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, 2018
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, a 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 25, 2018, 117,014,019 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)
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
1,204,484

 
$
1,044,713

 
$
3,335,285


$
2,759,939

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,035,914

 
896,277

 
2,896,531


2,357,867

Selling, general and administrative expenses
 
101,422

 
93,415

 
306,009


282,384

Interest expense
 
11,511

 
12,448

 
25,303

 
38,212

 
 
1,148,847

 
1,002,140

 
3,227,843


2,678,463

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
55,637

 
42,573

 
107,442


81,476

Income taxes
 
13,312

 
11,006

 
23,465


21,231

Earnings from continuing operations
 
42,325

 
31,567

 
83,977


60,245

 
 
 
 
 
 





Earnings (loss) from discontinued operations before income taxes (benefit)
 
(3,389
)
 
9,325

 
5,021

 
19,687

Income taxes (benefit)
 
(1,029
)
 
1,626

 
2,052

 
4,059

Earnings (loss) from discontinued operations
 
(2,360
)
 
7,699

 
2,969

 
15,628

 
 
 
 
 
 





Net earnings
 
$
39,965

 
$
39,266

 
$
86,946

 
$
75,873

 
 
 
 
 
 



Basic earnings (loss) per share*
 
 
 
 
 



Earnings from continuing operations
 
$
0.36

 
$
0.27

 
$
0.72


$
0.52

Earnings (loss) from discontinued operations
 
(0.02
)
 
0.07

 
0.03


0.14

Net earnings
 
$
0.34

 
$
0.34

 
$
0.74


$
0.66

 
 
 
 
 
 



Diluted earnings (loss) per share*
 
 
 
 
 



Earnings from continuing operations
 
$
0.36

 
$
0.27

 
$
0.71


$
0.51

Earnings (loss) from discontinued operations
 
(0.02
)
 
0.07

 
0.03


0.13

Net earnings
 
$
0.34

 
$
0.34

 
$
0.74


$
0.65

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.36


$
0.36

Average basic shares outstanding
 
117,111,799

 
115,886,372

 
116,722,504


115,574,289

Average diluted shares outstanding
 
118,254,791

 
117,205,369

 
118,050,864


117,087,341

See notes to unaudited condensed consolidated financial statements.

* EPS is calculated independently for each component and may not sum to Net Earnings EPS due to rounding

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)
 
2018
 
2017
 
2018
 
2017
Net earnings
 
$
39,965

 
$
39,266

 
$
86,946

 
$
75,873

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(26,434
)
 
27,109

 
(11,656
)
 
15,129

Reclassification for translation loss realized upon liquidation of investment in foreign entity
 
1,328

 
968

 
1,328

 
968

Foreign currency translation adjustment
 
(25,106
)
 
28,077

 
(10,328
)
 
16,097

Net unrealized gain (loss) on derivatives:
 
 
 
 
 
 
 
 
Unrealized holding gain
 
13

 
254

 
38

 
696

Reclassification for gain included in net earnings
 
(56
)
 
(333
)
 
(236
)
 
(853
)
Net unrealized loss on derivatives
 
(43
)
 
(79
)
 
(198
)
 
(157
)
Defined benefit obligation:
 
 
 
 
 
 
 
 
Amortization of prior services
 
(7
)
 
(9
)
 
(20
)
 
(27
)
Reclassification for settlement losses
 
—

 
—

 
437

 
—

Defined benefit obligation
 
(7
)
 
(9
)
 
417

 
(27
)
Other comprehensive income (loss)
 
(25,156
)
 
27,989

 
(10,109
)
 
15,913

Comprehensive income
 
$
14,809

 
$
67,255

 
$
76,837

 
$
91,786

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, 2018
 
August 31, 2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
600,444

 
$
252,595

Accounts receivable (less allowance for doubtful accounts of $4,648 and $4,146)
 
678,343

 
561,411

Inventories, net
 
595,231

 
462,648

Other current assets
 
109,656

 
140,136

Assets of businesses held for sale & discontinued operations
 
11,282

 
297,110

Total current assets
 
1,994,956

 
1,713,900

Property, plant and equipment, net
 
1,074,357

 
1,051,677

Goodwill
 
64,316

 
64,915

Other noncurrent assets
 
111,864

 
144,639

Total assets
 
$
3,245,493

 
$
2,975,131

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
241,584

 
$
226,456

Accrued expenses and other payables
 
247,635

 
274,972

Current maturities of long-term debt
 
19,874

 
19,182

Liabilities of businesses held for sale & discontinued operations
 
2,843

 
87,828

Total current liabilities
 
511,936

 
608,438

Deferred income taxes
 
30,760

 
49,160

Other long-term liabilities
 
110,792

 
111,023

Long-term debt
 
1,139,103

 
805,580

Total liabilities
 
1,792,591

 
1,574,201

Commitments and contingencies (Note 13)
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 117,014,019 and 115,793,736 shares
 
1,290

 
1,290

Additional paid-in capital
 
347,744

 
349,258

Accumulated other comprehensive loss
 
(91,622
)
 
(81,513
)
Retained earnings
 
1,408,715

 
1,363,806

Less treasury stock, 12,046,645 and 13,266,928 shares at cost
 
(213,411
)
 
(232,084
)
Stockholders' equity attributable to CMC
 
1,452,716

 
1,400,757

Stockholders' equity attributable to noncontrolling interests
 
186

 
173

Total stockholders' equity
 
1,452,902

 
1,400,930

Total liabilities and stockholders' equity
 
$
3,245,493

 
$
2,975,131

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)
 
2018
 
2017
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
86,946

 
$
75,873

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
99,443

 
93,049

Stock-based compensation
 
18,247

 
19,716

Asset impairment
 
14,265

 
622

Deferred income taxes & other long-term taxes
 
5,829

 
(2,538
)
Provision for losses on receivables, net
 
2,193

 
856

Net gain on disposals of subsidiaries, assets and other
 
(1,578
)
 
(343
)
Write-down of inventories
 
1,358

 
1,820

Amortization of interest rate swaps termination gain
 
—

 
(5,698
)
Changes in operating assets and liabilities
 
(135,058
)
 
(164,443
)
Net cash flows from operating activities
 
91,645

 
18,914

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(144,268
)
 
(162,082
)
Proceeds from the sale of subsidiaries
 
75,483

 
—

Proceeds from settlement of life insurance policies
 
25,000

 
—

Decrease in restricted cash, net
 
23,592

 
7,492

Acquisitions
 
(6,980
)
 
(54,425
)
Proceeds from the sale of property, plant and equipment and other
 
6,315

 
1,884

Net cash flows used by investing activities
 
(20,858
)
 
(207,131
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Proceeds from issuance of long-term debt
 
350,000

 
—

Cash dividends
 
(42,036
)
 
(41,619
)
Repayments on long-term debt
 
(15,382
)
 
(8,775
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(9,836
)
 
(5,516
)
Debt issuance costs
 
(5,254
)
 
—

Proceeds from New Markets Tax Credit transactions
 
—

 
2,141

Increase in documentary letters of credit, net
 
18

 
569

Contribution from noncontrolling interests
 
13

 
14

Net cash flows from (used by) financing activities
 
277,523

 
(53,186
)
Effect of exchange rate changes on cash
 
(461
)
 
(363
)
Increase (decrease) in cash and cash equivalents
 
347,849

 
(241,766
)
Cash and cash equivalents at beginning of year
 
252,595

 
517,544

Cash and cash equivalents at end of period
 
$
600,444

 
$
275,778

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
28,252

 
$
31,024

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, 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

 
 
 
 
 
 
 
 
 
 
 
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, 2017
129,060,664

$
1,290

$
349,258

$
(81,513
)
$
1,363,806

(13,266,928
)
$
(232,084
)
$
173

$
1,400,930

Net earnings
 
 
 
 
86,946

 
 
—

86,946

Other comprehensive loss
 
 
 
(10,109
)
 
 
 
 
(10,109
)
Cash dividends ($0.36 per share)
 
 
 
 
(42,037
)
 
 
 
(42,037
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(28,509
)
 
 
1,220,283

18,673

 
(9,836
)
Stock-based compensation
 
 
11,747

 
 
 
 
 
11,747

Contribution of noncontrolling interest
 
 
 
 
 
 
 
13

13

Reclassification of share-based liability awards
 
 
15,248

 
 
 
 
 
15,248

Balance, May 31, 2018
129,060,664

$
1,290

$
347,744

$
(91,622
)
$
1,408,715

(12,046,645
)
$
(213,411
)
$
186

$
1,452,902

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, 2017 ("2017 Form 10-K") filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements included in the 2017 Form 10-K. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for the full fiscal year.

Recently Issued Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815). The ASU better aligns accounting rules with a company's risk management activities; better reflects economic results of hedging in financial statements; and simplifies hedge accounting treatment. For public companies, this standard is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. The standard must be applied to hedging relationships existing on the date of adoption, and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements as well as determining the Company's planned adoption date.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018. The Company plans to early adopt ASU 2016-18 in the fourth quarter of fiscal 2018. The provisions of this guidance are to be applied using a retrospective approach, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230).  ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted.  The Company plans to adopt ASU 2016-15 no later than the required adoption date of September 1, 2018. The provisions of this guidance are to be adopted retrospectively.  The Company is continuing to evaluate the impact this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and has modified the standard thereafter. The standard requires a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of twelve months or longer. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and will be effective for the Company beginning September 1, 2019, at which point the Company plans to adopt the standard. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the guidance for all periods presented. The Company has a project plan in place to address the effects of ASU 2016-02 and any modifications thereafter, including evaluation of the impact of this guidance on internal processes and systems, internal controls, and its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has modified the standard thereafter. Under the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018, at which point the Company plans to adopt the standard. The standard permits the use of either the retrospective or cumulative effect transition method. The Company currently expects to adopt the standard using the modified retrospective method. Upon adoption of ASU 2014-09, for certain contracts within the Americas

8



Fabrication segment in which revenue is currently recognized on a percentage of completion basis using a cost-to-cost measure of progress, the measure of progress will change to an output measure to align with the pattern of transfer of control on these contracts. In addition, the standard includes expanded disclosure requirements, which the Company continues to analyze. The Company believes the adoption of this standard will not have a material impact on its statement of financial position, results of operations or cash flows. As part of the overall evaluation of the standard, the Company is also identifying and preparing to implement changes to its accounting policies, practices, and internal controls over financial reporting to support the standard both in the transition period as well as on an on-going basis.
NOTE 2. CHANGES IN BUSINESS

Pending Acquisition

On December 29, 2017, the Company entered into a definitive purchase agreement to acquire certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. (the "Business"), a producer of long and specialty steel products in the Americas for a cash purchase price of $600.0 million, subject to customary purchase price adjustments. The acquisition includes 33 rebar fabrication facilities in the U.S. as well as steel mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California, with annual melt capacity of 2.7 million tons, bringing the Company’s global melt capacity to approximately 7.2 million tons at the close of the transaction. The closing of the transaction is expected before calendar year-end 2018 and is subject to the satisfaction or waiver of customary closing conditions, including customary regulatory review.

The Company expects to fund the purchase price for the acquisition, including related fees and expenses, with proceeds from the offering of the 2026 Notes (as defined in Note 7, Credit Arrangements), together with the proceeds from the incurrence of a new term loan under the Company's existing Credit Agreement (as defined in Note 7, Credit Arrangements) and cash on hand.

Dispositions and Businesses Held for Sale

During the third quarter of fiscal 2018, the Company sold substantially all of the assets of its structural steel fabrication operations, which were part of the Americas Fabrication segment. This disposition did not meet the criteria for discontinued operations. As a result of the disposition, during the nine months ended May 31, 2018, the Company recognized impairment charges of $13.0 million, of which $0.9 million was recognized during the third quarter of fiscal 2018. The assets and liabilities related to these operations were included as assets and liabilities of businesses held for sale & discontinued operations in the condensed consolidated balance sheet at August 31, 2017, and consisted of the following:
(in thousands)
 
August 31, 2017*
Assets:
 
 
Accounts receivable
 
$
38,279

Inventories
 
10,676

Other current assets
 
77

Assets of businesses held for sale & discontinued operations
 
$
49,032

 
 
 
Liabilities:
 
 
Accounts payable-trade
 
$
13,108

Accrued expenses and other payables
 
16,785

Liabilities of businesses held for sale & discontinued operations
 
$
29,893

_________________
* At August 31, 2017, $8.8 million of property, plant, and equipment, net of accumulated depreciation and amortization was included in other noncurrent assets on the consolidated balance sheets.

Discontinued Operations

In June 2017, the Company announced a plan to exit its International Marketing and Distribution segment, including its trading operations in the U.S., Asia, and Australia. As an initial step in this plan, on August 31, 2017, the Company completed the sale of its raw materials business, CMC Cometals. Additionally, during the second quarter of fiscal 2018, the remaining operations related to the Company's steel trading business in the U.S. and Asia were substantially wound down. Finally, during the third quarter of fiscal 2018, the Company sold certain assets and liabilities of its Australian steel trading business, resulting in an overall transaction loss, including selling costs, of $5.3 million. Such loss was primarily due to impairment charges related to accumulated

9



foreign currency translation, $4.2 million of which the Company recorded during fiscal 2017. The results of these activities are included in discontinued operations in the unaudited condensed consolidated statements of earnings for all periods presented. With the conclusion of operations in this segment, any activities carried out within the segment are no longer of ongoing significance; accordingly, segment data with respect to International Marketing and Distribution activities will no longer be reported. See Note 14, Business Segments, for further discussion of the exit of the International Marketing and Distribution segment.

The major classes of line items constituting earnings from discontinued operations in the unaudited condensed consolidated statements of earnings, which primarily relate to International Marketing and Distribution activities, are presented in the table below.

 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
3,262

 
$
337,903

 
$
304,384

 
$
847,338

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of goods sold
 
4,233

 
312,917

 
276,371

 
784,836

Selling, general and administrative expenses
 
2,418

 
15,740

 
23,078

 
42,919

Interest expense
 
—

 
(79
)
 
(86
)
 
(104
)
Earnings (loss) before income taxes
 
(3,389
)
 
9,325

 
5,021

 
19,687

Income taxes (benefit)
 
(1,029
)
 
1,626

 
2,052

 
4,059

Earnings (loss) from discontinued operations
 
$
(2,360
)
 
$
7,699

 
$
2,969

 
$
15,628


There were no material operating or investing non-cash items for discontinued operations for the nine months ended May 31, 2018 and 2017.

Components of the International Marketing and Distribution segment meeting the criteria for discontinued operations have been re-classified as assets and liabilities of business held for sale & discontinued operations in the unaudited condensed consolidated balance sheets for all periods presented, the major components of which are presented in the table below.

(in thousands)
 
May 31, 2018
 
August 31, 2017*
Assets:
 
 
 
 
Accounts receivable
 
$
6,954

 
$
106,905

Inventories, net
 
—

 
141,135

Other current assets
 
4,111

 
38

Property, plant and equipment, net
 
217

 
—

Assets of businesses held for sale & discontinued operations
 
$
11,282

 
$
248,078

 
 
 
 
 
Liabilities:
 
 
 
 
Accounts payable-trade
 
$
—

 
$
42,563

Accrued expenses and other payables
 
2,843

 
15,372

Liabilities of businesses held for sale & discontinued operations
 
$
2,843

 
$
57,935

 
 
 
 
 
_________________
* Property, plant, and equipment, net of accumulated depreciation and amortization of $0.8 million at August 31, 2017 was included in other noncurrent assets on the unaudited condensed consolidated balance sheets.

10



NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
 
 
Three Months Ended May 31, 2018
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, February 28, 2018
 
$
(66,000
)
 
$
1,432

 
$
(1,898
)
 
$
(66,466
)
Other comprehensive income (loss) before reclassifications
 
(26,434
)
 
16

 
—

 
(26,418
)
Amounts reclassified from AOCI
 
1,328

 
(70
)
 
(9
)
 
1,249

Income taxes
 
—

 
11

 
2

 
13

Net other comprehensive (loss)
 
(25,106
)
 
(43
)
 
(7
)
 
(25,156
)
Balance, May 31, 2018
 
$
(91,106
)
 
$
1,389

 
$
(1,905
)
 
$
(91,622
)

 
 
Nine Months Ended May 31, 2018
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, August 31, 2017
 
$
(80,778
)
 
$
1,587

 
$
(2,322
)
 
$
(81,513
)
Other comprehensive income (loss) before reclassifications
 
(11,656
)
 
47

 
—

 
(11,609
)
Amounts reclassified from AOCI
 
1,328

 
(314
)
 
647

 
1,661

Income taxes (benefit)
 
—

 
69

 
(230
)
 
(161
)
Net other comprehensive income (loss)
 
(10,328
)
 
(198
)
 
417

 
(10,109
)
Balance, May 31, 2018
 
$
(91,106
)
 
$
1,389

 
$
(1,905
)
 
$
(91,622
)

 
 
Three Months Ended May 31, 2017
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, February 28, 2017
 
$
(124,235
)
 
$
2,108

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

 
368

 
—

 
27,477

Amounts reclassified from AOCI
 
968

 
(459
)
 
(11
)
 
498

Income taxes
 
—

 
12

 
2

 
14

Net other comprehensive income (loss)
 
28,077

 
(79
)
 
(9
)
 
27,989

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

 
$
(2,872
)
 
$
(97,001
)
 
 
Nine Months Ended May 31, 2017
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, August 31, 2016
 
$
(112,255
)
 
$
2,186

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

 
926

 
—

 
16,055

Amounts reclassified from AOCI
 
968

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

 
7

 
6

 
13

Net other comprehensive income (loss)
 
16,097

 
(157
)
 
(27
)
 
15,913

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

 
$
(2,872
)
 
$
(97,001
)

Items reclassified out of AOCI were not material for the three and nine months ended May 31, 2018 and 2017, thus the corresponding line items in the unaudited condensed consolidated statements of earnings to which the items were reclassified are not presented.

11



NOTE 4. SALES OF ACCOUNTS RECEIVABLE

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

At May 31, 2018 and August 31, 2017, under its U.S. sale of trade accounts receivable program, the Company had sold $272.9 million and $226.9 million of trade accounts receivable, respectively, to the financial institutions. At May 31, 2018, the Company had no advance payments outstanding on the sale of its U.S. trade accounts receivable. At August 31, 2017, the Company had $90.0 million in advance payments outstanding on the sale of its U.S. trade accounts receivable.

In addition to the U.S. sale of trade accounts receivable program described above, the Company's international subsidiaries in Poland sell, and previously in Australia have sold, trade accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the trade accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy and are removed from the consolidated balance sheets. The Polish program has a facility limit of 220.0 million Polish zloty ("PLN") ($59.6 million as of May 31, 2018) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable sold under the terms of the arrangement. Under the Polish and Australian programs, the cash advances received were reflected as cash from operating activities on the Company's unaudited condensed consolidated statements of cash flows. During the first quarter of fiscal 2017, the Company's Australian program expired, and the Company did not enter into a new program.

At May 31, 2018 and August 31, 2017, under its Polish program, the Company sold $79.3 million and $79.5 million of trade accounts receivable, respectively, to the third-party financial institution. At May 31, 2018, the Company had $18.1 million of advance payments outstanding on the sales of its Polish trade accounts receivable. At August 31, 2017, there were no advance payments outstanding under the Polish program.

During the nine months ended May 31, 2018 and 2017, cash proceeds from the U.S. and international sale of trade accounts receivable programs were $145.5 million and $246.0 million, respectively, and cash payments to the owners of trade accounts receivable were $217.4 million and $250.3 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the trade accounts receivable for the U.S. program. Discounts on U.S. and international sales of trade accounts receivable were $0.3 million and $0.7 million for the three and nine months ended May 31, 2018, respectively, and $0.2 million and $0.7 million for the three and nine months ended May 31, 2017, respectively, and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statements of earnings.

As of May 31, 2018 and August 31, 2017, the deferred purchase price on the Company's U.S. and international sale of trade accounts receivable programs was included in accounts receivable on the Company's unaudited condensed consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of trade accounts receivable programs.



12



 
 
Three Months Ended May 31, 2018
(in thousands)
 
Total
 
U.S.
 
Poland
Beginning balance
 
$
336,212

 
$
244,884

 
$
91,328

Transfers of accounts receivable
 
770,596

 
653,801

 
116,795

Collections
 
(774,154
)
 
(627,271
)
 
(146,883
)
Ending balance
 
$
332,654

 
$
271,414

 
$
61,240


 
 
Nine Months Ended May 31, 2018
(in thousands)
 
Total
 
U.S.
 
Poland
Beginning balance
 
$
215,123

 
$
135,623

 
$
79,500

Transfers of accounts receivable
 
2,116,243

 
1,741,451

 
374,792

Collections
 
(1,998,712
)
 
(1,605,660
)
 
(393,052
)
Ending balance
 
$
332,654

 
$
271,414

 
$
61,240


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

 
$
258,719

 
$
53,727

Transfers of accounts receivable
 
777,104

 
671,429

 
105,675

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

 
$
303,966

 
$
60,248

 _________________ 
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of $144.1 million and collections of $134.0 million, for the three months ended May 31, 2017.
 
 
Nine Months Ended May 31, 2017
(in thousands)
 
Total
 
U.S.*
 
Australia**
 
Poland
Beginning balance
 
$
289,748

 
$
212,762

 
$
26,662

 
$
50,324

Transfers of accounts receivable
 
1,977,546

 
1,702,584

 
16,914

 
258,048

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

 
(33,917
)
 
—

Ending balance
 
$
364,214

 
$
303,966

 
$
—

 
$
60,248

 _________________ 
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of $354.5 million and collections of $325.7 million, for the nine months ended May 31, 2017.
**
Includes collections of $3.7 million and program termination of $1.6 million related to discontinued operations and businesses sold, for the nine months ended May 31, 2017.
NOTE 5. INVENTORIES, NET

The majority of the Company's inventories are in the form of semi-finished and finished goods. Under the Company’s business model, products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. Work in process inventories were not material at May 31, 2018 and August 31, 2017. At May 31, 2018 and August 31, 2017, $177.6 million and $116.8 million, respectively, of the Company's inventories were in the form of raw materials.

13




NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table details the changes in the carrying amount of goodwill by reportable segment:
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other*
 
Consolidated
Goodwill, gross
 
 
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2017
 
$
9,751

 
$
4,970

 
$
57,943

 
$
2,664

 
$
1,982

 
$
77,310

 
Foreign currency translation
 
—

 
—

 
—

 
(90
)
 
—

 
(90
)
 
Impairment
 
—

 
—

 
(514
)
 
—

 
—

 
(514
)
 
Reclassification to assets of discontinued operations
 
—

 
—

 
—

 
—

 
(1,982
)
 
(1,982
)
Balance, May 31, 2018
 
$
9,751

 
$
4,970

 
$
57,429

 
$
2,574

 
$
—

 
$
74,724

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated impairment losses
 
 
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2017
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(169
)
 
$
(1,982
)
 
$
(12,395
)
 
Foreign currency translation
 
—

 
—

 
—

 
5

 
—

 
5

 
Reclassification to assets of discontinued operations
 
—

 
—

 
—

 
—

 
1,982

 
1,982

Balance, May 31, 2018
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(164
)
 
$
—

 
$
(10,408
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2017
 
$
—

 
$
4,970

 
$
57,450

 
$
2,495

 
$
—

 
$
64,915

 
Foreign currency translation
 
—

 
—

 
—

 
(85
)
 
—

 
(85
)
 
Impairment
 
—

 
—

 
(514
)
 
—

 
—

 
(514
)
Balance, May 31, 2018
 
$
—

 
$
4,970

 
$
56,936

 
$
2,410

 
$
—

 
$
64,316

_________________
* Other relates to goodwill for the International Marketing and Distribution segment which was moved to discontinued operations during the second quarter of fiscal 2018.

The total gross carrying amounts of the Company's intangible assets subject to amortization were $21.0 million and $19.7 million at May 31, 2018 and August 31, 2017, respectively, and were included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. As part of the Company's purchase of substantially all of the assets of MMFX Technologies Corporation ("MMFX") during the first fiscal quarter of 2018, the Company acquired patents which were assigned a fair value of $7.0 million with a useful life of 7.5 years. See Note 2, Changes in Business, to the unaudited condensed consolidated financial statements included in the Company's November 30, 2017 Quarterly Report on Form 10-Q for more information with respect to the MMFX acquisition. Intangible amortization expense from continuing operations was $0.6 million and $1.6 million for the three and nine months ended May 31, 2018, respectively, and $0.8 million and $1.8 million for the three and nine months ended May 31, 2017, respectively. The nine months ended May 31, 2018 included goodwill impairment charges of $0.5 million, recorded during the second fiscal quarter, related to the Company's sale of its structural steel fabrication operations as discussed in Note 2, Changes in Business. See Note 9, Fair Value, for further discussion related to the impairment. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives as of May 31, 2018.

14



NOTE 7. CREDIT ARRANGEMENTS

Long-term debt was as follows: 
(in thousands)
 
Weighted Average
Interest Rate as of May 31, 2018
 
May 31, 2018
 
August 31, 2017
2027 Notes
 
5.375%
 
$
300,000

 
$
300,000

2026 Notes
 
5.750%
 
350,000

 
—

2023 Notes
 
4.875%
 
330,000

 
330,000

2022 Term Loan
 
3.103%
 
144,375

 
150,000

Other, including equipment notes
 
 
 
46,763

 
52,077

Total debt
 
 
 
1,171,138

 
832,077

     Less debt issuance costs
 
 
 
12,161

 
7,315

Total amounts outstanding
 
 
 
1,158,977

 
824,762

     Less current maturities
 
 
 
19,874

 
19,182

Long-term debt
 
 
 
$
1,139,103

 
$
805,580


In July 2017, the Company issued $300.0 million of 5.375% Senior Notes due July 2027 (the "2027 Notes"). Interest on the 2027 Notes is payable semiannually.

In May 2018, the Company issued $350.0 million of 5.75% Senior Notes due April 2026 (the "2026 Notes"). Issuance costs associated with the 2026 Notes were approximately $5.3 million. Interest on the 2026 Notes is payable semiannually.

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

The Company has a $350.0 million revolving credit facility (the "Revolver") pursuant to the Fourth Amended and Restated Credit Agreement (the "Credit Agreement") and a senior secured term loan in the maximum principal amount of $150.0 million (the "2022 Term Loan"), each with a maturity date in June 2022. The 2022 Term Loan was drawn upon on July 13, 2017. The Company is required to make quarterly payments on the 2022 Term Loan equal to 1.25% of the original principal amount.  The maximum availability under the Credit Agreement, together with the 2022 Term Loan, can be increased to $750.0 million with bank approval. The Company's obligations under the Credit Agreement are collateralized by its U.S. inventory and U.S. fabrication receivables. The Credit Agreement's capacity includes $50.0 million for the issuance of stand-by letters of credit.

On February 21, 2018, the Company entered into a Joinder Agreement and Fifth Amendment to the Credit Agreement, which allowed for a coterminous delayed draw Term Loan A facility in the maximum aggregate principal amount of up to $200.0 million (the "2018 Term Loan"). The proceeds of the 2018 Term Loan are required to be used to (i) finance the acquisition of the Business, (ii) repay certain existing indebtedness of Gerdau S.A. and its subsidiaries, and (iii) pay transaction fees and expenses related thereto. Once drawn, the Company is required to make quarterly payments on the 2018 Term Loan equal to 1.25% of the original principal amount. The 2018 Term Loan has a maturity date of June 2022.

On December 29, 2017, the Company entered into a Fourth Amendment to the Credit Agreement providing for a Term Loan B Facility, as described in Note 7, Credit Arrangements, in the Company's Quarterly Report on Form 10-Q for the period ended February 28, 2018. During the third fiscal quarter of 2018, the Company terminated the commitment letter governing the Term Loan B Facility.

The Company had no amounts drawn under the Revolver at May 31, 2018 and August 31, 2017. The availability under the Revolver was reduced by outstanding letters of credit of $3.3 million and $3.0 million at May 31, 2018 and August 31, 2017, respectively.

Under the Credit Agreement, the Company is required to comply with certain financial and non-financial covenants, including covenants to maintain: (i) an interest coverage ratio (consolidated EBITDA to consolidated interest expense, each as defined in the Credit Agreement) of not less than 2.50 to 1.00 and (ii) a debt to capitalization ratio (consolidated funded debt to total capitalization, each as defined in the Credit Agreement) that does not exceed 0.60 to 1.00. At May 31, 2018, the Company's interest coverage ratio was 7.89 to 1.00, and the Company's debt to capitalization ratio was 0.45 to 1.00. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").

15




At May 31, 2018, the Company was in compliance with all covenants contained in its debt agreements.

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

At May 31, 2018 and August 31, 2017, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN 225.0 million ($61.0 million) and PLN 175.0 million ($49.1 million), respectively. As of May 31, 2018, the uncommitted credit facilities have expiration dates ranging from November 2018 to March 2019. At May 31, 2018 and August 31, 2017, no amounts were outstanding under these facilities. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, guarantees, and/or other financial assurance instruments, which totaled $1.7 million and $1.3 million at May 31, 2018 and August 31, 2017, respectively. During the nine months ended May 31, 2018 and 2017, CMCP had no borrowings and no repayments under its uncommitted credit facilities.

The Company capitalized $0.5 million and $7.3 million of interest in the cost of property, plant and equipment during the three and nine months ended May 31, 2018, respectively, and $2.9 million and $6.6 million for the three and nine months ended May 31, 2017, respectively. Cash paid for interest during the nine months ended May 31, 2018 and 2017 was $30.2 million and $41.4 million, respectively.
NOTE 8. DERIVATIVES AND RISK MANAGEMENT

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

At May 31, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $140.4 million and $64.8 million, respectively. At May 31, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $262.8 million and $36.9 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2018:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
6,125

 MT
Aluminum
 
Short
 
3,075

 MT
Copper
 
Long
 
363

 MT
Copper
 
Short
 
6,021

 MT
 _________________
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's unaudited condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 2018 and May 31, 2017. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.


16



The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the unaudited condensed consolidated statements of earnings (amounts in thousands): 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments
 
Location
 
2018
 
2017
 
2018
 
2017
Commodity
 
Cost of goods sold
 
$
1,498

 
$
1,654

 
$
2,071

 
$
(3,121
)
Foreign exchange
 
Net sales
 
—

 
(2
)
 
—

 
(2
)
Foreign exchange
 
Cost of goods sold
 
—

 
(5
)
 
(50
)
 
(38
)
Foreign exchange
 
SG&A expenses
 
518

 
(1,076
)
 
1,169

 
2,295

Gain (loss) before income taxes
 
 
 
$
2,016

 
$
571

 
$
3,190

 
$
(866
)

The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended May 31,
 
Location of gain (loss) recognized in income on related hedged items
 
Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Three Months Ended May 31,
 
 
2018
 
2017
 
 
2018
 
2017
Foreign exchange
 
Net sales
 
$
163

 
$
(102
)
 
Net sales
 
$
(163
)
 
$
102

Foreign exchange
 
Cost of goods sold
 
(429
)
 
1,042

 
Cost of goods sold
 
429

 
(1,042
)
Gain (loss) before income taxes
 
 
 
$
(266
)
 
$
940

 
 
 
$
266

 
$
(940
)


 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended May 31,
 
Location of gain (loss) recognized in income on related hedged items
 
Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Nine Months Ended May 31,
 
 
2018
 
2017
 
 
2018
 
2017
Foreign exchange
 
Net sales
 
$
(66
)
 
$
(58
)
 
Net sales
 
$
66

 
$
58

Foreign exchange
 
Cost of goods sold
 
1,596

 
435

 
Cost of goods sold
 
(1,596
)
 
(435
)
Gain (loss) before income taxes
 
 
 
$
1,530

 
$
377

 
 
 
$
(1,530
)
 
$
(377
)


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2018
 
2017
 
2018
 
2017
Commodity
 
$
—

 
$
(9
)
 
$
—

 
$
208

Foreign exchange
 
13

 
263

 
38

 
488

Gain, net of income taxes
 
$
13

 
$
254

 
$
38

 
$
696


Refer to Note 3, Accumulated Other Comprehensive Income (Loss), for the effective portion of derivatives designated as cash flow hedging instruments reclassified from AOCI.

The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's unaudited condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at May 31, 2018 and August 31, 2017. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows (amounts are in thousands): 


17



Derivative Assets
 
May 31, 2018
 
August 31, 2017
Commodity — not designated for hedge accounting
 
$
901

 
$
767

Foreign exchange — designated for hedge accounting
 
—

 
81

Foreign exchange — not designated for hedge accounting
 
1,573

 
1,286

Derivative assets (other current assets)*
 
$
2,474

 
$
2,134

 
Derivative Liabilities
 
May 31, 2018
 
August 31, 2017
Commodity — not designated for hedge accounting
 
$
80

 
$
3,251

Foreign exchange — designated for hedge accounting
 
—

 
1,549

Foreign exchange — not designated for hedge accounting
 
1,550

 
3,710

Derivative liabilities (accrued expenses and other payables)*
 
$
1,630

 
$
8,510

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

As of May 31, 2018, all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months. All of the instruments are highly liquid and were not entered into for trading purposes.

18



NOTE 9. FAIR VALUE

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

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

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

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

The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:
 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
May 31, 2018
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Investment deposit accounts (1)
 
$
522,971

 
$
522,971

 
$
—

 
$
—

Commodity derivative assets (2)
 
901

 
901

 
 
 
—

Foreign exchange derivative assets (2)
 
1,573

 
—

 
1,573

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
80

 
80

 
—

 
—

Foreign exchange derivative liabilities (2)
 
1,550

 
—

 
1,550

 
—


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Investment deposit accounts (1)
 
$
43,553

 
$
43,553

 
$
—

 
$
—

Commodity derivative assets (2)
 
767

 
767

 
—

 
—

Foreign exchange derivative assets (2)
 
1,367

 
—

 
1,367

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
3,251

 
3,251

 
—

 
—

Foreign exchange derivative liabilities (2)
 
5,259

 
—

 
5,259

 
—

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

(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivative instruments and the classification of the assets and liabilities is included in Note 8, Derivatives and Risk Management.

In connection with the sale of assets related to the Company's structural steel fabrication operations, the Company recorded an impairment charge of $0.9 million and $13.0 million, for the three and nine months ended May 31, 2018, respectively. The signed definitive asset sale agreement and subsequent post-closing adjustments (Level 2) were the basis for the determination of fair value of these operations. There were no other material non-recurring fair value remeasurements during the three and nine months ended May 31, 2018 and 2017.

19




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

The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the unaudited condensed consolidated balance sheets were as follows:
 
 
 
 
May 31, 2018
 
August 31, 2017
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2027 Notes (1)
 
Level 2
 
$
300,000

 
$
287,052

 
$
300,000

 
$
314,286

2026 Notes (1)
 
Level 2
 
350,000

 
346,966

 
—

 
—

2023 Notes (1)
 
Level 2
 
330,000

 
323,430

 
330,000

 
340,052

2022 Term Loan (2)
 
Level 2
 
144,375

 
144,375

 
150,000

 
150,000

_________________
(1) The fair value of the notes was determined based on indicated market values.
(2) The 2022 Term Loan contains variable interest rates and its carrying value approximates fair value.
NOTE 10. INCOME TAX

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("TCJA") which, among other provisions, reduced the federal corporate tax rate to 21.0% effective January 1, 2018. Due to the Company’s August 31st fiscal year end, this provision will result in a blended statutory U.S. tax rate of 25.7% for fiscal 2018 and a 21.0% statutory U.S. tax rate beginning September 1, 2018.

Accounting Standards Codification ("ASC") 740 requires the change in tax law to be accounted for in the period of enactment. Due to complexities involved in accounting for the TCJA, the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 118 provides a measurement period, which should not extend beyond one year from the date of enactment, to complete the accounting under ASC 740. The Company recognized additional income tax expense of $9.9 million during the nine months ended May 31, 2018 for the effects of those provisions of the TCJA for which amounts are reasonably estimable, including (i) recognition of the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits, in order to transition from a worldwide system with deferral to a territorial-style tax system, and (ii) the remeasurement of the Company’s deferred tax balances as of May 31, 2018 to the lower statutory rates. These provisions of the TCJA, as well as 100% bonus depreciation for qualified assets acquired and placed in service after September 27, 2017, resulted in a $45.8 million reduction to the Company’s net deferred tax liabilities. The impacts of the legislation on the Company’s tax expense and/or the Company’s deferred tax balances may differ from these estimates, possibly materially, and may be adjusted accordingly over the SAB 118 measurement period.

The Company’s current analysis of the following provisions of the TCJA resulted in minimal or no impact on the Company’s financial statements, and as a result, the Company did not record any associated tax expense or benefit as of May 31, 2018: (i) the new tax on global intangible low-taxed income, (ii) the new tax on foreign-derived intangible income, (iii) the base erosion anti-abuse tax, (iv) deductibility limitations on performance-based compensation, (v) deductibility limitations on business interest under Section 163(j) and (vi) deductibility limitations on meal and entertainment related expenses. The Company will continue to evaluate the effect of these provisions and adjust its financial statements if necessary as new information becomes available.

The Company's effective income tax rate from continuing operations for the three and nine months ended May 31, 2018 was 23.9% and 21.8%, respectively, compared with 25.9% and 26.1% for the three and nine months ended May 31, 2017, respectively. The effective tax rate is determined by computing the estimated annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the appropriate period. Several factors determine the Company's effective tax rate, including the mix and amount of global earnings, the impact of subsidiaries with losses for which no tax benefit is available due to valuation allowances, audit-related adjustments, and the impact of permanent tax adjustments.

20




For the three and nine months ended May 31, 2018, the Company's effective tax rate was lower than the blended U.S. statutory income tax rate of 25.7%. The statutory rate for fiscal 2018 was revised during the second quarter of fiscal 2018 due to the provisions of the TCJA, as discussed above. Items that impacted the effective tax rate included:

i.
the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits as a result of the TCJA;
ii.
the remeasurement of the Company’s deferred tax balances to the applicable reduced statutory income tax rates as a result of the TCJA;
iii.
a permanent tax benefit related to a worthless stock deduction from the reorganization and exit of the Company's steel trading business headquartered in the United Kingdom;
iv.
the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19.0%;
v.
a permanent tax benefit recorded under ASU 2016-09 for stock awards that vested during the first nine months of fiscal 2018; and
vi.
a non-taxable gain on assets related to the Company's non-qualified Benefits Restoration Plan ("BRP").

For the three and nine months ended May 31, 2017, the Company's effective tax rate was lower than the U.S. statutory income tax rate of 35.0%. Items that impacted the effective tax rate included:

i.
the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19.0%;
ii.
a permanent tax benefit under Section 199 of the Internal Revenue Code related to domestic production activity;
iii.
a non-taxable gain on assets related to the Company's non-qualified BRP; and
iv.
losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses.

For the three and nine months ended May 31, 2018, the Company’s effective income tax rates from discontinued operations of 30.4% and 40.9%, respectively, were greater than the blended U.S. statutory income tax rate of 25.7% primarily as a result of losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses. Additionally, the effective income tax rates were unfavorably impacted by state taxes imposed on income earned by the Company’s steel trading operations headquartered in the U.S.

For the three and nine months ended May 31, 2017, the Company’s effective income tax rate from discontinued operations of 17.4% and 20.6%, respectively, was less than the U.S. statutory income tax rate of 35.0% primarily due to pre-tax income earned in foreign jurisdictions that benefit from group loss sharing provisions. Such losses, which carry a full valuation allowance, are utilized to absorb current period income earned in foreign jurisdictions; thus, there is no associated tax expense or benefit.

The Company made net cash payments of $14.8 million and $28.2 million for income taxes during the nine months ended May 31, 2018 and 2017, respectively.

As of May 31, 2018 and August 31, 2017, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $8.0 million and $9.3 million, respectively, exclusive of interest and penalties. The decrease in the reserve for unrecognized income tax benefits resulted from the expiration of the statute of limitations for the Company’s fiscal 2014 federal income tax return.

The Company's policy classifies interest recognized on an underpayment of income taxes and any statutory penalties recognized on a tax position as income tax expense. For the three and nine months ended May 31, 2018, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.

During the twelve months ending May 31, 2019, it is reasonably possible that the statute of limitations pertaining to positions taken by the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits, as well as the provision for income taxes, may decrease by approximately $8.0 million.


21



The Company files income tax returns in the U.S. and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, CMC and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of tax years subject to examination:

U.S. Federal — 2015 and forward, with the exception of the R&D credit matter discussed below
U.S. States — 2009 and forward
Foreign — 2011 and forward

During the fiscal year ended August 31, 2016, the Company completed an IRS examination for the years 2009 through 2011 and received confirmation from the United States Congress Joint Committee on Taxation that all matters were settled with the exception of R&D credits, which are still under review. In addition, the Company is under examination by certain state revenue authorities for the years 2009 through 2015. Management believes the Company's recorded income tax liabilities as of May 31, 2018 sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. STOCK-BASED COMPENSATION PLANS

The Company's stock-based compensation plans are described, and informational disclosures provided, in Note 15, Stock-Based Compensation Plans, to the audited consolidated financial statements in the 2017 Form 10-K. In general, the restricted stock units granted during fiscal 2018 vest ratably over a period of three years. However, certain restricted stock units granted during fiscal 2018 cliff vest after a period of three years. Subject to the achievement of performance targets established by the Compensation Committee of CMC's Board of Directors, the performance stock units granted during fiscal 2018 will vest after a period of three years.

During the nine months ended May 31, 2018 and 2017, the Company granted the following awards under its stock-based compensation plans:
 
 
2018
 
2017
(in thousands, except per share data)
 
Shares Granted
 
Weighted Average Grant Date Fair Value
 
Shares Granted
 
Weighted Average Grant Date Fair Value
Equity Method
 
1,216

 
$
20.69

 
916

 
$
16.04

Liability Method
 
323

 
N/A

 
915

 
N/A


During the three and nine months ended May 31, 2018, the Company recorded a benefit of $0.1 million and an expense of $1.6 million for mark-to-market adjustments on liability awards, respectively, compared to a benefit of $2.0 million and an expense of $2.7 million recorded for the three and nine months ended May 31, 2017, respectively, which includes the impact of the modification of certain restricted stock and performance stock units that occurred during the first quarter of fiscal 2017. As of May 31, 2018, the Company had 769 thousand equivalent shares accounted for under the liability method outstanding. The Company expects 733 thousand equivalent shares to vest.

The following table summarizes total stock-based compensation expense, including fair value remeasurements, which was mainly included in selling, general and administrative expenses on the Company's unaudited condensed consolidated statements of earnings:
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Stock-based compensation expense
 
$
4,910

 
$
3,560

 
$
18,247

 
$
19,716


22




NOTE 12. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE

The calculations of basic and diluted earnings per share from continuing operations for the three and nine months ended May 31, 2018 and 2017 were as follows: 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands, except share data)
 
2018
 
2017
 
2018
 
2017
Earnings from continuing operations
 
$
42,325

 
$
31,567

 
$
83,977

 
$
60,245

 
 
 
 
 
 
 
 
 
Basic earnings per share: