10-Q 1 cmc-02282019x10xq.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 February 28, 2019
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 March 22, 2019, 117,921,070 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 February 28,
 
Six Months Ended February 28,
(in thousands, except share data)
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
1,402,783

 
$
1,054,268

 
$
2,680,125


$
2,130,801

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,252,493

 
927,101

 
2,370,926


1,860,617

Selling, general and administrative expenses
 
98,726

 
108,477

 
215,943


204,587

Interest expense
 
18,495

 
7,181

 
35,158

 
13,792

 
 
1,369,714

 
1,042,759

 
2,622,027


2,078,996

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
33,069

 
11,509

 
58,098


51,805

Income taxes
 
18,141

 
1,728

 
23,750


10,153

Earnings from continuing operations
 
14,928

 
9,781

 
34,348


41,652

 
 
 
 
 
 





Earnings (loss) from discontinued operations before income taxes
 
(1,075
)
 
290

 
(618
)
 
8,410

Income taxes (benefit)
 
3

 
(98
)
 
138

 
3,082

Earnings (loss) from discontinued operations
 
(1,078
)
 
388

 
(756
)
 
5,328

 
 
 
 
 
 





Net earnings
 
$
13,850

 
$
10,169

 
$
33,592

 
$
46,980

 
 
 
 
 
 



Basic earnings (loss) per share*
 
 
 
 
 



Earnings from continuing operations
 
$
0.13

 
$
0.08

 
$
0.29


$
0.36

Earnings (loss) from discontinued operations
 
(0.01
)
 

 
(0.01
)

0.05

Net earnings
 
$
0.12

 
$
0.09

 
$
0.29


$
0.40

 
 
 
 
 
 



Diluted earnings (loss) per share*
 
 
 
 
 



Earnings from continuing operations
 
$
0.13

 
$
0.08

 
$
0.29


$
0.35

Earnings (loss) from discontinued operations
 
(0.01
)
 

 
(0.01
)

0.05

Net earnings
 
$
0.12

 
$
0.09

 
$
0.28


$
0.40

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.24


$
0.24

Average basic shares outstanding
 
117,854,335

 
116,808,838

 
117,677,422


116,524,630

Average diluted shares outstanding
 
118,942,758

 
118,269,721

 
118,996,427


118,149,815

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 February 28,
Six Months Ended February 28,
(in thousands)
 
2019
 
2018
2019
 
2018
Net earnings
 
$
13,850

 
$
10,169

$
33,592

 
$
46,980

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
514

 
11,943

(9,143
)
 
14,778

Reclassification for translation loss realized upon liquidation of investment in foreign entity
 
936

 

837

 

Foreign currency translation adjustment
 
1,450

 
11,943

(8,306
)
 
14,778

Net unrealized gain (loss) on derivatives:
 
 
 
 
 
 
 
Unrealized holding gain (loss)
 
(86
)
 
14

(121
)
 
25

Reclassification for gain included in net earnings
 
(42
)
 
(74
)
(84
)
 
(180
)
Net unrealized loss on derivatives
 
(128
)
 
(60
)
(205
)
 
(155
)
Defined benefit obligation:
 
 
 
 
 
 
 
Amortization of prior services
 
(8
)
 
(7
)
(15
)
 
(13
)
Reclassification for settlement losses
 

 

1,316

 
437

Defined benefit obligation
 
(8
)
 
(7
)
1,301

 
424

Other comprehensive income (loss)
 
1,314

 
11,876

(7,210
)
 
15,047

Comprehensive income
 
$
15,164

 
$
22,045

$
26,382

 
$
62,027

See notes to unaudited condensed consolidated financial statements.

4




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
February 28, 2019
 
August 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
66,742

 
$
622,473

Accounts receivable (less allowance for doubtful accounts of $14,511 and $4,489)
 
976,681

 
749,484

Inventories, net
 
866,419

 
589,005

Other current assets
 
160,416

 
116,243

Total current assets
 
2,070,258

 
2,077,205

Property, plant and equipment, net
 
1,478,320

 
1,075,038

Goodwill
 
64,257

 
64,310

Other noncurrent assets
 
115,857

 
111,751

Total assets
 
$
3,728,692

 
$
3,328,304

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
322,147

 
$
261,258

Accrued expenses and other payables
 
265,924

 
260,939

Acquired unfavorable contract backlog
 
75,358

 

Current maturities of long-term debt and short-term borrowings
 
88,902

 
19,746

Total current liabilities
 
752,331

 
541,943

Deferred income taxes
 
38,370

 
37,834

Other long-term liabilities
 
129,345

 
116,325

Long-term debt
 
1,310,150

 
1,138,619

Total liabilities
 
2,230,196

 
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 117,921,070 and 117,015,558 shares
 
1,290

 
1,290

Additional paid-in capital
 
346,156

 
352,674

Accumulated other comprehensive loss
 
(100,887
)
 
(93,677
)
Retained earnings
 
1,449,159

 
1,446,495

Less treasury stock, 11,139,594 and 12,045,106 shares at cost
 
(197,418
)
 
(213,385
)
Stockholders' equity
 
1,498,300

 
1,493,397

Stockholders' equity attributable to noncontrolling interests
 
196

 
186

Total stockholders' equity
 
1,498,496

 
1,493,583

Total liabilities and stockholders' equity
 
$
3,728,692

 
$
3,328,304

See notes to unaudited condensed consolidated financial statements.

5




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six Months Ended February 28,
(in thousands)
 
2019
 
2018
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
33,592

 
$
46,980

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
76,430

 
66,316

Amortization of acquired unfavorable contract backlog
 
(34,808
)
 

Stock-based compensation
 
10,007

 
13,338

Net (gain) loss on disposals of subsidiaries, assets and other
 
(1,202
)
 
518

Deferred income taxes and other long-term taxes
 
11,705

 
(9,420
)
Write-down of inventories
 
237

 
1,296

Provision for losses on (recovery of) receivables, net
 
(518
)
 
2,048

Asset impairment
 

 
12,774

Changes in operating assets and liabilities
 
(80,809
)
 
4,937

Beneficial interest in securitized accounts receivable
 
(367,521
)
 
(322,403
)
Net cash flows used by operating activities
 
(352,887
)
 
(183,616
)
 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Acquisitions, net of cash acquired
 
(700,982
)
 
(6,980
)
Capital expenditures
 
(67,497
)
 
(101,028
)
Proceeds from insurance
 
3,905

 
25,000

Proceeds from the sale of property, plant and equipment
 
2,042

 
631

Proceeds from the sale of discontinued operations and other
 
1,893

 
7,406

Advances under accounts receivable programs
 

 
25,247

Repayments under accounts receivable programs
 

 
(115,247
)
Beneficial interest in securitized accounts receivable
 
367,521

 
322,403

Net cash flows from (used by) investing activities:
 
(393,118
)
 
157,432

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

 

Repayments of long-term debt
 
(14,605
)
 
(10,106
)
Proceeds from accounts receivable programs
 
140,070

 

Repayments under accounts receivable programs
 
(92,664
)
 

Dividends
 
(28,181
)
 
(27,995
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(2,856
)
 
(7,394
)
Increase in documentary letters of credit, net
 

 
10

Contribution from noncontrolling interests
 
10

 
13

Net cash flows from (used by) financing activities
 
181,774

 
(45,472
)
Effect of exchange rate changes on cash
 
(221
)
 
249

Decrease in cash, restricted cash and cash equivalents
 
(564,452
)
 
(71,407
)
Cash, restricted cash and cash equivalents at beginning of period
 
632,615

 
285,881

Cash, restricted cash and cash equivalents at end of period
 
$
68,163

 
$
214,474

See notes to unaudited condensed consolidated financial statements.



6




Supplemental information:
 
Six Months Ended February 28,
(in thousands)
 
2019
 
2018
Cash paid for income taxes
 
$
1,771

 
$
7,668

Cash paid for interest
 
$
31,518

 
$
20,229

 
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
26,186

 
$
30,374

 
 
 
 
 
Cash and cash equivalents
 
$
66,742

 
$
195,184

Restricted cash
 
1,421

 
19,290

Total cash, restricted cash and cash equivalents
 
$
68,163

 
$
214,474



7




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
 
Three Months Ended February 28, 2018
 
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, November 30, 2017
129,060,664

$
1,290

$
344,342

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

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

$
1,434,973

Net earnings
 
 
 
 
10,169

 
 
 
10,169

Other comprehensive income
 
 
 
11,876

 
 
 
 
11,876

Dividends
 
 
 
 
(14,001
)
 
 
 
(14,001
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(1,204
)
 
 
195,040

3,331

 
2,127

Stock-based compensation
 
 
6,316

 
 
 
 
 
6,316

Contribution of noncontrolling interest
 
 

 
 
 
 
13

13

Balance, February 28, 2018
129,060,664

$
1,290

$
349,454

$
(66,466
)
$
1,382,791

(12,234,996
)
$
(215,782
)
$
186

$
1,451,473

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2018
 
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
 
 
 
 
46,980

 
 
 
46,980

Other comprehensive income
 
 
 
15,047

 
 
 
 
15,047

Dividends
 
 
 
 
(27,995
)
 
 
 
(27,995
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(23,695
)
 
 
1,031,932

16,302

 
(7,393
)
Stock-based compensation
 
 
8,643

 
 
 
 
 
8,643

Contribution of noncontrolling interest
 
 

 
 
 
 
13

13

Reclassification of share-based liability awards
 
 
15,248

 
 
 
 
 
15,248

Balance, February 28, 2018
129,060,664

$
1,290

$
349,454

$
(66,466
)
$
1,382,791

(12,234,996
)
$
(215,782
)
$
186

$
1,451,473


8




 
Three Months Ended February 28, 2019
 
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, November 30, 2018
129,060,664

$
1,290

$
342,893

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

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

$
1,489,027

Net earnings
 
 
 
 
13,850

 
 
 
13,850

Other comprehensive income
 
 
 
1,314

 
 
 
 
1,314

Dividends
 
 
 
 
(14,065
)
 
 
 
(14,065
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(1,733
)
 
 
286,869

5,097

 
3,364

Stock-based compensation
 
 
4,996

 
 
 
 
 
4,996

Contribution of noncontrolling interests
 
 
 
 
 
 
 
10

10

Balance, February 28, 2019
129,060,664

$
1,290

$
346,156

$
(100,887
)
$
1,449,159

(11,139,594
)
$
(197,418
)
$
196

$
1,498,496

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2019
 
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
 
 
 
 
33,592

 
 
 
33,592

Other comprehensive loss
 
 
 
(7,210
)
 
 
 
 
(7,210
)
Dividends
 
 
 
 
(28,181
)
 
 
 
(28,181
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(18,823
)
 
 
905,512

15,967

 
(2,856
)
Stock-based compensation
 
 
12,305

 
 
 
 
 
12,305

Contribution of noncontrolling interests
 
 
 
 
 
 
 
10

10

Adoption of ASC 606 adjustment
 
 

 
(2,747
)
 
 
 
(2,747
)
Balance, February 28, 2019
129,060,664

$
1,290

$
346,156

$
(100,887
)
$
1,449,159

(11,139,594
)
$
(197,418
)
$
196

$
1,498,496

See notes to unaudited condensed consolidated financial statements.

9





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 and six month periods 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 Company adopted the standard, which requires retrospective application to all periods presented, in the first quarter of fiscal 2019. As a result of adoption, the Company reported reductions in operating cash flows of $367.5 million and $322.4 million, respectively, with offsetting increases in investing cash flows related to the collection of previously sold trade accounts receivable in the consolidated statements of cash flows for the six months ended February 28, 2019 and 2018. 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 adopted 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, Revenue Recognition. The impact to the unaudited condensed consolidated balance sheet was immaterial.

 
Three Months Ended February 28, 2019
(in thousands)
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change - Higher (Lower)
Net sales
 
$
1,402,783

 
$
1,405,205

 
$
(2,422
)
Net earnings
 
$
13,850

 
$
15,655

 
$
(1,805
)
 
 
Six Months Ended February 28, 2019
(in thousands)
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change - Higher (Lower)
Net sales
 
$
2,680,125

 
$
2,684,772

 
$
(4,647
)
Net earnings
 
$
33,592

 
$
37,124

 
$
(3,532
)


10




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 350-40, Internal-use Software, 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 on internal processes and systems, internal controls, and its consolidated financial statements.
NOTE 2. ACQUISITION

On November 5, 2018 (the "Acquisition Date"), the Company 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 financial statements were not retrospectively adjusted for any measurement-period adjustments that occurred in subsequent periods. Rather, any adjustments to provisional amounts that were identified during the allowable one year measurement period (the "Measurement Period") are recorded in the reporting period in which the adjustment was determined.

The table below presents the preliminary fair value that was allocated to the Acquired Businesses' assets and liabilities based upon fair values as determined by the Company, as well as any Measurement Period adjustments made during the second quarter of fiscal 2019. Final determination of the fair values may result in further adjustments to the values presented in the following table:

11




(in thousands)
 
Estimated Fair Value as Previously Reported*
 
Measurement Period Adjustments**
 
Estimated Fair Value
Cash and cash equivalents
 
$
6,399

 
$

 
$
6,399

Accounts receivable
 
308,074

 
(6,334
)
 
301,740

Inventories
 
207,648

 
(5,566
)
 
202,082

Other current assets
 
11,788

 
14,502

 
26,290

Property, plant and equipment
 
424,541

 
(10,304
)
 
414,237

Intangible assets
 
10,252

 
(10,252
)
 

Deferred income taxes
 
10,567

 
1,039

 
11,606

Accounts payable-trade, accrued expenses and other payables
 
(128,183
)
 
(6,519
)
 
(134,702
)
Acquired unfavorable contract backlog
 
(133,600
)
 
23,434

 
(110,166
)
Other long-term liabilities
 
(9,920
)
 

 
(9,920
)
Pension and other post retirement employment benefits
 
(6,365
)
 

 
(6,365
)
Total assets acquired and liabilities assumed
 
$
701,201

 
$

 
$
701,201

* As previously reported in the Company's Quarterly Report on Form 10-Q for the period ended November 30, 2018
** The Company recorded measurement period adjustments in the second quarter of fiscal 2019 to reflect facts and circumstances in existence as of the Acquisition Date. These measurement period adjustments primarily related to changes in valuation assumptions and other initial estimates.

Inventories
The acquired inventory is comprised of finished goods, work in process and raw materials. The fair value of finished goods was preliminarily calculated as the estimated selling price, adjusted for the selling costs and a reasonable profit margin. The fair value of semi-finished goods was preliminarily calculated as the estimated selling price, adjusted for estimated costs to complete manufacturing, estimated selling costs, and a reasonable profit margin. The fair value of raw materials was determined to approximate the historical carrying value as it represented market cost. The inventory step up recognized for the three and six month periods ended February 28, 2019 was $10.3 million, which has been reflected in the Company's Americas Mills segment as cost of goods sold as the related inventory has been sold.

Property, Plant and Equipment
The fair value of real property was preliminarily calculated using the cost approach for buildings and improvements and either a sales comparison or market approach for land. The fair value of personal property was preliminarily calculated using the cost approach. The cost approach measures the value by estimating the cost to acquire or construct comparable assets and adjusts for age and condition. The Company assigned real property a useful life ranging from 1 to 35 years and personal property a useful life ranging from 1 to 25 years.

Deferred Income Taxes
Deferred income tax assets include the expected future federal and state tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating the deferred tax assets represent a preliminary consolidated tax rate which may be adjusted during the Measurement Period as the Company applies the appropriate tax rate for each legal entity.

Pension and Other Postretirement Liabilities
The Company recognized a net liability of $6.4 million, representing the unfunded portion of the acquired defined-benefits pension plan and other postretirement benefit plan.

Acquired Unfavorable Contract Backlog
The Company determined that the backlog associated with existing contracts at the acquired fabrication facilities represented a separable intangible liability. The unfavorable contract backlog was valued using the income approach. Amortization of the backlog will correspond with completion of the acquired contracts, which is estimated to be between 1 to 2 years.

