CMC-05.31.2015-10Q

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, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
___________________________________
 
Delaware
75-0725338
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas 75039
(Address of Principal Executive Offices) (Zip Code)
(214) 689-4300
(Registrant's Telephone Number, Including Area Code)
 ___________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨

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

The number of shares outstanding of common stock as of June 25, 2015 was 115,602,102.


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands, except share data)
 
2015
 
2014
 
2015
 
2014
Net sales
 
$
1,506,002

 
$
1,738,593

 
$
4,577,109


$
4,953,129

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
1,270,044

 
1,560,174

 
3,933,516


4,455,481

Selling, general and administrative expenses
 
110,347

 
121,402

 
333,332


336,334

Interest expense
 
20,519

 
18,849

 
58,828

 
57,234

 
 
1,400,910

 
1,700,425

 
4,325,676


4,849,049

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
105,092

 
38,168

 
251,433


104,080

Income taxes
 
37,964

 
13,700

 
84,252


32,657

Earnings from continuing operations
 
67,128

 
24,468

 
167,181


71,423

 
 
 
 
 
 





Earnings (loss) from discontinued operations before income taxes (benefit)
 
(10,871
)
 
(1,042
)
 
(20,241
)

17,969

Income taxes (benefit)
 
(424
)
 
(137
)
 
(445
)

8,766

Earnings (loss) from discontinued operations
 
(10,447
)
 
(905
)
 
(19,796
)

9,203

 
 
 
 
 
 





Net earnings
 
56,681

 
23,563

 
147,385


80,626

Less net earnings attributable to noncontrolling interests
 
—

 
—

 
—


1

Net earnings attributable to CMC
 
$
56,681

 
$
23,563

 
$
147,385


$
80,625

 
 
 
 
 
 



Basic earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.58

 
$
0.21

 
$
1.43


$
0.61

Earnings (loss) from discontinued operations
 
(0.09
)
 
(0.01
)
 
(0.17
)

0.08

Net earnings
 
$
0.49

 
$
0.20

 
$
1.26


$
0.69

 
 
 
 
 
 



Diluted earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.58

 
$
0.21

 
$
1.42


$
0.60

Earnings (loss) from discontinued operations
 
(0.09
)
 
(0.01
)
 
(0.17
)

0.08

Net earnings
 
$
0.49

 
$
0.20

 
$
1.25


$
0.68

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.36


$
0.36

Average basic shares outstanding
 
115,742,534

 
117,705,133

 
116,807,469


117,400,198

Average diluted shares outstanding
 
116,759,215

 
118,769,675

 
117,871,228


118,521,816

See notes to unaudited consolidated financial statements.

3




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

 
Three Months Ended May 31,

Nine Months Ended May 31,
(in thousands)
 
2015

2014

2015

2014
Net earnings
 
$
56,681


$
23,563


$
147,385


$
80,626

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







Foreign currency translation adjustment and other
 
(4,588
)

655


(75,851
)

28,840

Net unrealized gain (loss) on derivatives:
 











Unrealized holding gain (loss), net of income taxes of $(55), $110, $(1,178) and $(434)
 
54


390


(2,371
)

(1,653
)
Reclassification for loss (gain) included in net earnings, net of income taxes of $469, $(50), $886 and $258
 
804


(103
)

1,570


1,259

Net unrealized gain (loss) on derivatives, net of income taxes of $414, $60, $(292) and $(176)
 
858


287


(801
)

(394
)
Defined benefit obligation:
 











Net gain, net of income taxes of $0, $0, $4 and $296
 
—


—


8


550

Amortization of prior services, net of income taxes of $(1), $(1), $(2) and $(2)
 
(3
)

(2
)

(9
)

(6
)
Defined benefit obligation, net of income taxes of $(1), $(1), $2 and $294
 
(3
)

(2
)

(1
)

544

Other comprehensive income (loss)
 
(3,733
)

940


(76,653
)

28,990

Comprehensive income
 
$
52,948


$
24,503


$
70,732


$
109,616

See notes to unaudited consolidated financial statements.

4



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
May 31, 2015
 
August 31, 2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
381,006

 
$
434,925

Accounts receivable (less allowance for doubtful accounts of $7,498 and $5,908)
 
987,146

 
1,028,425

Inventories, net
 
944,611

 
935,411

Current deferred tax assets
 
32,656

 
49,455

Other current assets
 
98,525

 
105,575

Assets of businesses held for sale
 
69,682

 
—

Total current assets
 
2,513,626

 
2,553,791

Property, plant and equipment:
 
 
 
 
Land
 
75,106

 
79,295

Buildings and improvements
 
488,551

 
494,842

Equipment
 
1,678,828

 
1,728,425

Construction in process
 
34,612

 
30,591


 
2,277,097

 
2,333,153

Less accumulated depreciation and amortization
 
(1,405,070
)
 
(1,408,055
)

 
872,027

 
925,098

Goodwill
 
73,762

 
74,319

Other noncurrent assets
 
120,311

 
135,312

Total assets
 
$
3,579,726

 
$
3,688,520

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
294,226

 
$
423,807

Accounts payable-documentary letters of credit
 
166,717

 
125,053

Accrued expenses and other payables
 
277,071

 
322,000

Notes payable
 
4,796

 
12,288

Current maturities of long-term debt
 
9,753

 
8,005

Liabilities of businesses held for sale
 
28,863

 
—

Total current liabilities
 
781,426

 
891,153

Deferred income taxes
 
60,338

 
55,600

Other long-term liabilities
 
105,303

 
112,134

Long-term debt
 
1,279,369

 
1,281,042

Total liabilities
 
2,226,436

 
2,339,929

Commitments and contingencies
 
 
 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 115,601,037 and 117,829,262 shares
 
1,290

 
1,290

Additional paid-in capital
 
363,458

 
359,338

Accumulated other comprehensive loss
 
(96,162
)
 
(19,509
)
Retained earnings
 
1,331,167

 
1,225,855

Less treasury stock, 13,459,627 and 11,231,402 shares at cost
 
(246,612
)
 
(218,494
)
Stockholders' equity attributable to CMC
 
1,353,141

 
1,348,480

Stockholders' equity attributable to noncontrolling interests
 
149

 
111

Total stockholders' equity
 
1,353,290

 
1,348,591

Total liabilities and stockholders' equity
 
$
3,579,726

 
$
3,688,520

See notes to unaudited consolidated financial statements.

5



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended May 31,
(in thousands)
 
2015
 
2014
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
147,385

 
$
80,626

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
99,829

 
101,130

Provision for losses on receivables, net
 
2,525

 
(1,705
)
Stock-based compensation
 
18,288

 
16,054

Amortization of interest rate swaps termination gain
 
(5,698
)
 
(5,698
)
Deferred income taxes
 
26,396

 
28,560

Tax benefits from stock plans
 
(122
)
 
(625
)
Net gain on sale of a subsidiary and other
 
(1,737
)
 
(28,032
)
Write-down of inventory
 
11,697

 
—

Asset impairment
 
3,390

 
1,227

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
90,412

 
(59,479
)
Accounts receivable sold, net
 
(98,033
)
 
124,415

Inventories
 
(111,675
)
 
(176,766
)
Other assets
 
11,055

 
(18,486
)
Accounts payable, accrued expenses and other payables
 
(129,322
)
 
38,328

Other long-term liabilities
 
(5,601
)
 
(5,244
)
Net cash flows from (used by) operating activities
 
58,789

 
94,305

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(75,976
)
 
(67,718
)
Proceeds from the sale of property, plant and equipment and other
 
10,143

 
6,773

Proceeds from the sale of a subsidiary
 
2,354

 
52,276

Net cash flows from (used by) investing activities
 
(63,479
)
 
(8,669
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Documentary letters of credit, net change
 
51,722

 
2,985

Short-term borrowings, net change
 
(7,492
)
 
(1,333
)
Repayments on long-term debt
 
(8,038
)
 
(4,826
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(1,389
)
 
(860
)
Treasury stock acquired
 
(41,806
)
 
—

Cash dividends
 
(42,073
)
 
(42,290
)
Tax benefits from stock plans
 
122

 
625

Decrease in restricted cash
 
3,630

 
18,037

Contribution from (purchase of) noncontrolling interests
 
38

 
(37
)
Payments for debt issuance costs
 
—

 
(430
)
Net cash flows from (used by) financing activities
 
(45,286
)
 
(28,129
)
Effect of exchange rate changes on cash
 
(3,943
)
 
933

Increase (decrease) in cash and cash equivalents
 
(53,919
)
 
58,440

Cash and cash equivalents at beginning of year
 
434,925

 
378,770

Cash and cash equivalents at end of period
 
$
381,006

 
$
437,210

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Capital lease additions and changes in accounts payable related to purchases of property, plant and equipment
 
$
11,882

 
$
9,143

See notes to unaudited consolidated financial statements.

6



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
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
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2013
129,060,664

$
1,290

$
363,772

$
(27,176
)
$
1,166,732

(12,049,674
)
$
(234,619
)
$
156

$
1,270,155

Net earnings
 
 
 
 
80,625

 
 
1

80,626

Other comprehensive income
 
 
 
28,990

 
 
 
 
28,990

Cash dividends ($0.36 per share)
 
 
 
 
(42,290
)
 
 
 
(42,290
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(15,505
)
 
 
745,917

14,645

 
(860
)
Stock-based compensation
 
 
13,437

 
 
 
 
 

13,437

Tax benefits from stock plans
 
 
625

 
 
 
 
 

625

Contribution of noncontrolling interest
 
 
31

 
 
 
 
(68
)
(37
)
Balance, May 31, 2014
129,060,664

$
1,290

$
362,360

$
1,814

$
1,205,067

(11,303,757
)
$
(219,974
)
$
89

$
1,350,646

 
 
 
 
 
 
 
 
 
 
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2014
129,060,664

$
1,290

$
359,338

$
(19,509
)
$
1,225,855

(11,231,402
)
$
(218,494
)
$
111

$
1,348,591

Net earnings
 
 
 
 
147,385

 
 
 
147,385

Other comprehensive loss
 
 
 
(76,653
)
 
 
 
 
(76,653
)
Cash dividends ($0.36 per share)
 
 
 
 
(42,073
)
 
 
 
(42,073
)
Treasury stock acquired
 
 
 
 
 
(2,902,218
)
(41,806
)
 
(41,806
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(15,077
)
 
 
673,993

13,688

 
(1,389
)
Stock-based compensation
 
 
15,127

 
 
 
 
 
15,127

Tax benefits from stock plans
 
 
122

 
 
 
 
 
122

Contribution of noncontrolling interest
 
 
 
 
 
 
 
38

38

Reclassification of share-based liability awards
 
 
3,948

 
 
 
 
 
3,948

Balance, May 31, 2015
129,060,664

$
1,290

$
363,458

$
(96,162
)
$
1,331,167

(13,459,627
)
$
(246,612
)
$
149

$
1,353,290

See notes to unaudited consolidated financial statements.

7




COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES

Accounting Principles
The accompanying unaudited 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, 2014 filed by Commercial Metals Company ("CMC", and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the consolidated balance sheets and the consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2014. The results of operations for the three and nine month periods are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements
In the first quarter of fiscal 2015, the Company adopted guidance issued by the Financial Accounting Standards Board ("FASB") requiring an entity to net an unrecognized tax benefit with a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2015, the Company adopted guidance issued by the FASB requiring an entity to release any related cumulative translation adjustment into net income when it either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the guidance resolves the diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2015, the Company adopted guidance issued by the FASB requiring an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about the obligation. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
 
In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued guidance modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities. This guidance also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. Entities may elect to apply this guidance either on a retrospective or a modified retrospective basis. The Company does not expect this guidance to have a material impact on its consolidated financial statements.


8



In January 2015, the FASB issued guidance eliminating the concept of extraordinary items. Under this guidance an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015 with early adoption permitted. Upon adoption, an entity may elect prospective or retrospective application. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2014, the FASB issued guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern and to provide disclosures in certain circumstances. The new guidance was issued to reduce diversity in the timing and content of footnote disclosures. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In August 2014, the FASB issued guidance providing a measurement alternative to the existing fair value measurement guidance for reporting entities that consolidate a collateralized financing entity in which (1) the financial assets and financial liabilities are measured at fair value except for those incidental financial assets and financial liabilities with their carrying values that approximate fair values and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. When the measurement alternative is elected, the financial assets and liabilities of a collateralized financing entity will be measured using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. This guidance is effective for public business entities for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2014, the FASB issued guidance requiring entities to account for a performance target as a performance condition if the target affects vesting and could be achieved after the requisite service period. The new guidance did not introduce additional disclosure requirements and was issued to resolve diversity in practice. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2015. The Company currently accounts for such performance targets in a manner consistent with the new guidance and does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued guidance requiring entities to recognize revenue from contracts with customers by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This guidance is currently effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2016. Entities have the option to adopt this guidance either retrospectively or through a modified retrospective transition method. This new standard will supersede existing revenue guidance and affect the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

In April 2014, the FASB issued guidance changing the requirements for reporting discontinued operations if the disposal of a component of an entity, or a group of components of an entity, represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The guidance requires expanded disclosures for discontinued operations and also requires entities to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. The guidance will affect the Company's current practice of assessing discontinued operations and the presentation and disclosure in the Company's consolidated financial statements.

9



NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss), net of income taxes:
 
 
Three Months Ended May 31, 2015
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total Accumulated Other Comprehensive Income (Loss)
Balance, February 28, 2015
 
$
(91,154
)
 
$
1,355

 
$
(2,630
)
 
$
(92,429
)
Other comprehensive income (loss) before reclassifications
 
(4,588
)
 
54

 
—

 
(4,534
)
Amounts reclassified from AOCI
 
—

 
804

 
(3
)
 
801

Net other comprehensive income (loss)
 
(4,588
)
 
858

 
(3
)
 
(3,733
)
Balance, May 31, 2015
 
$
(95,742
)
 
$
2,213

 
$
(2,633
)
 
$
(96,162
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2015
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total Accumulated Other Comprehensive Income (Loss)
Balance at August 31, 2014
 
$
(19,891
)
 
$
3,014

 
$
(2,632
)
 
$
(19,509
)
Other comprehensive income (loss) before reclassifications
 
(75,851
)
 
(2,371
)
 
8

 
(78,214
)
Amounts reclassified from AOCI
 
—

 
1,570

 
(9
)
 
1,561

Net other comprehensive loss
 
(75,851
)
 
(801
)
 
(1
)
 
(76,653
)
Balance, May 31, 2015
 
$
(95,742
)
 
$
2,213

 
$
(2,633
)
 
$
(96,162
)

 
 
Three Months Ended May 31, 2014
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total Accumulated Other Comprehensive Income (Loss)
Balance, February 28, 2014
 
$
708

 
$
2,913

 
$
(2,747
)
 
$
874

Other comprehensive income before reclassifications
 
655

 
390

 
—

 
1,045

Amounts reclassified from AOCI
 
—

 
(103
)
 
(2
)
 
(105
)
Net other comprehensive income (loss)
 
655

 
287

 
(2
)
 
940

Balance, May 31, 2014
 
$
1,363

 
$
3,200

 
$
(2,749
)
 
$
1,814

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2014
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total Accumulated Other Comprehensive Income (Loss)
Balance at August 31, 2013
 
$
(27,477
)
 
$
3,594

 
$
(3,293
)
 
$
(27,176
)
Other comprehensive income (loss) before reclassifications
 
28,840

 
(1,653
)
 
550

 
27,737

Amounts reclassified from AOCI
 
—

 
1,259

 
(6
)
 
1,253

Net other comprehensive income (loss)
 
28,840

 
(394
)
 
544

 
28,990

Balance, May 31, 2014
 
$
1,363

 
$
3,200

 
$
(2,749
)
 
$
1,814



10



The significant items reclassified out of accumulated other comprehensive income (loss) and the corresponding line items in the consolidated statements of earnings to which the items were reclassified were as follows:
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Components of AOCI (in thousands)
 
Location
 
2015
 
2014
 
2015
 
2014
Unrealized gain (loss) on derivatives:
 

 


 
 
 


 
 
Commodity
 
Cost of goods sold
 
$
(269
)
 
$
67

 
$
(429
)
 
$
(169
)
Foreign exchange
 
Net sales
 
(111
)
 
20

 
(37
)
 
(213
)
Foreign exchange
 
Cost of goods sold
 
(1,044
)
 
(60
)
 
(2,447
)
 
(1,574
)
Foreign exchange
 
SG&A expenses
 
17

 
(8
)
 
57

 
39

Interest rate
 
Interest expense
 
134

 
134

 
400

 
400


 

 
(1,273
)
 
153

 
(2,456
)
 
(1,517
)
Income tax effect
 
Income taxes benefit (expense)
 
469

 
(50
)
 
886

 
258

Net of income taxes
 

 
$
(804
)
 
$
103

 
$
(1,570
)
 
$
(1,259
)
Defined benefit obligation:
 

 


 
 
 


 
 
Amortization of prior services
 
SG&A expenses
 
$
4

 
$
3

 
$
11

 
$
8

Income tax effect
 
Income taxes expense
 
(1
)
 
(1
)
 
(2
)
 
(2
)
Net of income taxes
 

 
$
3

 
$
2

 
$
9

 
$
6

Amounts in parentheses reduce earnings.
NOTE 3. SALES OF ACCOUNTS RECEIVABLE

The Company has a $200.0 million U.S. sale of accounts receivable program which expires on August 15, 2017. Under the program, CMC contributes, and several of its subsidiaries sell without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity and was 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 three financial institutions. With the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable sold. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. Additionally, the U.S. sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the credit facility described in Note 7, Credit Arrangements.

At May 31, 2015 and August 31, 2014, under its U.S. sale of accounts receivable program, the Company had sold $343.8 million and $389.6 million of trade accounts receivable, respectively, to the financial institutions. At May 31, 2015 and August 31, 2014, the Company had $15.0 million and $55.0 million in advance payments outstanding on the sale of its trade accounts receivable, respectively.
 
In addition to the U.S. sale of accounts receivable program described above, the Company's international subsidiaries in Europe and Australia sell 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. The European program allows the Company's European subsidiaries to obtain an advance of up to 90% of eligible trade accounts receivable sold under the terms of the arrangement. In October 2014, the Company entered into a first amendment to its Australian program which extended the maturity date to October 2016. Under the Australian program, trade accounts receivable balances are sold to a special purpose vehicle, which in turn sells 100% of the eligible trade accounts receivable of Commercial Metals Pty. Ltd., CMC Steel Distribution Pty. Ltd. and G.A.M. Steel Pty. Ltd. to the financial institution. The financial institution will fund up to A$75.0 million for all trade accounts receivable sold, and the remaining portion of the purchase price of the trade accounts receivable is in the form of a subordinated note from the financial institution. This note will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts

11



receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows.

At May 31, 2015 and August 31, 2014, under its European and Australian programs, the Company had sold $116.8 million and $147.3 million of trade accounts receivable, respectively, to third-party financial institutions and received advance payments of $35.2 million and $90.5 million, respectively.

During the nine months ended May 31, 2015 and 2014, cash proceeds from the U.S. and international sale of accounts receivable programs were $441.6 million and $494.1 million, respectively, and cash payments to the owners of accounts receivable were $539.6 million and $369.7 million, respectively. For a nominal servicing fee, the Company is responsible for servicing the trade accounts receivable for the U.S. and Australian programs. Discounts on U.S. and international sales of trade accounts receivable were $0.4 million and $1.2 million for the three and nine months ended May 31, 2015, respectively, and $1.1 million and $2.6 million for the three and nine months ended May 31, 2014, respectively, and are included in selling, general and administrative expenses in the Company's consolidated statements of earnings.

The deferred purchase price on the Company's U.S. and European and the Commercial Metals Pty. Ltd. sale of accounts receivable programs are included in accounts receivable on the Company's consolidated balance sheets. The deferred purchase price on the CMC Steel Distribution Pty. Ltd. and the G.A.M. Steel Pty. Ltd. sale of accounts receivable programs are included in assets of businesses held for sale on the Company's consolidated balance sheets.

The following tables summarize the activity of the deferred purchase price receivables for the U.S. and international sale of accounts receivable programs:

 
 
Three Months Ended May 31, 2015
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Europe
Beginning balance
 
$
386,447

 
$
327,009

 
$
21,680

 
$
37,758

Transfers of accounts receivable
 
892,387

 
724,309

 
79,173

 
88,905

Collections
 
(871,953
)
 
(727,077
)
 
(75,210
)
 
(69,666
)
Ending balance
 
$
406,881

 
$
324,241

 
$
25,643

 
$
56,997

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2015
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Europe
Beginning balance
 
$
385,169

 
$
329,797

 
$
34,071

 
$
21,301

Transfers of accounts receivable
 
2,908,695

 
2,426,691

 
233,237

 
248,767

Collections
 
(2,886,983
)
 
(2,432,247
)
 
(241,665
)
 
(213,071
)
Ending balance
 
$
406,881

 
$
324,241

 
$
25,643

 
$
56,997

                                      
* Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of $46.2 million and $148.3 million, and collections of $47.5 million and $164.0 million for the three and nine months ended May 31, 2015, respectively).


12



 
 
Three Months Ended May 31, 2014
(in thousands)
 
Total
 
U.S.
 
Australia
 
Europe
Beginning balance
 
$
313,117

 
$
273,714

 
$
29,635

 
$
9,768

Transfers of accounts receivable
 
1,039,136

 
808,886

 
120,350

 
109,900

Collections
 
(989,887
)
 
(803,592
)
 
(111,791
)
 
(74,504
)
Ending balance
 
$
362,366

 
$
279,008

 
$
38,194

 
$
45,164

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended May 31, 2014
(in thousands)
 
Total
 
U.S.
 
Australia
 
Europe
Beginning balance
 
$
453,252

 
$
358,822

 
$
64,996

 
$
29,434

Transfers of accounts receivable
 
3,115,437

 
2,423,990

 
374,170

 
317,277

Collections
 
(3,134,011
)
 
(2,503,804
)
 
(328,660
)
 
(301,547
)
Program termination
 
(72,312
)
 
—

 
(72,312
)
 
—

Ending balance
 
$
362,366

 
$
279,008

 
$
38,194

 
$
45,164


NOTE 4. INVENTORIES, NET

Inventories are stated at the lower of cost or market. Inventory cost for most U.S. inventories is determined by the last-in, first-out ("LIFO") method. At May 31, 2015 and August 31, 2014, 57% and 44%, respectively, of the Company's total net inventories were valued at LIFO. LIFO inventory reserves were $83.0 million and $198.8 million at May 31, 2015 and August 31, 2014, respectively.

Effective September 1, 2014, the Company changed its method of determining its interim LIFO inventory reserve from the complete quarterly LIFO valuation method to the expected annual LIFO valuation method. Under the expected annual LIFO valuation method, interim LIFO expense or income is based on management's current estimates of inventory costs and quantities at year end, and that annual estimate is incurred ratably over the remainder of the fiscal year. Key assumptions related to estimates of inventory costs used in management’s estimate changed in the three months ended May 31, 2015 resulting in a change in the annual LIFO estimate for the fiscal year ended August 31, 2015. Accordingly, the Company recorded pre-tax LIFO income of $37.1 million and $115.8 million for the three and nine months ended May 31, 2015, respectively.

Inventory cost for the International Mill segment is determined by the weighted average cost method. Inventory cost for the remaining international and U.S. inventories is determined by the first-in, first-out ("FIFO") method.

For the three and nine months ended May 31, 2015, the Company recorded inventory write-downs related to its continuing operations of $9.5 million and $9.8 million, respectively, which are included in cost of goods sold on the Company's consolidated statements of earnings. The Company had no material write-downs of inventory for the three and nine months ended May 31, 2014.

The majority of the Company's inventories are in the form of finished goods with minimal work in process. At May 31, 2015 and August 31, 2014, $63.6 million and $84.3 million, before LIFO reserves, respectively, of the Company's inventories were in the form of raw materials.

13




NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table details the changes in the carrying amount of goodwill by reportable segment:
 
 
Americas
 
International
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Consolidated
Balance at August 31, 2014
 
$
7,267

 
$
4,970

 
$
57,144

 
$
2,776

 
$
2,162

 
$
74,319

Foreign currency translation
 
—

 
—

 
—

 
(398
)
 
(159
)
 
(557
)
Balance at May 31, 2015
 
$
7,267

 
$
4,970

 
$
57,144

 
$
2,378

 
$
2,003

 
$
73,762


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $48.1 million and $53.8 million at May 31, 2015 and August 31, 2014, respectively, and are included in other noncurrent assets on the Company's consolidated balance sheets. Excluding goodwill, there are no other significant intangible assets with indefinite lives. Intangible amortization expense from continuing operations was $1.6 million and $5.2 million for the three and nine months ended May 31, 2015 and 2014, respectively.
NOTE 6. BUSINESSES HELD FOR SALE, DISCONTINUED OPERATIONS AND DISPOSITIONS
Businesses Held for Sale
The Company did not have any assets and liabilities of businesses held for sale at August 31, 2014. The components of assets and liabilities of businesses held for sale on the Company's consolidated balance sheet were as follows:
(in thousands)
 
May 31, 2015
Assets:
 
 
Accounts receivable
 
$
15,075

Inventories, net
 
46,199

Other current assets
 
442

Property, plant and equipment, net of accumulated depreciation and amortization
 
6,313

Other noncurrent assets
 
1,653

Assets of businesses held for sale
 
$
69,682

Liabilities:
 


Accounts payable-trade
 
$
15,918

Accounts payable-documentary letters of credit
 
6,622

Accrued expenses and other payables
 
6,323

Liabilities of businesses held for sale
 
$
28,863


Discontinued Operations
In September 2014, the Company made the decision to exit and sell its steel distribution business in Australia. Despite focused efforts and substantial progress to stabilize and improve the results of the Australian distribution business, the Company determined that achieving acceptable financial returns would take additional time and investment. The Company determined that the decision to exit this business met the definition of a discontinued operation. As a result, this business has been presented as a discontinued operation for all periods presented. The expenses associated with exiting this business were not material for the three and nine months ended May 31, 2015. The Australian steel distribution business was previously an operating segment included in the International Marketing and Distribution reporting segment.
During the fourth quarter of fiscal 2013, the Company decided to sell all of the capital stock of its wholly owned copper tube manufacturing operation, Howell Metal Company ("Howell"). The Company determined that the decision to sell this business met the definition of a discontinued operation. As a result, the Company included Howell in discontinued operations for all periods presented. Howell was previously an operating segment included in the Americas Mills reporting segment.

14




Financial information for discontinued operations was as follows:
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Net sales
 
$
43,307

 
$
66,068

 
$
143,644

 
$
200,932

Earnings (loss) from discontinued operations before income taxes
 
(10,871
)
 
(1,042
)
 
(20,241
)
 
17,969


Dispositions
During the first quarter of fiscal 2014, the Company sold all of the outstanding capital stock of Howell for $58.5 million, $3.2 million of which was held in escrow as of both May 31, 2015 and August 31, 2014. During the second quarter of fiscal 2014, the Company made a $3.0 million working capital adjustment, which was included in the Company's estimated pre-tax gain of $23.8 million.
NOTE 7. CREDIT ARRANGEMENTS

On June 26, 2014, the Company entered into a fourth amended and restated credit agreement (the "Credit Agreement") with a revolving credit facility of $350.0 million and a maturity date of June 26, 2019 (the "credit facility"). The maximum availability under the credit facility can be increased to $500.0 million. The Company's obligation under its credit facility is secured by its U.S. inventory. The credit facility's capacity includes $50.0 million for the issuance of stand-by letters of credit and was reduced by outstanding stand-by letters of credit which totaled $23.4 million and $28.1 million at May 31, 2015 and August 31, 2014, respectively.

Under the credit facility, the Company is required to comply with certain financial and non-financial covenants, including covenants to maintain: (i) an interest coverage ratio (consolidated EBITDA to consolidated interest expense, as each is defined in the Credit Agreement) of not less than 2.50 to 1.00 and (ii) a debt to capitalization ratio (consolidated funded debt to total capitalization, as each is defined in the Credit Agreement) that does not exceed 0.60 to 1.00. In addition, beginning on the date three months prior to each maturity date of the Company's 2017 Notes and 2018 Notes, as defined below, and each day thereafter that the 2017 Notes and the 2018 Notes are outstanding, the Company will be required to maintain liquidity of at least $150.0 million in excess of each of the outstanding aggregate principal amounts of the 2017 Notes and 2018 Notes. Loans under the credit facility bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate.

At May 31, 2015, the Company's interest coverage ratio was 6.26 to 1.00, and the Company's debt to capitalization ratio was 0.48 to 1.00. The Company had no amount drawn under the credit facility at May 31, 2015 and August 31, 2014.

In May 2013, the Company issued $330.0 million of 4.875% Senior Notes due May 15, 2023 (the "2023 Notes"). Interest on the 2023 Notes is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2013. The Company may, at any time, redeem the 2023 Notes at a redemption price equal to 100 percent of the principal amount, plus a "make-whole" premium described in the indenture pursuant to which the 2023 Notes were issued. Additionally, if a change of control triggering event occurs, as defined by the terms of the indenture governing the 2023 Notes, holders of the 2023 Notes may require the Company to repurchase the 2023 Notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The Company is generally not limited under the indenture governing the 2023 Notes in its ability to incur additional indebtedness provided the Company is in compliance with certain restrictive covenants, including restrictions on liens, sale and leaseback transactions, mergers, consolidations and transfers of substantially all of the Company's assets.

In August 2008, the Company issued $500.0 million of 7.35% senior unsecured notes due in August 2018 (the "2018 Notes"). In anticipation of the offering, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to 6.40% per annum. Interest on these notes is payable semiannually.

In July 2007, the Company issued $400.0 million of 6.50% senior unsecured notes due in July 2017 (the "2017 Notes"). In anticipation of the offering, the Company entered into hedge transactions which reduced the Company's effective interest rate on these notes to 5.74% per annum. Interest on these notes is payable semiannually.

At May 31, 2015, the Company was in compliance with all covenants contained in its debt agreements.


15



During fiscal 2012, the Company terminated its existing interest rate swap transactions and received cash proceeds of approximately $52.7 million, net of customary finance charges. The resulting gain was deferred and is being amortized as a reduction to interest expense over the remaining term of the respective debt tranches. At May 31, 2015 and August 31, 2014, the unamortized amounts were $21.1 million and $26.8 million, respectively. Amortization of the deferred gain for each of the three and nine months ended May 31, 2015 and 2014 was $1.9 million and $5.7 million, respectively.

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

Long-term debt, including the deferred gain from the termination of the interest rate swaps, was as follows: 
(in thousands)
 
Weighted Average
Interest Rate as of May 31, 2015
 
May 31, 2015
 
August 31, 2014
$400 million notes at 6.50% due July 2017
 
5.74%
 
$
406,317

 
$
408,546

$500 million notes at 7.35% due August 2018
 
6.40%
 
514,837

 
518,305

$330 million notes at 4.875% due May 2023
 
4.875%
 
330,000

 
330,000

Other, including equipment notes
 
 
 
37,968

 
32,196

 
 
 
 
1,289,122

 
1,289,047

Less current maturities
 
 
 
9,753

 
8,005

 
 
 
 
$
1,279,369

 
$
1,281,042

 

Interest on these notes is payable semiannually.

CMC Poland Sp.z.o.o. ("CMCP") has uncommitted credit facilities of $57.5 million with several banks with expiration dates ranging from November 2015 to March 2016. During the nine months ended May 31, 2015, CMCP had total borrowings of $49.6 million and total repayments of $49.6 million under these credit facilities. At May 31, 2015, no material amounts were outstanding under these credit facilities.

The Company had no material amounts of interest capitalized in the cost of property, plant and equipment during the three and nine months ended May 31, 2015 and 2014, respectively. Cash paid for interest during the three and nine months ended May 31, 2015 was $10.6 million and $53.5 million, respectively, and $9.6 million and $51.9 million during the three and nine months ended May 31, 2014, respectively.
NOTE 8. DERIVATIVES AND RISK MANAGEMENT

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


16



At May 31, 2015, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $399.8 million and $46.5 million, respectively. At May 31, 2014, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $457.7 million and $41.5 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2015:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
3,746

 MT
Aluminum
 
Short
 
325

 MT
Copper
 
Long
 
826

 MT
Copper
 
Short
 
5,364

 MT
Zinc
 
Long
 
29

 MT
Natural Gas
 
Long
 
180,000

MMBTUs
                                      
MT = Metric Ton
MMBTU = One million British thermal units

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 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, 2015 and 2014. 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 consolidated statements of earnings: 
 
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2015
 
2014
 
2015
 
2014
Commodity
 
Cost of goods sold
 
$
(354
)
 
$
1,346

 
$
4,947

 
$
1,985

Foreign exchange
 
Net sales
 
—

 
(351
)
 
3,005

 
(736
)
Foreign exchange
 
Cost of goods sold
 
562

 
(326
)
 
4,913

 
(697
)
Foreign exchange
 
SG&A expenses
 
2,405

 
1,183

 
22,479

 
(5,632
)
Gain (loss) before income taxes
 
 
 
$
2,613

 
$
1,852

 
$
35,344

 
$
(5,080
)

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.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2015
 
2014
 
2015
 
2014
Foreign exchange
 
Net sales
 
$
207

 
$
(55
)
 
$
566

 
$
(28
)
Foreign exchange
 
Cost of goods sold
 
(283
)
 
(1,053
)
 
642

 
(2,133
)
Gain (loss) before income taxes
 
 
 
$
(76
)
 
$
(1,108
)
 
$
1,208

 
$
(2,161
)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2015
 
2014
 
2015
 
2014
Foreign exchange
 
Net sales
 
$
(207
)
 
$
62

 
$
(565
)
 
$
25

Foreign exchange
 
Cost of goods sold
 
283

 
1,053

 
(642
)
 
2,133

Gain (loss) before income taxes
 
 
 
$
76

 
$
1,115

 
$
(1,207
)
 
$
2,158



17



Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Commodity
 
$
(76
)
 
$
65

 
$
(492
)
 
$
(48
)
Foreign exchange
 
130

 
325

 
(1,879
)
 
(1,605
)
Gain (loss), net of income taxes
 
$
54

 
$
390

 
$
(2,371
)
 
$
(1,653
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
Location
 
2015
 
2014
 
2015
 
2014
Commodity
 
Cost of goods sold
 
$
(174
)
 
$
43

 
$
(278
)
 
$
(110
)
Foreign exchange
 
Net sales
 
(114
)
 
20

 
(38
)
 
(213
)
Foreign exchange
 
Cost of goods sold
 
(617
)
 
(57
)
 
(1,560
)
 
(1,231
)
Foreign exchange
 
SG&A expenses
 
14

 
10

 
46

 
35

Interest rate
 
Interest expense
 
87

 
87

 
260

 
260

Gain (loss), net of income taxes
 
 
 
(804
)
 
$
103

 
$
(1,570
)
 
$
(1,259
)

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 consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at May 31, 2015 and August 31, 2014. The fair value of the Company's derivative instruments on the consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
May 31, 2015
 
August 31, 2014
Commodity — designated for hedge accounting
 
$
16

 
$
42

Commodity — not designated for hedge accounting
 
942

 
869

Foreign exchange — designated for hedge accounting
 
1,414

 
136

Foreign exchange — not designated for hedge accounting
 
3,240

 
1,853

Derivative assets (other current assets)*
 
$
5,612

 
$
2,900

 
Derivative Liabilities (in thousands)
 
May 31, 2015
 
August 31, 2014
Commodity — designated for hedge accounting
 
$
242

 
$
6

Commodity — not designated for hedge accounting
 
603

 
162

Foreign exchange — designated for hedge accounting
 
951

 
325

Foreign exchange — not designated for hedge accounting
 
1,178

 
1,010

Derivative liabilities (accrued expenses and other payables)*
 
$
2,974

 
$
1,503

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

As of May 31, 2015, most of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months.

All of the instruments are highly liquid and were not entered into for trading purposes.

18



NOTE 9. FAIR VALUE

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

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

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

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

The following tables summarize information regarding the Company's financial assets and financial liabilities that were measured at fair value on a recurring basis:
 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
May 31, 2015
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market investments (1)
 
$
200,394

 
$
200,394

 
$
—

 
$
—

Commodity derivative assets (2)
 
958

 
942

 
16

 
—

Foreign exchange derivative assets (2)
 
4,654

 
—

 
4,654

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
845

 
603

 
242

 
—

Foreign exchange derivative liabilities (2)
 
2,129

 
—

 
2,129

 
—


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2014
 
Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
 
Significant  Other
Observable  Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market investments (1)
 
$
200,487

 
$
200,487

 
$
—

 
$
—

Commodity derivative assets (2)
 
911

 
911

 
—

 
—

Foreign exchange derivative assets (2)
 
1,989

 
—

 
1,989

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
168

 
162

 
6

 
—

Foreign exchange derivative liabilities (2)
 
1,335

 
—

 
1,335

 
—

 _________________ 
(1) Money market investments are short-term in nature, and the value is determined by broker quoted prices in active markets. 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 Commodity Exchange, Inc. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Further discussion regarding the Company's use of derivative instruments and the classification of the assets and liabilities is included in Note 8, Derivatives and Risk Management.

There were no material non-recurring fair value measurements during the three and nine months ended May 31, 2015 and 2014, respectively.


19



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

The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the consolidated balance sheets were as follows:
 
 
 
 
May 31, 2015
 
August 31, 2014
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
$400 million notes at 6.50% due July 2017 (1)
 
Level 2
 
$
406,317

 
$
427,000

 
$
408,546

 
$
438,200

$500 million notes at 7.35% due August 2018 (1)
 
Level 2
 
514,837

 
535,000

 
518,305

 
567,560

$330 million notes at 4.875% due May 2023 (1)
 
Level 2
 
330,000

 
318,302

 
330,000

 
325,050

_________________
(1) The fair values of the 2017 Notes, 2018 Notes and 2023 Notes are estimated based on readily available market prices of these notes at May 31, 2015 and August 31, 2014, or similar notes with the same maturities, rating and interest rates.
NOTE 10. INCOME TAX

The Company's effective income tax rate from continuing operations for the three and nine months ended May 31, 2015 was 36.1% and 33.5%, respectively, compared with 35.9% and 31.4% for the three and nine months ended May 31, 2014, respectively. For the three months ended May 31, 2015, the tax rate is higher than the statutory income tax rate of 35% due to losses in certain foreign jurisdictions where the deferred tax assets created by such losses are subject to a full valuation allowance, thus providing no tax benefit for such losses. For the nine months ended May 31, 2015, the tax rate was lower than the statutory income tax rate of 35% because the Company had income from operations in countries which have lower tax rates than the United States. In addition, the Company benefited under Section 199 of the Internal Revenue Code related to domestic production activity income during the three and nine months ended May 31, 2015. The Company's effective income tax rate from discontinued operations for the three and nine months ended May 31, 2015 was 3.9% and 2.2%, respectively, compared with 13.1% and 48.8% for the three and nine months ended May 31, 2014, respectively. The Company's effective income tax rate from discontinued operations for the three and nine months ended May 31, 2015 reflected the fact that earnings from discontinued operations before income taxes included a loss in Australia, a jurisdiction in which all tax losses created a deferred tax asset that was subject to a full valuation allowance, and thus no tax benefit. The Company's effective income tax rate from discontinued operations for the nine months ended May 31, 2014 reflected a $23.8 million pre-tax gain on the sale of Howell, resulting in the appropriate amount of U.S. federal and state income tax expense.

The Company made net payments of $46.7 million and $12.9 million for income taxes during the nine months ended May 31, 2015 and 2014, respectively.

As of both May 31, 2015 and August 31, 2014, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $27.3 million, exclusive of interest and penalties.

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, and the balances at the end of a reporting period are recorded as part of the current or noncurrent reserve for uncertain income tax positions. For the three and nine months ended May 31, 2015, before any income tax benefits, the Company recorded immaterial amounts of accrued interest and penalties on unrecognized income tax benefits.

During the twelve months ending May 31, 2016, 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 may decrease by approximately $16.9 million, which would reduce the provision for income taxes by $2.7 million.

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

U.S. Federal — 2009 and forward
U.S. States — 2009 and forward
Foreign — 2007 and forward

20




The Company is currently under examination by the Internal Revenue Service and state revenue authorities from 2009 to 2011. Management believes the Company's recorded tax liabilities as of May 31, 2015 sufficiently reflect the anticipated outcome of these examinations.
NOTE 11. STOCK-BASED COMPENSATION PLANS

The Company's stock-based compensation plans are described, and informational disclosures provided, in Note 15, Stock-Based Compensation Plans, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2014. During the nine months ended May 31, 2015 and 2014, restricted stock units and performance stock units totaling 1.1 million and 1.2 million, respectively, were granted at a weighted-average fair value of $15.92 and $16.90, respectively.

During the nine months ended May 31, 2015 and 2014, the Company granted 392,517 and 390,562 equivalent shares, respectively, of performance stock units and restricted stock units accounted for as liability awards. The fair value of these liability awards is remeasured each reporting period and is recognized ratably over the service period. As of May 31, 2015, the Company had 913,712 equivalent shares in liability awards outstanding. The Company expects 868,025 equivalent shares to vest.

In general, the restricted stock units granted during fiscal 2015 and 2014 vest ratably over a period of three years; however, certain restricted stock units granted during fiscal 2015 either vest after a period of three years or vest after a specified service period; one-third of each such award vest on the second anniversary of the grant date and the remaining two-thirds of each such award vest on the third anniversary of the grant date. In addition, certain restricted stock units granted during fiscal 2014 vest after a specified service period; 25% of the award vest on the second anniversary of the grant date; 25% of each such award vest on the third anniversary of the grant date and the remaining 50% of each such award vest on the fourth anniversary of the grant date. 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 2015 and fiscal 2014 will vest after a period of three years.

Stock-based compensation expense for the three and nine months ended May 31, 2015 of $6.5 million and $18.3 million, respectively, and $5.3 million and $16.1 million for the three and nine months ended May 31, 2014, respectively, was included in selling, general and administrative expenses on the Company's consolidated statements of earnings.
NOTE 12. STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE ATTRIBUTABLE TO CMC

The calculations of basic and diluted earnings per share from continuing operations for the three and nine months ended May 31, 2015 and 2014 were as follows: 
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
(in thousands, except share data)
 
2015
 
2014
 
2015
 
2014
Earnings from continuing operations attributable to CMC
 
$
67,128

 
$
24,468

 
$
167,181

 
$
71,422

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
       Shares outstanding for basic earnings per share
 
115,742,534

 
117,705,133

 
116,807,469

 
117,400,198

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to CMC:
 
$
0.58

 
$
0.21

 
$
1.43

 
$
0.61

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
       Shares outstanding for basic earnings per share
 
115,742,534

 
117,705,133

 
116,807,469

 
117,400,198

 
 
 
 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock-based incentive/purchase plans
 
1,016,681

 
1,064,542

 
1,063,759

 
1,121,618

Shares outstanding for diluted earnings per share
 
116,759,215