company plans to adopt the standard. The standard permits the use of either the retrospective or cumulative effect transition method. The Company currently expects to adopt the standard using the modified retrospective approach. The Company believes there will not be a material impact on its statement of financial position, results of operations or cash flows in its Americas Mills, Americas Recycling or International Mill segments. The Company is still in the process of examining contract specific terms within the Americas Fabrication segment. In addition, the standard includes expanded disclosure requirements, which the Company continues to analyze. As part of the overall evaluation of the standard, the Company is also identifying and preparing to implement changes to its accounting policies, practices, and internal controls over financial reporting to support the standard both in the transition period as well as on an on-going basis.
NOTE 2. CHANGES IN BUSINESS

Acquisitions

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

9



its strategy of creating value for customers. The operating results of this facility are included in the Americas Fabrication 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 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 CMC’s minimill in Cayce, South Carolina. These facilities provide synergies with CMC's other operations in the region. The operating results of these facilities are included in the Americas Recycling reporting segment.

The acquisitions of CCS, ASW and the Recycling Assets are 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.

Discontinued Operations

During the first quarter of fiscal 2015, the Company decided to exit and sell its steel distribution business in Australia and determined that the decision to exit this business met the definition of a discontinued operation. As a result, this business has been presented as a discontinued operation for all periods presented. The Australian steel distribution business was previously 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)
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
—

 
$
12,321

 
$
(22
)
 
$
33,828

Loss from discontinued operations before income taxes (benefit)
 
(351
)
 
(15,785
)
 
(542
)
 
(16,803
)
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
 
 
Three Months Ended May 31, 2017
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, February 28, 2017
 
$
(124,235
)
 
$
2,108

 
$
(2,863
)
 
$
(124,990
)
Other comprehensive income before reclassifications
 
27,109

 
368

 
—

 
27,477

Amounts reclassified from AOCI
 
968

 
(459
)
 
(11
)
 
498

Income taxes
 
—

 
12

 
2

 
14

Net other comprehensive income (loss)
 
28,077

 
(79
)
 
(9
)
 
27,989

Balance, May 31, 2017
 
$
(96,158
)
 
$
2,029

 
$
(2,872
)
 
$
(97,001
)


10



 
 
Nine Months Ended May 31, 2017
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, August 31, 2016
 
$
(112,255
)
 
$
2,186

 
$
(2,845
)
 
$
(112,914
)
Other comprehensive income before reclassifications
 
15,129

 
926

 
—

 
16,055

Amounts reclassified from AOCI
 
968

 
(1,090
)
 
(33
)
 
(155
)
Income taxes
 
—

 
7

 
6

 
13

Net other comprehensive income (loss)
 
16,097

 
(157
)
 
(27
)
 
15,913

Balance, May 31, 2017
 
$
(96,158
)
 
$
2,029

 
$
(2,872
)
 
$
(97,001
)

 
 
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
 
—

 
21

 
(2
)
 
19

Income taxes
 
—

 
11

 
—

 
11

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, August 31, 2015
 
$
(113,081
)
 
$
2,305

 
$
(2,759
)
 
$
(113,535
)
Other comprehensive income (loss) before reclassifications
 
(13,967
)
 
543

 
—

 
(13,424
)
Amounts reclassified from AOCI
 
—

 
(230
)
 
(6
)
 
(236
)
Income taxes
 
—

 
14

 
1

 
15

Net other comprehensive income (loss)
 
(13,967
)
 
327

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

 
$
(2,764
)
 
$
(127,180
)


11



The significant items reclassified out of AOCI and the corresponding line items in the unaudited 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
 
2017
 
2016
 
2017
 
2016
Foreign currency translation adjustment:
 
 
 
 
 
 
 
 
 
 
Translation loss realized upon liquidation of investment in foreign entity
 
SG&A expenses
 
$
968

 
$
—

 
$
968

 
$
—

Unrealized gain (loss) on derivatives:
 

 
 
 
 
 


 
 
Commodity
 
Cost of goods sold
 
$
94

 
$
(263
)
 
$
(31
)
 
$
(373
)
Foreign exchange
 
Net sales
 
124

 
(168
)
 
368

 
(561
)
Foreign exchange
 
Cost of goods sold
 
19

 
223

 
(25
)
 
641

Foreign exchange
 
SG&A expenses
 
88

 
53

 
378

 
123

Interest rate
 
Interest expense
 
134

 
134

 
400

 
400

 
 
 
 
459

 
(21
)
 
1,090

 
230

Income tax effect
 
Income taxes
 
(126
)
 
(11
)
 
(237
)
 
(88
)
Net of income taxes
 
 
 
$
333

 
$
(32
)
 
$
853

 
$
142

Defined benefit obligation:
 

 
 
 
 
 
 
 
 
Amortization of prior services
 
SG&A expenses
 
$
11

 
$
2

 
$
33

 
$
6

Income tax effect
 
Income taxes
 
(2
)
 
—

 
(6
)
 
(1
)
Net of income taxes
 

 
$
9

 
$
2

 
$
27

 
$
5

Amounts in parentheses reduce earnings.