Other Assets Acquired and Liabilities Assumed
The Company used historical carrying values for trade accounts receivable and payables, as well as certain other current and non-current assets and liabilities, as their carrying values represented the fair value of those items as of the Acquisition Date.



12




Financial Results

The following table summarizes the financial results of the Acquired Businesses from the Acquisition Date for the three and six months ended February 28, 2019 that are included in the Company’s condensed consolidated statement of earnings and condensed consolidated statement of comprehensive income.
(in thousands)
 
Three Months Ended February 28, 2019
 
Six Months Ended February 28, 2019
Net sales
 
$
383,572

 
$
505,071

Earnings before income taxes
 
$
26,670

 
$
35,096


Pro Forma Supplemental Information

Supplemental information on an unaudited pro forma basis is presented below 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 part of management analysis of the financial results and performance of the Company. These results are adjusted, where possible, for transaction and integration related costs. These results involve a significant amount of estimates.

 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Pro forma net sales *
 
$
1,379,033

 
$
1,470,603

 
$
2,925,007

 
$
2,914,292

Pro forma net earnings **
 
$
10,260

 
$
18,786

 
$
26,081

 
$
(2,187
)
* Pro forma net sales for the three and six months ended February 28, 2018 includes estimated fair value adjustments related to amortization of unfavorable contract backlog. The impact of the amortization of unfavorable contract backlog has been removed from the pro forma net sales for the three and six months ended February 28, 2019.
** Pro forma net earnings for the three and six months ended February 28, 2018 reflects the impact of fair value adjustments related to the amortization of unfavorable contract backlog described above. Pro forma net earnings for the six months ended February 28, 2018 includes estimated fair value adjustments related to inventory step-up, as well as non-recurring acquisition and integration costs of approximately $47.5 million.
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.

 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
(in thousands)
 
2018
 
2018
Net sales
 
$
139,011

 
$
301,122

Costs and expenses:
 
 
 
 
Cost of goods sold
 
130,687

 
272,138

Selling, general and administrative expenses
 
8,034

 
20,660

Interest expense
 

 
(86
)
Earnings before income taxes
 
290

 
8,410

Income taxes
 
(98
)
 
3,082

Earnings from discontinued operations
 
$
388

 
$
5,328


There were no material operating or investing non-cash items for discontinued operations for the three and six months ended February 28, 2019 and 2018.


13




The assets and liabilities of the businesses classified as held for sale and discontinued operations were immaterial at both February 28, 2019 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 February 28, 2019
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, November 30, 2018
 
$
(102,393
)
 
$
1,279

 
$
(1,087
)
 
$
(102,201
)
Other comprehensive income (loss) before reclassifications
 
514

 
(52
)
 
(8
)
 
454

Amounts reclassified from AOCI
 
936

 
(107
)
 

 
829

Income taxes
 

 
31

 

 
31

Net other comprehensive income (loss)
 
1,450

 
(128
)
 
(8
)
 
1,314

Balance, February 28, 2019
 
$
(100,943
)
 
$
1,151

 
$
(1,095
)
 
$
(100,887
)
 
 
Six Months Ended February 28, 2019
(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 loss before reclassifications
 
(9,143
)
 
(104
)
 
(19
)
 
(9,266
)
Amounts reclassified from AOCI
 
837

 
(149
)
 
1,666

 
2,354

Income taxes (benefit)
 

 
48

 
(346
)
 
(298
)
Net other comprehensive income (loss)
 
(8,306
)
 
(205
)
 
1,301

 
(7,210
)
Balance, February 28, 2019
 
$
(100,943
)
 
$
1,151

 
$
(1,095
)
 
$
(100,887
)

 
 
Three Months Ended February 28, 2018
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, November 30, 2017
 
$
(77,943
)
 
$
1,492

 
$
(1,891
)
 
$
(78,342
)
Other comprehensive income before reclassifications
 
11,943

 
18

 

 
11,961

Amounts reclassified from AOCI
 

 
(97
)
 
(9
)
 
(106
)
Income taxes
 

 
19

 
2

 
21

Net other comprehensive income (loss)
 
11,943

 
(60
)
 
(7
)
 
11,876

Balance, February 28, 2018
 
$
(66,000
)
 
$
1,432

 
$
(1,898
)
 
$
(66,466
)
 
 
Six Months Ended February 28, 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 before reclassifications
 
14,778

 
31

 

 
14,809

Amounts reclassified from AOCI
 

 
(243
)
 
656

 
413

Income taxes (benefit)
 

 
57

 
(232
)
 
(175
)
Net other comprehensive income (loss)
 
14,778

 
(155
)
 
424

 
15,047

Balance, February 28, 2018
 
$
(66,000
)
 
$
1,432

 
$
(1,898
)
 
$
(66,466
)

Items reclassified out of AOCI were not material for the three and six months ended February 28, 2019 and 2018, thus the corresponding line items in the unaudited condensed consolidated statements of earnings to which the items were reclassified are not presented.

14




NOTE 5. REVENUE RECOGNITION

Revenue from Contracts with Customers
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration received or expected to be received in exchange for those goods or services. The Company's performance obligations arise from (i) sales of steel products, ferrous and nonferrous scrap metals, and construction materials and (ii) services such as steel fabrication and installation. The shipment of products to customers is considered a fulfillment activity and amounts billed to customers for shipping and freight are included in net sales, and the related costs are included in cost of goods sold. Net sales 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 is either recognized over time or equal to billing under an available practical expedient. For contracts where the Company provides fabricated product and installation services, revenue is recognized over time using an input method. For the three and six months of February 28, 2019, these contracts represent approximately 29% of net sales in the Americas Fabrication segment. For these contracts, the measure of progress is based on contract costs incurred to date compared to total estimated contract costs, which provides a reasonable depiction of the Company’s progress towards satisfaction of the performance obligation as there is a direct relationship between costs incurred by the Company and the transfer of the fabricated product and installation services. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method. For the three and six months of February 28, 2019, these contracts represent approximately 27% and 26%, respectively, 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 consolidated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete, or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgment in determining the transaction price. For the three and six months of February 28, 2019, the remaining 44% and 45%, respectively, 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 do not include a significant financing component.
The following table provides information about assets and liabilities from contracts with customers.
(in thousands)
 
February 28, 2019
 
August 31, 2018
Contract assets (included in other current assets)
 
$
76,316

 
$
49,221

Contract liabilities (included in accrued expenses and other payables)
 
17,791

 
6,679

The entire contract liability as of August 31, 2018 was recognized as revenue during the six months ended February 28, 2019.
Remaining Performance Obligations
As of February 28, 2019, a total of $930.4 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.

15




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 February 28, 2019
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
202

 
$
444,327

 
$
462,963

 
$
167,534

 
$

 
$
1,075,026

Ferrous scrap
 
105,253

 
8,744

 

 
255

 

 
114,252

Nonferrous scrap
 
120,004

 
3,308

 

 
2,524

 

 
125,836

Construction materials
 

 

 
60,190

 

 

 
60,190

Other
 
429

 
16,416

 
3,525

 
4,632

 
2,477

 
27,479

Total
 
$
225,888

 
$
472,795

 
$
526,678

 
$
174,945

 
$
2,477

 
$
1,402,783

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2019
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
441

 
$
792,292

 
$
837,770

 
$
385,304

 
$

 
$
2,015,807

Ferrous scrap
 
216,907

 
17,886

 

 
530

 

 
235,323

Nonferrous scrap
 
248,079

 
6,488

 

 
5,465

 

 
260,032

Construction materials
 

 

 
117,361

 

 

 
117,361

Other
 
642

 
29,800

 
6,105

 
10,319

 
4,736

 
51,602

Total
 
$
466,069

 
$
846,466

 
$
961,236

 
$
401,618

 
$
4,736

 
$
2,680,125

 
 
Three Months Ended February 28, 2018*
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
277

 
$
240,024

 
$
257,167

 
$
202,178

 
$

 
$
699,646

Ferrous scrap
 
116,313

 
7,095

 

 
298

 

 
123,706

Nonferrous scrap
 
148,425

 
3,902

 

 
3,458

 

 
155,785

Construction materials
 

 

 
51,174

 

 

 
51,174

Other
 
417

 
11,682

 
1,858

 
5,550

 
4,450

 
23,957

Total
 
$
265,432

 
$
262,703

 
$
310,199

 
$
211,484

 
$
4,450

 
$
1,054,268

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended February 28, 2018*
(in thousands)
 
Americas Recycling
 
Americas Mills
 
Americas Fabrication
 
International Mill
 
Corporate and Other
 
Total
Steel products
 
$
575

 
$
461,586

 
$
526,809

 
$
412,038

 
$

 
$
1,401,008

Ferrous scrap
 
238,960

 
16,143

 

 
619

 

 
255,722

Nonferrous scrap
 
299,377

 
7,883

 

 
7,141

 

 
314,401

Construction materials
 

 

 
110,205

 

 

 
110,205

Other
 
857

 
23,824

 
3,737

 
11,898

 
9,149

 
49,465

Total
 
$
539,769

 
$
509,436

 
$
640,751

 
$
431,696

 
$
9,149

 
$
2,130,801

* Prior period amounts have been reported under ASC 605.

16




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.

 
 
Six Months Ended February 28, 2018
(in thousands)
 
Total
 
U.S.
 
Poland
Deferred purchase price
 
 
 
 
 
 
Balance, August 31, 2017
 
$
215,123

 
$
135,623

 
$
79,500

Transfers of trade receivables
 
1,345,646

 
1,087,650

 
257,996

Less: CPP
 
(992,154
)
 
(812,120
)
 
(180,034
)
Non-cash increase to DPP
 
353,492

 
275,530

 
77,962

Cash collections of DPP
 
(322,403
)
 
(256,269
)
 
(66,134
)
Net repayments (advances)
 
90,000

 
90,000

 

Net collections of DPP
 
(232,403
)
 
(166,269
)
 
(66,134
)
Balance, February 28, 2018
 
$
336,212

 
$
244,884

 
$
91,328


At February 28, 2018, the Company transferred $338.0 million of trade accounts receivable to the financial institutions and had no advance payments outstanding under the Programs.

Discounts related to the Programs were immaterial for the three and six months ended February 28, 2018.
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 as finished goods. Work in process inventories were not material at February 28, 2019 and August 31, 2018. At February 28, 2019 and August 31, 2018, $186.7 million and $177.7 million, respectively, of the Company's inventories were in the form of raw materials.

17





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
 

 

 

 
(56
)
 
(56
)
Impairment
 

 

 

 

 

Reclassification to assets of discontinued operations
 

 

 

 

 

Balance, February 28, 2019
 
$
9,543

 
$
4,970

 
$
57,428

 
$
2,512

 
$
74,453

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

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

 

 

 
3

 
3

Reclassification to assets of discontinued operations
 

 

 

 

 

Balance, February 28, 2019
 
$
(9,543
)
 
$

 
$
(493
)
 
$
(160
)
 
$
(10,196
)
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
Balance, August 31, 2018
 
$

 
$
4,970

 
$
56,935

 
$
2,405

 
$
64,310

Foreign currency translation
 

 

 

 
(53
)
 
(53
)
Impairment
 

 

 

 

 

Balance, February 28, 2019
 
$

 
$
4,970

 
$
56,935

 
$
2,352

 
$
64,257


The total gross carrying amounts of the Company's intangible assets subject to amortization were $22.2 million and $20.5 million at February 28, 2019 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 $0.6 million and $1.1 million for the three and six months ended February 28, 2019 and 2018, respectively. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives as of February 28, 2019.

The amortizable intangible assets (liabilities) acquired consisted of:
(in thousands, except life in years)
 
Life in Years
 
Estimated Fair Value Adjusted
Net unfavorable lease contracts
 
Various
 
$
(2,705
)
Unfavorable contract backlog
 
1-2 years*
 
$
(110,166
)
* Amortization will correspond with completion of the acquired contracts, which is estimated to occur over the next 1 to 2 years.

In connection with the acquisition of the Acquired Businesses, the Company recorded a preliminary unfavorable contract backlog liability of $110.2 million. Amortization of the backlog for the three and six months ended February 28, 2019 was $23.5 million and $34.8 million, respectively, and was recorded as an increase to net sales in the Company's unaudited condensed consolidated statement of earnings.

18




NOTE 9. CREDIT ARRANGEMENTS

Long-term debt as of February 28, 2019 and August 31, 2018 was as follows: 
(in thousands)
 
Weighted Average Interest Rate as of February 28, 2019
 
February 28, 2019
 
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
 
4.236%
 
314,250

 
142,500

Short-term borrowings
 
*
 
59,473

 

Other, including equipment notes
 
 
 
56,441

 
47,629

Total debt
 
 
 
1,410,164

 
1,170,129

     Less debt issuance costs
 
 
 
11,112

 
11,764

Total amounts outstanding
 
 
 
1,399,052

 
1,158,365

     Less current maturities
 
 
 
29,429

 
19,746

Less short-term borrowings
 
 
 
$
59,473

 

Current maturities of long-term debt and short-term borrowings
 
 
 
88,902

 
19,746

Long-term debt
 
 
 
$
1,310,150

 
$
1,138,619

* As of February 28, 2019, the weighted average interest rates associated with the U.S. Program and Poland Program were 3.497% and 2.410%, respectively.

In July 2017, the Company issued $300.0 million of 5.375% Senior Notes due July 2027 (the "2027 Notes"). Interest on 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 February 28, 2019 and August 31, 2018. The Company's availability under the Revolver was reduced by outstanding letters of credit of $3.3 million at February 28, 2019 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 February 28, 2019, the Company's interest coverage ratio was 5.41 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 February 28, 2019, 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

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assurance and other trade finance-related matters.  At February 28, 2019, CMCP's uncommitted credit facilities totaled Polish zloty ("PLN") 225.0 million, or $59.4 million. These facilities, which we intend to renew, will expire during March 2019. At February 28, 2019 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 $1.1 million at February 28, 2019 and August 31, 2018. During the six months ended February 28, 2019 and 2018, 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. Advances taken under the U.S. Program incur interest based on LIBOR plus a margin. The Company had advance payments outstanding of $25.0 million under the U.S. Program at February 28, 2019.

In addition to the U.S. Program, the Company's international subsidiary in Poland transfers trade accounts receivable to financial institutions without recourse (the "Poland Program"). The Poland Program has a facility limit of PLN 220.0 million ($58.1 million as of February 28, 2019) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable transferred under the terms of the arrangement. Advances taken under the Poland Program incur interest based on the Warsaw Interbank Offered Rate ("WIBOR") plus a margin. The Company had advance payments outstanding of $34.5 million and $12.1 million under the Poland Program at February 28, 2019 and August 31, 2018, respectively.

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.


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At February 28, 2019, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $125.9 million and $56.2 million, respectively. At February 28, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $300.9 million and $55.3 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of February 28, 2019:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
5,175

 MT
Aluminum
 
Short
 
2,425

 MT
Copper
 
Long
 
601

 MT
Copper
 
Short
 
6,146

 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 six months ended February 28, 2019 and 2018. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the unaudited condensed consolidated statements of earnings (amounts in thousands): 
 
 
 
 
Three Months Ended February 28,
 
Six Months Ended February 28,
Derivatives Not Designated as Hedging Instruments
 
Location
 
2019
 
2018
 
2019
 
2018
Commodity
 
Cost of goods sold
 
$
(2,425
)
 
$
(2
)
 
$
(3,265
)
 
$
573

Foreign exchange
 
Cost of goods sold
 

 
(31
)
 

 
(50
)
Foreign exchange
 
SG&A expenses
 
(526
)
 
(1,729
)
 
(400
)
 
651

Gain (loss) before income taxes
 
 
 
$
(2,951
)
 
$
(1,762
)
 
$
(3,665
)
 
$
1,174



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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 February 28,
 
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 February 28,
 
 
2019
 
2018
 
 
2019
 
2018
Foreign exchange
 
Net sales