UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 20182019
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, Texas75039
(Address of Principal Executive Offices) (Zip Code)
(214) (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 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| |
Large accelerated filerx | Accelerated filer¨ |
Non-accelerated filer ¨(Do not check if a smaller reporting company) | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | CMC | New York Stock Exchange |
As of June 25, 2018, 117,014,0192019, 117,924,115 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
| |
PART I. | FINANCIAL INFORMATION |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) |
| | | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands, except share data) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 1,204,484 |
| | $ | 1,044,713 |
| | $ | 3,335,285 |
|
| $ | 2,759,939 |
| | $ | 1,605,872 |
| | $ | 1,204,484 |
| | $ | 4,285,997 |
|
| $ | 3,335,285 |
|
Costs and expenses: | | | | | |
|
|
| | | | | |
|
|
|
Cost of goods sold | | 1,035,914 |
| | 896,277 |
| | 2,896,531 |
|
| 2,357,867 |
| | 1,364,242 |
| | 1,035,914 |
| | 3,735,168 |
|
| 2,896,531 |
|
Selling, general and administrative expenses | | 101,422 |
| | 93,415 |
| | 306,009 |
|
| 282,384 |
| | 115,461 |
| | 101,422 |
| | 331,404 |
|
| 306,009 |
|
Interest expense | | 11,511 |
| | 12,448 |
| | 25,303 |
| | 38,212 |
| | 18,513 |
| | 11,511 |
| | 53,671 |
| | 25,303 |
|
| | 1,148,847 |
| | 1,002,140 |
| | 3,227,843 |
|
| 2,678,463 |
| | 1,498,216 |
| | 1,148,847 |
| | 4,120,243 |
|
| 3,227,843 |
|
| | | | | | | | | | | | | | | | |
Earnings from continuing operations before income taxes | | 55,637 |
| | 42,573 |
| | 107,442 |
|
| 81,476 |
| | 107,656 |
| | 55,637 |
| | 165,754 |
|
| 107,442 |
|
Income taxes | | 13,312 |
| | 11,006 |
| | 23,465 |
|
| 21,231 |
| | 29,105 |
| | 13,312 |
| | 52,855 |
|
| 23,465 |
|
Earnings from continuing operations | | 42,325 |
| | 31,567 |
| | 83,977 |
|
| 60,245 |
| | 78,551 |
| | 42,325 |
| | 112,899 |
|
| 83,977 |
|
| | | | | |
|
|
|
|
| | | | | |
|
|
|
|
|
Earnings (loss) from discontinued operations before income taxes (benefit) | | (3,389 | ) | | 9,325 |
| | 5,021 |
| | 19,687 |
| |
Earnings (loss) from discontinued operations before income taxes | | | (190 | ) | | (3,389 | ) | | (808 | ) | | 5,021 |
|
Income taxes (benefit) | | (1,029 | ) | | 1,626 |
| | 2,052 |
| | 4,059 |
| | (29 | ) | | (1,029 | ) | | 109 |
| | 2,052 |
|
Earnings (loss) from discontinued operations | | (2,360 | ) | | 7,699 |
| | 2,969 |
| | 15,628 |
| | (161 | ) | | (2,360 | ) | | (917 | ) | | 2,969 |
|
| | | | | |
|
|
|
|
| | | | | |
|
|
|
|
|
Net earnings | | $ | 39,965 |
| | $ | 39,266 |
| | $ | 86,946 |
| | $ | 75,873 |
| | $ | 78,390 |
| | $ | 39,965 |
| | $ | 111,982 |
| | $ | 86,946 |
|
| | | | | |
|
|
| | | | | |
|
|
|
Basic earnings (loss) per share* | | | | | |
|
|
| | | | | |
|
|
|
Earnings from continuing operations | | $ | 0.36 |
| | $ | 0.27 |
| | $ | 0.72 |
|
| $ | 0.52 |
| | $ | 0.67 |
| | $ | 0.36 |
| | $ | 0.96 |
|
| $ | 0.72 |
|
Earnings (loss) from discontinued operations | | (0.02 | ) | | 0.07 |
| | 0.03 |
|
| 0.14 |
| | — |
| | (0.02 | ) | | (0.01 | ) |
| 0.03 |
|
Net earnings | | $ | 0.34 |
| | $ | 0.34 |
| | $ | 0.74 |
|
| $ | 0.66 |
| | $ | 0.66 |
| | $ | 0.34 |
| | $ | 0.95 |
|
| $ | 0.74 |
|
| | | | | |
|
|
| | | | | |
|
|
|
Diluted earnings (loss) per share* | | | | | |
|
|
| | | | | |
|
|
|
Earnings from continuing operations | | $ | 0.36 |
| | $ | 0.27 |
| | $ | 0.71 |
|
| $ | 0.51 |
| | $ | 0.66 |
| | $ | 0.36 |
| | $ | 0.95 |
|
| $ | 0.71 |
|
Earnings (loss) from discontinued operations | | (0.02 | ) | | 0.07 |
| | 0.03 |
|
| 0.13 |
| | — |
| | (0.02 | ) | | (0.01 | ) |
| 0.03 |
|
Net earnings | | $ | 0.34 |
| | $ | 0.34 |
| | $ | 0.74 |
|
| $ | 0.65 |
| | $ | 0.66 |
| | $ | 0.34 |
| | $ | 0.94 |
|
| $ | 0.74 |
|
| | | | | |
|
|
|
|
| | | | | |
|
|
|
|
|
Cash dividends per share | | $ | 0.12 |
| | $ | 0.12 |
| | $ | 0.36 |
|
| $ | 0.36 |
| |
Average basic shares outstanding | | 117,111,799 |
| | 115,886,372 |
| | 116,722,504 |
|
| 115,574,289 |
| | 118,045,362 |
| | 117,111,799 |
| | 117,762,945 |
|
| 116,722,504 |
|
Average diluted shares outstanding | | 118,254,791 |
| | 117,205,369 |
| | 118,050,864 |
|
| 117,087,341 |
| | 119,145,566 |
| | 118,254,791 |
| | 119,013,014 |
|
| 118,050,864 |
|
See notes to unaudited condensed consolidated financial statements.
_________________
* EPSEarnings Per Share ("EPS") is calculated independently for each component and may not sum to Net Earnings EPS due to roundingrounding.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) |
|
| | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net earnings | | $ | 39,965 |
| | $ | 39,266 |
| | $ | 86,946 |
| | $ | 75,873 |
| | $ | 78,390 |
| | $ | 39,965 |
| | $ | 111,982 |
| | $ | 86,946 |
|
Other comprehensive income (loss), net of income taxes: | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | (26,434 | ) | | 27,109 |
| | (11,656 | ) | | 15,129 |
| | (5,135 | ) | | (26,434 | ) | | (14,278 | ) | | (11,656 | ) |
Reclassification for translation loss realized upon liquidation of investment in foreign entity | | 1,328 |
| | 968 |
| | 1,328 |
| | 968 |
| | 19 |
| | 1,328 |
| | 856 |
| | 1,328 |
|
Foreign currency translation adjustment | | (25,106 | ) | | 28,077 |
| | (10,328 | ) | | 16,097 |
| | (5,116 | ) | | (25,106 | ) | | (13,422 | ) | | (10,328 | ) |
Net unrealized gain (loss) on derivatives: | | | | | | | | | | | | | | | | |
Unrealized holding gain | | 13 |
| | 254 |
| | 38 |
| | 696 |
| |
Unrealized holding gain (loss) | | | (145 | ) | | 13 |
| | (267 | ) | | 38 |
|
Reclassification for gain included in net earnings | | (56 | ) | | (333 | ) | | (236 | ) | | (853 | ) | | (71 | ) | | (56 | ) | | (154 | ) | | (236 | ) |
Net unrealized loss on derivatives | | (43 | ) | | (79 | ) | | (198 | ) | | (157 | ) | | (216 | ) | | (43 | ) | | (421 | ) | | (198 | ) |
Defined benefit obligation: | | | | | | | | | | | | | | | | |
Amortization of prior services | | (7 | ) | | (9 | ) | | (20 | ) | | (27 | ) | | (6 | ) | | (7 | ) | | (21 | ) | | (20 | ) |
Reclassification for settlement losses | | — |
| | — |
| | 437 |
| | — |
| | — |
| | — |
| | 1,316 |
| | 437 |
|
Defined benefit obligation | | (7 | ) | | (9 | ) | | 417 |
| | (27 | ) | | (6 | ) | | (7 | ) | | 1,295 |
| | 417 |
|
Other comprehensive income (loss) | | (25,156 | ) | | 27,989 |
| | (10,109 | ) | | 15,913 |
| |
Other comprehensive loss | | | (5,338 | ) | | (25,156 | ) | | (12,548 | ) | | (10,109 | ) |
Comprehensive income | | $ | 14,809 |
| | $ | 67,255 |
| | $ | 76,837 |
| | $ | 91,786 |
| | $ | 73,052 |
| | $ | 14,809 |
| | $ | 99,434 |
| | $ | 76,837 |
|
See notes to unaudited condensed consolidated financial statements.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) |
| (in thousands, except share data) | | May 31, 2018 | | August 31, 2017 | | May 31, 2019 | | August 31, 2018 |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 600,444 |
| | $ | 252,595 |
| | $ | 120,315 |
| | $ | 622,473 |
|
Accounts receivable (less allowance for doubtful accounts of $4,648 and $4,146) | | 678,343 |
| | 561,411 |
| |
Accounts receivable (less allowance for doubtful accounts of $8,584 and $4,489) | | | 1,014,157 |
| | 749,484 |
|
Inventories, net | | 595,231 |
| | 462,648 |
| | 807,593 |
| | 589,005 |
|
Other current assets | | 109,656 |
| | 140,136 |
| | 172,007 |
| | 116,243 |
|
Assets of businesses held for sale & discontinued operations | | 11,282 |
| | 297,110 |
| |
Total current assets | | 1,994,956 |
| | 1,713,900 |
| | 2,114,072 |
| | 2,077,205 |
|
Property, plant and equipment, net | | 1,074,357 |
| | 1,051,677 |
| | 1,473,568 |
| | 1,075,038 |
|
Goodwill | | 64,316 |
| | 64,915 |
| | 64,226 |
| | 64,310 |
|
Other noncurrent assets | | 111,864 |
| | 144,639 |
| | 115,144 |
| | 111,751 |
|
Total assets | | $ | 3,245,493 |
| | $ | 2,975,131 |
| | $ | 3,767,010 |
| | $ | 3,328,304 |
|
Liabilities and stockholders' equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable-trade | | $ | 241,584 |
| | $ | 226,456 |
| | $ | 278,390 |
| | $ | 261,258 |
|
Accrued expenses and other payables | | 247,635 |
| | 274,972 |
| | 318,975 |
| | 260,939 |
|
Current maturities of long-term debt | | 19,874 |
| | 19,182 |
| |
Liabilities of businesses held for sale & discontinued operations | | 2,843 |
| | 87,828 |
| |
Acquired unfavorable contract backlog | | | 51,998 |
| | — |
|
Current maturities of long-term debt and short-term borrowings | | | 54,895 |
| | 19,746 |
|
Total current liabilities | | 511,936 |
| | 608,438 |
| | 704,258 |
| | 541,943 |
|
Deferred income taxes | | 30,760 |
| | 49,160 |
| | 63,413 |
| | 37,834 |
|
Other long-term liabilities | | 110,792 |
| | 111,023 |
| |
Other noncurrent liabilities | | | 128,281 |
| | 116,325 |
|
Long-term debt | | 1,139,103 |
| | 805,580 |
| | 1,306,863 |
| | 1,138,619 |
|
Total liabilities | | 1,792,591 |
| | 1,574,201 |
| | 2,202,815 |
| | 1,834,721 |
|
Commitments and contingencies (Note 13) | |
| |
| |
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 117,014,019 and 115,793,736 shares | | 1,290 |
| | 1,290 |
| |
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 117,924,115 and 117,015,558 shares | | | 1,290 |
| | 1,290 |
|
Additional paid-in capital | | 347,744 |
| | 349,258 |
| | 352,881 |
| | 352,674 |
|
Accumulated other comprehensive loss | | (91,622 | ) | | (81,513 | ) | | (106,225 | ) | | (93,677 | ) |
Retained earnings | | 1,408,715 |
| | 1,363,806 |
| | 1,513,418 |
| | 1,446,495 |
|
Less treasury stock, 12,046,645 and 13,266,928 shares at cost | | (213,411 | ) | | (232,084 | ) | |
Stockholders' equity attributable to CMC | | 1,452,716 |
| | 1,400,757 |
| |
Less treasury stock, 11,136,549 and 12,045,106 shares at cost | | | (197,365 | ) | | (213,385 | ) |
Stockholders' equity | | | 1,563,999 |
| | 1,493,397 |
|
Stockholders' equity attributable to noncontrolling interests | | 186 |
| | 173 |
| | 196 |
| | 186 |
|
Total stockholders' equity | | 1,452,902 |
| | 1,400,930 |
| | 1,564,195 |
| | 1,493,583 |
|
Total liabilities and stockholders' equity | | $ | 3,245,493 |
| | $ | 2,975,131 |
| | $ | 3,767,010 |
| | $ | 3,328,304 |
|
See notes to unaudited condensed consolidated financial statements.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
| | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 |
Cash flows from (used by) operating activities: | | | | |
Net earnings | | $ | 86,946 |
| | $ | 75,873 |
|
Adjustments to reconcile net earnings to cash flows from (used by) operating activities: | | | | |
Depreciation and amortization | | 99,443 |
| | 93,049 |
|
Stock-based compensation | | 18,247 |
| | 19,716 |
|
Asset impairment | | 14,265 |
| | 622 |
|
Deferred income taxes & other long-term taxes | | 5,829 |
| | (2,538 | ) |
Provision for losses on receivables, net | | 2,193 |
| | 856 |
|
Net gain on disposals of subsidiaries, assets and other | | (1,578 | ) | | (343 | ) |
Write-down of inventories | | 1,358 |
| | 1,820 |
|
Amortization of interest rate swaps termination gain | | — |
| | (5,698 | ) |
Changes in operating assets and liabilities | | (135,058 | ) | | (164,443 | ) |
Net cash flows from operating activities | | 91,645 |
| | 18,914 |
|
| | | | |
Cash flows from (used by) investing activities: | | | | |
Capital expenditures | | (144,268 | ) | | (162,082 | ) |
Proceeds from the sale of subsidiaries | | 75,483 |
| | — |
|
Proceeds from settlement of life insurance policies | | 25,000 |
| | — |
|
Decrease in restricted cash, net | | 23,592 |
| | 7,492 |
|
Acquisitions | | (6,980 | ) | | (54,425 | ) |
Proceeds from the sale of property, plant and equipment and other | | 6,315 |
| | 1,884 |
|
Net cash flows used by investing activities | | (20,858 | ) | | (207,131 | ) |
| | | | |
Cash flows from (used by) financing activities: | | | | |
Proceeds from issuance of long-term debt | | 350,000 |
| | — |
|
Cash dividends | | (42,036 | ) | | (41,619 | ) |
Repayments on long-term debt | | (15,382 | ) | | (8,775 | ) |
Stock issued under incentive and purchase plans, net of forfeitures | | (9,836 | ) | | (5,516 | ) |
Debt issuance costs | | (5,254 | ) | | — |
|
Proceeds from New Markets Tax Credit transactions | | — |
| | 2,141 |
|
Increase in documentary letters of credit, net | | 18 |
| | 569 |
|
Contribution from noncontrolling interests | | 13 |
| | 14 |
|
Net cash flows from (used by) financing activities | | 277,523 |
| | (53,186 | ) |
Effect of exchange rate changes on cash | | (461 | ) | | (363 | ) |
Increase (decrease) in cash and cash equivalents | | 347,849 |
| | (241,766 | ) |
Cash and cash equivalents at beginning of year | | 252,595 |
| | 517,544 |
|
Cash and cash equivalents at end of period | | $ | 600,444 |
| | $ | 275,778 |
|
| | | | |
Supplemental information: | | | | |
Noncash activities: | | | | |
Liabilities related to additions of property, plant and equipment | | $ | 28,252 |
| | $ | 31,024 |
|
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
| | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 |
Cash flows from (used by) operating activities: | | | | |
Net earnings | | $ | 111,982 |
| | $ | 86,946 |
|
Adjustments to reconcile net earnings to cash flows from (used by) operating activities: | | | | |
Depreciation and amortization | | 117,617 |
| | 99,443 |
|
Amortization of acquired unfavorable contract backlog | | (58,202 | ) | | — |
|
Stock-based compensation | | 17,350 |
| | 18,247 |
|
Net gain on disposals of subsidiaries, assets and other | | (1,334 | ) | | (1,578 | ) |
Deferred income taxes and other long-term taxes | | 36,367 |
| | 5,829 |
|
Write-down of inventories | | 551 |
| | 1,358 |
|
Provision for losses on receivables, net | | 100 |
| | 2,193 |
|
Asset impairment | | 15 |
| | 14,265 |
|
Changes in operating assets and liabilities | | (75,422 | ) | | (65,612 | ) |
Beneficial interest in securitized accounts receivable | | (367,521 | ) | | (491,577 | ) |
Net cash flows used by operating activities | | (218,497 | ) | | (330,486 | ) |
| | | | |
Cash flows from (used by) investing activities: | | | | |
Acquisitions, net of cash acquired | | (700,941 | ) | | (6,980 | ) |
Capital expenditures | | (91,753 | ) | | (144,268 | ) |
Proceeds from insurance | | 4,405 |
| | 25,000 |
|
Proceeds from the sale of property, plant and equipment | | 2,503 |
| | 6,315 |
|
Proceeds from the sale of discontinued operations and other | | 1,893 |
| | 75,483 |
|
Advances under accounts receivable programs | | — |
| | 132,979 |
|
Repayments under accounts receivable programs | | — |
| | (202,423 | ) |
Beneficial interest in securitized accounts receivable | | 367,521 |
| | 491,577 |
|
Net cash flows from (used by) investing activities: | | (416,372 | ) | | 377,683 |
|
| | | | |
Cash flows from (used by) financing activities: | | | | |
Proceeds from issuance of long-term debt | | 180,000 |
| | 350,000 |
|
Repayments of long-term debt | | (24,138 | ) | | (15,382 | ) |
Proceeds from accounts receivable programs | | 223,143 |
| | — |
|
Repayments under accounts receivable programs | | (209,363 | ) | | — |
|
Dividends | | (42,387 | ) | | (42,036 | ) |
Stock issued under incentive and purchase plans, net of forfeitures | | (2,364 | ) | | (9,836 | ) |
Debt issuance costs | | — |
| | (5,254 | ) |
Other | | 10 |
| | 31 |
|
Net cash flows from financing activities | | 124,901 |
| | 277,523 |
|
Effect of exchange rate changes on cash | | (341 | ) | | (461 | ) |
Increase (decrease) in cash, restricted cash and cash equivalents | | (510,309 | ) | | 324,259 |
|
Cash, restricted cash and cash equivalents at beginning of period | | 632,615 |
| | 285,881 |
|
Cash, restricted cash and cash equivalents at end of period | | $ | 122,306 |
| | $ | 610,140 |
|
See notes to unaudited condensed consolidated financial statements.
|
| | | | | | | | |
Supplemental information: | | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 |
Cash paid for income taxes | | $ | 6,852 |
| | $ | 14,802 |
|
Cash paid for interest | | 53,773 |
| | 30,201 |
|
| | | | |
Noncash activities: | | | | |
Liabilities related to additions of property, plant and equipment | | 37,602 |
| | 28,252 |
|
| | | | |
Cash and cash equivalents | | $ | 120,315 |
| | $ | 600,444 |
|
Restricted cash | | 1,991 |
| | 9,696 |
|
Total cash, restricted cash and cash equivalents | | $ | 122,306 |
| | $ | 610,140 |
|
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional | Accumulated Other | | Treasury Stock | Non- | |
(in thousands, except share data) | Number of Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Number of Shares | Amount | controlling Interests | Total |
Balance, September 1, 2016 | 129,060,664 |
| $ | 1,290 |
| $ | 358,745 |
| $ | (112,914 | ) | $ | 1,372,988 |
| (14,425,068 | ) | $ | (252,837 | ) | $ | 159 |
| $ | 1,367,431 |
|
Net earnings | | | | | 75,873 |
| | | — |
| 75,873 |
|
Other comprehensive income | | | | 15,913 |
| | | | | 15,913 |
|
Cash dividends ($0.36 per share) | | | | | (41,619 | ) | | | | (41,619 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | (26,269 | ) | | | 1,153,396 |
| 20,670 |
| | (5,599 | ) |
Stock-based compensation | | | 9,731 |
| | | | | | 9,731 |
|
Contribution of noncontrolling interest | | | | | | | | 14 |
| 14 |
|
Reclassification of share-based liability awards | | | 1,780 |
| | | | | | 1,780 |
|
Reclassification of share-based equity awards | | | (5,439 | ) | | | | | | (5,439 | ) |
Balance, May 31, 2017 | 129,060,664 |
| $ | 1,290 |
| $ | 338,548 |
| $ | (97,001 | ) | $ | 1,407,242 |
| (13,271,672 | ) | $ | (232,167 | ) | $ | 173 |
| $ | 1,418,085 |
|
| | | | | | | | | |
| Common Stock | Additional | Accumulated Other | | Treasury Stock | Non- | |
(in thousands, except share data) | Number of Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Number of Shares | Amount | controlling Interests | Total |
Balance, September 1, 2017 | 129,060,664 |
| $ | 1,290 |
| $ | 349,258 |
| $ | (81,513 | ) | $ | 1,363,806 |
| (13,266,928 | ) | $ | (232,084 | ) | $ | 173 |
| $ | 1,400,930 |
|
Net earnings | | | | | 86,946 |
| | | — |
| 86,946 |
|
Other comprehensive loss | | | | (10,109 | ) | | | | | (10,109 | ) |
Cash dividends ($0.36 per share) | | | | | (42,037 | ) | | | | (42,037 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | (28,509 | ) | | | 1,220,283 |
| 18,673 |
| | (9,836 | ) |
Stock-based compensation | | | 11,747 |
| | | | | | 11,747 |
|
Contribution of noncontrolling interest | | | | | | | | 13 |
| 13 |
|
Reclassification of share-based liability awards | | | 15,248 |
| | | | | | 15,248 |
|
Balance, May 31, 2018 | 129,060,664 |
| $ | 1,290 |
| $ | 347,744 |
| $ | (91,622 | ) | $ | 1,408,715 |
| (12,046,645 | ) | $ | (213,411 | ) | $ | 186 |
| $ | 1,452,902 |
|
COMMERCIAL METALS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, 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, February 28, 2019 | 129,060,664 |
| $ | 1,290 |
| $ | 346,156 |
| $ | (100,887 | ) | $ | 1,449,159 |
| (11,139,594 | ) | $ | (197,418 | ) | $ | 196 |
| $ | 1,498,496 |
|
Net earnings | | | | | 78,390 |
| | | | 78,390 |
|
Other comprehensive loss | | | | (5,338 | ) | | | | | (5,338 | ) |
Dividends ($0.12 per share) | | | | | (14,206 | ) | | | | (14,206 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | 439 |
| | | 3,045 |
| 53 |
| | 492 |
|
Stock-based compensation and other | | | 6,286 |
| | 75 |
| | | | 6,361 |
|
Balance, May 31, 2019 | 129,060,664 |
| $ | 1,290 |
| $ | 352,881 |
| $ | (106,225 | ) | $ | 1,513,418 |
| (11,136,549 | ) | $ | (197,365 | ) | $ | 196 |
| $ | 1,564,195 |
|
| | | | | | | | | |
| Nine Months Ended May 31, 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 | | | | | 111,982 |
| | | | 111,982 |
|
Other comprehensive loss | | | | (12,548 | ) | | | | | (12,548 | ) |
Dividends ($0.36 per share) | | | | | (42,387 | ) | | | | (42,387 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | (18,384 | ) | | | 908,557 |
| 16,020 |
| | (2,364 | ) |
Stock-based compensation and other | | | 18,591 |
| | 75 |
| | | | 18,666 |
|
Contribution of noncontrolling interests | | | | | | | | 10 |
| 10 |
|
Adoption of ASC 606 adjustment | | | | | (2,747 | ) | | | | (2,747 | ) |
Balance, May 31, 2019 | 129,060,664 |
| $ | 1,290 |
| $ | 352,881 |
| $ | (106,225 | ) | $ | 1,513,418 |
| (11,136,549 | ) | $ | (197,365 | ) | $ | 196 |
| $ | 1,564,195 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, 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, February 28, 2018 | 129,060,664 |
| $ | 1,290 |
| $ | 349,454 |
| $ | (66,466 | ) | $ | 1,382,791 |
| (12,234,996 | ) | $ | (215,782 | ) | $ | 186 |
| $ | 1,451,473 |
|
Net earnings | | | | | 39,965 |
| | | | 39,965 |
|
Other comprehensive loss | | | | (25,156 | ) | | | | | (25,156 | ) |
Dividends ($0.12 per share) | | | | | (14,041 | ) | | | | (14,041 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | (4,814 | ) | | | 188,351 |
| 2,371 |
| | (2,443 | ) |
Stock-based compensation | | | 3,104 |
| | | | | | 3,104 |
|
Balance, May 31, 2018 | 129,060,664 |
| $ | 1,290 |
| $ | 347,744 |
| $ | (91,622 | ) | $ | 1,408,715 |
| (12,046,645 | ) | $ | (213,411 | ) | $ | 186 |
| $ | 1,452,902 |
|
| | | | | | | | | |
| Nine Months Ended May 31, 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 | | | | | 86,946 |
| | | | 86,946 |
|
Other comprehensive loss | | | | (10,109 | ) | | | | | (10,109 | ) |
Dividends ($0.36 per share) | | | | | (42,037 | ) | | | | (42,037 | ) |
Issuance of stock under incentive and purchase plans, net of forfeitures | | | (28,509 | ) | | | 1,220,283 |
| 18,673 |
| | (9,836 | ) |
Stock-based compensation | | | 11,747 |
| | | | | | 11,747 |
|
Contribution of noncontrolling interest | | | | | | | | 13 |
| 13 |
|
Reclassification of share-based liability awards | | | 15,248 |
| | | | | | 15,248 |
|
Balance, May 31, 2018 | 129,060,664 |
| $ | 1,290 |
| $ | 347,744 |
| $ | (91,622 | ) | $ | 1,408,715 |
| (12,046,645 | ) | $ | (213,411 | ) | $ | 186 |
| $ | 1,452,902 |
|
See notes to unaudited condensed consolidated financial statements.
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, 20172018 ("20172018 Form 10-K") filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC"(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 20172018 Form 10-K. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for the full fiscal year.
Recently IssuedAdopted Accounting Pronouncements
In August 2017,2016, the Financial Accounting Standards Board ("FASB"(the "FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815). The ASU better aligns accounting rules with a company's risk management activities; better reflects economic results of hedging in financial statements; and simplifies hedge accounting treatment. For public companies, this standard is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. The standard must be applied to hedging relationships existing on the date of adoption, and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements as well as determining the Company's planned adoption date.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018. The Company plans to early adopt ASU 2016-18 in the fourth quarter of fiscal 2018. The provisions of this guidance are to be applied using a retrospective approach, which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented in the statement of cash flows. 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 $491.6 million, with offsetting increases in investing cash flows related to the collection of previously sold trade accounts receivable in the condensed consolidated statements of cash flows for the nine months ended May 31, 2019 and 2018, respectively. 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 Company adopted ASC 606 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 condensed consolidated statement of earnings, as compared to what the results would have been under ASC 605, Revenue Recognition. The impact to the condensed consolidated balance sheet was immaterial.
|
| | | | | | | | | | | | |
| | Three Months Ended May 31, 2019 |
(in thousands) | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change - Higher (Lower) |
Net sales | | $ | 1,605,872 |
| | $ | 1,607,214 |
| | $ | (1,342 | ) |
Net earnings | | 78,390 |
| | 79,506 |
| | (1,116 | ) |
|
| | | | | | | | | | | | |
| | Nine Months Ended May 31, 2019 |
(in thousands) | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change - Higher (Lower) |
Net sales | | $ | 4,285,997 |
| | $ | 4,291,986 |
| | $ | (5,989 | ) |
Net earnings | | 111,982 |
| | 116,630 |
| | (4,648 | ) |
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 guidanceASU is effective for fiscal years and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted.2019, and interim periods within those fiscal years, and will be effective for the Company beginning September 1, 2020. The Company planswill apply this ASU prospectively to adopt ASU 2016-15 no later thanall implementation costs incurred after the required adoption date of September 1, 2018.adoption. The provisionsCompany concluded the impact of this guidance are to be adopted retrospectively. The Company is continuing to evaluate the impact this guidance will haveASU on its consolidated financial statements.statements and disclosures will be immaterial.
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 concluded the impact of this guidance on its consolidated financial statements and disclosures will be immaterial.
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 ("ROU") asset and a lease liability on its balance sheet for all leases with terms of twelve months or longer. The Company plans to apply the new standard using a modified retrospective approach that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods, and to elect the three packaged transition practical expedients under ASC 842-10-65-1(f). 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 point2019. Although evaluation and implementation procedures are ongoing, the Company plans to adoptcurrently estimates the standard. The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires applicationROU assets and lease liabilities will represent less than 5% of the guidance for all periods presented.Company's total assets and total liabilities, respectively, as of September 1, 2019. The Company hasis in the process of implementing a project plan in placenew lease management, accounting, and administration system and determining appropriate changes to address the effects of ASU 2016-02 and any modifications thereafter, including evaluation of the impact of this guidance on internal processes and systems, internal controls to support recognition and disclosure under the new standard.
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 were determined using 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.
In May 2014,statements from the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has modifiedAcquisition Date. The financial statements were not retrospectively adjusted for any measurement-period adjustments that occurred in subsequent periods. Rather, any adjustments to provisional amounts identified during the standard thereafter. Underallowable one year measurement period (the "Measurement Period") are recorded in the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognizedreporting period in an amount that reflects the consideration to which the entity expectsadjustment 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 third quarter of fiscal 2019. Final determination of the fair values may result in further adjustments to the values presented in the following table:
|
| | | | |
(in thousands) | | Estimated Fair Value* |
Cash and cash equivalents | | $ | 6,399 |
|
Accounts receivable | | 301,740 |
|
Inventories | | 202,082 |
|
Other current assets | | 26,290 |
|
Property, plant and equipment | | 414,237 |
|
Deferred income taxes | | 11,606 |
|
Accounts payable-trade, accrued expenses and other payables | | (134,702 | ) |
Acquired unfavorable contract backlog | | (110,166 | ) |
Other long-term liabilities | | (9,920 | ) |
Pension and other post retirement employment benefits | | (6,365 | ) |
Total assets acquired and liabilities assumed | | $ | 701,201 |
|
_________________
*As previously reported in the Company's Quarterly Report on Form 10-Q for the period ended February 28, 2019. No measurement period adjustments occurred in the third quarter of fiscal 2019.
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 nine months ended May, 31, 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-benefit 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 in which the selling price was less than estimated costs to fulfill using market participant assumptions 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 entitled in exchangebetween 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 goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and will be effectiveitems as of the Acquisition Date.
Financial Results
The following table summarizes the financial results of the Acquired Businesses from the Acquisition Date for the Company beginningthree and nine months ended May 31, 2019 included in the Company’s condensed consolidated statement of earnings and condensed consolidated statement of comprehensive income.
|
| | | | | | | | |
(in thousands) | | Three Months Ended May 31, 2019 | | Nine Months Ended May 31, 2019 |
Net sales | | $ | 453,479 |
| | $ | 958,550 |
|
Earnings before income taxes | | 42,951 |
| | 78,047 |
|
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, 2018, at which point the Company plans to adopt the standard.2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company currently expects to adopt the standard using the modified retrospective method. Upon adoption of ASU 2014-09,pro forma financial information is presented for comparative purposes only, based on certain contracts within the Americas
Fabrication segment in which revenue is currently recognized on a percentage of completion basis using a cost-to-cost measure of progress, the measure of progress will change to an output measure to align with the pattern of transfer of control on these contracts. In addition, the standard includes expanded disclosure requirements,estimates and assumptions, which the Company continuesbelieves to analyze. The Company believes the adoptionbe reasonable, but not necessarily indicative of this standard will not have a material impact on its statement of financial position,future results of operations or cash flows. Asthe 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 the overall evaluationmanagement analysis of the standard,financial results and performance of the Company is also identifyingCompany. These results are adjusted, where possible, for transaction and preparingintegration related costs. These results involve a significant amount of estimates.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Pro forma net sales (1) | | $ | 1,582,478 |
| | $ | 1,648,962 |
| | $ | 4,507,485 |
| | $ | 4,560,929 |
|
Pro forma net earnings (2) | | 63,018 |
| | 49,402 |
| | 88,987 |
| | 40,311 |
|
_________________
(1) Pro forma net sales for the three and nine months ended May 31, 2018 includes estimated fair value adjustments related to implement changesamortization 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 nine months ended May 31, 2019.
(2) Pro forma net earnings for the three and nine months ended May 31, 2018 reflects the impact of fair value adjustments related to its accounting policies, practices, and internal controls over financial reportingthe amortization of unfavorable contract backlog described above. Pro forma net earnings for the nine months ended May 31, 2018 includes estimated fair value adjustments related to support the standard both in the transition periodinventory step-up, as well as on an on-going basis.non-recurring acquisition and integration costs of approximately $49.8 million.
NOTE 2.3. CHANGES IN BUSINESS
Pending Acquisition
On December 29, 2017, the Company entered into a definitive purchase agreement to acquire certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. (the "Business"), a producer of long and specialty steel products in the Americas for a cash purchase price of $600.0 million, subject to customary purchase price adjustments. The acquisition includes 33 rebar fabrication facilities in the U.S. as well as steel mills located in Knoxville, Tennessee; Jacksonville, Florida; Sayreville, New Jersey and Rancho Cucamonga, California, with annual melt capacity of 2.7 million tons, bringing the Company’s global melt capacity to approximately 7.2 million tons at the close of the transaction. The closing of the transaction is expected before calendar year-end 2018 and is subject to the satisfaction or waiver of customary closing conditions, including customary regulatory review.
The Company expects to fund the purchase price for the acquisition, including related fees and expenses, with proceeds from the offering of the 2026 Notes (as defined in Note 7, Credit Arrangements), together with the proceeds from the incurrence of a new term loan under the Company's existing Credit Agreement (as defined in Note 7, Credit Arrangements) and cash on hand.
Dispositions and Businesses Held for Sale
During the third quarter of fiscal 2018, the Company sold substantially allcompleted the exit of the assets of its structural steel fabrication operations, which were part of the Americas Fabrication segment. This disposition did not meet the criteria for discontinued operations. As a result of the disposition, during the nine months ended May 31, 2018, the Company recognized impairment charges of $13.0 million, of which $0.9 million was recognized during the third quarter of fiscal 2018. The assets and liabilities related to these operations were included as assets and liabilities of businesses held for sale & discontinued operations in the condensed consolidated balance sheet at August 31, 2017, and consisted of the following:
|
| | | | |
(in thousands) | | August 31, 2017* |
Assets: | | |
Accounts receivable | | $ | 38,279 |
|
Inventories | | 10,676 |
|
Other current assets | | 77 |
|
Assets of businesses held for sale & discontinued operations | | $ | 49,032 |
|
| | |
Liabilities: | | |
Accounts payable-trade | | $ | 13,108 |
|
Accrued expenses and other payables | | 16,785 |
|
Liabilities of businesses held for sale & discontinued operations | | $ | 29,893 |
|
_________________
* At August 31, 2017, $8.8 million of property, plant, and equipment, net of accumulated depreciation and amortization was included in other noncurrent assets on the consolidated balance sheets.
Discontinued Operations
In June 2017, the Company announced a plan to exit its International Marketing and Distribution segment, including its trading operations in the U.S., Asia, and Australia. As an initial step in this plan, on August 31, 2017, the Company completed the sale of its raw materials business, CMC Cometals. Additionally, during the second quarter of fiscal 2018, the remaining operations related to the Company's steel trading business in the U.S. and Asia were substantially wound down. Finally, during the third quarter of fiscal 2018, the Company sold certain assets and liabilities of its Australian steel trading business, resulting in an overall transaction loss, including selling costs, of $5.3 million. Such loss was primarily due to impairment charges related to accumulated
foreign currency translation, $4.2 million of which the Company recorded during fiscal 2017. The results of these activities are included in discontinued operations in the unaudited condensed consolidated statements of earnings for all periods presented. With the conclusion of operations in this segment, any activities carried out within the segment are no longer of ongoing significance; accordingly, segment data with respect to International Marketing and Distribution activities will no longer be reported. See Note 14, Business Segments, for further discussion of the exit of the International Marketing and Distribution segment.
The major classes of line items constituting earnings from discontinued operations in the unaudited condensed consolidated statements of earnings which primarily relate to International Marketing and Distribution activities, are presented in the table below.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | | $ | 3,262 |
| | $ | 337,903 |
| | $ | 304,384 |
| | $ | 847,338 |
|
Costs and expenses: | | | | | | | | |
Cost of goods sold | | 4,233 |
| | 312,917 |
| | 276,371 |
| | 784,836 |
|
Selling, general and administrative expenses | | 2,418 |
| | 15,740 |
| | 23,078 |
| | 42,919 |
|
Interest expense | | — |
| | (79 | ) | | (86 | ) | | (104 | ) |
Earnings (loss) before income taxes | | (3,389 | ) | | 9,325 |
| | 5,021 |
| | 19,687 |
|
Income taxes (benefit) | | (1,029 | ) | | 1,626 |
| | 2,052 |
| | 4,059 |
|
Earnings (loss) from discontinued operations | | $ | (2,360 | ) | | $ | 7,699 |
| | $ | 2,969 |
| | $ | 15,628 |
|
|
| | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2018 |
Net sales | | $ | 3,262 |
| | $ | 304,384 |
|
Costs and expenses: | | | | |
Cost of goods sold | | 4,233 |
| | 276,371 |
|
Selling, general and administrative expenses | | 2,418 |
| | 23,078 |
|
Interest expense | | — |
| | (86 | ) |
Earnings (loss) before income taxes | | (3,389 | ) | | 5,021 |
|
Income taxes (benefit) | | (1,029 | ) | | 2,052 |
|
Earnings (loss) from discontinued operations | | $ | (2,360 | ) | | $ | 2,969 |
|
There were no material operating or investing non-cash items for discontinued operations for the three and nine months ended May 31, 20182019 and 2017.2018.
Components of the International Marketing and Distribution segment meeting the criteria for discontinued operations have been re-classified asThe assets and liabilities of businessthe businesses classified as held for sale &and discontinued operations in the unaudited condensed consolidated balance sheets for all periods presented, the major components of which are presented in the table below.
|
| | | | | | | | |
(in thousands) | | May 31, 2018 | | August 31, 2017* |
Assets: | | | | |
Accounts receivable | | $ | 6,954 |
| | $ | 106,905 |
|
Inventories, net | | — |
| | 141,135 |
|
Other current assets | | 4,111 |
| | 38 |
|
Property, plant and equipment, net | | 217 |
| | — |
|
Assets of businesses held for sale & discontinued operations | | $ | 11,282 |
| | $ | 248,078 |
|
| | | | |
Liabilities: | | | | |
Accounts payable-trade | | $ | — |
| | $ | 42,563 |
|
Accrued expenses and other payables | | 2,843 |
| | 15,372 |
|
Liabilities of businesses held for sale & discontinued operations | | $ | 2,843 |
| | $ | 57,935 |
|
| | | | |
_________________
* Property, plant,were immaterial at both May 31, 2019 and equipment, net of accumulated depreciation and amortization of $0.8 million at August 31, 2017 was included in other noncurrent assets on the unaudited condensed consolidated balance sheets.2018.
NOTE 3.4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2018 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, February 28, 2018 | | $ | (66,000 | ) | | $ | 1,432 |
| | $ | (1,898 | ) | | $ | (66,466 | ) |
Other comprehensive income (loss) before reclassifications | | (26,434 | ) | | 16 |
| | — |
| | (26,418 | ) |
Amounts reclassified from AOCI | | 1,328 |
| | (70 | ) | | (9 | ) | | 1,249 |
|
Income taxes | | — |
| | 11 |
| | 2 |
| | 13 |
|
Net other comprehensive (loss) | | (25,106 | ) | | (43 | ) | | (7 | ) | | (25,156 | ) |
Balance, May 31, 2018 | | $ | (91,106 | ) | | $ | 1,389 |
| | $ | (1,905 | ) | | $ | (91,622 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2019 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, February 28, 2019 | | $ | (100,943 | ) | | $ | 1,151 |
| | $ | (1,095 | ) | | $ | (100,887 | ) |
Other comprehensive loss before reclassifications | | (5,135 | ) | | (86 | ) | | (6 | ) | | (5,227 | ) |
Amounts reclassified from AOCI | | 19 |
| | (181 | ) | | — |
| | (162 | ) |
Income taxes | | — |
| | 51 |
| | — |
| | 51 |
|
Net other comprehensive loss | | (5,116 | ) | | (216 | ) | | (6 | ) | | (5,338 | ) |
Balance, May 31, 2019 | | $ | (106,059 | ) | | $ | 935 |
| | $ | (1,101 | ) | | $ | (106,225 | ) |
| | | | Nine Months Ended May 31, 2018 | | Nine Months Ended May 31, 2019 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, August 31, 2017 | | $ | (80,778 | ) | | $ | 1,587 |
| | $ | (2,322 | ) | | $ | (81,513 | ) | |
Other comprehensive income (loss) before reclassifications | | (11,656 | ) | | 47 |
| | — |
| | (11,609 | ) | |
Balance, August 31, 2018 | | | $ | (92,637 | ) | | $ | 1,356 |
| | $ | (2,396 | ) | | $ | (93,677 | ) |
Other comprehensive loss before reclassifications | | | (14,278 | ) | | (190 | ) | | (25 | ) | | (14,493 | ) |
Amounts reclassified from AOCI | | 1,328 |
| | (314 | ) | | 647 |
| | 1,661 |
| | 856 |
| | (330 | ) | | 1,666 |
| | 2,192 |
|
Income taxes (benefit) | | — |
| | 69 |
| | (230 | ) | | (161 | ) | | — |
| | 99 |
| | (346 | ) | | (247 | ) |
Net other comprehensive income (loss) | | (10,328 | ) | | (198 | ) | | 417 |
| | (10,109 | ) | | (13,422 | ) | | (421 | ) | | 1,295 |
| | (12,548 | ) |
Balance, May 31, 2018 | | $ | (91,106 | ) | | $ | 1,389 |
| | $ | (1,905 | ) | | $ | (91,622 | ) | |
Balance, May 31, 2019 | | | $ | (106,059 | ) | | $ | 935 |
| | $ | (1,101 | ) | | $ | (106,225 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2018 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, February 28, 2018 | | $ | (66,000 | ) | | $ | 1,432 |
| | $ | (1,898 | ) | | $ | (66,466 | ) |
Other comprehensive income (loss) before reclassifications | | (26,434 | ) | | 16 |
| | — |
| | (26,418 | ) |
Amounts reclassified from AOCI | | 1,328 |
| | (70 | ) | | (9 | ) | | 1,249 |
|
Income taxes | | — |
| | 11 |
| | 2 |
| | 13 |
|
Net other comprehensive loss | | (25,106 | ) | | (43 | ) | | (7 | ) | | (25,156 | ) |
Balance, May 31, 2018 | | $ | (91,106 | ) | | $ | 1,389 |
| | $ | (1,905 | ) | | $ | (91,622 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2017 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, February 28, 2017 | | $ | (124,235 | ) | | $ | 2,108 |
| | $ | (2,863 | ) | | $ | (124,990 | ) |
Other comprehensive income before reclassifications | | 27,109 |
| | 368 |
| | — |
| | 27,477 |
|
Amounts reclassified from AOCI | | 968 |
| | (459 | ) | | (11 | ) | | 498 |
|
Income taxes | | — |
| | 12 |
| | 2 |
| | 14 |
|
Net other comprehensive income (loss) | | 28,077 |
| | (79 | ) | | (9 | ) | | 27,989 |
|
Balance, May 31, 2017 | | $ | (96,158 | ) | | $ | 2,029 |
| | $ | (2,872 | ) | | $ | (97,001 | ) |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2017 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, August 31, 2016 | | $ | (112,255 | ) | | $ | 2,186 |
| | $ | (2,845 | ) | | $ | (112,914 | ) |
Other comprehensive income before reclassifications | | 15,129 |
| | 926 |
| | — |
| | 16,055 |
|
Amounts reclassified from AOCI | | 968 |
| | (1,090 | ) | | (33 | ) | | (155 | ) |
Income taxes | | — |
| | 7 |
| | 6 |
| | 13 |
|
Net other comprehensive income (loss) | | 16,097 |
| | (157 | ) | | (27 | ) | | 15,913 |
|
Balance, May 31, 2017 | | $ | (96,158 | ) | | $ | 2,029 |
| | $ | (2,872 | ) | | $ | (97,001 | ) |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018 |
(in thousands) | | Foreign Currency Translation | | Unrealized Gain (Loss) on Derivatives | | Defined Benefit Obligation | | Total AOCI |
Balance, August 31, 2017 | | $ | (80,778 | ) | | $ | 1,587 |
| | $ | (2,322 | ) | | $ | (81,513 | ) |
Other comprehensive income (loss) before reclassifications | | (11,656 | ) | | 47 |
| | — |
| | (11,609 | ) |
Amounts reclassified from AOCI | | 1,328 |
| | (314 | ) | | 647 |
| | 1,661 |
|
Income taxes (benefit) | | — |
| | 69 |
| | (230 | ) | | (161 | ) |
Net other comprehensive income (loss) | | (10,328 | ) | | (198 | ) | | 417 |
| | (10,109 | ) |
Balance, May 31, 2018 | | $ | (91,106 | ) | | $ | 1,389 |
| | $ | (1,905 | ) | | $ | (91,622 | ) |
Items reclassified out of AOCI were not material for the three and nine months ended May 31, 20182019 and 2017,2018, thus the corresponding line items in the unaudited condensed consolidated statements of earnings to which the items were reclassified are not presented.
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. When the Company provides fabricated product and installation services, revenue is recognized over time using an input method. For the three and nine months ended May 31, 2019, these contracts represent approximately 27% 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 nine months ended May 31, 2019, these contracts represent approximately 19% and 22%, 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 nine months ended May 31, 2019, the remaining 54% and 51%, respectively, of revenue in the Americas Fabrication segment is recognized as amounts are billed to the customer and control of the promised goods is transferred 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) | | May 31, 2019 | | August 31, 2018 |
Contract assets (included in other current assets) | | $ | 96,842 |
| | $ | 49,221 |
|
Contract liabilities (included in accrued expenses and other payables) | | 35,812 |
| | 6,679 |
|
The majority of the increase in contract asset and liability balances was attributable to the acquisition of the Acquired Businesses. The entire contract liability as of August 31, 2018 was recognized as revenue during the nine months ended May 31, 2019.
Remaining Performance Obligations
As of May 31, 2019, a total of $853.1 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.
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 May 31, 2019 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Total |
Steel products | | $ | 238 |
| | $ | 501,925 |
| | $ | 554,672 |
| | $ | 199,431 |
| | $ | — |
| | $ | 1,256,266 |
|
Ferrous scrap | | 106,404 |
| | 8,916 |
| | 2 |
| | 525 |
| | — |
| | 115,847 |
|
Nonferrous scrap | | 121,581 |
| | 4,080 |
| | — |
| | 3,212 |
| | — |
| | 128,873 |
|
Construction materials | | — |
| | — |
| | 71,228 |
| | — |
| | — |
| | 71,228 |
|
Other | | 563 |
| | 21,114 |
| | 3,608 |
| | 5,854 |
| | 2,519 |
| | 33,658 |
|
Total | | $ | 228,786 |
| | $ | 536,035 |
| | $ | 629,510 |
| | $ | 209,022 |
| | $ | 2,519 |
| | $ | 1,605,872 |
|
| | | | | | | | | | | | |
| | Nine Months Ended May 31, 2019 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Total |
Steel products | | $ | 679 |
| | $ | 1,294,217 |
| | $ | 1,392,442 |
| | $ | 584,735 |
| | $ | — |
| | $ | 3,272,073 |
|
Ferrous scrap | | 323,311 |
| | 26,802 |
| | 2 |
| | 1,055 |
| | — |
| | 351,170 |
|
Nonferrous scrap | | 369,660 |
| | 10,568 |
| | — |
| | 8,677 |
| | — |
| | 388,905 |
|
Construction materials | | — |
| | — |
| | 188,589 |
| | — |
| | — |
| | 188,589 |
|
Other | | 1,205 |
| | 50,914 |
| | 9,713 |
| | 16,173 |
| | 7,255 |
| | 85,260 |
|
Total | | $ | 694,855 |
| | $ | 1,382,501 |
| | $ | 1,590,746 |
| | $ | 610,640 |
| | $ | 7,255 |
| | $ | 4,285,997 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2018* |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Total |
Steel products | | $ | 319 |
| | $ | 305,390 |
| | $ | 303,363 |
| | $ | 193,114 |
| | $ | — |
| | $ | 802,186 |
|
Ferrous scrap | | 144,398 |
| | 8,462 |
| | 2 |
| | 351 |
| | — |
| | 153,213 |
|
Nonferrous scrap | | 147,683 |
| | 4,851 |
| | — |
| | 3,286 |
| | — |
| | 155,820 |
|
Construction materials | | — |
| | — |
| | 70,436 |
| | — |
| | — |
| | 70,436 |
|
Other | | 279 |
| | 13,756 |
| | 1,382 |
| | 4,687 |
| | 2,725 |
| | 22,829 |
|
Total | | $ | 292,679 |
| | $ | 332,459 |
| | $ | 375,183 |
| | $ | 201,438 |
| | $ | 2,725 |
| | $ | 1,204,484 |
|
| | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018* |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Total |
Steel products | | $ | 894 |
| | $ | 766,976 |
| | $ | 830,172 |
| | $ | 605,152 |
| | $ | — |
| | $ | 2,203,194 |
|
Ferrous scrap | | 383,358 |
| | 24,605 |
| | 2 |
| | 970 |
| | — |
| | 408,935 |
|
Nonferrous scrap | | 447,060 |
| | 12,734 |
| | — |
| | 10,427 |
| | — |
| | 470,221 |
|
Construction materials | | — |
| | — |
| | 180,641 |
| | — |
| | — |
| | 180,641 |
|
Other | | 1,136 |
| | 37,580 |
| | 5,119 |
| | 16,585 |
| | 11,874 |
| | 72,294 |
|
Total | | $ | 832,448 |
| | $ | 841,895 |
| | $ | 1,015,934 |
| | $ | 633,134 |
| | $ | 11,874 |
| | $ | 3,335,285 |
|
_________________
* Prior period amounts have been reported under ASC 605.
NOTE 4. SALES OF6. ACCOUNTS RECEIVABLE PROGRAMS
For added flexibility withAs an additional source of liquidity, the Company's liquidity, we may sellCompany sells certain trade accounts receivable both in the U.S. and internationally. CMC has a $200.0 million U.S. salePoland (hereinafter referred to as the “Programs”). For years prior to fiscal 2019, the Company accounted for transfers of trade accounts receivable program which expires in August 2019. Underunder the program, CMC contributes, and certain of its subsidiaries sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly-owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity formed for the sole purpose of buying and selling trade accounts receivable generated by the Company. CMCRV sells the trade accounts receivable in their entirety to two financial institutions. Under the U.S. sale of trade accounts receivable program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable sold. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts forPrograms as sales of the trade accounts receivable as true sales,financial assets, and the trade accounts receivable balances that are sold arewere removed from the consolidated balance sheets. TheOn 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 advances(referred to as a cash purchase price or “CPP”) or a deferred purchase price (“DPP”). Upon adoption of ASU 2016-15, the CPP received arewas reflected as cash fromprovided by operating activities onin the Company's unaudited condensed 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. Additionally,For periods prior to fiscal 2019, DPP on the U.S. sale of tradePrograms was included in accounts receivable program contains certain cross-default provisions whereby a termination event could occur ifon the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement described in Note 7, Credit Arrangements.Company's condensed consolidated balance sheets.
At May 31, 2018 and August 31, 2017, under its U.S. sale of trade accounts receivable program, the Company had sold $272.9 million and $226.9 million of trade accounts receivable, respectively, to the financial institutions. |
| | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018 |
(in thousands) | | Total | | U.S. | | Poland |
Deferred purchase price | | | | | | |
Balance, August 31, 2017 | | $ | 215,123 |
| | $ | 135,623 |
| | $ | 79,500 |
|
Transfers of trade receivables | | 2,116,243 |
| | 1,741,451 |
| | 374,792 |
|
Less: CPP | | (1,576,579 | ) | | (1,311,705 | ) | | (264,874 | ) |
Non-cash increase to DPP | | 539,664 |
| | 429,746 |
| | 109,918 |
|
Cash collections of DPP | | (491,577 | ) | | (383,955 | ) | | (107,622 | ) |
Net repayments (advances) | | 69,444 |
| | 90,000 |
| | (20,556 | ) |
Net collections of DPP | | (422,133 | ) | | (293,955 | ) | | (128,178 | ) |
Balance, May 31, 2018 | | $ | 332,654 |
| | $ | 271,414 |
| | $ | 61,240 |
|
At May 31, 2018, the Company had no advance payments outstanding on the sale of its U.S. trade accounts receivable. At August 31, 2017, the Company had $90.0 million in advance payments outstanding on the sale of its U.S. trade accounts receivable.
In addition to the U.S. sale of trade accounts receivable program described above, the Company's international subsidiaries in Poland sell, and previously in Australia have sold, trade accounts receivable to financial institutions without recourse. These arrangements constitute true sales, and once the trade accounts receivable are sold, they are no longer available to the Company's creditors in the event of bankruptcy and are removed from the consolidated balance sheets. The Polish program has a facility limit of 220.0 million Polish zloty ("PLN") ($59.6 million as of May 31, 2018) and allows the Company's Polish subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable sold under the terms of the arrangement. Under the Polish and Australian programs, the cash advances received were reflected as cash from operating activities on the Company's unaudited condensed consolidated statements of cash flows. During the first quarter of fiscal 2017, the Company's Australian program expired, and the Company did not enter into a new program.
At May 31, 2018 and August 31, 2017, under its Polish program, the Company sold $79.3 million and $79.5transferred $352.2 million of trade accounts receivable respectively, to the third-party financial institution. At May 31, 2018, the Companyinstitutions and had $18.1 million of advance payments outstanding on the sales of its Polish trade accounts receivable. At August 31, 2017, there were no advance payments outstanding under the U.S. Program and $18.1 million outstanding under the Polish program.Program.
During the nine months ended May 31, 2018 and 2017, cash proceeds from the U.S. and international sale of trade accounts receivable programs were $145.5 million and $246.0 million, respectively, and cash paymentsDiscounts related to the owners of trade accounts receivablePrograms were $217.4 million and $250.3 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the trade accounts receivable for the U.S. program. Discounts on U.S. and international sales of trade accounts receivable were $0.3 million and $0.7 millionimmaterial for the three and nine months ended May 31, 2018, respectively, and $0.2 million and $0.7 million for the three and nine months ended May 31, 2017, respectively, and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statements of earnings.2018.
As of May 31, 2018 and August 31, 2017, the deferred purchase price on the Company's U.S. and international sale of trade accounts receivable programs was included in accounts receivable on the Company's unaudited condensed consolidated balance sheets. The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of trade accounts receivable programs.
|
| | | | | | | | | | | | |
| | Three Months Ended May 31, 2018 |
(in thousands) | | Total | | U.S. | | Poland |
Beginning balance | | $ | 336,212 |
| | $ | 244,884 |
| | $ | 91,328 |
|
Transfers of accounts receivable | | 770,596 |
| | 653,801 |
| | 116,795 |
|
Collections | | (774,154 | ) | | (627,271 | ) | | (146,883 | ) |
Ending balance | | $ | 332,654 |
| | $ | 271,414 |
| | $ | 61,240 |
|
|
| | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018 |
(in thousands) | | Total | | U.S. | | Poland |
Beginning balance | | $ | 215,123 |
| | $ | 135,623 |
| | $ | 79,500 |
|
Transfers of accounts receivable | | 2,116,243 |
| | 1,741,451 |
| | 374,792 |
|
Collections | | (1,998,712 | ) | | (1,605,660 | ) | | (393,052 | ) |
Ending balance | | $ | 332,654 |
| | $ | 271,414 |
| | $ | 61,240 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended May 31, 2017 |
(in thousands) | | Total | | U.S.* | | Poland |
Beginning balance | | $ | 312,446 |
| | $ | 258,719 |
| | $ | 53,727 |
|
Transfers of accounts receivable | | 777,104 |
| | 671,429 |
| | 105,675 |
|
Collections | | (725,336 | ) | | (626,182 | ) | | (99,154 | ) |
Ending balance | | $ | 364,214 |
| | $ | 303,966 |
| | $ | 60,248 |
|
_________________
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of $144.1 million and collections of $134.0 million, for the three months ended May 31, 2017.
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2017 |
(in thousands) | | Total | | U.S.* | | Australia** | | Poland |
Beginning balance | | $ | 289,748 |
| | $ | 212,762 |
| | $ | 26,662 |
| | $ | 50,324 |
|
Transfers of accounts receivable | | 1,977,546 |
| | 1,702,584 |
| | 16,914 |
| | 258,048 |
|
Collections | | (1,869,163 | ) | | (1,611,380 | ) | | (9,659 | ) | | (248,124 | ) |
Program termination | | (33,917 | ) | | — |
| | (33,917 | ) | | — |
|
Ending balance | | $ | 364,214 |
| | $ | 303,966 |
| | $ | — |
| | $ | 60,248 |
|
_________________
* Includes the sale of trade accounts receivable activities related to discontinued operations, including transfers of trade accounts receivable of $354.5 million and collections of $325.7 million, for the nine months ended May 31, 2017.
| |
** | Includes collections of $3.7 million and program termination of $1.6 million related to discontinued operations and businesses sold, for the nine months ended May 31, 2017. |
NOTE 5.7. 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.combined as finished goods. Work in process inventories were not material at May 31, 20182019 and August 31, 2017.2018. At May 31, 20182019 and August 31, 2017, $177.62018, $185.1 million and $116.8$177.7 million, respectively, of the Company's inventories were in the form of raw materials.
NOTE 6.8. GOODWILL AND OTHER INTANGIBLE ASSETSINTANGIBLES
The following table details the changesGoodwill by reportable segment at May 31, 2019 is detailed in the carrying amount of goodwill by reportable segment:following table:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other* | | Consolidated |
Goodwill, gross | | | | | | | | | | | | |
Balance, August 31, 2017 | | $ | 9,751 |
| | $ | 4,970 |
| | $ | 57,943 |
| | $ | 2,664 |
| | $ | 1,982 |
| | $ | 77,310 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | (90 | ) | | — |
| | (90 | ) |
| Impairment | | — |
| | — |
| | (514 | ) | | — |
| | — |
| | (514 | ) |
| Reclassification to assets of discontinued operations | | — |
| | — |
| | — |
| | — |
| | (1,982 | ) | | (1,982 | ) |
Balance, May 31, 2018 | | $ | 9,751 |
| | $ | 4,970 |
| | $ | 57,429 |
| | $ | 2,574 |
| | $ | — |
| | $ | 74,724 |
|
| | | | | | | | | | | | |
Accumulated impairment losses | | | | | | | | | | | | |
Balance, August 31, 2017 | | $ | (9,751 | ) | | $ | — |
| | $ | (493 | ) | | $ | (169 | ) | | $ | (1,982 | ) | | $ | (12,395 | ) |
| Foreign currency translation | | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Reclassification to assets of discontinued operations | | — |
| | — |
| | — |
| | — |
| | 1,982 |
| | 1,982 |
|
Balance, May 31, 2018 | | $ | (9,751 | ) | | $ | — |
| | $ | (493 | ) | | $ | (164 | ) | | $ | — |
| | $ | (10,408 | ) |
| | | | | | | | | | | | | |
Goodwill, net | | | | | | | | | | | | |
Balance, August 31, 2017 | | $ | — |
| | $ | 4,970 |
| | $ | 57,450 |
| | $ | 2,495 |
| | $ | — |
| | $ | 64,915 |
|
| Foreign currency translation | | — |
| | — |
| | — |
| | (85 | ) | | — |
| | (85 | ) |
| Impairment | | — |
| | — |
| | (514 | ) | | — |
| | — |
| | (514 | ) |
Balance, May 31, 2018 | | $ | — |
| | $ | 4,970 |
| | $ | 56,936 |
| | $ | 2,410 |
| | $ | — |
| | $ | 64,316 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Consolidated |
Goodwill, gross* | | $ | 9,543 |
| | $ | 4,970 |
| | $ | 57,428 |
| | $ | 2,478 |
| | $ | 74,419 |
|
Accumulated impairment losses* | | (9,543 | ) | | — |
| | (493 | ) | | (157 | ) | | (10,193 | ) |
Goodwill, net* | | $ | — |
| | $ | 4,970 |
| | $ | 56,935 |
| | $ | 2,321 |
| | $ | 64,226 |
|
_________________
* Other relates to goodwill for the International Marketing and Distribution segment whichThe change in balance from August 31, 2018 was moved to discontinued operations during the second quarter of fiscal 2018.immaterial.
The total gross carrying amounts of the Company's intangible assets subject to amortization were $21.0$21.8 million and $19.7$20.5 million at May 31, 20182019 and August 31, 2017,2018, respectively, and were included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. As part of the Company's purchase of substantially all of the assets of MMFX Technologies Corporation ("MMFX") during the first fiscal quarter of 2018, the Company acquired patents which were assigned a fair value of $7.0 million with a useful life of 7.5 years. See Note 2, Changes in Business, to the unaudited condensed consolidated financial statements included in the Company's November 30, 2017 Quarterly Report on Form 10-Q for more information with respect to the MMFX acquisition. Intangible amortization expense from continuing operations related to such intangible assets was $0.6 million for both the three months ended May 31, 2019 and May 31, 2018, and $1.7 million and $1.6 million for the three and nine months ended May 31, 2019 and 2018, respectively, and $0.8 million and $1.8 million for the three and nine months ended May 31, 2017, respectively. The nine months ended May 31, 2018 included goodwill impairment charges of $0.5 million, recorded during the second fiscal quarter, related to the Company's sale of its structural steel fabrication operations as discussed in Note 2, Changes in Business. See Note 9, Fair Value, for further discussion related to the impairment. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives as of May 31, 2018.2019.
The amortizable intangible (liabilities) acquired consisted of:
|
| | | | | | |
(in thousands, except life in years) | | Life in Years | | Estimated Fair Value |
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 nine months ended May 31, 2019 was $23.4 million and $58.2 million, respectively, and was recorded as an increase to net sales in the Company's condensed consolidated statement of earnings.
NOTE 7.9. CREDIT ARRANGEMENTS
Long-term debt as of May 31, 2019 and August 31, 2018 was as follows:
|
| | | | | | | | | | |
(in thousands) | | Weighted Average Interest Rate as of May 31, 2019 | | May 31, 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 | | 4.115% | | 310,125 |
| | 142,500 |
|
Short-term borrowings | | * | | 25,327 |
| | — |
|
Other, including equipment notes | | | | 56,996 |
| | 47,629 |
|
Total debt | | | | 1,372,448 |
| | 1,170,129 |
|
Less debt issuance costs | | | | 10,690 |
| | 11,764 |
|
Total amounts outstanding | | | | 1,361,758 |
| | 1,158,365 |
|
Less current maturities | | | | 29,568 |
| | 19,746 |
|
Less short-term borrowings | | | | 25,327 |
| | — |
|
Current maturities of long-term debt and short-term borrowings | | | | 54,895 |
| | 19,746 |
|
Long-term debt | | | | $ | 1,306,863 |
| | $ | 1,138,619 |
|
|
| | | | | | | | | | |
(in thousands) | | Weighted Average Interest Rate as of May 31, 2018 | | May 31, 2018 | | August 31, 2017 |
2027 Notes | | 5.375% | | $ | 300,000 |
| | $ | 300,000 |
|
2026 Notes | | 5.750% | | 350,000 |
| | — |
|
2023 Notes | | 4.875% | | 330,000 |
| | 330,000 |
|
2022 Term Loan | | 3.103% | | 144,375 |
| | 150,000 |
|
Other, including equipment notes | | | | 46,763 |
| | 52,077 |
|
Total debt | | | | 1,171,138 |
| | 832,077 |
|
Less debt issuance costs | | | | 12,161 |
| | 7,315 |
|
Total amounts outstanding | | | | 1,158,977 |
| | 824,762 |
|
Less current maturities | | | | 19,874 |
| | 19,182 |
|
Long-term debt | | | | $ | 1,139,103 |
| | $ | 805,580 |
|
_________________
* As of May 31, 2019, the weighted average interest rates associated with the U.S. Program and Poland Program were 3.120% 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"). Issuance costs associated with the 2026 Notes were approximately $5.3 million. Interest on the 2026 Notes is payable semiannually.
In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 2023 (the "2023 Notes"). Interest on the 2023 Notes is payable semiannually.
The Company has a $350.0 million revolving credit facility (the "Revolver") pursuant to the Fourth Amended and Restated Credit Agreement (the "Credit Agreement"), and atwo senior secured term loan in the maximumloans: one drawn on July 13, 2017 with an original principal amount of $150.0 million (the "2022 Term Loan"), eachand 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 2022 Term Loan was drawn upon on July 13, 2017. The Company is required to make quarterly payments on the 2022 Term LoanLoans equal to 1.25% of the original principal amount. The maximum availability under the Credit Agreement, together with the 2022 Term Loan,Revolver can be increased to $750.0$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.
On February 21, 2018, the Company entered into a Joinder Agreement and Fifth Amendment to the Credit Agreement, which allowed for a coterminous delayed draw Term Loan A facility in the maximum aggregate principal amount of up to $200.0 million (the "2018 Term Loan"). The proceeds of the 2018 Term Loan are required to be used to (i) finance the acquisition of the Business, (ii) repay certain existing indebtedness of Gerdau S.A. and its subsidiaries, and (iii) pay transaction fees and expenses related thereto. Once drawn, the Company is required to make quarterly payments on the 2018 Term Loan equal to 1.25% of the original principal amount. The 2018 Term Loan has a maturity date of June 2022.
On December 29, 2017, the Company entered into a Fourth Amendment to the Credit Agreement providing for a Term Loan B Facility, as described in Note 7, Credit Arrangements, in the Company's Quarterly Report on Form 10-Q for the period ended February 28, 2018. During the third fiscal quarter of 2018, the Company terminated the commitment letter governing the Term Loan B Facility.
The Company had no amounts drawn under the Revolver at May 31, 20182019 and August 31, 2017.2018. The Company's availability under the Revolver was reduced by outstanding letters of credit of $3.3$3.0 million and $3.0$3.3 million at May 31, 20182019 and August 31, 2017, respectively.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 May 31, 2018,2019, the Company's interest coverage ratio was 7.895.53 to 1.00, and the Company's debt to capitalization ratio was 0.450.47 to 1.00. Loans under the Credit Agreement bear interest based onat the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").
At May 31, 2018,2019, the Company was in compliance with all covenants contained in its debt agreements.
The Company also has uncommitted credit facilities available from U.S. and international banks. In general, these credit facilities are used to support trade letters of credit (including accounts payable settled under bankers' acceptances), foreign exchange transactions and short-term advances which are priced at market rates.
At May 31, 2018 and August 31, 2017,in Poland, primarily through its subsidiary, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted, available to support global working capital, short-term cash needs, letters of credit, facilities with several banks of PLN 225.0 million ($61.0 million)financial assurance and PLN 175.0 million ($49.1 million), respectively. As of May 31, 2018, the uncommitted credit facilities have expiration dates ranging from November 2018 to March 2019.other trade finance-related matters. At May 31, 20182019, CMCP's credit facilities totaled Polish zloty ("PLN") 275.0 million, or $71.7 million. These facilities will expire in March 2022. At May 31, 2019 and August 31, 2017,2018, 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 $1.7$1.3 million and $1.3$1.1 million at May 31, 20182019 and August 31, 2017,2018, respectively. During the nine months ended May 31, 20182019 and 2017,2018, 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 capitalized $0.5had no advance payments outstanding under the U.S. Program at May 31, 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 ($57.4 million as of May 31, 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 $25.3 million and $7.3$12.1 million of interest inunder the cost of property, plant and equipment during the three and nine months endedPoland Program at May 31, 2018, respectively,2019 and $2.9 million and $6.6 million for the three and nine months ended May 31, 2017, respectively. Cash paid for interest during the nine months ended MayAugust 31, 2018, respectively.
Prior to fiscal 2019, the Company accounted for transfers of trade accounts receivable as sales, and 2017 was $30.2 millionthe 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 $41.4 million, respectively.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 8.10. 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 May 31, 2019, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $112.0 million and $49.7 million, respectively. At May 31, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $140.4$140.4 million and $64.8 million, respectively. At May 31, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $262.8 million and $36.9 million, respectively.
The following table provides information regarding the Company's commodity contract commitments as of May 31, 2018:2019:
|
| | | | | | |
Commodity | | Long/Short | | Total |
Aluminum | | Long | | 6,1254,500 |
| MT |
Aluminum | | Short | | 3,0752,350 |
| MT |
Copper | | Long | | 363669 |
| MT |
Copper | | Short | | 6,0215,341 |
| MT |
_________________
MT = Metric Ton
The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's unaudited condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 20182019 and May 31, 2017.2018. 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 May 31, | | Nine Months Ended May 31, |
Derivatives Not Designated as Hedging Instruments | | Location | | 2019 | | 2018 | | 2019 | | 2018 |
Commodity | | Cost of goods sold | | $ | 3,408 |
| | $ | 1,498 |
| | $ | 143 |
| | $ | 2,071 |
|
Foreign exchange | | Cost of goods sold | | — |
| | — |
| | — |
| | (50 | ) |
Foreign exchange | | SG&A expenses | | (72 | ) | | 518 |
| | (472 | ) | | 1,169 |
|
Gain (loss) before income taxes | | | | $ | 3,336 |
| | $ | 2,016 |
| | $ | (329 | ) | | $ | 3,190 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended May 31, | | Nine Months Ended May 31, |
Derivatives Not Designated as Hedging Instruments | | Location | | 2018 | | 2017 | | 2018 | | 2017 |
Commodity | | Cost of goods sold | | $ | 1,498 |
| | $ | 1,654 |
| | $ | 2,071 |
| | $ | (3,121 | ) |
Foreign exchange | | Net sales | | — |
| | (2 | ) | | — |
| | (2 | ) |
Foreign exchange | | Cost of goods sold | | — |
| | (5 | ) | | (50 | ) | | (38 | ) |
Foreign exchange | | SG&A expenses | | 518 |
| | (1,076 | ) | | 1,169 |
| | 2,295 |
|
Gain (loss) before income taxes | | | | $ | 2,016 |
| | $ | 571 |
| | $ | 3,190 |
| | $ | (866 | ) |
The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
|
| | | | | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended May 31, | | Location of Gain (Loss) Recognized in Income on Related Hedged Items | | Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Three Months Ended May 31, |
| | 2019 | | 2018 | | | 2019 | | 2018 |
Foreign exchange | | Net sales | | $ | — |
| | $ | 163 |
| | Net sales | | $ | — |
| | $ | (163 | ) |
Foreign exchange | | Cost of goods sold | | — |
| | (429 | ) | | Cost of goods sold | | — |
| | 429 |
|
Gain (loss) before income taxes | | | | $ | — |
| | $ | (266 | ) | | | | $ | — |
| | $ | 266 |
|
| | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended May 31, | | Location of Gain (Loss) Recognized in Income on Related Hedged Items | | Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Nine Months Ended May 31, |
| | 2019 | | 2018 | | | 2019 | | 2018 |
Foreign exchange | | Net sales | | $ | — |
| | $ | (66 | ) | | Net sales | | $ | — |
| | $ | 66 |
|
Foreign exchange | | Cost of goods sold | | — |
| | 1,596 |
| | Cost of goods sold | | — |
| | (1,596 | ) |
Gain (loss) before income taxes | | | | $ | — |
| | $ | 1,530 |
| | | | $ | — |
| | $ | (1,530 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended May 31, | | Location of gain (loss) recognized in income on related hedged items | | Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Three Months Ended May 31, |
| | 2018 | | 2017 | | | 2018 | | 2017 |
Foreign exchange | | Net sales | | $ | 163 |
| | $ | (102 | ) | | Net sales | | $ | (163 | ) | | $ | 102 |
|
Foreign exchange | | Cost of goods sold | | (429 | ) | | 1,042 |
| | Cost of goods sold | | 429 |
| | (1,042 | ) |
Gain (loss) before income taxes | | | | $ | (266 | ) | | $ | 940 |
| | | | $ | 266 |
| | $ | (940 | ) |
|
| | | | | | | | | | | | | | | | |
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI | | Three Months Ended May 31, | | Nine Months Ended May 31, |
| 2019 | | 2018 | | 2019 | | 2018 |
Foreign exchange, net of income taxes | | $ | (145 | ) | | $ | 13 |
| | $ | (267 | ) | | $ | 38 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended May 31, | | Location of gain (loss) recognized in income on related hedged items | | Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Nine Months Ended May 31, |
| | 2018 | | 2017 | | | 2018 | | 2017 |
Foreign exchange | | Net sales | | $ | (66 | ) | | $ | (58 | ) | | Net sales | | $ | 66 |
| | $ | 58 |
|
Foreign exchange | | Cost of goods sold | | 1,596 |
| | 435 |
| | Cost of goods sold | | (1,596 | ) | | (435 | ) |
Gain (loss) before income taxes | | | | $ | 1,530 |
| | $ | 377 |
| | | | $ | (1,530 | ) | | $ | (377 | ) |
|
| | | | | | | | | | | | | | | | |
Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI | | Three Months Ended May 31, | | Nine Months Ended May 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Commodity | | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | 208 |
|
Foreign exchange | | 13 |
| | 263 |
| | 38 |
| | 488 |
|
Gain, net of income taxes | | $ | 13 |
| | $ | 254 |
| | $ | 38 |
| | $ | 696 |
|
Refer to Note 3, Accumulated Other Comprehensive Income (Loss), for the effective portion of derivatives designated as cash flow hedging instruments reclassified from AOCI.
The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's unaudited condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at May 31, 20182019 and August 31, 20172018. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows (amounts are in thousands):follows:
17 |
| | | | | | | | |
Derivative Assets (in thousands) | | May 31, 2019 | | August 31, 2018 |
Commodity — not designated for hedge accounting | | $ | 2,088 |
| | $ | 1,881 |
|
Foreign exchange — designated for hedge accounting | | — |
| | — |
|
Foreign exchange — not designated for hedge accounting | | 221 |
| | 407 |
|
Derivative assets (other current assets) (1) | | $ | 2,309 |
| | $ | 2,288 |
|
|
| | | | | | | | |
Derivative Assets | | May 31, 2018 | | August 31, 2017 |
Commodity — not designated for hedge accounting | | $ | 901 |
| | $ | 767 |
|
Foreign exchange — designated for hedge accounting | | — |
| | 81 |
|
Foreign exchange — not designated for hedge accounting | | 1,573 |
| | 1,286 |
|
Derivative assets (other current assets)* | | $ | 2,474 |
| | $ | 2,134 |
|
| | Derivative Liabilities | | May 31, 2018 | | August 31, 2017 | |
Derivative Liabilities (in thousands) | | | May 31, 2019 | | August 31, 2018 |
Commodity — not designated for hedge accounting | | $ | 80 |
| | $ | 3,251 |
| | $ | 322 |
| | $ | 301 |
|
Foreign exchange — designated for hedge accounting | | — |
| | 1,549 |
| | 373 |
| | — |
|
Foreign exchange — not designated for hedge accounting | | 1,550 |
| | 3,710 |
| | 581 |
| | 1,095 |
|
Derivative liabilities (accrued expenses and other payables)* | | $ | 1,630 |
| | $ | 8,510 |
| |
Derivative liabilities (accrued expenses and other payables) (1) | | | $ | 1,276 |
| | $ | 1,396 |
|
_________________
*(1) Derivative assets and liabilities do not include the hedged items designated as fair value hedges.
As of May 31, 20182019, allmost 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.
NOTE 9.11. 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 | | | | Fair Value Measurements at Reporting Date Using |
(in thousands) | | May 31, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | May 31, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | | | |
Investment deposit accounts (1) | | $ | 522,971 |
| | $ | 522,971 |
| | $ | — |
| | $ | — |
| | $ | 2,792 |
| | $ | 2,792 |
| | $ | — |
| | $ | — |
|
Commodity derivative assets (2) | | 901 |
| | 901 |
| | | | — |
| | 2,088 |
| | 2,088 |
| | — |
| | — |
|
Foreign exchange derivative assets (2) | | 1,573 |
| | — |
| | 1,573 |
| | — |
| | 221 |
| | — |
| | 221 |
| | — |
|
Liabilities: | | | | | | | | | | | | | | | | |
Commodity derivative liabilities (2) | | 80 |
| | 80 |
| | — |
| | — |
| | 322 |
| | 322 |
| | — |
| | — |
|
Foreign exchange derivative liabilities (2) | | 1,550 |
| | — |
| | 1,550 |
| | — |
| | 954 |
| | — |
| | 954 |
| | — |
|
| | | | | | Fair Value Measurements at Reporting Date Using | | | | Fair Value Measurements at Reporting Date Using |
(in thousands) | | August 31, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | 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) | | $ | 43,553 |
| | $ | 43,553 |
| | $ | — |
| | $ | — |
| | $ | 541,101 |
| | $ | 541,101 |
| | $ | — |
| | $ | — |
|
Commodity derivative assets (2) | | 767 |
| | 767 |
| | — |
| | — |
| | 1,881 |
| | 1,881 |
| | — |
| | — |
|
Foreign exchange derivative assets (2) | | 1,367 |
| | — |
| | 1,367 |
| | — |
| | 407 |
| | — |
| | 407 |
| | — |
|
Liabilities: | | | | | | | | | | | | | | | | |
Commodity derivative liabilities (2) | | 3,251 |
| | 3,251 |
| | — |
| | — |
| | 301 |
| | 301 |
| | — |
| | — |
|
Foreign exchange derivative liabilities (2) | | 5,259 |
| | — |
| | 5,259 |
| | — |
| | 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 8,10, Derivatives and Risk Management.
In connection with the sale of assets related to the Company's structural steel fabrication operations, the Company recorded an impairment chargecharges of $0.9 million and $13.0 million for the three and nine months ended May 31, 2018, respectively. The signed definitive asset sale agreement and subsequent post-closing adjustments (Level 2) werewas the basis forof the determination of fair value of these operations. There were no other material, non-recurring fair value remeasurements during the three and nine months ended May 31, 20182019 and 2017.2018.
The carrying values of the Company's short-term items including the deferred purchase price of accounts receivable, documentary letters of credit and notes payable, approximate fair value due to their short-term nature.value.
The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the unaudited condensed consolidated balance sheets were as follows:
| | | | May 31, 2018 | | August 31, 2017 | | May 31, 2019 | | August 31, 2018 |
(in thousands) | | Fair Value Hierarchy | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Fair Value Hierarchy | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2027 Notes (1) | | Level 2 | | $ | 300,000 |
| | $ | 287,052 |
| | $ | 300,000 |
| | $ | 314,286 |
| | Level 2 | | $ | 300,000 |
| | $ | 279,195 |
| | $ | 300,000 |
| | $ | 281,655 |
|
2026 Notes (1) | | Level 2 | | 350,000 |
| | 346,966 |
| | — |
| | — |
| | Level 2 | | 350,000 |
| | 345,769 |
| | 350,000 |
| | 339,238 |
|
2023 Notes (1) | | Level 2 | | 330,000 |
| | 323,430 |
| | 330,000 |
| | 340,052 |
| | Level 2 | | 330,000 |
| | 328,964 |
| | 330,000 |
| | 326,090 |
|
2022 Term Loan (2) | | Level 2 | | 144,375 |
| | 144,375 |
| | 150,000 |
| | 150,000 |
| |
Short-term borrowings (2) | | | Level 2 | | 25,327 |
| | 25,327 |
| | — |
| | — |
|
Term loans (2) | | | Level 2 | | 310,125 |
| | 310,125 |
| | 142,500 |
| | 142,500 |
|
_________________
(1) The fair value of the notes was determined based on indicated market values.
(2) The 2022 Term Loan containsContains variable interest rates and its carrying value approximates fair value.
NOTE 10.12. INCOME TAX
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("TCJA") which, among other provisions, reduced the federal corporate tax rate to 21.0% effective January 1, 2018. Due to the Company’s August 31st fiscal year end, this provision will result in a blended statutory U.S. tax rate of 25.7% for fiscal 2018 and a 21.0% statutory U.S. tax rate beginning September 1, 2018.
Accounting Standards Codification ("ASC") 740 requires the change in tax law to be accounted for in the period of enactment. Due to complexities involved in accounting for the TCJA, the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 118 provides a measurement period, which should not extend beyond one year from the date of enactment, to complete the accounting under ASC 740. The Company recognized additional income tax expense of $9.9 million during the nine months ended May 31, 2018 for the effects of those provisions of the TCJA for which amounts are reasonably estimable, including (i) recognition of the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits, in order to transition from a worldwide system with deferral to a territorial-style tax system, and (ii) the remeasurement of the Company’s deferred tax balances as of May 31, 2018 to the lower statutory rates. These provisions of the TCJA, as well as 100% bonus depreciation for qualified assets acquired and placed in service after September 27, 2017, resulted in a $45.8 million reduction to the Company’s net deferred tax liabilities. The impacts of the legislation on the Company’s tax expense and/or the Company’s deferred tax balances may differ from these estimates, possibly materially, and may be adjusted accordingly over the SAB 118 measurement period.
The Company’s current analysis of the following provisions of the TCJA resulted in minimal or no impact on the Company’s financial statements, and as a result, the Company did not record any associated tax expense or benefit as of May 31, 2018: (i) the new tax on global intangible low-taxed income, (ii) the new tax on foreign-derived intangible income, (iii) the base erosion anti-abuse tax, (iv) deductibility limitations on performance-based compensation, (v) deductibility limitations on business interest under Section 163(j) and (vi) deductibility limitations on meal and entertainment related expenses. The Company will continue to evaluate the effect of these provisions and adjust its financial statements if necessary as new information becomes available.
The Company's effective income tax rate from continuing operations for the three and nine months ended May 31, 2018 was 23.9% and 21.8%, respectively, compared with 25.9% and 26.1% forFor the three and nine months ended May 31, 2017, respectively.2019, the Company's effective tax rates from continuing operations were 27.0% and 31.9%, respectively, as compared to the U.S. statutory income tax rate of 21.0%. The effective tax rate is determined by computing the estimated annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the appropriate period. Several factors determineItems that impacted the Company's effective tax rate, including the mix and amount of global earnings, the impact of subsidiaries with losses for which no tax benefit is available due to valuation allowances, audit-related adjustments, and the impact of permanent tax adjustments.rates included:
| |
i. | a global intangible low-taxed income (“GILTI”) tax; |
| |
ii. | a valuation allowance on foreign tax credits from the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries as a result of the Tax Cuts and Jobs Act ("TCJA"); |
| |
iii. | an uncertain tax position related to the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries as a result of the TCJA; |
| |
iv. | non-deductible compensation expense; and |
For the three and nine months ended May 31, 2018, the Company's effective tax rate was lower thanrates from continuing operations were 23.9% and 21.8%, respectively, as compared to the blended U.S. statutory income tax rate of 25.7%. The statutory rate for fiscal 2018 was revised during the second quarter of fiscal 2018 due to the provisions of the TCJA, as discussed above. Items that impacted the effective tax raterates included:
| |
i. | the one-time toll charge on certain undistributed earnings of non-U.S. subsidiaries with associated foreign tax credits as a result of the TCJA; |
| |
ii. | the remeasurement of the Company’s deferred tax balances to the applicable reduced statutory income tax rates as a result of the TCJA; |
| |
iii. | a permanent tax benefit related to a worthless stock deduction from the reorganization and exit of the Company's steel trading business headquartered in the United Kingdom; |
| |
iv. | the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19.0%; |
| |
v. | a permanent tax benefit recorded under ASU 2016-09 for stock awards that vested during the first nine months of fiscal 2018; and |
| |
vi. | a non-taxable gain on assets related to the Company's non-qualified Benefits Restoration Plan ("BRP").benefits restoration plan. |
For the three and nine months ended May 31, 2017, the Company's effective tax rate was lower than the U.S. statutory income tax rate of 35.0%. Items that impacted the effective tax rate included:
| |
i. | the proportion of the Company's global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19.0%; |
| |
ii. | a permanent tax benefit under Section 199 of the Internal Revenue Code related to domestic production activity; |
| |
iii. | a non-taxable gain on assets related to the Company's non-qualified BRP; and |
| |
iv. | losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses. |
For the three and nine months ended May 31, 2018, the Company’sCompany's effective income tax rates from discontinued operations of 30.4% and 40.9%, respectively, were greater than the blended U.S. statutory income tax rate of 25.7%, primarily as a result of losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses. Additionally, the effective income tax rates were unfavorably impacted by state taxes imposed on income earned by the Company’s steel trading operations headquartered in the U.S.
For the three and nine months ended May 31, 2017, the Company’s effective income tax rate from discontinued operations of 17.4% and 20.6%, respectively, was less than the U.S. statutory income tax rate of 35.0% primarily due to pre-tax income earned in foreign jurisdictions that benefit from group loss sharing provisions. Such losses, which carry a full valuation allowance, are utilized to absorb current period income earned in foreign jurisdictions; thus, there is no associated tax expense or benefit.
The Company made net cash payments of $14.8 million and $28.2 million for income taxes during the nine months ended May 31, 2018 and 2017, respectively.
As of May 31, 20182019 and August 31, 2017,2018, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $8.0$6.2 million and $9.3$3.1 million, respectively, exclusive of interest and penalties. The decrease inwhich, if recognized, would have decreased the reserve for unrecognizedCompany’s effective income tax benefits resulted fromrate at the expirationend of the statute of limitations for the Company’s fiscal 2014 federal income tax return.
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 and
nine months ended May 31, 2018,2019, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.
During the twelve months ending May 31, 2019, it is reasonably possible that the statute of limitations pertaining to positions taken by the Company in prior year income tax returns may lapse or that income tax audits in various taxing jurisdictions could be finalized. As a result, the total amount of unrecognized income tax benefits, as well as the provision for income taxes, may decrease by approximately $8.0 million.
The Company files income tax returnsis subject to varying statutes of limitation in the U.S. and multiple foreign jurisdictions with varying statutes of limitations.jurisdictions. In the normal course of business, CMC and its subsidiaries are subject to examination by various taxing authorities. The following is a summary ofsummarizes tax years subject to examination:
U.S. Federal — 20152016 and forward with the exception of the R&D credit matter discussed below
U.S. States — 20092015 and forward
Foreign — 20112012 and forward
During the fiscal year ended August 31, 2016, the Company completed an IRS examination for the years 2009 through 2011 and received confirmation from the United States Congress Joint Committee on Taxation that all matters were settled with the exception of R&D credits, which are still under review. In addition, the Company is under examination by certain state revenue authorities for thefiscal years 20092015 through 2015. Management2017. The Company believes the Company's recorded income tax liabilities as of May 31, 2018 sufficiently2019 reflect the anticipated outcome of these examinations.
Beginning in fiscal 2019, the Company is subject to the following provisions of the TCJA: (i) a new tax on GILTI; (ii) a new deduction for foreign-derived intangible income (“FDII”); (iii) deductibility limitations on compensation for covered employees; and (iv) deductibility limitations on business interest expense. The U.S. Department of Treasury continues to release new and clarifying guidance with regard to interpretation of certain provisions of the TCJA, which the Company evaluates during the period of enactment. Based on enacted legislation through the third quarter of fiscal 2019, the Company has included in the estimated annual effective tax rate estimates of the tax impacts related to GILTI and the deductibility limitations on compensation for covered employees. The Company has elected to treat the new GILTI tax as a current period cost. The Company’s current assessment of FDII and the deductibility limitations on business interest expense did not result in an impact to the estimated annual effective tax rate.
In general, it is the practice and intention of the Company to indefinitely reinvest earnings of non-U.S. subsidiaries. Based on the provisions of the TCJA, future distributions of earnings of non-U.S. subsidiaries are not expected to be subject to U.S. income tax. However, such distributions may be subject to other global income tax considerations, such as withholding taxes, but are not expected to materially impact the Company’s financial statements.
NOTE 11.13. 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 20172018 Form 10-K. In general, the restricted stock units granted during fiscal 20182019 vest ratably over a period of three years. However, certain restricted stock units granted during fiscal 20182019 cliff vest after a period of three years. Subject to the achievement of performance targets established by the Compensation Committee of CMC's Board of Directors, the performance stock units granted during fiscal 2018 will2019 vest after a period of three years.
During the nine months ended May 31, 20182019 and 2017,2018, the Company granted the following awards under its stock-based compensation plans:
|
| | | | | | | | | | | | | | |
| | May 31, 2019 | | May 31, 2018 |
(in thousands, except per share data) | | Shares Granted | | Weighted Average Grant Date Fair Value | | Shares Granted | | Weighted Average Grant Date Fair Value |
Equity method | | 1,505 |
| | $ | 17.75 |
| | 1,216 |
| | $ | 20.69 |
|
Liability method | | 374 |
| | N/A |
| | 323 |
| | N/A |
|
|
| | | | | | | | | | | | | | |
| | 2018 | | 2017 |
(in thousands, except per share data) | | Shares Granted | | Weighted Average Grant Date Fair Value | | Shares Granted | | Weighted Average Grant Date Fair Value |
Equity Method | | 1,216 |
| | $ | 20.69 |
| | 916 |
| | $ | 16.04 |
|
Liability Method | | 323 |
| | N/A |
| | 915 |
| | N/A |
|
During the three and nine months ended May 31, 2019 and 2018, the Company recorded a benefit of $0.1 million and an expense of $1.6 millionimmaterial amounts for mark-to-market adjustments on liability awards, respectively, compared to a benefit of $2.0 million and an expense of $2.7 million recorded for the three and nine months ended May 31, 2017, respectively, which includes the impact of the modification of certain restricted stock and performance stock units that occurred during the first quarter of fiscal 2017.awards. As of May 31, 2018,2019, the Company had 769 thousandoutstanding 718,223 equivalent shares accounted for under the liability method outstanding.method. The Company expects 733 thousand683,922 equivalent shares to vest.
The following table summarizes total stock-based compensation expense, including fair value remeasurements, which was mainly included in selling, general and administrative expenses on the Company's unaudited condensed consolidated statements of earnings:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Stock-based compensation expense | | $ | 7,342 |
| | $ | 4,910 |
| | $ | 17,350 |
| | $ | 18,247 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Stock-based compensation expense | | $ | 4,910 |
| | $ | 3,560 |
| | $ | 18,247 |
| | $ | 19,716 |
|
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 and nine months ended May 31, 2019.
NOTE 12.15. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The calculations of basic and diluted earnings per share from continuing operations for the three and nine months ended May 31, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands, except share data) | | 2019 | | 2018 | | 2019 | | 2018 |
Earnings from continuing operations | | $ | 78,551 |
| | $ | 42,325 |
| | $ | 112,899 |
| | $ | 83,977 |
|
Basic earnings per share: | | | | | | | | |
Shares outstanding for basic earnings per share | | 118,045,362 |
| | 117,111,799 |
| | 117,762,945 |
| | 116,722,504 |
|
Basic earnings per share from continuing operations | | $ | 0.67 |
| | $ | 0.36 |
| | $ | 0.96 |
| | $ | 0.72 |
|
Diluted earnings per share: | | | | | | | | |
Shares outstanding for basic earnings per share | | 118,045,362 |
| | 117,111,799 |
| | 117,762,945 |
| | 116,722,504 |
|
Effect of dilutive securities: | | | | | | | | |
Stock-based incentive/purchase plans | | 1,100,204 |
| | 1,142,992 |
| | 1,250,069 |
| | 1,328,360 |
|
Shares outstanding for diluted earnings per share | | 119,145,566 |
| | 118,254,791 |
| | 119,013,014 |
| | 118,050,864 |
|
Diluted earnings per share from continuing operations | | $ | 0.66 |
| | $ | 0.36 |
| | $ | 0.95 |
| | $ | 0.71 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands, except share data) | | 2018 | | 2017 | | 2018 | | 2017 |
Earnings from continuing operations | | $ | 42,325 |
| | $ | 31,567 |
| | $ | 83,977 |
| | $ | 60,245 |
|
| | | | | | | | |
Basic earnings per share: | | | | | | | | |
Shares outstanding for basic earnings per share | | 117,111,799 |
| | 115,886,372 |
| | 116,722,504 |
| | 115,574,289 |
|
| | | | | | | | |
Basic earnings per share from continuing operations | | $ | 0.36 |
| | $ | 0.27 |
| | $ | 0.72 |
| | $ | 0.52 |
|
| | | | | | | | |
Diluted earnings per share: | | | | | | | | |
Shares outstanding for basic earnings per share | | 117,111,799 |
| | 115,886,372 |
| | 116,722,504 |
| | 115,574,289 |
|
Effect of dilutive securities: | | | | | | | | |
Stock-based incentive/purchase plans | | 1,142,992 |
| | 1,318,997 |
| | 1,328,360 |
| | 1,513,052 |
|
Shares outstanding for diluted earnings per share | | 118,254,791 |
| | 117,205,369 |
| | 118,050,864 |
| | 117,087,341 |
|
| | | | | | | | |
Diluted earnings per share from continuing operations | | $ | 0.36 |
| | $ | 0.27 |
| | $ | 0.71 |
| | $ | 0.51 |
|
CMC had 32,623 and 26,886 shares that were anti-dilutive for the three months ended May 31, 2018.2019 and 2018, respectively. There are no anti-dilutive shares for the other 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 nine months ended May 31, 2018 and 2017,2019, CMC did not repurchase any shares of common stock. CMC had remaining authorization to repurchase $27.6$27.6 million shares of common stock at May 31, 2018.2019.
NOTE 13.16. 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 20172018 Form 10-K.
On April 28, 2016, the Company was served with a lawsuit filed by Ector County, Texas and the State of Texas by and through the Texas Commission on Environmental Quality ("TCEQ") alleging violations of the Texas Solid Waste Disposal Act, the Texas Water Code, the Texas Clean Air Act, and TCEQ rules on spill prevention and control. The Plaintiffs amended their petition in February 2017 to include violations of TCEQ rules on recycling and storm water permits. The Plaintiffs further amended their petition in April 2017, broadening their allegations. The lawsuit, filed in the 201st Judicial District Court of Travis County, Texas, alleged improper disposal of solid waste and unauthorized outdoor burning activity at the Company’s recycling facility located in Odessa, Texas. The lawsuit sought a penalty for each day of alleged violation under the Texas Health & Safety Code, the Texas Water Code, or the Texas Administrative Code. The parties agreed to a mediated settlement on December 1, 2017 and entered into an Agreed Final Judgment on June 12, 2018. The Agreed Final Judgment is subject to the formal approval process of the State of Texas. Under the mediated settlement, the Company will pay $1.1 million, net of insurance recoveries. The Company denies any wrongdoing in connection with the alleged claims, and the settlement does not contain an admission of liability from the Company.
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 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 May 31, 20182019 and August 31, 2017,2018, 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 May 31, 20182019 and August 31, 2017,2018, total environmental liabilities including with respect to CERCLA sites, were $4.0$3.8 million and $4.3$4.0 million, respectively, of which $2.0$1.9 million and $2.1 million, respectively, 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 14.17. 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 20172018 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. During the second quarter of fiscal 2018, the Company substantially completed the exit of the International Marketing and Distribution segment. See Note 2, Changes in Business, for further information. Certain components of the International Marketing and Distribution segment which were wound down in prior periods, including the Company's steel trading operations based in the United Kingdom, did not meet the criteria for discontinued operations and thus, are included in continuing operations for all periods presented. Such activities are included in the results of Corporate and Other and are immaterial for the three and nine months ended May 31, 2018. Corporate and Other also contains earnings or losses on assets and liabilities related to the BRPCompany's Benefit Restoration Plan assets and short-term investments, as well as expenses of the Company's corporate headquarters, and interest expense related to its long-term debt.debt and intercompany eliminations.
The Company uses adjusted operating profit (loss)EBITDA from continuing operations to compare and evaluate the financial performance of its segments. Adjusted operating profit (loss)EBITDA is the sum of the Company's earnings from continuing operations before interest expense, income taxes, depreciation and discounts on sales of accounts receivable.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 20172018 Form 10-K.
The following is a summary of certain financial information from continuing operations by reportable segment:
| | | | Three Months Ended May 31, 2018 | | Three Months Ended May 31, 2019 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Eliminations | | Continuing Operations | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Continuing Operations |
Net sales-unaffiliated customers | | $ | 292,679 |
| | $ | 332,459 |
| | $ | 375,183 |
| | $ | 201,438 |
| | $ | 2,725 |
| | $ | — |
| | $ | 1,204,484 |
| | $ | 228,786 |
| | $ | 536,035 |
| | $ | 629,510 |
| | $ | 209,022 |
| | $ | 2,519 |
| | $ | 1,605,872 |
|
Intersegment sales | | 71,419 |
| | 220,604 |
| | 3,058 |
| | 299 |
| | — |
| | (295,380 | ) | | — |
| | 60,229 |
| | 330,868 |
| | 3,537 |
| | 343 |
| | (394,977 | ) | | — |
|
Net sales | | 364,098 |
| | 553,063 |
| | 378,241 |
| | 201,737 |
| | 2,725 |
| | (295,380 | ) | | 1,204,484 |
| | 289,015 |
| | 866,903 |
| | 633,047 |
| | 209,365 |
| | (392,458 | ) | | 1,605,872 |
|
Adjusted operating profit (loss) from continuing operations | | 14,350 |
| | 70,404 |
| | (16,096 | ) | | 24,370 |
| | (22,678 | ) | | (2,941 | ) | | 67,409 |
| |
| | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018 | |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Eliminations | | Continuing Operations | |
Net sales-unaffiliated customers | | $ | 832,448 |
| | $ | 841,895 |
| | $ | 1,015,934 |
| | $ | 633,134 |
| | $ | 11,874 |
| | $ | — |
| | $ | 3,335,285 |
| |
Intersegment sales | | 171,618 |
| | 550,573 |
| | 8,059 |
| | 846 |
| | — |
| | (731,096 | ) | | — |
| |
Net sales | | 1,004,066 |
| | 1,392,468 |
| | 1,023,993 |
| | 633,980 |
| | 11,874 |
| | (731,096 | ) | | 3,335,285 |
| |
Adjusted operating profit (loss) from continuing operations | | 36,580 |
| | 142,639 |
| | (47,995 | ) | | 72,297 |
| | (65,648 | ) | | (4,413 | ) | | 133,460 |
| |
Total assets as of May 31, 2018* | | 310,513 |
| | 1,078,308 |
| | 684,929 |
| | 476,946 |
| | 1,128,360 |
| | (467,603 | ) | | 3,211,453 |
| |
| | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2017 | |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Eliminations | | Continuing Operations | |
Net sales-unaffiliated customers | | $ | 247,896 |
| | $ | 243,934 |
| | $ | 377,188 |
| | $ | 167,409 |
| | $ | 8,286 |
| | $ | — |
| | $ | 1,044,713 |
| |
Intersegment sales | | 46,270 |
| | 183,342 |
| | 2,788 |
| | 230 |
| | 3 |
| | (232,633 | ) | | — |
| |
Net sales | | 294,166 |
| | 427,276 |
| | 379,976 |
| | 167,639 |
| | 8,289 |
| | (232,633 | ) | | 1,044,713 |
| |
Adjusted operating profit (loss) from continuing operations | | 9,247 |
| | 50,734 |
| | 1,808 |
| | 12,971 |
| | (20,281 | ) | | 772 |
| | 55,251 |
| |
| | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2017 | |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Eliminations | | Continuing Operations | |
Net sales-unaffiliated customers | | $ | 590,760 |
| | $ | 667,872 |
| | $ | 1,013,847 |
| | $ | 436,413 |
| | $ | 51,047 |
| | $ | — |
| | $ | 2,759,939 |
| |
Intersegment sales | | 103,442 |
| | 483,162 |
| | 8,355 |
| | 621 |
| | 643 |
| | (596,223 | ) | | — |
| |
Net sales | | 694,202 |
| | 1,151,034 |
| | 1,022,202 |
| | 437,034 |
| | 51,690 |
| | (596,223 | ) | | 2,759,939 |
| |
Adjusted operating profit (loss) from continuing operations | | 11,981 |
| | 139,002 |
| | 9,025 |
| | 32,517 |
| | (72,176 | ) | | (22 | ) | | 120,327 |
| |
Total assets as of August 31, 2017* | | 240,371 |
| | 933,022 |
| | 683,609 |
| | 464,428 |
| | 687,984 |
| | (327,883 | ) | | 2,681,531 |
| |
Adjusted EBITDA | | | 12,331 |
| | 158,114 |
| | (23,289 | ) | | 24,120 |
| | (27,305 | ) | | 143,971 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2019 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Continuing Operations |
Net sales-unaffiliated customers | | $ | 694,855 |
| | $ | 1,382,501 |
| | $ | 1,590,746 |
| | $ | 610,640 |
| | $ | 7,255 |
| | $ | 4,285,997 |
|
Intersegment sales | | 183,244 |
| | 860,964 |
| | 10,248 |
| | 947 |
| | (1,055,403 | ) | | — |
|
Net sales | | 878,099 |
| | 2,243,465 |
| | 1,600,994 |
| | 611,587 |
| | (1,048,148 | ) | | 4,285,997 |
|
Adjusted EBITDA | | 37,889 |
| | 384,383 |
| | (109,863 | ) | | 77,436 |
| | (111,005 | ) | | 278,840 |
|
Total assets as of May 31, 2019 (1) | | 262,620 |
| | 1,682,255 |
| | 1,136,996 |
| | 501,079 |
| | 184,060 |
| | 3,767,010 |
|
_________________ * Excludes total(1) Total assets listed in Corporate and Other includes assets from discontinued operations of $34.0 million at May 31, 2018operations.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2018 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Continuing Operations |
Net sales-unaffiliated customers | | $ | 292,679 |
| | $ | 332,459 |
| | $ | 375,183 |
| | $ | 201,438 |
| | $ | 2,725 |
| | $ | 1,204,484 |
|
Intersegment sales | | 71,419 |
| | 220,604 |
| | 3,058 |
| | 299 |
| | (295,380 | ) | | — |
|
Net sales | | 364,098 |
| | 553,063 |
| | 378,241 |
| | 201,737 |
| | (292,655 | ) | | 1,204,484 |
|
Adjusted EBITDA | | 19,477 |
| | 89,590 |
| | (8,208 | ) | | 31,987 |
| | (31,814 | ) | | 101,032 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2018 |
(in thousands) | | Americas Recycling | | Americas Mills | | Americas Fabrication | | International Mill | | Corporate and Other | | Continuing Operations |
Net sales-unaffiliated customers | | $ | 832,448 |
| | $ | 841,895 |
| | $ | 1,015,934 |
| | $ | 633,134 |
| | $ | 11,874 |
| | $ | 3,335,285 |
|
Intersegment sales | | 171,618 |
| | 550,573 |
| | 8,059 |
| | 846 |
| | (731,096 | ) | | — |
|
Net sales | | 1,004,066 |
| | 1,392,468 |
| | 1,023,993 |
| | 633,980 |
| | (719,222 | ) | | 3,335,285 |
|
Adjusted EBITDA | | 51,698 |
| | 194,975 |
| | (14,787 | ) | | 95,066 |
| | (81,777 | ) | | 245,175 |
|
Total assets as of August 31, 2018 (1) | | 291,838 |
| | 1,115,339 |
| | 739,151 |
| | 485,548 |
| | 696,428 |
| | 3,328,304 |
|
_________________ (1) Total assets listed in Corporate and $293.6 million at August 31, 2017.Other includes assets from discontinued operations.
ReconciliationsThe following table presents a reconciliation of earnings from continuing operations to adjusted operating profitEBITDA from continuing operations are provided below:operations: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Earnings from continuing operations | | $ | 78,551 |
| | $ | 42,325 |
| | $ | 112,899 |
|
| $ | 83,977 |
|
Interest expense | | 18,513 |
| | 11,511 |
| | 53,671 |
|
| 25,303 |
|
Income taxes | | 29,105 |
| | 13,312 |
| | 52,855 |
|
| 23,465 |
|
Depreciation and amortization | | 41,181 |
| | 32,949 |
| | 117,602 |
| | 98,898 |
|
Amortization of acquired unfavorable contract backlog | | (23,394 | ) | | — |
| | (58,202 | ) | | — |
|
Impairment of assets | | 15 |
| | 935 |
| | 15 |
|
| 13,532 |
|
Adjusted EBITDA from continuing operations | | $ | 143,971 |
| | $ | 101,032 |
| | $ | 278,840 |
|
| $ | 245,175 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Earnings from continuing operations | | $ | 42,325 |
| | $ | 31,567 |
| | $ | 83,977 |
|
| $ | 60,245 |
|
Income taxes | | 13,312 |
| | 11,006 |
| | 23,465 |
|
| 21,231 |
|
Interest expense | | 11,511 |
| | 12,448 |
| | 25,303 |
|
| 38,212 |
|
Discounts on sales of accounts receivable | | 261 |
| | 230 |
| | 715 |
|
| 639 |
|
Adjusted operating profit from continuing operations | | $ | 67,409 |
| | $ | 55,251 |
| | $ | 133,460 |
|
| $ | 120,327 |
|
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, 20172018 (the "2017"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 Quarterly Report on 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 Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in Item 1A of the 20172018 Form 10-K.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 20172018 Form 10-K.10-K, except for the change in revenue recognition as described in Note 1, Accounting Policies, of this Form 10-Q.
RESULTS OF OPERATIONS SUMMARY
Business Overview
As a vertically integrated organization,enterprise, we manufacture, recycle, and market steel and metal products, related materials and services through a network of facilities that includes foureight 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. See Note 2, Changes in Business, and Note 14, Business Segments, for additional information regarding our exit of the International Marketing and Distribution segment.
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. In the table below, we have included financial measures that were not derived in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Refer to the information and reconciliations in the section entitled "Non-GAAP Financial Measures" at the end of this Item 2 of this Quarterly Report on Form 10-Q.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 |
Net sales from continuing operations | | $ | 1,204,484 |
| | $ | 1,044,713 |
| | $ | 3,335,285 |
| | $ | 2,759,939 |
|
Earnings from continuing operations | | 42,325 |
| | 31,567 |
| | 83,977 |
| | 60,245 |
|
Adjusted earnings from continuing operations+ | | 48,985 |
| | 31,567 |
| | 116,183 |
| | 60,245 |
|
Adjusted operating profit from continuing operations+ | | 67,409 |
| | 55,251 |
| | 133,460 |
| | 120,327 |
|
Adjusted EBITDA from continuing operations+ | | 101,032 |
| | 87,207 |
| | 245,175 |
| | 212,847 |
|
Diluted net earnings per share | | 0.34 |
| | 0.34 |
| | 0.74 |
| | 0.65 |
|
_________________ + Non-GAAP financial measure |
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 1,605,872 |
| | $ | 1,204,484 |
| | $ | 4,285,997 |
| | $ | 3,335,285 |
|
Earnings | | 78,551 |
| | 42,325 |
| | 112,899 |
| | 83,977 |
|
Diluted earnings per share | | $ | 0.66 |
| | $ | 0.36 |
| | $ | 0.95 |
| | $ | 0.71 |
|
Net sales from continuing operations for the three and nine months ended May 31, 20182019 increased 15%33% and 21%29%, respectively, compared to the same periods for fiscal 2017. The increase in net sales is largely attributable to increased selling prices and
volumes, driven by year-over-year improvement in global economic indicators, including increased non-residential construction spending, as well as increased input costs. This has led to increased pricing of our primary product offerings, which favorably impacted our quarter-over-quarter and year-over-year selling prices in our Americas Recycling, Americas Mills, and International Mill segments. In our Americas Fabrication segment, average selling prices related to our backlog, originally contracted at lower prices, have not kept pace with increased input and production costs, as seen in our quarter–over–quarter and year–over–year results. However, new contract bookings indicate that pricing in this segment is beginning to reflect increased input costs.
We have incurred costs throughout fiscal 2018 related to the pending acquisition of certain rebar assets of Gerdau S.A. Such costs have been reflected in the quarter and year-to-date results of our Corporate and Other segment. Additionally, our2018. Our results for the three and nine months ended May 31, 2019 include the Acquired Businesses, as discussed in Note 2, Acquisition, which contributed net sales of $453.5 million quarter-to-date and $958.6 million year-to-date. Third quarter and year-to-date net sales in our Americas Mills segment increased in fiscal 2019, as compared to the same periods in 2018, include expenses relateddue to start-up activities of our new micro millthe Acquired Businesses and an increase in Durant, Oklahoma. Ouryear-over-year average selling prices in both fiscal periods. Third quarter average selling prices were down in fiscal 2019, as compared to the same period in fiscal 2018, results also reflectin our Americas Recycling and International Mill segments, leading to year-over-year reductions in net sales in the estimatedAmericas Recycling segment on both a quarter and year-to-date discrete impact that the TCJA will have on our net earnings.
During the third quarter of fiscal 2018, we concluded the wind down of our operationsbasis and in the International MarketingMill segment on a year-to-date basis. Quarter-to-date net sales in the International Mill segment, however, increased as compared to the same period in fiscal 2018 due to an increase in tons shipped. In our Americas Fabrication segment, third quarter average selling prices were up in fiscal 2019, compared to the same period in fiscal 2018, as we have shipped the majority of the lower priced work in our backlog leading to year-over-year increases in net sales on both a quarter and Distribution segment,year-to-date basis.
Earnings from continuing operations for the results of which are included in discontinued operations. As ofthree and nine months ended May 31, 2018, we have collected substantially all proceeds related2019 increased $36.2 million and $28.9 million, respectively, compared to the exit of this segment. See Note 2, Changessame periods for fiscal 2018. The increase in Business, for further discussion ofearnings was primarily driven by the wind down of the International MarketingAcquired Businesses and Distributionyear-over-year increases in quarter-to-date and year-to-date metal margins and tons shipped in our Americas Mills segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations increased $8.0 million for the three months ended May 31, 2018 and increased $23.6 million for the nine months ended May 31, 2018, in each case compared to the corresponding periods in fiscal 2017. The three and nine months ended May 31, 2018 include increased impairment charges of $0.9$14.0 million and $13.0 million, respectively, compared to the same periods of fiscal 2017, primarily related to the sale of our structural steel fabrication operations, as discussed in Note 2, Changes in Business. Additionally, we incurred increased professional services-related expenses, primarily as a result of acquisition-related activities, for the three and nine months ended May 31, 2018 of $4.4 million and $11.6 million, respectively. Also contributing to period-over-period increases were increased employee-related expenses of $5.0 million and $0.3$25.4 million for the three and nine months ended May 31, 2018,2019, respectively. The year-over-year increase in expenses was driven primarily by the acquisition of the Acquired Businesses.
Interest Expense
Interest expense for the three and nine months ended May 31, 2018 decreased $0.92019 increased $7.0 million and $12.9$28.4 million, respectively, compared to the same periods in fiscal 2018. The increase was primarily the result of financing activities 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), which drove increases of $5.4 million and $18.2 million for the three and nine months ended May 31, 2017. The overall decrease was a result of refinancing activities during the fourth quarter of fiscal 2017 that reduced our debt obligations by approximately $260 million, which was partially offset by additional interest expense related2019, respectively. Also contributing to the increase in the nine months ended May 2018 issuance31, 2019 were year-over-year reductions in capitalized interest of $7.2 million, principally due to the completion of the 2026 Notes.Oklahoma micro mill in fiscal 2018.
Income Taxes
The provisions of the recently enacted TCJA, discussed in Note 10, Income Tax, require a one-time U.S. toll charge related to undistributed earnings of non-U.S. subsidiaries. While this toll charge generally reduces the U.S. tax burden on future distributions from non-U.S. subsidiaries, other global income tax considerations, such as non-U.S. income and withholding taxes, are relevant as it pertains to the taxation of earnings in our non-U.S. subsidiaries. With respect to such earnings, we intend to indefinitely reinvest all undistributed earnings of our non-U.S. subsidiaries.
Our effective income tax rate from continuing operations for the three and nine months ended May 31, 20182019 was 23.9%27.0% and 21.8%31.9%, respectively, compared with 25.9%23.9% and 26.1%21.8%, for the three and nine months ended May 31, 2017,2018, respectively. The decrease in our effective income tax rate from continuing operations is largely attributablefor the current period was greater than the effective tax rate for the corresponding period of the prior fiscal year primarily due to the remeasurementrecognition of tax expense in the Company’s deferred tax balancescurrent year compared to benefits recognized in the applicable reduced statutory income tax ratesprior year, both as a result of the TCJA, a permanent tax benefit related to a reorganization of certain international operations and a permanent tax benefit recorded under ASU 2016-09 for stock awards that vested during the first nine months of fiscal 2018.TCJA. See Note 10,12, Income Tax, for further discussiondetails of the impacts of the TCJA and other factors impacting our effective tax rate. Our effective income tax rates were also impacted by state and local taxes as well as earnings or losses from foreign jurisdictions. State and local taxes are generally consistent over time, while the composition of domestic and foreign earnings can create larger fluctuations in our effective tax rate.to each comparative period.
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 14,17, Business Segments. The operational data presented in the tables below is calculated using averages;averages and, therefore, it is not meaningful to quantify the effect that any individual component had on the segment's net sales or adjusted operating profit.EBITDA.
Americas Recycling
| | | | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 364,098 |
| | $ | 294,166 |
| | $ | 1,004,066 |
| | $ | 694,202 |
| | $ | 289,015 |
| | $ | 364,098 |
| | $ | 878,099 |
| | $ | 1,004,066 |
|
Adjusted operating profit | | 14,350 |
| | 9,247 |
| | 36,580 |
| | 11,981 |
| |
Adjusted EBITDA | | | 12,331 |
| | 19,477 |
| | 37,889 |
| | 51,698 |
|
| | | | | | | | | |
Average selling price (per short ton) | | | | | | | | | |
Ferrous | | | $ | 252 |
| | $ | 314 |
| | $ | 263 |
| | $ | 286 |
|
Nonferrous | | | 2,047 |
| | 2,252 |
| | 2,009 |
| | 2,267 |
|
| | | | | | | | | |
Short tons shipped (in thousands) | | | | | | | | | |
Ferrous | | | 597 |
| | 642 |
| | 1,746 |
| | 1,791 |
|
Nonferrous | | | 60 |
| | 65 |
| | 182 |
| | 194 |
|
Total | | | 657 |
| | 707 |
| | 1,928 |
| | 1,985 |
|
Net sales for the three and nine months ended May 31, 2019 decreased $75.1 million, or 21%, and $126.0 million, or 13%, respectively, compared to the corresponding periods in fiscal 2018. For the three and nine months ended May 31, 2019, the primary drivers for the year-over-year decreases in net sales were reductions in the ferrous and nonferrous scrap pricing environment. Average ferrous and nonferrous selling prices decreased approximately 20% and 9%, respectively, for the three months ended May 31, 2019, and decreased approximately 8% and 11%, respectively, for the nine months ended May 31, 2019, as compared to the same periods in fiscal 2018.
Adjusted EBITDA for the three and nine months ended May 31, 2019 decreased $7.1 million and $13.8 million, respectively, as third quarter nonferrous margins, though still strong, have declined approximately 5% on a year-over-year basis due to a decrease
in the scrap pricing environment in fiscal 2019 which compressed margins. Adjusted EBITDA included non-cash stock compensation expense of $0.3 million and $1.0 million for the three and nine months ended May 31, 2019 and 2018, respectively.
Americas Mills
|
| | | | | | | | | | | | | | | | |
Average selling price (per short ton) | | | | | | | | |
Ferrous | | $ | 314 |
| | $ | 264 |
| | $ | 286 |
| | $ | 236 |
|
Nonferrous | | 2,252 |
| | 2,017 |
| | 2,267 |
| | 1,969 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 866,903 |
| | $ | 553,063 |
| | $ | 2,243,465 |
| | $ | 1,392,468 |
|
Adjusted EBITDA | | 158,114 |
| | 89,590 |
| | 384,383 |
| | 194,975 |
|
| | | | | | | | |
Average price (per short ton) | | | | | | | | |
Total selling price | | $ | 670 |
| | $ | 632 |
| | $ | 674 |
| | $ | 587 |
|
Cost of ferrous scrap utilized | | 284 |
| | 329 |
| | 297 |
| | 293 |
|
Metal margin | | 386 |
| | 303 |
| | 377 |
| | 294 |
|
| | | | | | | | |
Short tons (in thousands) | | | | | | | | |
Melted | | 1,164 |
| | 790 |
| | 3,199 |
| | 2,108 |
|
Rolled | | 1,118 |
| | 737 |
| | 3,007 |
| | 1,936 |
|
Shipped | | 1,236 |
| | 811 |
| | 3,178 |
| | 2,172 |
|
|
| | | | | | | | | | | | |
Short tons shipped (in thousands) | | | | | | | | |
Ferrous | | 642 |
| | 590 |
| | 1,791 |
| | 1,416 |
|
Nonferrous | | 65 |
| | 61 |
| | 194 |
| | 163 |
|
Total | | 707 |
| | 651 |
| | 1,985 |
| | 1,579 |
|
Net sales for the three and nine months ended May 31, 20182019 increased $69.9$313.8 million, or 24%57%, and $309.9$851.0 million, or 45%61%, respectively, compared to the corresponding periods in fiscal 2017.2018. The increase in net sales was primarily due to shipments from the Acquired Businesses of 469 thousand short tons and 974 thousand short tons for the three months ended May 31, 2018 was due to increases in average ferrous and nonferrous selling prices of $50 and $235 per short ton, respectively, coupled with increases in ferrous and nonferrous tons shipped of 9% and 7%, respectively, in each case compared to the corresponding period in fiscal 2017. The increase in net sales for the nine months ended May 31, 2018 was due2019, respectively. Also contributing to increases inincreased net sales were increased average ferrous and nonferrous selling prices of $50 and $298$38 per short ton and $87 per short ton for the three and nine months ended May 31, 2019, respectively, coupled with increasesas trade actions recently implemented in ferrousthe U.S., aimed at unfairly priced steel imports, have favorably impacted the pricing environment.
Adjusted EBITDA for the three and nonferrous tons shipped of 26%nine months ended May 31, 2019 increased $68.5 million and 19%,$189.4 million, respectively, in each case compared to the corresponding periodperiods in fiscal 2017.2018, with the Acquired Businesses contributing $53.6 million and $87.9 million, respectively. The increasesincrease in tons shipped resulted from continued strong scrap demandadjusted EBITDA for the three and nine months ended May 31, 2019 was primarily driven by the Acquired Businesses and metal margin expansion of 27% and 28%, respectively, due to increased U.S. steel mill capacity utilization, an improved pricing environment across many commodities,decreases in ferrous scrap prices and an increase in our internal capacity as a resultmanufacturing costs due to higher production levels. Adjusted EBITDA included non-cash stock compensation expense of our acquisition of seven recycling facilities during$1.1 million and $3.6 million for the third quarter of fiscal 2017, which accounted for approximately 40%three and 70% of the total increase in tons shippednine months ended May 31, 2019, respectively, and $1.1 million and $3.9 million for the three and nine months ended May 31, 2018, respectively, compared to the corresponding periods in fiscal 2017.respectively.
Adjusted operating profit for the three and nine months ended May 31, 2018 was $14.4 million and $36.6 million, respectively, compared to adjusted operating profit of $9.2 million and $12.0 million for the three and nine months ended May 31, 2017, respectively. For the third fiscal quarter of 2018, the increase was primarily due to a 17% increase in average ferrous metal margins compared to the corresponding period in fiscal 2017. Partially offsetting the benefit of margin expansion for the three months ended May 31, 2018 were increased per ton freight costs of 9%. The improvement in adjusted operating profit for the nine months ended May 31, 2018 as compared to the same period in fiscal 2017 was primarily due to increases of 17% and 9% in ferrous and nonferrous metal margins, respectively. Also contributing to the increase in adjusted operating profit was the improved volumes in ferrous and nonferrous shipments described above.
Americas MillsFabrication
| | | | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 553,063 |
| | $ | 427,276 |
| | $ | 1,392,468 |
| | $ | 1,151,034 |
| | $ | 633,047 |
| | $ | 378,241 |
| | $ | 1,600,994 |
| | $ | 1,023,993 |
|
Adjusted operating profit | | 70,404 |
| | 50,734 |
| | 142,639 |
| | 139,002 |
| |
Adjusted EBITDA | | | (23,289 | ) | | (8,208 | ) | | (109,863 | ) | | (14,787 | ) |
| | | | | | | | | |
Average selling price (excluding stock and buyout sales) (per short ton) | | | | | | | | | |
Rebar and other | | | $ | 925 |
| | $ | 777 |
| | $ | 886 |
| | $ | 784 |
|
| | | | | | | | | |
Total short tons shipped | | | | | | | | | |
Rebar and other | | | 469 |
| | 302 |
| | 1,184 |
| | 808 |
|
|
| | | | | | | | | | | | | | | | |
Average price (per short ton) | | | | | | | | |
Total sales | | $ | 632 |
| | $ | 540 |
| | $ | 587 |
| | $ | 522 |
|
Cost of ferrous scrap utilized | | 329 |
| | 266 |
| | 293 |
| | 239 |
|
Metal margin | | 303 |
| | 274 |
| | 294 |
| | 283 |
|
|
| | | | | | | | | | | | |
Short tons (in thousands) | | | | | | | | |
Melted | | 790 |
| | 670 |
| | 2,108 |
| | 1,941 |
|
Rolled | | 737 |
| | 626 |
| | 1,936 |
| | 1,846 |
|
Shipped | | 811 |
| | 722 |
| | 2,172 |
| | 2,015 |
|
Net sales for the three and nine months ended May 31, 20182019 increased $125.8$254.8 million, or 29%67%, and $241.4$577.0 million, or 21%56%, respectively, compared to the correspondingsame periods in fiscal 2017.2018. The increase in net sales for the three and nine months ended May 31, 20182019 was due to an increase in average selling price of $92 and $65 per short ton, respectively, largely driven by selling price increases in response to the increased scrap prices described in our Americas Recycling segment. Also contributing to increased net sales were 12% and 8% increases inshort tons shipped in the threeof 167 thousand and nine months ended May 31, 2018, respectively, compared to the corresponding periods in fiscal 2017, as a result of improved demand from the service center industry and increased non-residential construction spending.
Adjusted operating profit376 thousand for the three and nine months ended May 31, 2018 increased $19.7 million2019, respectively, due to shipments by the Acquired Businesses during fiscal 2019, and $3.6 million,by increases in average selling prices of $148 and $102 per ton, respectively, compared to the corresponding periodssame period in fiscal 2017. Offsetting the increase2018, as selling prices have increased in adjusted operating profit for the three and nine months ended May 31, 2018 was increased period-over-period costs during fiscal 2018 relatedresponse to our new micro mill in Durant, Oklahoma of approximately $2.2 million and $12.0 million, respectively, which includes $3.0 million of incentives recorded as income during the quarter. Other items adversely impacting adjusted operating profit during the third quarter and the first nine months of fiscal 2018, compared to the same periods in fiscal 2017, were increased freight costs on a per ton basis of 4%, as well as increased manufacturing supply costs due to inflationary pressures for electrodes and alloys compared to the same periods of fiscal 2017.
Americas Fabrication
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | | $ | 378,241 |
| | $ | 379,976 |
| | $ | 1,023,993 |
| | $ | 1,022,202 |
|
Adjusted operating (loss) profit | | (16,096 | ) | | 1,808 |
| | (47,995 | ) | | 9,025 |
|
|
| | | | | | | | | | | | | | | | |
Average selling price (excluding stock and buyout sales) (per short ton) | | | | | | | | |
Rebar and other | | $ | 777 |
| | $ | 775 |
| | $ | 784 |
| | $ | 772 |
|
|
| | | | | | | | | | | | |
Short tons shipped (in thousands) | | | | | | | | |
Rebar and other | | 302 |
| | 310 |
| | 808 |
| | 836 |
|
rising input costs. Net sales for the three and nine months ended May 31, 2018 were flat compared2019 included amortization benefit of $23.4 million and $58.2 million, respectively, related to the same periods in fiscal 2017, withunfavorable contract backlog of the impact of modest period-over-period increases in price and reductions in shipments offsetting one another. Average selling prices in this segment were largely driven by projects from our backlog, which were generally contracted prior to the escalation of scrap and other input costs.Acquired Businesses.
For the three and nine months ended May 31, 2018,2019, Americas Fabrication reported an adjusted operatingEBITDA loss was $16.1of $23.3 million and $48.0$109.9 million, respectively, compared to an adjusted operating profitEBITDA loss of $1.8$8.2 million and $9.0$14.8 million in the corresponding periods in fiscal 2017. Included2018. The primary driver for the year-over-year increase in adjusted operatingEBITDA loss for the three and nine months ended May 31, 2018 were impairment charges of $0.9 million2019 was the additional volume and $13.5
million, respectively, primarily related toloss associated with the saleAcquired Businesses and compression in metal margins as average selling prices have not increased as much as rebar prices. As the majority of our structural steelrebar fabrication business duringprojects in this segment are fixed price, there is a lag between current market prices and average selling price of material we ship as we work through the project backlog. However, in the third quarter of fiscal 2018. Impacting2019, the period-over-period changeexisting business approached break-even levels at current rebar selling prices, while the unfavorable contract backlog associated with the Acquired Businesses had a lower per ton value and is expected to turn profitable in fiscal 2020. Adjusted EBITDA included non-cash stock compensation expense of $0.4 million and $1.7 million for boththe three and nine months ended May 31, 2019, respectively, and $0.3 million and $1.7 million for the three and nine months ended May 31, 2018, was a 31% and 19% reduction, respectively, in average rebar fabrication metal margin, driven by the lag in our fabrication project backlog where average selling prices did not keep pace with increasing raw material costs.respectively.
International Mill
| | | | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | $ | 201,737 |
| | $ | 167,639 |
| | $ | 633,980 |
| | $ | 437,034 |
| | $ | 209,365 |
| | $ | 201,737 |
| | $ | 611,587 |
| | $ | 633,980 |
|
Adjusted operating profit | | 24,370 |
| | 12,971 |
| | 72,297 |
| | 32,517 |
| |
Adjusted EBITDA | | | 24,120 |
| | 31,987 |
| | 77,436 |
| | 95,066 |
|
| | | | | | | | | |
Average price (per short ton) | | | | | | | | | |
Total selling price | | | $ | 524 |
| | $ | 599 |
| | $ | 539 |
| | $ | 562 |
|
Cost of ferrous scrap utilized | | | 288 |
| | 329 |
| | 295 |
| | 317 |
|
Metal margin | | | 236 |
| | 270 |
| | 244 |
| | 245 |
|
| | | | | | | | | |
Short tons (in thousands) | | | | | | | | | |
Melted | | | 368 |
| | 389 |
| | 1,135 |
| | 1,137 |
|
Rolled | | | 341 |
| | 316 |
| | 902 |
| | 974 |
|
Shipped | | | 376 |
| | 320 |
| | 1,072 |
| | 1,066 |
|
|
| | | | | | | | | | | | | | | | |
Average price (per short ton) | | | | | | | | |
Total sales | | $ | 599 |
| | $ | 443 |
| | $ | 562 |
| | $ | 415 |
|
Cost of ferrous scrap utilized | | 329 |
| | 253 |
| | 317 |
| | 229 |
|
Metal margin | | 270 |
| | 190 |
| | 245 |
| | 186 |
|
|
| | | | | | | | | | | | |
Short tons (in thousands) | | | | | | | | |
Melted | | 389 |
| | 380 |
| | 1,137 |
| | 1,066 |
|
Rolled | | 316 |
| | 326 |
| | 974 |
| | 948 |
|
Shipped | | 320 |
| | 354 |
| | 1,066 |
| | 983 |
|
Net sales for the three and nine months ended May 31, 20182019 increased $34.1$7.6 million, or 20%4%, and $196.9decreased $22.4 million, or 45%4%, respectively, compared to the corresponding periods in fiscal 2017, driven largely by increased construction activity and economic improvements in the Polish and surrounding markets, resulting in an increase in average selling prices of 35% for both the three and nine months ended May 31, 2018. Short tons shipped duringFor the three months ended May 31, 2019, the increase in net sales was due to a year-over-year increase in shipments of 18%, as compared to the same period in fiscal 2018, decreasedpartially offset by approximately 10% as a 13% decrease in average selling prices. The reduction in average selling prices was primarily the result of increased imports into the Polish market; however,European Union. For the impact of such decreasednine months ended May 31, 2019, the decrease in net sales compared to the same period in fiscal 2018 was primarily due to a 4% decrease in average selling price while shipments was more than offset by our increased selling prices. The increase in netremained relatively flat. Net sales for the three and nine months ended May 31, 2019 were also impacted by unfavorable foreign currency translation adjustments of approximately $20.2 million and $46.9 million, respectively, due to the fluctuations of the U.S. dollar in relation to the Polish zloty.
Adjusted EBITDA for the three months ended May 31, 2019 decreased $7.9 million compared to the corresponding period in fiscal 2018, also reflects favorableprimarily due to a decrease in metal margins. Adjusted EBITDA for the nine months ended May 31, 2019 decreased $17.6 million compared to the corresponding period in fiscal 2018, driven, in part, by the decrease in average selling prices described above and an increase in manufacturing costs on a per ton basis due to a decrease in melt shop volumes. Adjusted EBITDA included non-cash stock compensation expense of $0.4 million and $0.7 million for the three and nine months ended May 31, 2019, respectively, and $0.2 million and $1.2 million for the three and nine months ended May 31, 2018, respectively. Adjusted EBITDA for the three and nine months ended May 31, 2019 reflected unfavorable foreign currency translation impacts of approximately $22.3$2.3 million and $76.0$5.7 million, respectively, due to the fluctuations of the U.S. dollar in relation to the Polish zloty.
Adjusted operating profit
Corporate and Other
Corporate and Other reported an adjusted EBITDA loss of $27.3 million and $111.0 million for the three and nine months ended May 31, 2018 increased $11.42019, respectively, compared to an adjusted EBITDA loss of $31.8 million and $39.8$81.8 million respectively, compared tofor the corresponding periods in fiscal 2017. The increases in adjusted operating profit for the three and nine months ended May 31, 2018 resulted from increases of 42% and 32%, respectively, in average metal margin compared to the corresponding periods in fiscal 2017. Metal margin expansion occurred across all product lines during the first nine months of fiscal 2018, as increased selling prices outpaced average cost increases, particularly for higher-margin merchant products. Partially offsetting these increases in adjusted operating profit were increases in per ton employee-related costs of 38% and 20% for the three and nine months ended May 31, 2018, respectively, as compared to the same periods in fiscal 2017. Additionally, fluctuations in the U.S. dollar relative to the Polish zloty resulted in increases of approximately $2.5 million and $8.0 million of this segment's adjusted operating profit for the three and nine months ended May 31, 2018, respectively.
Corporate and Other
Corporate and Other adjusted operating loss increased $2.4 million for the three months ended May 31, 2018 and decreased $6.5 million for For the nine months ended May 31, 2018, compared to2019, the corresponding periods in fiscal 2017. The increase for the three months ended May 31, 2018 was primarily the result of a $4.8 million increase in professional services driven by acquisition-related activities, partially offset by a $3.1 million reduction in depreciation expenseadjusted EBITDA loss, as compared to the three months ended May 31, 2017. The decrease for the nine months ended May 31,same period in fiscal 2018, was primarilylargely driven by a result of a $5.4 million reduction in depreciation expense, a $7.1 million decrease in employee-related expenses and a $1.6 million reduction in other fees including bank fees and insurance, as compared to the nine months ended May 31, 2017. Partially offsetting the reduced costs during the nine months ended May 31, 2018 was an $11.9$25.3 million increase in corporate expenses due to an increase in professional services that were primarily a result of acquisition-related activities, as comparedfees related to the nine months ended May 31, 2017.acquisition of the Acquired Businesses and other legal expenses.
Also impacting our year-over-year change in adjusted operating loss was the impact of prior year operating results of certain operations related to our former International Marketing and Distribution segment which did not meet the criteria for discontinued operations, and are now included in our results of Corporate and Other, as discussed in Note 14, Business Segments. These results had an immaterial impact on adjusted operating loss for the three and nine months ended May 31, 2018. For the three and nine months ended May 31, 2017, these operations had adjusted operating income of $0.9 million and adjusted operating loss of $2.4 million, respectively.
DISCONTINUED OPERATIONS DATA
See Note 2, Changes in Business, for information regarding discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
See Note 7, Credit Arrangements, for additional information.
While we believe the lending institutions participating in our credit arrangements are financially capable, it is important to note that the banking and capital markets periodically experience volatility that may limit our ability to raise capital in a cost efficient manner. Additionally,In addition, our financing costs associated with raising capital may be affected by changes to our credit rating made by any rating agency.
The table below reflects our sources, facilities and availability of liquidity as of May 31, 2018:
|
| | | | | | | | |
(in thousands) | | Total Facility | | Availability |
Cash and cash equivalents | | $ | 600,444 |
| | $ | 600,444 |
|
Notes due from 2023 to 2027 | | 980,000 |
| | * |
|
Revolving credit facility | | 350,000 |
| | 346,728 |
|
U.S. receivables sale facility | | 200,000 |
| | 172,695 |
|
2022 Term Loan | | 144,375 |
| | — |
|
International accounts receivable sales facilities | | 54,179 |
| | 36,117 |
|
Bank credit facilities — uncommitted | | 60,951 |
| | 59,284 |
|
Other, including equipment notes | | 46,763 |
| | * |
|
_________________
* We believe we have access to additional financing and refinancing, if needed.
Sources of Liquidity and Capital Resources
We expect cash on hand and cash generated from operations to be sufficient to meet all interest payments due within the next twelve months. See Note 7, Credit Arrangements, for further information regarding such interest payment obligations.
Our U.S. operations have access to the $350.0 million revolving credit facility described in Note 7, Credit Arrangements, and the $200.0 millionavailability under our sale of accounts receivable programprograms, as described below.in Note 9, Credit Arrangements.
We regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, we record allowances as soon as we believe accounts are uncollectible. Continued pressure on the liquidity of our customers could result in additional allowances as we make our assessments in the future. We use credit insurance both in the U.S. and internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit insured receivables (and those covered by export letters of credit) was approximately 14%12% of total trade receivables at May 31, 2018. For added flexibility, we may sell certain accounts receivable both in the U.S.2019.
The table below shows our sources, facilities and internationally. See Note 4, Sales of Accounts Receivable, for further information.
Stock Repurchase Program
During the first quarter of fiscal 2015, CMC's Board of Directors authorized a share repurchase program under which we may repurchase up to $100.0 million of shares of common stock. Asavailable liquidity as of May 31, 2018, the approximate value of shares of common stock that may yet be purchased under this program is $27.6 million.2019:
|
| | | | | | | | |
(in thousands) | | Total Facility | | Availability |
Cash and cash equivalents | | $ | 120,315 |
| | $ | 120,315 |
|
Notes due from 2023 to 2027 | | 980,000 |
| | * |
|
Revolving credit facility | | 350,000 |
| | 346,971 |
|
U.S. accounts receivable facility | | 200,000 |
| | 172,975 |
|
Term loans | | 310,125 |
| | — |
|
Poland accounts receivable facility | | 57,375 |
| | 26,833 |
|
Poland credit facilities | | 71,719 |
| | 70,464 |
|
Other, including equipment notes | | 56,996 |
| | * |
|
_________________
* We may repurchase shares from timebelieve we have access to time for cash in the open market or privately-negotiated transactions in accordance with applicable federal securities laws. The timingadditional financing and the amount of repurchases,refinancing, 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 us 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. We did not purchase any shares of common stock during the three and nine months ended May 31, 2018 and 2017.needed.
Pending AcquisitionCash Flows
On December 29, 2017, we entered into a definitive purchase agreement to acquire certain U.S. rebar steel mill and fabrication assets from Gerdau S.A. See Note 2, Changes in Business, for further information. The Company expects to fund the purchase price for the acquisition with cash on hand together with proceeds from the 2026 Notes and borrowings under the 2018 Term Loan (as defined in Note 7, Credit Arrangements).
In connection with the issuance of the 2026 Notes during the third quarter of fiscal 2018, we terminated the commitment letter governing the Term Loan B Facility, which we entered into on December 29, 2017. See Note 7, Credit Arrangements, for further information.
Operating Cash Flow and Capital Expenditures
Operating Activities
Our cash flows from operating activities result primarily from the sale of steel, nonferrous metals and related products, and to a lesser extent, sales of nonferrous metal products and other raw materials used in steel manufacturing.products. We have a diverse and generally stable customer base. From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. See Note 8,10, Derivatives and Risk Management, for further information.
Net cash flows fromused by operating activities increased $72.7were $218.5 million for the nine months ended May 31, 2018,2019, compared to $330.5 million for the nine months ended May 31, 2017. Year-over-year2018. The decrease in cash flows fromused by operating activities increased aswas primarily due to a result$124.1 million decrease in cash collections of improved earnings after taking into consideration non-cash charges, as compared tothe DPP from the Programs described in Note 6, Accounts Receivable Programs, for the nine months ended May 31, 2017. Our2019, as compared to the same period in 2018. This decrease was partially offset by a $9.8 million year-over-year increase in cash flows from changesused in operating assets and liabilities ("working capital") for the nine months ended May 31, 2018 reflect a net increase in working capital, largely driven by increased input costs and volumes. Also included are net inflows related to the wind down of our International Marketing and Distribution operations, which was partially offset by net repayments of $71.9 million of advance payments outstanding on our sale of trade accounts receivable programs.2019. For continuing operations, operating working capital days sales outstanding improved by 5deteriorated four days while days sales in inventory was flat compared to the nine months ended May 31, 2017.on a year-over-year basis.
Investing Activities
Net cash flows used by investing activities decreased $186.3increased $794.1 million for the nine months ended May 31, 20182019 as compared to the nine months ended May 31, 2017.2018. The overall year-over-year reductionincrease in cash used by investing activities was largelyprimarily due to cash receipts during the third fiscal quarteracquisition of 2018 related to the sale of our structural steel operationsAcquired Businesses, as described in the U.S. and our trading operations in Australia. The sale of our remaining assets in Australia concludes the exit of our International Marketing and Distribution segment. Also contributing to theNote 2, Acquisition. Partially offsetting this increase was a year-over-year decrease in cash flows used by investing activities was the collection of $25.0 million from the settlement of certain life insurance policies received during the second quarter of fiscal 2018. Additional items impacting year-over-year changes in cash used by investing activities include decreased cash outflows in fiscal 2018 of $47.4 million related to acquisitions, and decreased outflows for capital spending in fiscal 2018 of $17.8 million, primarily related to reduced year-over-year spending required at our new micro mill in Durant, Oklahoma, in each case compared to the nine months ended May 31, 2017.
During fiscal 2018, we anticipate capital expenditures ranging from $175 million to $200of $52.5 million.
We expectestimate that our fiscal 2019 capital spending will be funded from internally generated capital.range between $150 million to $175 million. We regularly assess our capital spending and reevaluate our requirements based on current and expected results.
Financing Activities
Net year-over-year cash flows from financing activities during fiscal 2018 increased2019 decreased by $330.7$152.6 million compared to the nine months ended May 31, 2017.2018. The increasedecrease was primarily due to the receipt of funds receiveda $170 million reduction in connection with the issuance of
the 2026 Notes. This increase was partially offset by increased outflows of $6.6 million related to repayments of long-term debt duringin fiscal 2018, including required minimum principal payments associated with the 2022 Term Loan (as defined in Note 7, Credit Arrangements).2019 as compared to fiscal 2018. We regularly evaluate the use of our cash in efforts to maximize total shareholder return, including debt repayment, capital deployment, share repurchases and dividends.
We anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements, including our scheduled debt repayments, payments for our contractual obligations, capital expenditures, working capital needs, share repurchases, dividends and other prudent uses of our capital, such as future acquisitions. However, in the event of sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds.actions.
CONTRACTUAL OBLIGATIONS
Our contractual obligations increased approximately $302.7 million to $2.0 billion at May 31, 20182019 increased by approximately $316 million from $1.7 billion at August 31, 2017. This2018, primarily due to the acquisition of the Acquired Businesses. The increase was primarilyincludes financing and related interest obligations, as well as incremental open purchase orders of the Acquired Businesses related to the issuanceordinary course of the 2026 Notes during the third quarter of fiscal 2018.business. Our estimated contractual obligations for the twelve months ending May 31, 20192020 are approximately $413.2$527 million and primarily consist of expenditures incurred in connection with normal revenue producing activities.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that our insurance providers and suppliers request. At May 31, 2018,2019, we had committed $24.1$28.1 million under these arrangements, of which $3.3$3.0 million reduced availability under the Revolver.Revolver, as defined in Note 9, Credit Arrangements.
OFF-BALANCE SHEET ARRANGEMENTS
For added flexibility,As described in Note 9, Credit Arrangements, we may sell certainhave trade accounts receivable programs in both in the U.S. and internationally. We utilize proceeds fromPoland. As of September 1, 2018, the salesPrograms were amended such that they no longer qualify for off-balance sheet treatment. For periods prior to September 1, 2018, we accounted for transfers of the trade accounts receivable as an alternative to short-term borrowings, effectively managing our overall borrowing costs and providing an additional source of working capital. We account for sales of the trade accounts receivable as true sales and the tradesales. Trade accounts receivable balances that are sold aretransferred were removed from the unaudited condensed consolidated balance sheets. Thesheets, and cash advances received arewere reflected as cash provided by operating activities on our unaudited condensed consolidated statements of cash flows. See Note 4, Sales of Accounts Receivable, for additional information.
CONTINGENCIES
See Note 13, Commitments and Contingencies, for further information.
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including with respect to environmental matters. We may incur settlements, fines, penalties or judgments in connection withas a result of these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. See Note 16, Commitments and Contingencies, for more information.
NON-GAAP FINANCIAL MEASURES
Adjusted Operating Profit from Continuing Operations
Adjusted operating profit from continuing operations is the sum of our earnings from continuing operations before interest expense, income taxes and discounts on sales of accounts receivable. Adjusted operating profit from continuing operations should not be considered as an alternative to earnings from continuing operations or net earnings, as determined by GAAP. However, we believe that adjusted operating profit from continuing operations provides relevant and useful information, which is often used by analysts, creditors and other interested parties as it allows: (i) a supplemental measure of our ongoing core performance and (ii) the assessment of period-to-period performance trends. Management uses adjusted operating profit from continuing operations to evaluate our financial performance. For added flexibility, we may sell certain trade accounts receivable both in the U.S. and internationally. We consider sales of accounts receivable as an alternative source of liquidity to finance our operations, and we believe that removing these costs provides a clearer perspective of our operating performance. Adjusted operating profit from continuing operations may be inconsistent with similar measures presented by other companies.
Reconciliations of earnings from continuing operations to adjusted operating profit from continuing operations are provided below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Earnings from continuing operations | | $ | 42,325 |
| | $ | 31,567 |
| | $ | 83,977 |
| | $ | 60,245 |
|
Income taxes | | 13,312 |
| | 11,006 |
| | 23,465 |
| | 21,231 |
|
Interest expense | | 11,511 |
| | 12,448 |
| | 25,303 |
| | 38,212 |
|
Discounts on sales of accounts receivable | | 261 |
| | 230 |
| | 715 |
| | 639 |
|
Adjusted operating profit from continuing operations | | $ | 67,409 |
| | $ | 55,251 |
| | $ | 133,460 |
| | $ | 120,327 |
|
Adjusted EBITDA from Continuing Operations
Adjusted EBITDA from continuing operations is the sum of earnings from continuing operations before interest expense and income taxes. It also excludes our largest recurring non-cash charge, depreciation and amortization, as well as long-lived asset and goodwill impairment charges, which are also non-cash charges. Adjusted EBITDA from continuing operations should not be considered as an alternative to earnings from continuing operations or net earnings, or as a better measure of liquidity than net cash flows from operating activities, as determined by GAAP. However, we believe that adjusted EBITDA from continuing operations provides relevant and useful information, which is often used by analysts, creditors and other interested parties as it allows: (i) comparison of our earnings to those of our competitors; (ii) a supplemental measure of our ongoing core performance; and (iii) the assessment of period-to-period performance trends. Additionally, adjusted EBITDA from continuing operations is the target benchmark for our annual and long-term cash incentive performance plans for management. Adjusted EBITDA from continuing operations may be inconsistent with similar measures presented by other companies.
Reconciliations of earnings from continuing operations to adjusted EBITDA from continuing operations are provided below: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Earnings from continuing operations | | $ | 42,325 |
| | $ | 31,567 |
| | $ | 83,977 |
| | $ | 60,245 |
|
Interest expense | | 11,511 |
| | 12,448 |
| | 25,303 |
| | 38,212 |
|
Income taxes | | 13,312 |
| | 11,006 |
| | 23,465 |
| | 21,231 |
|
Depreciation and amortization | | 32,949 |
| | 32,116 |
| | 98,898 |
| | 92,610 |
|
Impairment charges | | 935 |
| | 70 |
| | 13,532 |
| | 549 |
|
Adjusted EBITDA from continuing operations | | $ | 101,032 |
| | $ | 87,207 |
| | $ | 245,175 |
| | $ | 212,847 |
|
Adjusted Earnings from Continuing Operations
Adjusted earnings from continuing operations is a non-GAAP financial measure that is equal to earnings from continuing operations before certain material acquisition and integration costs, mill operational start-up costs, CMC Steel Oklahoma incentives, asset impairments, debt restructuring and extinguishment gains and losses and severance expenses, including the estimated income tax effects thereof. Additionally, we adjust adjusted earnings from continuing operations for the effects of the TCJA as well as the tax benefit associated with an international reorganization. Adjusted earnings from continuing operations should not be considered as an alternative to earnings from continuing operations or any other performance measure derived in accordance with GAAP. However, we believe that adjusted earnings from continuing operations provides relevant and useful information to investors as it allows: (i) a supplemental measure of our ongoing core performance and (ii) the assessment of period-to-period performance trends. Management uses adjusted earnings from continuing operations to evaluate our financial performance. Adjusted earnings from continuing operations may be inconsistent with similar measures presented by other companies. Adjusted earnings from continuing operations per diluted share is defined as adjusted earnings from continuing operations on a diluted per share basis.
A reconciliation of earnings from continuing operations to adjusted earnings from continuing operations is provided below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(in thousands, except per share amounts) | | 5/31/2018 | | 5/31/2017 | | 5/31/2018 | | 5/31/2017 |
| | | | | | | | |
Earnings from continuing operations | | $ | 42,325 |
| | $ | 31,567 |
| | $ | 83,977 |
| | $ | 60,245 |
|
| | | | | | | | |
Acquisition and integration related costs | | 4,975 |
| | — |
| | 14,600 |
| | — |
|
Mill operational start-up costs | | 6,456 |
| | — |
| | 18,016 |
| | — |
|
CMC Steel Oklahoma incentives | | (3,000 | ) | | — |
| | (3,000 | ) | | — |
|
Asset impairments | | — |
| | — |
| | 12,136 |
| | — |
|
Loss (gain) on debt extinguishment | | — |
| | — |
| | — |
| | — |
|
Severance | | — |
| | — |
| | — |
| | — |
|
Total adjustments (pre-tax) | | $ | 8,431 |
| | $ | — |
| | $ | 41,752 |
| | $ | — |
|
| | | | | | | | |
Related tax effects on adjustments | | $ | (1,771 | ) | | $ | — |
| | $ | (10,946 | ) | | $ | — |
|
TCJA impact | | — |
| | — |
| | 10,600 |
| | — |
|
International reorganization | | — |
| | — |
| | (9,200 | ) | | — |
|
Total tax impact | | $ | (1,771 | ) | | $ | — |
| | $ | (9,546 | ) | | $ | — |
|
| | | | | | | | |
Adjusted earnings from continuing operations | | $ | 48,985 |
| | $ | 31,567 |
| | $ | 116,183 |
| | $ | 60,245 |
|
| | | | | | | | |
Adjusted earnings from continuing operations per diluted share | | $ | 0.41 |
| | $ | 0.27 |
| | $ | 0.98 |
| | $ | 0.51 |
|
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains or incorporates by reference a number of "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies provided by our recent acquisitions, demand for our products, steel margins, the ability to operate our mills at full capacity, future supplies of raw materials and energy for our operations, share repurchases, legal proceedings, renewing the credit facilities of our Polish subsidiary, the reinvestment of undistributed earnings of our non-U.S. subsidiaries, U.S. non-residential construction activity, international trade, capital expenditures, our liquidity and our ability to satisfy future liquidity requirements, our new Oklahoma micro mill, estimated contractual obligations, the planned acquisitioneffects of substantially all of the U.S. rebar fabrication facilities and the steel mini mills located in or around Rancho Cucamonga, California, Jacksonville, Florida, Sayreville, New Jersey and Knoxville, Tennessee currently owned by Gerdau S.A. and certain of its subsidiaries (collectively, the “Business”) and the timing thereof, the ability to obtain regulatory approvals and meet other closing conditions for the planned acquisition of the Business,Acquired Businesses, and our expectations or beliefs concerning future events. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements.
Our forward-looking statements are based on management's expectations and beliefs as of the time this Quarterly Report on Form 10-Q is filed with the SEC or, with respect to any document incorporated by reference into this Quarterly Report on Form 10-Q, as of the time such document was prepared. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Except as required by law, we undertake no 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 any other changes. Some of the importantImportant factors that could cause actual results to differ materially from our expectations include those described in Part I, Item 1A, Risk Factors, of the 2018 Form 10-K as well as the following:
changes in economic conditions which affect demand for our products or construction activity generally, and the impact of such changes on the highly cyclical steel industry;
rapid and significant changes in the price of metals, potentially impairing our inventory values due to declines in commodity prices;prices or reducing the profitability of our fabrication contracts due to rising commodity pricing;
excess capacity in our industry, particularly in China, and product availability from competing steel mills and other steel suppliers including import quantities and pricing;
compliance with and changes in environmental laws and regulations, including increased regulation associated with climate change and greenhouse gas emissions;
involvement in various environmental matters that may result in fines, penalties or judgments;
potential limitations in our or our customers' abilities to access credit and non-compliance by our customers with our contracts;
activity in repurchasing shares of our common stock under our repurchase program;
financial covenants and restrictions on the operation of our business contained in agreements governing our debt;
our ability to successfully identify, consummate, and integrate acquisitions and the effects that acquisitions may have on our financial leverage;
risks associated with acquisitions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable antitrust legislation and other regulatory and third party consents and approvals;
failure to retain key management and employees of the Business;Acquired Businesses;
issues or delays in the successful integration of the Business’Acquired Businesses’ operations with those of the Company, including the inability to substantially increase utilization of the Business'Acquired Businesses' steel mini mills, and incurring or experiencing unanticipated costs and/or delays or difficulties;
difficulties or delays in the successful transition of the BusinessAcquired Businesses to the information technology systems of the Company as well as risks associated with other integration or transition of the operations, systems and personnel of the Business;Acquired Businesses;
unfavorable reaction to the acquisition of the Acquired Businesses by customers, competitors, suppliers and employees;
lower than expected future levels of revenues being lowerand higher than expected and costs being higher than expected;future costs;
failure or inability to implement growth strategies in a timely manner;
unfavorable reaction to the acquisition of the Business by customers, competitors, suppliers and employees;
impact of goodwill impairment charges;
impact of long-lived asset impairment charges;
currency fluctuations;
global factors, including political uncertainties and military conflicts;
availability and pricing of electricity, electrodes and natural gas for mill operations;
our ability to hire and retain key executives and other employees;
competition from other materials or from competitors that have a lower cost structure or access to greater financial resources;
information technology interruptions and breaches in data security;
ability to make necessary capital expenditures;
availability and pricing of raw materials and other items over which we exert little influence, including scrap metal, energy insurance and supply prices;insurance;
unexpected equipment failures;
our ability to realize the anticipated benefits of our investment in our new micro mill in Durant, Oklahoma;
losses or limited potential gains due to hedging transactions;
litigation claims and settlements, court decisions, regulatory rulings and legal compliance risks;
risk of injury or death to employees, customers or other visitors to our operations;
impacts fromof the TCJA; and
increased costs related to health care reform legislation; andlegislation.
those factors listed under Part I, Item 1A, Risk Factors, included in the 2017 Form 10-K.
You should refer to the “Risk Factors” disclosed in our periodic and current reports filed with the SEC for specific risks which would cause actual results to be significantly different from those expressed or implied by these forward-looking statements. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Accordingly, readers of this Form 10-Q are cautioned not to place undue reliance on the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The U.S. dollar equivalent of the Company's total gross foreign currency exchange contract commitments decreased $160.0$7.5 million, or 6%, compared to August 31, 2017.2018. Forward contracts denominated in Polish zlotyEuro with a U.S. dollarPolish zloty functional currency, forward contracts denominated in EuroU.S. dollars with a Polish zloty functional currency, and forward contracts denominated in U.S. dollarsEuro with an Australiana U.S. dollar functional currency decreased $33.2increased $11.8 million, $34.0$4.0 million, and $76.4$5.1 million, respectively, compared to August 31, 2017.2018. Forward contracts denominated in Australian dollar with a U.S. dollar functional currency decreased $28.5 million compared to August 31, 2018. As of May 31, 2019, the Company had no forward contracts denominated in Australian dollar.
The Company's total commodity contract commitments increased $5.5decreased $5.6 million, or 9.3%10%, compared to August 31, 2017.2018.
There were no other material changes to the information set forth in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in the 20172018 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods, and includes controls and procedures designed to ensure that such information is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and they have concluded that as of that date, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended May 31, 20182019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in lawsuits associated with the normal conduct of its businesses and operations. It is not possible to predict the outcome of the pending actions, and as with any litigation, it is possible that these actions could be decided unfavorably to the Company. We believe that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon our results of operations, cash flows or financial condition, and where appropriate, these actions are being vigorously contested.
On April 28, 2016,We are the subject of civil actions, or have received notices from the EPA or state agencies with similar responsibility, that we were served withand numerous other parties are considered a lawsuit filed by Ector County,potentially responsible party ("PRP") and may be obligated under CERCLA, or similar state statutes, to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at eleven locations. The actions and notices refer to the following locations, none of which involve real estate we ever owned or upon which we ever conducted operations: the Sapp Battery Site in Cottondale, Florida, the Interstate Lead Company Site in Leeds, Alabama, the Ross Metals Site in Rossville, Tennessee, the Li Tungsten Site in Glen Cove, New York, the Peak Oil Site in Tampa, Florida, the R&H Oil Site in San Antonio, Texas, the SoGreen/Parramore Site in Tifton, Georgia, the Jensen Drive site in Houston, Texas, the Industrial Salvage site in Corpus Christi, Texas, Chemetco site in Hartford, Illinois and the State of Texas by and throughWard Transformer site in Raleigh, North Carolina. We may contest our designation as a PRP with regard to certain sites, while at other sites we are participating with other named PRPs in agreements or negotiations that have resulted or that we expect will result in agreements to remediate the Texas Commission on Environmental Quality ("TCEQ") alleging violationssites. During 2010, we acquired a 70% interest in the real property at Jensen Drive as part of the Texas Solid Waste Disposal Act,remediation of that site. We have periodically received information requests from government environmental agencies with regard to other sites that are apparently under consideration for designation as listed sites under CERCLA or similar state statutes. Often we do not receive any further communication with regard to these sites, and as of the Texas Water Code,date of this Form 10-Q, we do not know if any of these inquiries will ultimately result in a demand for payment from us.
The EPA notified us and other alleged PRPs that under Section 106 of CERCLA, we and the Texas Clean Air Act,other PRPs could be subject to a maximum fine of $25,000 per day and TCEQ rules on spill preventionthe imposition of treble damages if we and control. The Plaintiffs amended their petitionthe other PRPs refuse to clean up the Peak Oil, Sapp Battery and SoGreen/Parramore sites as ordered by the EPA. We are presently participating in February 2017PRP organizations at these sites, which are paying for certain site remediation expenses. We do not believe that the EPA will pursue any fines against us if we continue to include violations of TCEQ rules on recycling and storm water permits. The Plaintiffs further amended their petition in April 2017, broadening their allegations. The lawsuit, filedparticipate in the 201st Judicial District Court of Travis County, Texas, alleged improper disposal of solid waste and unauthorized outdoor burning activity at the Company’s recycling facility located in Odessa, Texas. The lawsuit sought a penalty for each day of alleged violation under the Texas Health & Safety Code, the Texas Water Code,PRP groups or the Texas Administrative Code. The parties agreed to a mediated settlement on December 1, 2017 and entered into an Agreed Final Judgment on June 12, 2018. The Agreed Final Judgment is subjectif we have adequate defenses to the formal approval processEPA's imposition of fines against us in these matters.
We believe that adequate provisions have been made in the Statefinancial statements for the potential impact of Texas. Under the mediated settlement, the Company will pay $1.1 million, net of insurance recoveries. The Company denies any wrongdoingloss in connection with the alleged claims,above-described legal proceedings and environmental matters. Management believes that the settlement does not contain an admission of liability from the Company.
We are subject to laws and regulations relating to protectionoutcome of the environment. It is not possible to quantify with certainty the potential impact of actions relating to environmental matters, particularly remediationproceedings mentioned, and other compliance efforts that our subsidiaries may undertake in the future. We believe, however, compliance with current environmental protection laws (before taking into account estimated recoveries from third parties)miscellaneous litigation and proceedings now pending, will not have a material adverse effect uponon our business, results of operations cash flows or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of the 20172018 Form 10-K as updated by ourand Part II, Item 1A, Risk Factors, of the Quarterly ReportsReport on Form 10-Q filed sincefor the date of the 2017 Form 10-K.period ended February 28, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended May 31, 2018.2019. ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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2.1 | Stock and Asset Purchase Agreement, dated as of December 29, 2017, by and among Commercial Metals Company, CMC Steel Fabricators, Inc., CMC Steel US, LLC, GNA Financing, Inc., Gerdau Ameristeel US, Inc., Gerdau Ameristeel Sayreville Inc. and Gerdau Ameristeel WC, Inc. (filed as Exhibit 2.1 to Commercial Metals Company’s Current Report on Form 8-K filed January 2, 2018 and incorporated herein by reference). |
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3.1(a) | |
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3.1(b) | |
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3.1(c) | |
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3.1(d) | |
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3.1(e) | |
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3.1(f) | |
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3.2 | |
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4.1 | |
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4.2 | |
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10.1 | |
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10.2 | Registration Rights Agreement, dated May 3, 2018, by and among Commercial Metals Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., PNC Capital Markets LLC and Wells Fargo Securities, LLC (filed as Exhibit 10.1 to Commercial Metals Company’s Current Report on Form 8-K filed May 3, 2018 and incorporated herein by reference). |
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31.1 | |
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31.2 | |
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32.1 | |
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32.2 | |
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101 | The following financial information from Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2018,2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings (Unaudited), (ii) the Condensed Consolidated Statements of Comprehensive Income (Unaudited), (iii) the Condensed Consolidated Balance Sheets (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), (v) the Condensed Consolidated Statements of Stockholders' Equity (Unaudited) and (vi) the Notes to Condensed Consolidated Financial Statements (Unaudited) (submitted electronically herewith). |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| COMMERCIAL METALS COMPANY |
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June 27, 20182019 | /s/ Mary A. Lindsey |
| Mary A. Lindsey |
| Senior Vice President and Chief Financial Officer |
| (Duly authorized officer and principal financial officer of the registrant) |