12



NOTE 4. SALES OF ACCOUNTS RECEIVABLE

During the fourth quarter of fiscal 2016, CMC entered into a fifth amended $200.0 million U.S. sale of trade accounts receivable program which expires on August 15, 2019. Under the program, CMC contributes, and several of its subsidiaries sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly-owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity formed for the sole purpose of buying and selling trade accounts receivable generated by CMC. CMCRV sells the trade accounts receivable in their entirety to two financial institutions. Under the amended U.S. sale of trade accounts receivable program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable sold. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. Additionally, the U.S. sale of trade accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaults under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement described in Note 7, Credit Arrangements.

At May 31, 2017 and August 31, 2016, under its U.S. sale of trade accounts receivable program, the Company had sold $307.3 million and $215.9 million of trade accounts receivable, respectively, to the financial institutions, with no advance payments outstanding.
 
In addition to the U.S. sale of trade accounts receivable program described above, the Company's international subsidiaries in Poland and Australia have sold trade accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the trade accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy and are removed from the consolidated balance sheets. The Polish program has a facility limit of 220.0 million Polish zloty ($59.1 million as of May 31, 2017) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable sold under the terms of the arrangement. Under the Polish and Australian programs, the cash advances received were reflected as cash provided by operating activities on the Company's unaudited condensed consolidated statements of cash flows. In October 2016, the Company's existing Australian program expired, and the Company did not enter into a new program.

At May 31, 2017, under its Polish program, the Company had sold $64.2 million of trade accounts receivable to the third-party financial institution. At August 31, 2016, under its Polish and Australian programs, the Company had sold $85.7 million of trade accounts receivable to third-party financial institutions. At May 31, 2017 and August 31, 2016, $3.9 million and $8.3 million in advance payments had been received, respectively.

During the nine months ended May 31, 2017 and 2016, cash proceeds from the U.S. and international sale of trade accounts receivable programs were $246.0 million and $280.7 million, respectively, and cash payments to the owners of trade accounts receivable were $250.3 million and $279.2 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the trade accounts receivable for the U.S. and Australian programs. Discounts on U.S. and international sales of trade accounts receivable were $0.2 million and $0.7 million for the three and nine months ended May 31, 2017, respectively, and $0.4 million and $1.2 million for the three and nine months ended May 31, 2016, respectively, and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statements of earnings.

As of May 31, 2017 and August 31, 2016, the deferred purchase price on the Company's U.S. and international sale of trade accounts receivable programs is included in accounts receivable on the Company's unaudited condensed consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of trade accounts receivable programs.

 
 
Three Months Ended May 31, 2017
(in thousands)
 
Total
 
U.S.
 
Poland
Beginning balance
 
$
312,446

 
$
258,719

 
$
53,727

Transfers of accounts receivable
 
777,104

 
671,429

 
105,675

Collections
 
(725,336
)
 
(626,182
)
 
(99,154
)
Ending balance
 
$
364,214

 
$
303,966

 
$
60,248



13



 
 
Nine Months Ended May 31, 2017
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Poland
Beginning balance
 
$
289,748

 
$
212,762

 
$
26,662

 
$
50,324

Transfers of accounts receivable
 
1,977,546

 
1,702,584

 
16,914

 
258,048

Collections
 
(1,869,163
)
 
(1,611,380
)
 
(9,659
)
 
(248,124
)
     Program termination
 
(33,917
)
 
—

 
(33,917
)
 
—

Ending balance
 
$
364,214

 
$
303,966

 
$
—

 
$
60,248

 _________________ 
* Includes collections of $3.7 million and program termination of $1.6 million related to discontinued operations and businesses sold.
 
 
Three Months Ended May 31, 2016
(in thousands)
 
Total
 
U.S.
 
Australia**
 
Poland
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 transfers of accounts receivable of $13.6 million and collections of $12.3 million related to discontinued operations and businesses held for sale.
 
 
Nine Months Ended May 31, 2016
(in thousands)
 
Total
 
U.S.
 
Australia***
 
Poland
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 transfers of accounts receivable of $37.0 million and collections of $49.1 million related to discontinued operations and businesses held for sale.
NOTE 5. INVENTORIES, NET

As of May 31, 2017 and August 31, 2016, inventories were stated at the lower of cost or net realizable value. The Company determines inventory cost for its Americas Recycling, Americas Mills, Americas Fabrication and International Mill segments using the weighted average cost method. The Company determines inventory cost for its International Marketing and Distribution segment using the specific identification method. At May 31, 2017, 64% of the Company's total net inventories were valued using the weighted average cost method and 36% 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 semi-finished and finished goods. The Company’s business model, with the exception of the International Marketing and Distribution segment, is such that products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. Inventories in the International Marketing and Distribution segment are sold as finished goods. As such, work in process inventories were not material at May 31, 2017 and August 31, 2016. At May 31, 2017 and August 31, 2016, $141.2 million and $77.9 million, respectively, of the Company's inventories were in the form of raw materials.

14




NOTE 6. 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
Goodwill, gross
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
9,751

 
$
4,970

 
$
57,637

 
$
2,432

 
$
1,982

 
$
76,772

 
Acquisitions
 
—

 
—

 
306

 
—

 
—

 
306

 
Foreign currency translation
 
—

 
—

 
—

 
123

 
(30
)
 
93

Balance at May 31, 2017
 
$
9,751

 
$
4,970

 
$
57,943

 
$
2,555

 
$
1,952

 
$
77,171

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated impairment losses
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(155
)
 
$
—

 
$
(10,399
)
 
Foreign currency translation
 
—

 
—

 
—

 
(8
)
 
—

 
(8
)
Balance at May 31, 2017
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(163
)
 
$
—

 
$
(10,407
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
—

 
$
4,970

 
$
57,144

 
$
2,277

 
$
1,982

 
$
66,373

 
Acquisitions
 
—

 
—

 
306

 
—

 
—

 
306

 
Foreign currency translation
 
—

 
—

 
—

 
115

 
(30
)
 
85

Balance at May 31, 2017
 
$
—

 
$
4,970

 
$
57,450

 
$
2,392

 
$
1,952

 
$
66,764


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $20.5 million and $18.6 million at May 31, 2017 and August 31, 2016, respectively, and are included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. Intangible amortization expense from continuing operations was $0.9 million and $1.9 million for the three and nine months ended May 31, 2017, respectively, and $1.0 million and $3.1 million for the three and nine months ended May 31, 2016, respectively. Excluding goodwill, there are no significant intangible assets with indefinite lives.
NOTE 7. CREDIT ARRANGEMENTS

The Company has 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 $3.0 million at both May 31, 2017 and August 31, 2016. The Company had no amounts drawn under the Credit Agreement at May 31, 2017 and August 31, 2016.

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. At May 31, 2017, the Company's interest coverage ratio was 5.98 to 1.00, and the Company's debt to capitalization ratio was 0.43 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. At May 31, 2017, the Company had sufficient liquidity and was in compliance with this covenant. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").

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


15



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 hedging 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 three and 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 hedging 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 three and nine months ended May 31, 2016.

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, 2017 and August 31, 2016, the unamortized amounts were $5.9 million and $11.6 million, respectively. Amortization of the deferred gain for each of the three and nine months ended May 31, 2017 and 2016 was $1.9 million and $5.7 million, respectively.

At May 31, 2017, the Company was in compliance with all covenants contained in its debt agreements.

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, 2017
 
May 31, 2017
 
August 31, 2016
2023 Notes
 
4.875%
 
$
330,000

 
$
330,000

2018 Notes
 
6.40%
 
405,406

 
408,874

2017 Notes
 
5.74%
 
300,372

 
302,601

Other, including equipment notes
 
 
 
30,984

 
34,166

Total debt
 
 
 
1,066,762

 
1,075,641

     Less debt issuance costs
 
 
 
3,432

 
4,224

Total amounts outstanding
 
 
 
1,063,330

 
1,071,417

     Less current maturities
 
 
 
311,654

 
313,469

Long-term debt
 
 
 
$
751,676

 
$
757,948


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

At both May 31, 2017 and August 31, 2016, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN 175 million ($47.0 million as of May 31, 2017). The uncommitted credit facilities as of May 31, 2017 have expiration dates ranging from November 2017 to March 2018, which CMCP intends to renew upon expiration. At May 31, 2017 and August 31, 2016, no amounts were outstanding under these facilities. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, which totaled $1.5 million at both May 31, 2017 and August 31, 2016. During the nine months ended May 31, 2017 and 2016, CMCP had no borrowings and no repayments under its uncommitted credit facilities.

The Company capitalized $2.9 million and $6.6 million of interest in the cost of property, plant and equipment during the three and nine months ended May 31, 2017, respectively, and $0.6 million and $1.6 million for the three and nine months ended May 31, 2016, respectively. Cash paid for interest during the three and nine months ended May 31, 2017 was $8.3 million and $41.4 million, respectively, and $9.1 million and $50.0 million during the three and nine months ended May 31, 2016, respectively.

16



NOTE 8. NEW MARKETS TAX CREDIT TRANSACTIONS

The Company, through its wholly-owned subsidiary, CMC Steel Oklahoma, LLC ("CMC Steel OK"), is in the process of constructing a minimill with an expected commissioning date in late calendar year 2017. Additionally, the Company, through its wholly-owned subsidiary, CMC Post Oklahoma, LLC ("CMC Post OK"), is in the process of constructing a T-post shop with an expected commissioning date in the summer of 2018. Both projects are located in Durant, Oklahoma. In connection with these projects, the Company entered into transactions that qualified through the New Markets Tax Credit program provided for in the Community Renewal Tax Relief Act of 2000 (the "NMTC Program"), as the minimill and T-post shop will be located in a zone designated by the IRS as eligible for the NMTC Program 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 (a) qualifies as a Community Development Entity ("CDE"), (b) 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 (c) 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 (the "Recapture Period") as provided in the Internal Revenue Code.

Minimill NMTC Transaction

In the second quarter of fiscal 2016, certain of the Company's subsidiaries entered into an NMTC transaction with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"), related to the development, construction and equipping of a new minimill in Durant, Oklahoma (the "Minimill Project"). To effect the transaction, USBCDC made a $17.7 million capital contribution ("the USBCDC Equity") to USBCDC Investment Fund 156, LLC, a Missouri limited liability company (the "Investment Fund"). Additionally, Commonwealth Acquisition Holdings, Inc., a wholly-owned subsidiary of the Company ("Commonwealth"), made a $35.3 million loan to the Investment Fund at an interest rate of approximately 1.08% per year with a maturity date of December 24, 2045 (the "Commonwealth Mill Loan"). The Investment Fund used $51.5 million of the proceeds received from the Commonwealth Mill Loan and the USBCDC Equity to make QEIs into CDEs, which, in turn, used $50.7 million of the QEIs to make loans to CMC Steel OK with terms similar to the Commonwealth Mill Loan and as partial financing for the Minimill Project. The proceeds of the loans from the CDEs were recorded as restricted cash and included in other current assets in the accompanying unaudited condensed consolidated balance sheets. In connection with this NMTC transaction, CMC Steel OK spent $21.0 million for qualified construction, development, and equipping activities for the Minimill Project during the nine months ended May 31, 2017. The balance remaining in restricted cash was $0.7 million at May 31, 2017.

Post Shop NMTC Transaction

In the third quarter of fiscal 2017, certain of the Company's subsidiaries entered into a second NMTC transaction with USBCDC, related to the development, construction and equipping of a new T-post shop in Durant, Oklahoma (the "Post Shop Project"). To effect the transaction, USBCDC made capital contributions to Twain Investment Fund 219, LLC (the "Fund 219"), and Twain Investment Fund 222 (the "Fund 222"), both Missouri limited liability companies, in the amounts of $2.8 million (the "USBCDC Fund 219 Equity") and $2.2 million (the "USBCDC Fund 222 Equity"), respectively. Additionally, Commonwealth made a $10.4 million loan to Fund 219 at an interest rate of approximately 1.16% per year with a maturity date of March 23, 2047 (the "Commonwealth Post Shop Loan"). Fund 219 used $12.8 million of the proceeds received from the Commonwealth Post Shop Loan and the USBCDC Fund 219 Equity to make a QEI into a CDE, which, in turn, used $12.6 million of the QEI to make a loan to CMC Post OK with terms similar to the Commonwealth Post Shop Loan and as partial financing for the Post Shop Project. Additionally, Fund 222 used $2.2 million of the proceeds received from the USBCDC Fund 222 Equity to make a QEI into a CDE, which, in turn, used $2.1 million of the QEI to make a loan to CMC Post OK. The proceeds of the loans from the CDEs were recorded as restricted cash and included in other current assets in the accompanying unaudited condensed consolidated balance sheet. In connection with this NMTC transaction, CMC Post OK spent $0.8 million for qualified construction, development, and equipping activities for the Post Shop Project during the nine months ended May 31, 2017. The balance remaining in restricted cash was $13.3 million at May 31, 2017.

Variable Interest Entities

By virtue of its capital contributions to the Investment Fund and the Fund 219, USBCDC is entitled to substantially all of 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 Investment Fund and the Fund 219 at the end of the Recapture Period. The Company believes USBCDC will exercise the put options in 2022 and 2025, respectively, following the end of the respective Recapture Periods. The value attributed to the put/call is de minimis. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC transactions. Non-compliance with applicable requirements could

17



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 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 these transactions.

The Company has determined that the Investment Fund and Fund 219 are variable interest entities ("VIEs"), of which the Company is the primary beneficiary and has consolidated them in accordance with Accounting Standards Codification Topic 810, Consolidation. USBCDC’s contributions are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Direct costs incurred in structuring the transactions were deferred and are recognized as expense over each seven year recapture period. Incremental costs to maintain the structures during the compliance periods are recognized as incurred.

The Company has determined that Fund 222 is a VIE, of which the Company is not the primary beneficiary and has therefore treated the QEI of $2.1 million from Fund 222 as debt. The debt is included in long-term debt in the accompanying unaudited condensed consolidated balance sheet as of May 31, 2017.
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.

At May 31, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $262.8 million and $36.9 million, respectively. 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.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2017:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
1,925

 MT
Aluminum
 
Short
 
25

 MT
Copper
 
Long
 
555

 MT
Copper
 
Short
 
5,250

 MT
Zinc
 
Long
 
7

 MT
 _________________
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's unaudited condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 2017 and May 31, 2016. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.


18



The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the unaudited condensed consolidated statements of earnings: 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2017
 
2016
 
2017
 
2016
Commodity
 
Cost of goods sold
 
$
1,654

 
$
224

 
$
(3,121
)
 
$
2,172

Foreign exchange
 
Net sales
 
(2
)
 
—

 
(2
)
 
(4
)
Foreign exchange
 
Cost of goods sold
 
(5
)
 
(9
)
 
(38
)
 
72

Foreign exchange
 
SG&A expenses
 
(1,076
)
 
(6,304
)
 
2,295

 
9,410

Gain (loss) before income taxes
 
 
 
$
571

 
$
(6,089
)
 
$
(866
)
 
$
11,650


The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
 
 
Location of gain (loss) recognized in income on derivatives
 
Amount of gain (loss) recognized in income on derivatives for the three months ended May 31,
 
Location of gain (loss) recognized in income on related hedged items
 
Amount of gain (loss) recognized in income on related hedge items for the three months ended May 31,
 
 
2017
 
2016
 
 
2017
 
2016
Foreign exchange
 
Net sales
 
$
(102
)
 
$
(122
)
 
Net sales
 
$
102

 
$
122

Foreign exchange
 
Cost of goods sold
 
1,042

 
901

 
Cost of goods sold
 
(1,042
)
 
(901
)
Gain (loss) before income taxes
 
 
 
$
940

 
$
779

 
 
 
$
(940
)
 
$
(779
)

 
 
Location of gain (loss) recognized in income on derivatives
 
Amount of gain (loss) recognized in income on derivatives for the nine months ended May 31,
 
Location of gain (loss) recognized in income on related hedged items
 
Amount of gain (loss) recognized in income on related hedge items for the nine months ended May 31,
 
 
2017
 
2016
 
 
2017
 
2016
Foreign exchange
 
Net sales
 
$
(58
)
 
$
(39
)
 
Net sales
 
$
58

 
$
39

Foreign exchange
 
Cost of goods sold
 
435

 
90

 
Cost of goods sold
 
(435
)
 
(90
)
Gain (loss) before income taxes
 
 
 
$
377

 
$
51

 
 
 
$
(377
)
 
$
(51
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI (Loss) (in thousands)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2017
 
2016
 
2017
 
2016
Commodity
 
$
(9
)
 
$
(56
)
 
$
208

 
$
(280
)
Foreign exchange
 
263

 
40

 
488

 
749

Gain (loss), net of income taxes
 
$
254

 
$
(16
)
 
$
696

 
$
469


Refer to Note 3, Accumulated Other Comprehensive Income (Loss), of the unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q for the effective portion of derivatives designated as cash flow hedging instruments reclassified from AOCI.

The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's unaudited condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at May 31, 2017 and August 31, 2016. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows: 


19



Derivative Assets (in thousands)
 
May 31, 2017
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
13

 
$
4

Commodity — not designated for hedge accounting
 
324

 
584

Foreign exchange — designated for hedge accounting
 
606

 
1,398

Foreign exchange — not designated for hedge accounting
 
2,374

 
750

Derivative assets (other current assets)*
 
$
3,317

 
$
2,736

 
Derivative Liabilities (in thousands)
 
May 31, 2017
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
—

 
$
5

Commodity — not designated for hedge accounting
 
238

 
117

Foreign exchange — designated for hedge accounting
 
101

 
902

Foreign exchange — not designated for hedge accounting
 
1,805

 
1,161

Derivative liabilities (accrued expenses and other payables)*
 
$
2,144

 
$
2,185

 _________________ 
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.

As of May 31, 2017, all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months. All of the instruments are highly liquid and were not entered into for trading purposes.

20



NOTE 10. FAIR VALUE

The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities;

Level 2 - Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly; and

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:
 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
May 31, 2017
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Investment deposit accounts (1)
 
$
230,025

 
$
230,025

 
$
—

 
$
—

Commodity derivative assets (2)
 
337

 
324

 
13

 
—

Foreign exchange derivative assets (2)
 
2,980

 
—

 
2,980

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
238

 
238

 
—

 
—

Foreign exchange derivative liabilities (2)
 
1,906

 
—

 
1,906

 
—


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2016
 
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)
 
$
278,759

 
$
278,759

 
$
—

 
$
—

Commodity derivative assets (2)
 
588

 
584

 
4

 
—

Foreign exchange derivative assets (2)
 
2,148

 
—

 
2,148

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
122

 
117

 
5

 
—

Foreign exchange derivative liabilities (2)
 
2,063

 
—

 
2,063

 
—

 _________________ 
(1) Investment deposit accounts are short-term in nature, and the value is determined by principal plus interest. The investment portfolio mix can change each period based on the Company's assessment of investment options.

(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivative instruments and the classification of the assets and liabilities is included in Note 9, Derivatives and Risk Management.


21



There were no material non-recurring fair value remeasurements during the three and nine months ended May 31, 2017. On June 10, 2016, the Company, through its wholly-owned Australian subsidiary, G.A.M. Steel Pty. Ltd., signed a definitive asset sale agreement to sell its remaining steel distribution assets located in Australia. For the third quarter of fiscal 2016, the Company recorded an impairment charge of $15.8 million, including the impact of an approximate $13.5 million accumulated foreign currency translation loss, on this remaining component of the Australian steel distribution business that was classified as held for sale at May 31, 2016 and as discontinued operations during the three and nine months ended May 31, 2016. After consideration of the impairment charge, the fair value, less costs to sell, of this component was $10.4 million at May 31, 2016. The signed definitive asset sale agreement (Level 3) was the basis for the determination of fair value of this component. There were no other material non-recurring fair value measurements during the three and nine months ended May 31, 2016.

The carrying values of the Company's short-term items, including the deferred purchase price of accounts receivable, documentary letters of credit and notes payable, approximate fair value due to their short-term nature.

The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the unaudited condensed consolidated balance sheets were as follows:
 
 
 
 
May 31, 2017
 
August 31, 2016
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2023 Notes (1)
 
Level 2
 
$
330,000

 
$
333,630

 
$
330,000

 
$
332,010

2018 Notes (1)
 
Level 2
 
405,406

 
424,007

 
408,874

 
432,303

2017 Notes (1)
 
Level 2
 
300,372

 
301,230

 
302,601

 
311,250

_________________
(1) The fair value of the notes is determined based on indicated market values.
NOTE 11. INCOME TAX

The Company's effective income tax rate from continuing operations for the three and nine months ended May 31, 2017 was 24.2% and 24.9%, respectively, compared with 23.3% and 25.5% for the three and nine months ended May 31, 2016, respectively. The effective tax rate is determined by computing the estimated annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the appropriate period. Several factors determine the Company's effective tax rate, including the mix and amount of global earnings, the impact of loss companies for which no tax benefit is available due to valuation allowances, audit related adjustments, and the impact of permanent tax adjustments.

For the three and nine months ended May 31, 2017 and 2016, the tax rate was lower than the statutory income tax rate of 35%. Items that impacted the effective tax rate included: