10-Q 1 cmc-11302018x10xq.htm 10-Q 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 November 30, 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 every Interactive Data File required to be submitted 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 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 ¨
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 January 7, 2019, 117,639,213 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 November 30,
(in thousands, except share data)
 
2018
 
2017
Net sales
 
$
1,277,342

 
$
1,076,533

Costs and expenses:
 
 
 
 
Cost of goods sold
 
1,118,433

 
933,515

Selling, general and administrative expenses
 
117,217

 
96,111

Interest expense
 
16,663

 
6,611

 
 
1,252,313

 
1,036,237

 
 
 
 
 
Earnings from continuing operations before income taxes
 
25,029

 
40,296

Income taxes
 
5,609

 
8,425

Earnings from continuing operations
 
19,420

 
31,871

 
 
 
 
 
Earnings from discontinued operations before income taxes
 
457

 
8,120

Income taxes
 
135

 
3,181

Earnings from discontinued operations
 
322

 
4,939

 
 
 
 
 
Net earnings
 
$
19,742

 
$
36,810

 
 
 
 
 
Basic earnings per share*
 
 
 
 
Earnings from continuing operations
 
$
0.17

 
$
0.27

Earnings from discontinued operations
 

 
0.04

Net earnings
 
$
0.17

 
$
0.32

 
 
 
 
 
Diluted earnings per share*
 
 
 
 
Earnings from continuing operations
 
$
0.16

 
$
0.27

Earnings from discontinued operations
 

 
0.04

Net earnings
 
$
0.17

 
$
0.31

 
 
 
 
 
Cash dividends per share
 
$
0.12

 
$
0.12

Average basic shares outstanding
 
117,387,038

 
116,243,545

Average diluted shares outstanding
 
118,682,473

 
117,857,911

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 November 30,
(in thousands)
 
2018
 
2017
Net earnings
 
$
19,742

 
$
36,810

Other comprehensive income (loss), net of income taxes:
 
 
 
 
Foreign currency translation adjustment
 
(9,657
)
 
2,835

Reclassification for translation loss realized upon liquidation of investment in foreign entity
 
(99
)
 

Foreign currency translation adjustment
 
(9,756
)
 
2,835

Net unrealized gain (loss) on derivatives:
 
 
 
 
Unrealized holding gain (loss)
 
(35
)
 
11

Reclassification for gain included in net earnings
 
(42
)
 
(106
)
Net unrealized loss on derivatives
 
(77
)
 
(95
)
Defined benefit obligation:
 
 
 
 
Amortization of prior services
 
(7
)
 
(6
)
Reclassification for settlement losses
 
1,316

 
437

Defined benefit obligation
 
1,309

 
431

Other comprehensive income (loss)
 
(8,524
)
 
3,171

Comprehensive income
 
$
11,218

 
$
39,981

See notes to unaudited condensed consolidated financial statements.

4




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
November 30, 2018
 
August 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
52,352

 
$
622,473

Accounts receivable (less allowance for doubtful accounts of $7,301 and $4,489)
 
1,018,000

 
749,484

Inventories, net
 
828,559

 
589,005

Other current assets
 
130,013

 
116,243

Total current assets
 
2,028,924

 
2,077,205

Property, plant and equipment, net
 
1,492,228

 
1,075,038

Goodwill
 
64,252

 
64,310

Other noncurrent assets
 
123,246

 
111,751

Total assets
 
$
3,708,650

 
$
3,328,304

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
319,637

 
$
261,258

Accrued expenses and other payables
 
287,467

 
260,939

Acquired unfavorable contract backlog
 
122,268

 

Current maturities of long-term debt
 
29,083

 
19,746

Total current liabilities
 
758,455

 
541,943

Deferred income taxes
 
27,182

 
37,834

Other long-term liabilities
 
126,162

 
116,325

Long-term debt
 
1,307,824

 
1,138,619

Total liabilities
 
2,219,623

 
1,834,721

Commitments and contingencies (Note 16)
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 117,634,201 and 117,015,558 shares
 
1,290

 
1,290

Additional paid-in capital
 
342,893

 
352,674

Accumulated other comprehensive loss
 
(102,201
)
 
(93,677
)
Retained earnings
 
1,449,374

 
1,446,495

Less treasury stock, 11,426,463 and 12,045,106 shares at cost
 
(202,515
)
 
(213,385
)
Stockholders' equity
 
1,488,841

 
1,493,397

Stockholders' equity attributable to noncontrolling interests
 
186

 
186

Total stockholders' equity
 
1,489,027

 
1,493,583

Total liabilities and stockholders' equity
 
$
3,708,650

 
$
3,328,304

See notes to unaudited condensed consolidated financial statements.

5




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
19,742

 
$
36,810

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
35,182

 
32,193

Amortization of acquired unfavorable contract backlog
 
(11,332
)
 

Stock-based compensation
 
4,217

 
4,780

Net gain on disposals of subsidiaries, assets and other
 
(1,271
)
 
(228
)
Deferred income taxes and other long-term taxes
 
(352
)
 
9,312

Write-down of inventories
 
45

 
87

Provision for losses on receivables, net
 

 
1,901

Asset impairment
 

 
1,480

Changes in operating assets and liabilities
 
(36,333
)
 
(30,537
)
Beneficial interest in securitized accounts receivable
 
(367,521
)
 
(175,957
)
Net cash flows used by operating activities
 
(357,623
)
 
(120,159
)
 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Acquisitions, net of cash acquired
 
(694,802
)
 
(6,980
)
Capital expenditures
 
(37,914
)
 
(59,681
)
Proceeds from settlement of life insurance policies
 
1,905

 

Insurance proceeds
 
2,000

 

Proceeds from the sale of property, plant and equipment and other
 
1,953

 
560

Proceeds from the sale of subsidiaries
 
1,893

 
2,260

Repayments under accounts receivable programs
 

 
(90,000
)
Beneficial interest in securitized accounts receivable
 
367,521

 
175,957

Net cash flows from (used by) investing activities
 
(357,444
)
 
22,116

 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Proceeds from issuance of long-term debt
 
180,000

 

Repayments of long-term debt
 
(7,175
)
 
(2,979
)
Proceeds from the accounts receivable programs
 
33,439

 

Repayments under accounts receivable programs
 
(45,586
)
 

Dividends
 
(14,116
)
 
(13,993
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(6,220
)
 
(9,520
)
Increase in documentary letters of credit, net
 

 
2,141

Net cash flows from (used by) financing activities
 
140,342

 
(24,351
)
Effect of exchange rate changes on cash
 
(353
)
 
(235
)
Decrease in cash, restricted cash and cash equivalents
 
(575,078
)
 
(122,629
)
Cash, restricted cash and cash equivalents at beginning of period
 
632,615

 
285,881

Cash, restricted cash and cash equivalents at end of period
 
$
57,537

 
$
163,252

See notes to unaudited condensed consolidated financial statements.



6




Supplemental information:
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017
Cash paid for income taxes
 
$
4,879

 
$
4,310

Cash paid for interest
 
$
19,807

 
$
9,402

 
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
19,676

 
$
48,726

 
 
 
 
 
Cash and cash equivalents
 
$
52,352

 
$
130,209

Restricted cash
 
5,185

 
33,043

Total cash, restricted cash and cash equivalents
 
$
57,537

 
$
163,252



7




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, 2017
129,060,664

$
1,290

$
349,258

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

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

$
1,400,930

Net earnings
 
 
 
 
36,810

 
 


36,810

Other comprehensive income
 
 
 
3,171

 
 
 
 
3,171

Dividends ($0.12 per share)
 
 
 
 
(13,993
)
 
 
 
(13,993
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(22,491
)
 
 
836,892

12,971

 
(9,520
)
Stock-based compensation
 
 
2,327

 
 
 
 
 
2,327

Reclassification of share-based liability awards
 
 
15,248

 
 
 
 
 
15,248

Balance, November 30, 2017
129,060,664

$
1,290

$
344,342

$
(78,342
)
$
1,386,623

(12,430,036
)
$
(219,113
)
$
173

$
1,434,973

 
 
 
 
 
 
 
 
 
 
 
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, 2018
129,060,664

$
1,290

$
352,674

$
(93,677
)
$
1,446,495

(12,045,106
)
$
(213,385
)
$
186

$
1,493,583

Net earnings
 
 
 
 
19,742

 
 


19,742

Other comprehensive loss
 
 
 
(8,524
)
 
 
 
 
(8,524
)
Dividends ($0.12 per share)
 
 
 
 
(14,116
)
 
 
 
(14,116
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(17,090
)
 
 
618,643

10,870

 
(6,220
)
Stock-based compensation
 
 
7,309

 
 
 
 
 
7,309

Adoption of ASC 606 adjustment
 
 
 
 
(2,747
)
 
 
 
(2,747
)
Balance, November 30, 2018
129,060,664

$
1,290

$
342,893

$
(102,201
)
$
1,449,374

(11,426,463
)
$
(202,515
)
$
186

$
1,489,027

See notes to unaudited condensed consolidated financial statements.

8





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, 2018 ("2018 Form 10-K") filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission (the "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 2018 Form 10-K. The results of operations for the three month period are not necessarily indicative of the results to be expected for the full fiscal year.

Recently Adopted Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230).  ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. The new standard provides guidance on eight specific cash flow issues, including the statement of cash flows treatment of beneficial interests in securitized financial transactions, which encompasses activities under the Company's accounts receivable programs in the U.S. and Poland. The standard, which requires retrospective application to all periods presented, was adopted in the first quarter of fiscal 2019. As a result of adoption, in the consolidated statements of cash flows for the three months ended November 30, 2018 and 2017, the Company reported reductions in operating cash flows of $367.5 million and $176.0 million, respectively, with offsetting increases in investing cash flows related to the collection of previously sold trade accounts receivable. Additionally, upon adoption, the $90.0 million repayment during the first quarter of fiscal 2018 of advances outstanding at August 31, 2017, originally recorded as an outflow from operating activities, was reclassified to investing activities.

On September 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, including the related amendments ("the new revenue standard"). The Company elected to adopt the new revenue standard under the modified retrospective approach and applied the guidance only to contracts that were not completed as of the date of adoption. The Company recognized a total cumulative effect of $2.7 million, net of tax, as a reduction to the opening balance of retained earnings as of September 1, 2018. There was no impact to the condensed consolidated statement of cash flows or other comprehensive income.
In accordance with ASC 606, the disclosure below reflects the impact of adoption to the unaudited condensed consolidated statement of earnings, as compared to what the results would have been under ASC 605. The impact to the unaudited condensed consolidated balance sheet would have been immaterial.

 
Three Months Ended November 30, 2018
(in thousands)
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change - Higher (Lower)
Net sales
 
$
1,277,342

 
$
1,279,567

 
$
(2,225
)
Net earnings
 
$
19,742

 
$
21,469

 
$
(1,727
)




9




Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance in ASC 250-40 to determine which implementation costs to capitalize or to expense as incurred. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. This ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of this ASU on its consolidated financial statements and disclosures.

In August 2017, the FASB issued 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. 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 evaluating the impact of this guidance on its consolidated financial statements and the planned adoption date.

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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. 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. Upon adoption, the Company expects an increase in both right of use assets and right of use liabilities in the consolidated balance sheet. The Company continues to review 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.
NOTE 2. ACQUISITION

On November 5, 2018 (the "Acquisition Date"), we completed the acquisition of 33 rebar fabrication facilities in the United States, as well as four electric-arc furnace mini mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California from Gerdau S.A., hereinafter collectively referred to as the "Acquired Businesses". The total cash purchase price, including working capital adjustments, was $701.2 million, subject to customary purchase price adjustments, and was funded through a combination of domestic cash on-hand and borrowings under the 2018 Term Loan, as defined in Note 9, Credit Arrangements.

The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the Acquisition Date fair value. In valuing acquired assets and liabilities, fair value estimates use Level 3 inputs, including expected future cash flows and discount rates. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the Acquisition Date, the Company’s estimates are inherently uncertain and subject to refinement. The results of operations of the Acquired Businesses are reflected in the Company’s condensed consolidated financial statements from the Acquisition Date. The purchase price allocation is subject to change as the Company obtains additional information during the allowable one year measurement period (the "Measurement Period") about the facts and circumstances that existed as of the Acquisition Date.

The following table summarizes the fair values of the assets acquired and the liabilities assumed on the Acquisition Date.

10




(in thousands)
 
November 5, 2018
Cash and cash equivalents
 
$
6,399

Accounts receivable
 
308,074

Inventories
 
207,648

Other current assets
 
11,788

Property, plant and equipment
 
424,541

Intangible assets
 
10,252

Deferred income taxes
 
10,567

Accounts payable-trade, accrued expenses and other payables
 
(128,183
)
Acquired unfavorable contract backlog
 
(133,600
)
Other long-term liabilities
 
(9,920
)
Pension and other post retirement employment benefits
 
(6,365
)
Total assets acquired and liabilities assumed
 
$
701,201


The amortizable intangible assets (liabilities) acquired consisted of:
(in thousands, except life in years)
 
Life in Years
 
Preliminary Fair Value
Non-compete agreement
 
5 years
 
$
7,769

Net unfavorable lease contracts
 
Various
 
(2,516
)
Favorable contract backlog
 
1 year
 
2,294

Unfavorable contract backlog
 
1-2 years*
 
(133,600
)
* Amortization will correspond with completion of the acquired contracts, which is estimated to occur over the next 1 to 2 years.

Financial Results

The following table summarizes the financial results of the Acquired Businesses from the Acquisition Date through the end of the first quarter of fiscal 2019 that are included in the Company’s condensed consolidated statement of earnings and condensed consolidated statement of comprehensive income.
(in thousands)
 
November 30, 2018
Net sales
 
$
121,499

Earnings before income taxes
 
$
8,427


Pro Forma Supplemental Information

Supplemental information on an unaudited pro forma basis is presented below for the three months ended November 30, 2018 and 2017 as if the acquisition of the Acquired Businesses occurred on September 1, 2017. The pro forma financial information is presented for comparative purposes only, based on certain estimates and assumptions, which the Company believes to be reasonable, but not necessarily indicative of future results of operations or the results that would have been reported if the acquisition of the Acquired Businesses had been completed on September 1, 2017. These results were not used as a part of management analysis of the financial results and performance of the Company’s business. These results are adjusted, where possible, for transaction and integration related costs. These results involve a significant amount of estimates.

 
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017*
Pro forma net sales
 
1,557,032

 
1,417,583

Pro forma net earnings
 
38,059

 
(4,749
)
*Non-recurring acquisition and integration costs of approximately $43.3 million incurred through the first quarter of fiscal 2019 have been included in pro forma net earnings for the three months ended November 30, 2017.

11




NOTE 3. CHANGES IN BUSINESS

During fiscal 2018, the Company completed the exit of its trading operations in the U.S., Asia, and Australia. The results of these activities are included in discontinued operations in the unaudited condensed consolidated statements of earnings for all periods presented. The major classes of line items constituting earnings from discontinued operations in the unaudited condensed consolidated statements of earnings are presented in the table below.

(in thousands)
 
Three Months Ended November 30, 2017
Net sales
 
$
162,111

Costs and expenses:
 
 
Cost of goods sold
 
141,451

Selling, general and administrative expenses
 
12,626

Interest expense
 
(86
)
Earnings before income taxes
 
8,120

Income taxes
 
3,181

Earnings from discontinued operations
 
$
4,939


Results for discontinued operations were immaterial for the three months ended November 30, 2018. There were no material operating or investing non-cash items for discontinued operations for the three months ended November 30, 2018 and 2017.

The assets and liabilities of the businesses classified as held for sale and discontinued operations were immaterial at both November 30, 2018 and August 31, 2018.
NOTE 4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
 
 
Three Months Ended November 30, 2018
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, August 31, 2018
 
$
(92,637
)
 
$
1,356

 
$
(2,396
)
 
$
(93,677
)
Other comprehensive income (loss) before reclassifications
 
(9,657
)
 
(52
)
 
(11
)
 
(9,720
)
Amounts reclassified from AOCI
 
(99
)
 
(42
)
 
1,666

 
1,525

Income taxes
 

 
17

 
(346
)
 
(329
)
Net other comprehensive income (loss)
 
(9,756
)
 
(77
)
 
1,309

 
(8,524
)
Balance, November 30, 2018
 
$
(102,393
)
 
$
1,279

 
$
(1,087
)
 
$
(102,201
)

 
 
Three Months Ended November 30, 2017
(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 before reclassifications
 
2,835

 
13

 

 
2,848

Amounts reclassified from AOCI
 

 
(146
)
 
665

 
519

Income taxes
 

 
38

 
(234
)
 
(196
)
Net other comprehensive income (loss)
 
2,835

 
(95
)
 
431

 
3,171

Balance, November 30, 2017
 
$
(77,943
)
 
$
1,492

 
$
(1,891
)
 
$
(78,342
)

Items reclassified out of AOCI were not material for the three months ended November 30, 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.

12




NOTE 5. REVENUE RECOGNITION

Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration received or expected to be received in exchange for those goods or services. The Company's performance obligations arise from sales of steel products, ferrous and nonferrous scrap metals, and construction materials; and from services such as steel fabrication and installation. The shipment of products to customers is considered a fulfillment activity and amounts billed to customers for shipping and freight are included in net sales, and the related costs are included in cost of goods sold. Net sales is presented net of taxes.
In the Americas Mills, Americas Recycling, and International Mill segments, revenue is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt.
In the Americas Fabrication segment, each contract represents a single performance obligation. Revenue from certain contracts is recognized over time and revenue from certain contracts is recognized equal to billing under an available practical expedient. For contracts where the Company provides fabricated product and installation services, revenue is recognized over time using an input method. These contracts represent approximately 29% of total revenue in the Americas Fabrication segment. For these contracts, the measure of progress is based on contract costs incurred to date compared to total estimated contract costs, which provides a reasonable depiction of the Company’s progress toward satisfaction of the performance obligation as there is a direct relationship between costs incurred by the Company and the transfer of the fabricated product and installation services. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method. These contracts represent approximately 21% of total revenue in the Americas Fabrication segment. For these contracts, the Company uses tons shipped compared to total estimated tons, which provides a reasonable depiction of the transfer of contract value to the customer, as there is a direct relationship between the units shipped by the Company and the transfer of the fabricated product. Significant judgment is required to evaluate total estimated costs used in the input method and total estimated tons in the output method. If estimated total costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete, or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgments in determining the transaction price. The remaining 50% of revenue in the Americas Fabrication segment is recognized as amounts are billed to the customer.
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing and a liability when revenue is recognized subsequent to invoicing. Payment terms and conditions vary by contract type, although the Company generally requires customers to pay 30 days after the Company satisfies the performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined the contracts generally do not include a significant financing component.
The following table provides information about assets and liabilities from contracts with customers.
(in thousands)
 
November 30, 2018
 
August 31, 2018
Contract assets (included in other current assets)
 
$
70,455

 
$
49,221

Contract liabilities (included in accrued expenses and other payables)
 
23,716

 
6,679

The amount of revenue reclassified from the August 31, 2018 contract liabilities balance during the three months ended November 30, 2018 was approximately $5.5 million.
Remaining Performance Obligations
As of November 30, 2018, a total of $896.1 million has been allocated to remaining performance obligations in the Americas Fabrication segment, excluding those contracts where revenue is recognized equal to billing under an available practical expedient. Of this amount, the Company estimates the remaining performance obligations will be recognized as revenue as follows: 40% in the first twelve months, 49% in the following twelve months, and 11% thereafter. The duration of contracts in the Americas Mills, Americas Recycling, and International Mill segments are typically less than one year.

13




Disaggregation of Revenue
The following tables display revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
 
 
Three Months Ended November 30, 2018
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
239

 
$
347,965

 
$
374,807

 
$
217,770

 
$

 
$
940,781

Ferrous scrap
 
111,654

 
9,142

 

 
275

 

 
121,071

Nonferrous scrap
 
128,075

 
3,180

 

 
2,941

 

 
134,196

Construction materials
 

 

 
57,171

 

 

 
57,171

Other
 
213

 
13,384

 
2,580

 
5,687

 
2,259

 
24,123

Total
 
$
240,181

 
$
373,671

 
$
434,558

 
$
226,673

 
$
2,259

 
$
1,277,342

 
 
Three Months Ended November 30, 2017
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
298

 
$
221,562

 
$
269,642

 
$
209,860

 
$

 
$
701,362

Ferrous scrap
 
122,647

 
9,048

 

 
321

 

 
132,016

Nonferrous scrap
 
150,952

 
3,981

 

 
3,683

 

 
158,616

Construction materials
 

 

 
59,031

 

 

 
59,031

Other
 
440

 
12,142

 
1,879

 
6,348

 
4,699

 
25,508

Total
 
$
274,337

 
$
246,733

 
$
330,552

 
$
220,212

 
$
4,699

 
$
1,076,533


14




NOTE 6. ACCOUNTS RECEIVABLE PROGRAMS

As an additional source of liquidity, the Company sells certain trade accounts receivable both in the U.S. and Poland (hereinafter referred to as the “Programs”). For years prior to fiscal 2019, the Company accounted for transfers of trade accounts receivable under the Programs as sales of financial assets, and the trade accounts receivable balances sold were removed from the consolidated balance sheets. On September 1, 2018, the Company amended certain terms of the Programs, disqualifying the sale of such receivables from being accounted for as sales of financial assets. For activity in the Programs occurring prior to the September 1, 2018 amendment, disclosures required under ASC 860-20-50 are provided below. See Note 9, Credit Arrangements, for further details regarding the Programs.

Prior to September 1, 2018, in exchange for trade receivables transferred into the Programs, the Company received either cash (referred to as a cash purchase price or “CPP”) or a deferred purchase price (“DPP”). Upon adoption of ASU 2016-15, the CPP received was reflected as cash provided by operating activities in the Company's consolidated statements of cash flows, and cash received to settle the DPP related to the transfer of receivables was included as part of investing activities in the Company's consolidated statement of cash flows. For periods prior to fiscal 2019, DPP on the Programs was included in accounts receivable on the Company's unaudited condensed consolidated balance sheets.

 
 
Three Months Ended November 30, 2017
(in thousands)
 
Total
 
U.S.
 
Poland
Deferred purchase price
 
 
 
 
 
 
Balance, August 31, 2017
 
$
215,123

 
$
135,623

 
$
79,500

Transfers of trade receivables
 
656,642

 
535,893

 
120,749

Less: CPP
 
(492,432
)
 
(404,337
)
 
(88,095
)
Non-cash increase to DPP
 
164,210

 
131,556

 
32,654

Cash collections of DPP
 
(175,957
)
 
(136,145
)
 
(39,812
)
Repayments of advances
 
90,000

 
90,000

 

Net collections of DPP
 
(85,957
)
 
(46,145
)
 
(39,812
)
Balance, November 30, 2017
 
$
293,376

 
$
221,034

 
$
72,342


At November 30, 2017, the Company transferred $294.8 million of trade accounts receivable to the financial institutions and had no advance payments outstanding under the Programs.

Discounts related to the Programs were $0.3 million for the three months ended November 30, 2017 and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statement of earnings.
NOTE 7. 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 November 30, 2018 and August 31, 2018. At November 30, 2018 and August 31, 2018, $184.4 million and $177.7 million, respectively, of the Company's inventories were in the form of raw materials.

15





NOTE 8. GOODWILL AND OTHER INTANGIBLES

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
 
Consolidated
Goodwill, gross
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2018
 
$
9,543

 
$
4,970

 
$
57,428

 
$
2,568

 
$
74,509

Foreign currency translation
 

 

 

 
(62
)
 
(62
)
Impairment
 

 

 

 

 

Reclassification to assets of discontinued operations
 

 

 

 

 

Balance, November 30, 2018
 
$
9,543

 
$
4,970

 
$
57,428

 
$
2,506

 
$
74,447

 
 
 
 
 
 
 
 
 
 
 
Accumulated impairment losses
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2018
 
$
(9,543
)
 
$

 
$
(493
)
 
$
(163
)
 
$
(10,199
)
Foreign currency translation
 

 

 

 
4

 
4

Reclassification to assets of discontinued operations
 

 

 

 

 

Balance, November 30, 2018
 
$
(9,543
)
 
$

 
$
(493
)
 
$
(159
)
 
$
(10,195
)
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2018
 
$

 
$
4,970

 
$
56,935

 
$
2,405

 
$
64,310

Foreign currency translation
 

 

 

 
(58
)
 
(58
)
Impairment
 

 

 

 

 

Balance, November 30, 2018
 
$

 
$
4,970

 
$
56,935

 
$
2,347

 
$
64,252


The total gross carrying amounts of the Company's intangible assets subject to amortization, including any intangible assets associated with the Acquired Businesses, were $30.6 million and $20.5 million at November 30, 2018 and August 31, 2018, respectively, and were included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. Intangible amortization expense from continuing operations related to such intangible assets was $0.5 million for the three months ended November 30, 2018 and 2017. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives as of November 30, 2018.

In connection with acquisition of the Acquired Businesses, the Company recorded a preliminary unfavorable contract backlog liability of $133.6 million. Amortization of the backlog for the three months ended November 30, 2018 was $11.3 million and was recorded as an increase to net sales in the Company's unaudited condensed consolidated statement of earnings.

16




NOTE 9. CREDIT ARRANGEMENTS

Long-term debt as of November 30, 2018 and August 31, 2018 was as follows: 
(in thousands)
 
Weighted Average Interest Rate as of November 30, 2018
 
November 30, 2018
 
August 31, 2018
2027 Notes
 
5.375%
 
$
300,000

 
$
300,000

2026 Notes
 
5.750%
 
350,000

 
350,000

2023 Notes
 
4.875%
 
330,000

 
330,000

Term Loans
 
3.810%
 
318,375

 
142,500

Other, including equipment notes
 
 
 
49,991

 
47,629

Total debt
 
 
 
1,348,366

 
1,170,129

     Less debt issuance costs
 
 
 
11,459

 
11,764

Total amounts outstanding
 
 
 
1,336,907

 
1,158,365

     Less current maturities
 
 
 
29,083

 
19,746

Long-term debt
 
 
 
$
1,307,824

 
$
1,138,619

 
 
 
 
 
 
 
Advances outstanding under the U.S. Program
 
 
 
$

 
$

Advances outstanding under the Poland Program
 
 
 

 
12,147


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"). 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 two senior secured term loans: one drawn on July 13, 2017 with an original principal amount of $150.0 million (the "2022 Term Loan"), and one drawn on November 1, 2018 with an original principal amount of $180.0 million (the "2018 Term Loan"). These term loans are hereinafter collectively referred to as the "Term Loans." The Credit Agreement and the Term Loans are coterminous with a maturity date in June 2022. The Company is required to make quarterly payments on the Term Loans equal to 1.25% of the original principal amount.  The maximum availability under the Revolver can be increased to $600.0 million with bank approval. The Company's obligations under the Credit Agreement are collateralized by its U.S. inventory and U.S. fabrication receivables. The Credit Agreement's capacity includes a $50.0 million sub-limit for the issuance of stand-by letters of credit.

The Company had no amounts drawn under the Revolver at November 30, 2018 and August 31, 2018. The Company's availability under the Revolver was reduced by outstanding letters of credit of $3.3 million at November 30, 2018 and August 31, 2018.

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 November 30, 2018, the Company's interest coverage ratio was 6.55 to 1.00, and the Company's debt to capitalization ratio was 0.48 to 1.00. Loans under the Credit Agreement bear interest based at the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").

At November 30, 2018, the Company was in compliance with all covenants contained in its debt agreements.

In addition to its committed facilities, the Company has uncommitted credit facilities in Poland, primarily through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP"), available to support global working capital, short-term cash needs, letters of credit, financial assurance and other trade finance-related matters.  At November 30, 2018, CMCP's uncommitted credit facilities totaled Polish zloty ("PLN") 225.0 million, or $59.3 million, with expiration dates ranging from January 2019 to March 2019. At November 30,

17




2018 and August 31, 2018, no amounts were outstanding under these facilities. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, guarantees, and/or other financial assurance instruments, which totaled $1.3 million at November 30, 2018 and $1.1 million at August 31, 2018. During the three months ended November 30, 2018 and 2017, CMCP had no borrowings and no repayments under its uncommitted credit facilities.

Accounts Receivable Programs

CMC has a $200.0 million U.S. trade accounts receivable program (the "U.S. Program"), which expires in August 2020. Under the U.S. Program, CMC contributes, and certain of its subsidiaries transfer without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly-owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity formed for the sole purpose of facilitating transfers of trade accounts receivable generated by the Company. CMCRV transfers the trade accounts receivable in their entirety to two financial institutions. Under the U.S. Program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The U.S. Program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement.

In addition to the U.S. Program, the Company's international subsidiary in Poland transfers trade accounts receivable to financial institutions without recourse (the "Poland Program"). The Poland Program has a facility limit of PLN 220.0 million ($58.0 million as of November 30, 2018) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable transferred under the terms of the arrangement. The Company had advance payments outstanding of $12.1 million under the Poland Program at August 31, 2018 which were repaid during the first quarter of fiscal 2019.

Prior to fiscal 2019, the Company accounted for transfers of trade accounts receivable as sales, and the trade accounts receivable balances transferred were removed from the condensed consolidated balance sheets. On September 1, 2018, the Company amended certain terms of both the U.S. and Poland Programs, disqualifying the accounting of the transfer of such receivables as sales. As a result of the amendments, beginning in fiscal 2019, any advances outstanding under the U.S. and Poland Programs are recorded as debt on the Company's condensed consolidated balance sheets.

NOTE 10. 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 November 30, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $178.1 million and $37.8 million, respectively. At November 30, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $289.5 million and $56.7 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of November 30, 2018:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
2,575

 MT
Aluminum
 
Short
 
100

 MT
Copper
 
Long
 
624

 MT
Copper
 
Short
 
4,683

 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

18




of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three months ended November 30, 2018 and November 30, 2017. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essentially economic hedges.

The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the unaudited condensed consolidated statements of earnings (amounts in thousands): 
 
 
 
 
Three Months Ended November 30,
Derivatives Not Designated as Hedging Instruments
 
Location
 
2018
 
2017
Commodity
 
Cost of goods sold
 
$
(840
)
 
$
575

Foreign exchange
 
Cost of goods sold
 

 
(19
)
Foreign exchange
 
SG&A expenses
 
126

 
2,380

Gain (loss) before income taxes
 
 
 
$
(714
)
 
$
2,936


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 November 30,
 
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 November 30,
 
 
2018
 
2017
 
 
2018
 
2017
Foreign exchange
 
Net sales
 
$

 
$
(237
)
 
Net sales
 
$

 
$
237

Foreign exchange
 
Cost of goods sold
 

 
3,348

 
Cost of goods sold
 

 
(3,348
)
Gain (loss) before income taxes
 
 
 
$

 
$
3,111

 
 
 
$

 
$
(3,111
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI
 
Three Months Ended November 30,
 
2018
 
2017
Foreign exchange, net of income taxes
 
$
(35
)
 
$
11


Refer to Note 4, 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 November 30, 2018 and August 31, 2018. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows: 

Derivative Assets (in thousands)
 
November 30, 2018
 
August 31, 2018
Commodity — not designated for hedge accounting
 
$
162

 
$
1,881

Foreign exchange — designated for hedge accounting
 
9

 

Foreign exchange — not designated for hedge accounting
 
257

 
407

Derivative assets (other current assets)*
 
$
428

 
$
2,288


19




 
Derivative Liabilities (in thousands)
 
November 30, 2018
 
August 31, 2018
Commodity — not designated for hedge accounting
 
$
417

 
$
301

Foreign exchange — designated for hedge accounting
 
65

 

Foreign exchange — not designated for hedge accounting
 
391

 
1,095

Derivative liabilities (accrued expenses and other payables)*
 
$
873

 
$
1,396

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

As of November 30, 2018, most 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 11. 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)
 
November 30, 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)
 
$
25,183

 
$
25,183

 
$

 
$

Commodity derivative assets (2)
 
162

 
162

 

 

Foreign exchange derivative assets (2)
 
266

 

 
266

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
417

 
417

 

 

Foreign exchange derivative liabilities (2)
 
456

 

 
456

 


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2018
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Investment deposit accounts (1)
 
$
541,101

 
$
541,101

 
$

 
$

Commodity derivative assets (2)
 
1,881

 
1,881

 

 

Foreign exchange derivative assets (2)
 
407

 

 
407

 

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
301

 
301

 

 

Foreign exchange derivative liabilities (2)
 
1,095

 

 
1,095

 

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

(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or 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 10, Derivatives and Risk Management.

There were no material non-recurring fair value remeasurements during the three months ended November 30, 2018.

The carrying values of the Company's short-term items approximate fair value.


21




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:
 
 
 
 
November 30, 2018
 
August 31, 2018
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2027 Notes (1)
 
Level 2
 
$
300,000

 
$
274,755

 
$
300,000

 
$
281,655

2026 Notes (1)
 
Level 2
 
350,000

 
334,985

 
350,000

 
339,238

2023 Notes (1)
 
Level 2
 
330,000

 
318,273

 
330,000

 
326,090

Term Loans (2)
 
Level 2
 
318,375

 
318,375

 
142,500

 
142,500

_________________
(1) The fair value of the notes was determined based on indicated market values.
(2) Contains variable interest rates and carrying value approximates fair value.
NOTE 12. INCOME TAX

For the three months ended November 30, 2018, the Company's effective tax rate of 22.4% was greater than the U.S. statutory income tax rate of 21.0%. The effective tax rate is determined by computing the estimated annual effective tax rate, which includes provisional estimates for certain components of the Tax Cuts and Jobs Act (“TCJA”), adjusted for discrete items, if any, which are taken into account in the appropriate period. Items that impacted the effective tax rate included:

i.
non-deductible compensation expense; and
ii.
state and local taxes.

For the three months ended November 30, 2017, the Company's effective tax rate of 20.9% was lower than the U.S. statutory income tax rate of 35.0% due to:

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 recorded for stock awards that vested during the first quarter of fiscal 2018; and
iii.
a non-taxable gain on assets related to the Company's non-qualified benefits restoration plan.

For the three months ended November 30, 2017, the Company’s effective income tax rate from discontinued operations of 39.2% was greater than the U.S. statutory income tax rate of 35.0%, primarily due to losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses.

As of November 30, 2018 and August 31, 2018, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $3.1 million, which, if recognized, would have decreased the Company’s effective income tax rate at the end of each respective period. 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 months ended November 30, 2018, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.

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
U.S. States — 2009 and forward
Foreign — 2011 and forward

In addition, the Company is under examination by certain state revenue authorities for fiscal 2009 and fiscal years 2015 through 2017. Management believes the Company's recorded income tax liabilities as of November 30, 2018 sufficiently reflect the anticipated outcome of these examinations.

On December 22, 2017, the President signed the TCJA into law. 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 SEC'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

22




accounting under ASC 740. During the first quarter of fiscal 2019, the impact of the TCJA to the Company’s income tax expense was immaterial.

As of November 30, 2018, the Company has completed its accounting for the remeasurement of the Company’s deferred tax balances. Additionally, the Company has concluded there is minimal to no impact on the Company’s financial statements as a result of the following provisions of the TCJA: deductibility limitations on meal and entertainment-related expenses and base erosion anti-abuse tax.

As of November 30, 2018, the Company continues to evaluate the accounting for the following provisions of the TCJA: (i) recognition of the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits; (ii) a new tax on global intangible low-taxed income ("GILTI"); (iii) deductibility limitations on compensation for covered employees; (iv) deductibility limitations on business interest expense; and (v) a new tax on foreign-derived intangible income. The Company has elected to treat the new GILTI tax as a current period cost. The impacts of the legislation on the Company’s tax expense may differ from the estimates recorded through November 30, 2018 and may be adjusted accordingly over the remainder of the SAB 118 measurement period.

The Company continues to evaluate the impact of the TCJA and monitor regulatory developments affecting the Company’s assertion to indefinitely reinvest all undistributed foreign earnings. The Company will complete its analysis during the remainder of the SAB 118 measurement period.
NOTE 13. 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 2018 Form 10-K. In general, restricted stock units granted during fiscal 2019 vest ratably over a period of three years. However, certain restricted stock units granted during fiscal 2019 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, performance stock units granted during fiscal 2019 vest after a period of three years.

During the three months ended November 30, 2018 and 2017, the Company granted the following awards under its stock-based compensation plans:
 
 
November 30, 2018
 
November 30, 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
 
1,454

 
$
17.81

 
1,167

 
$
20.55

Liability Method
 
374

 
N/A

 
317

 
N/A


During the three months ended November 30, 2018 and the three months ended November 30, 2017, the Company recorded immaterial amounts for mark-to-market adjustments on liability awards. As of November 30, 2018, the Company had 718,640 equivalent shares accounted for under the liability method outstanding. The Company expects 684,318 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 November 30,
(in thousands)
 
2018
 
2017
Stock-based compensation expense
 
$
4,217

 
$
4,780



23




NOTE 14. EMPLOYEES' RETIREMENT PLANS

Following the acquisition of the Acquired Businesses, the Company sponsors a single employer defined benefit pension plan (“Plan”) covering certain hourly union employees. The Plan is closed to new entrants. The Plan provides benefits based on length of service. The Company’s funding policy for the Plan is to contribute annually the amount necessary to provide for benefits based on accrued service and to contribute at least the minimum required by the Employee Retirement Income Security Act rules. Service cost is recorded in costs of goods sold, while other components of the net periodic benefit costs are recorded as selling, general and administrative expenses. Net periodic pension expense was immaterial for the three months ended November 30, 2018.

NOTE 15. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE

The calculations of basic and diluted earnings per share from continuing operations for the three months ended November 30, 2018 and 2017 were as follows: 
 
 
Three Months Ended November 30,
(in thousands, except share data)
 
2018
 
2017
Earnings from continuing operations
 
$
19,420

 
$
31,871

Basic earnings per share:
 
 
 
 
       Shares outstanding for basic earnings per share
 
117,387,038

 
116,243,545

Basic earnings per share from continuing operations
 
$
0.17

 
$
0.27

Diluted earnings per share:
 
 
 
 
       Shares outstanding for basic earnings per share
 
117,387,038

 
116,243,545

Effect of dilutive securities:
 
 
 
 
Stock-based incentive/purchase plans
 
1,295,435

 
1,614,366

Shares outstanding for diluted earnings per share
 
118,682,473

 
117,857,911

Diluted earnings per share from continuing operations
 
$
0.16

 
$
0.27

  
There are no anti-dilutive shares for the periods presented.

CMC's restricted stock is included in the number of shares of common stock issued and outstanding, but is omitted from the basic earnings per share calculation until the shares vest.
During the first quarter of fiscal 2015, CMC's Board of Directors authorized a share repurchase program under which CMC may repurchase up to $100.0 million of shares of common stock. The timing and the amount of repurchases, if any, are determined by management based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require the Company to purchase any dollar amount or number of shares of common stock and may be modified, suspended, extended or terminated at any time without prior notice. During the three months ended November 30, 2018, CMC did not repurchase any shares of common stock. CMC had remaining authorization to repurchase $27.6 million of shares of common stock at November 30, 2018.
NOTE 16. COMMITMENTS AND CONTINGENCIES

Legal and Environmental Matters

In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. See Note 18, Commitments and Contingencies, to the audited consolidated financial statements in the 2018 Form 10-K.
The Company has received notices from the U.S. Environmental Protection Agency ("EPA") or state agencies with similar responsibility that it is considered a potentially responsible party ("PRP") at several sites (none of which are owned by the Company) and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its

24




liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. At both November 30, 2018 and August 31, 2018, the Company had accrued $0.7 million for estimated cleanup and remediation costs in connection with CERCLA sites. The estimation process is based on currently available information, which is in many cases preliminary and incomplete. As of November 30, 2018 and August 31, 2018, total environmental liabilities with respect to CERCLA sites, were $4.0 million, of which $1.9 million was classified as other long-term liabilities. These amounts have not been discounted to their present values. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material.
Management believes that adequate provisions have been made in the Company's unaudited condensed consolidated financial statements for the potential impact of these contingencies and that the outcomes of the suits and proceedings described above, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on the business, results of operations or financial condition of the Company.
NOTE 17. BUSINESS SEGMENTS

The Company's operating segments earn revenues and incur expenses for which discrete financial information is available. Operating results for the operating segments are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segments and to assess performance. The Company's chief operating decision maker is identified as the Chief Executive Officer. Operating segments are aggregated for reporting purposes when the operating segments are identified as similar in accordance with the basic principles and aggregation criteria in the accounting standards. The Company's reporting segments are based primarily on product lines and secondarily on geographic area. The reporting segments have different lines of management responsibility as each business requires different marketing strategies and management expertise.

The Company structures its business into the following four reporting segments: Americas Recycling, Americas Mills, Americas Fabrication, and International Mill. See Note 1, Nature of Operations, of the audited consolidated financial statements included in the 2018 Form 10-K for more information about the reporting segments, including the types of products and services from which each reporting segment derives its net sales. Corporate and Other contains earnings or losses on assets and liabilities related to the Company's Benefit Restoration Plan assets and short-term investments, expenses of the Company's corporate headquarters, interest expense related to its long-term debt and intercompany eliminations.

The Company uses adjusted EBITDA from continuing operations to compare and evaluate the financial performance of its segments. Adjusted EBITDA is the sum of the Company's earnings from continuing operations before interest expense, income taxes, depreciation and amortization, and impairment expense. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to the segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the 2018 Form 10-K.

The following is a summary of certain financial information from continuing operations by reportable segment:
 
 
Three Months Ended November 30, 2018
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Continuing Operations
Net sales-unaffiliated customers
 
$
240,181

 
$
373,671

 
$
434,558

 
$
226,673

 
$
2,259

 
$
1,277,342

Intersegment sales
 
61,828

 
228,182

 
2,553

 
351

 
(292,914
)
 

Net sales
 
302,009

 
601,853

 
437,111

 
227,024

 
(290,655
)
 
1,277,342

Adjusted EBITDA from continuing operations
 
15,434

 
113,873

 
(36,996
)
 
32,779

 
(59,554
)
 
65,536

Total assets as of November 30, 2018*
 
264,142

 
1,701,353

 
1,145,705

 
501,886

 
95,564

 
3,708,650

* Total assets listed in Corporate and Other includes assets from discontinued operations.

25




 
 
Three Months Ended November 30, 2017
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Continuing Operations
Net sales-unaffiliated customers
 
$
274,337

 
$
246,733

 
$
330,552

 
$
220,212

 
$
4,699

 
$
1,076,533

Intersegment sales
 
45,004

 
166,785

 
2,227

 
266

 
(214,282
)
 

Net sales
 
319,341

 
413,518

 
332,779

 
220,478

 
(209,583
)
 
1,076,533

Adjusted EBITDA from continuing operations
 
15,005

 
55,166

 
2,032

 
30,944

 
(23,880
)
 
79,267

Total assets as of August 31, 2018*
 
291,838

 
1,115,339

 
739,151

 
485,548

 
696,428

 
3,328,304

 
* Total assets listed in Corporate and Other includes assets from discontinued operations.

The following table presents a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations:
 
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017
Earnings from continuing operations
 
$
19,420

 
$
31,871

Interest expense
 
16,663

 
6,611

Income taxes
 
5,609

 
8,425

Depreciation and amortization
 
35,176

 
31,899

Amortization of acquired unfavorable contract backlog
 
(11,332
)
 

Impairment of assets
 

 
461

Adjusted EBITDA from continuing operations
 
$
65,536

 
$
79,267

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the following discussion, references to "we," "us," "our" or the "Company" mean Commercial Metals Company ("CMC") and its consolidated subsidiaries, unless the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this Quarterly Report on Form 10-Q (the "Form 10-Q"), and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2018 (the "2018 Form 10-K"). This discussion contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this Form 10-Q is filed with the Securities and Exchange Commission ("SEC") or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled "Forward-Looking Statements" at the end of this Item 2 of this Form 10-Q and in the section entitled "Risk Factors" in Item 1A of the 2018 Form 10-K and this Form 10-Q. We do not undertake any obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.
CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the 2018 Form 10-K.

26




RESULTS OF OPERATIONS SUMMARY

Business Overview

As a vertically integrated organization, we manufacture, recycle, and market steel and metal products, related materials and services through a network of facilities that includes eight electric arc furnace ("EAF") mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the United States ("U.S.") and Poland. Our operations are conducted through the following business segments: Americas Recycling, Americas Mills, Americas Fabrication, and International Mill.

Financial Results Overview

The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations.
 
 
Three Months Ended November 30,
(in thousands, except per share data)
 
2018
 
2017
Net sales*
 
$
1,277,342

 
$
1,076,533

Earnings from continuing operations
 
19,420

 
31,871

Diluted earnings per share*
 
0.16

 
0.27

*from continuing operations

Our first quarter of fiscal 2019 was highlighted by the completion of the acquisition of the Acquired Businesses on November 5, 2018, as discussed in Note 2, Acquisition, the operating results of which are included in our Americas Mills and Americas Fabrication segments from the date of acquisition. Net sales from continuing operations for the three months ended November 30, 2018 increased 19% compared to the same period for fiscal 2018, with approximately $121.2 million of the increase attributable to operations of the Acquired Businesses. Also contributing to the increase in net sales, our new micro mill in Durant, Oklahoma shipped approximately 59 thousand short tons during the first quarter of fiscal 2019, with no comparable activity in the first quarter of fiscal 2018. Continued strength in global demand for steel has led to increased margins across our Americas Recycling, Americas Mills and International Mill segments as compared to the first quarter of fiscal 2018. Our Americas Fabrication segment continues to reflect average selling prices that have lagged behind increased input and production costs. However, new contract bookings indicate that pricing in this segment is beginning to reflect the increased input costs.

Earnings from continuing operations for the three months ended November 30, 2018 includes certain purchase accounting adjustments required in connection with the acquisition of the Acquired Businesses, including amortization of the acquired unfavorable contract backlog. Additionally, included in our results for the first quarter of fiscal 2019 were certain acquisition-related costs, including integration efforts. These costs have been reflected in the results of our Corporate and Other segment.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses from continuing operations increased $21.1 million for the three months ended November 30, 2018 compared to the corresponding period in fiscal 2018, driven by an increase in professional fees and legal expenses.

Interest Expense

Interest expense for the three months ended November 30, 2018 increased $10.1 million compared to the three months ended November 30, 2017. The increase was, in part, a result of financing activities undertaken in connection with the acquisition of the Acquired Businesses, including issuance of the 2026 Notes and a draw under the 2018 Term Loan (both defined in Note 9, Credit Arrangements), driving a year-over-year increase of $5.6 million. Also contributing to the increase in the first quarter of fiscal 2019, as compared to the same period of fiscal 2018, was a reduction of $3.8 million in capitalized interest. Capitalized interest, which reduces interest expense, was higher in fiscal 2018 due to the construction of our new micro mill in Durant, Oklahoma, which was placed in service during fiscal 2018.


27




Income Taxes

Our effective income tax rate from continuing operations for the three months ended November 30, 2018 and 2017 was 22.4% and 20.9%, respectively. The effective tax rate for the current period is greater than the effective tax rate for the corresponding period of the prior fiscal year primarily due to the recognition of more significant benefits in the prior year, as disclosed in Note 12, Income Tax.
SEGMENT OPERATING DATA

Unless otherwise indicated, all dollar amounts below are from continuing operations and calculated before income taxes. Financial results for our reportable segments are consistent with the basis in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 17, Business Segments. The operational data presented in the tables below is calculated using averages; and therefore, it is not meaningful to quantify the effect that any individual component had on the segment's net sales or adjusted EBITDA.

Americas Recycling
 
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017
Net sales
 
$
302,009

 
$
319,341

 Adjusted EBITDA
 
15,434

 
15,005

 
 
 
 
 
Average selling price (per short ton)
 
 
 
 
Ferrous
 
$
273

 
$
257

Nonferrous
 
1,982

 
2,208

 
 
 
 
 
Short tons shipped (in thousands)
 
 
 
 
Ferrous
 
579

 
589

Nonferrous
 
63

 
66

Total
 
642

 
655


Net sales for the three months ended November 30, 2018 decreased $17.3 million, or 5%, compared to the corresponding period in fiscal 2018. Approximately 82% of the decrease in net sales for the three months ended November 30, 2018 was due to decreases in nonferrous average selling prices, as compared to the corresponding period in fiscal 2018. Such decrease was the result of a general decline in pricing across non-ferrous commodities, including copper and aluminum during the three months ended November 30, 2018 as compared to the same period in fiscal 2018.

Adjusted EBITDA for the three months ended November 30, 2018 was relatively flat on a year-over-year basis, as modest increases in average combined metal margin of ferrous and nonferrous scrap were largely offset by reduced shipments, as compared to the first quarter of fiscal 2018. Adjusted EBITDA included non-cash stock compensation expense of $0.3 million and $0.2 million for the three months ended November 30, 2018 and 2017, respectively.


28




Americas Mills
 
 
Three Months Ended November 30,
(in thousands)
 
2018
 
2017
Net sales
 
$
601,853

 
$
413,518

 Adjusted EBITDA
 
113,873

 
55,166

 
 
 
 
 
Average price (per short ton)
 
 
 
 
Total sales
 
$
682

 
$
550

Cost of ferrous scrap utilized
 
307

 
256

Metal margin
 
375

 
294

 
 
 
 
 
Short tons (in thousands)
 
 
 
 
Melted