Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2017
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 March 23, 2017 was 115,778,772.


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
(in thousands, except share data)
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Net sales
 
$
1,149,621

 
$
1,019,697

 
$
2,224,684


$
2,174,556

Costs and expenses:
 
 
 
 
 



Cost of goods sold
 
990,431

 
884,876

 
1,933,502


1,882,118

Selling, general and administrative expenses
 
107,119

 
93,918

 
215,986


195,826

Interest expense
 
12,442

 
16,625

 
25,740

 
34,929

Loss on debt extinguishment
 
—

 
11,365

 
—

 
11,365

 
 
1,109,992

 
1,006,784

 
2,175,228


2,124,238

 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
39,629

 
12,913

 
49,456


50,318

Income taxes
 
9,990

 
2,064

 
12,643


13,836

Earnings from continuing operations
 
29,639

 
10,849

 
36,813


36,482

 
 
 
 
 
 





Earnings (loss) from discontinued operations before income taxes (benefit)
 
726

 
(446
)
 
(191
)

(1,018
)
Income taxes (benefit)
 
33

 
(99
)
 
15


(101
)
Earnings (loss) from discontinued operations
 
693

 
(347
)
 
(206
)

(917
)
 
 
 
 
 
 





Net earnings
 
30,332

 
10,502

 
36,607

 
35,565

Less net earnings attributable to noncontrolling interests
 
—

 
—

 
—

 
—

Net earnings attributable to CMC
 
$
30,332

 
$
10,502

 
$
36,607


$
35,565

 
 
 
 
 
 



Basic earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.25

 
$
0.09

 
$
0.32


$
0.32

Earnings (loss) from discontinued operations
 
0.01

 
—

 
—


(0.01
)
Net earnings
 
$
0.26

 
$
0.09

 
$
0.32


$
0.31

 
 
 
 
 
 



Diluted earnings (loss) per share attributable to CMC:
 
 
 
 
 



Earnings from continuing operations
 
$
0.25

 
$
0.09

 
$
0.31


$
0.31

Earnings (loss) from discontinued operations
 
0.01

 
—

 
—


(0.01
)
Net earnings
 
$
0.26

 
$
0.09

 
$
0.31


$
0.30

 
 
 
 
 
 





Cash dividends per share
 
$
0.12

 
$
0.12

 
$
0.24


$
0.24

Average basic shares outstanding
 
115,736,369

 
115,429,550

 
115,415,662


115,725,896

Average diluted shares outstanding
 
117,120,208

 
116,507,591

 
117,007,958


117,002,822

See notes to unaudited condensed consolidated financial statements.

3




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

 
Three Months Ended
 
Six Months Ended
(in thousands)
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
Net earnings attributable to CMC
 
$
30,332

 
$
10,502

 
$
36,607

 
$
35,565

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

 

Foreign currency translation adjustment
 
9,551

 
4,211

 
(11,980
)
 
(17,784
)
Net unrealized gain (loss) on derivatives:
 
 
 
 
 


 


Unrealized holding gain, net of income taxes of $106, $221, $116 and $74
 
310

 
494

 
442

 
485

Reclassification for gain included in net earnings, net of income taxes of $(64), $(28), $(111) and $(77)
 
(330
)
 
(56
)
 
(520
)
 
(174
)
Net unrealized gain (loss) on derivatives, net of income taxes of $42, $193, $5 and $(3)
 
(20
)
 
438

 
(78
)
 
311

Defined benefit obligation:
 
 
 
 
 


 


Amortization of prior services, net of income taxes of $(2), $0, $(4) and $(1)
 
(9
)
 
(2
)
 
(18
)
 
(3
)
Defined benefit obligation, net of income taxes of $(2), $0, $(4) and $(1)
 
(9
)
 
(2
)
 
(18
)
 
(3
)
Other comprehensive income (loss)
 
9,522

 
4,647

 
(12,076
)
 
(17,476
)
Comprehensive income
 
$
39,854

 
$
15,149

 
$
24,531

 
$
18,089

See notes to unaudited condensed consolidated financial statements.

4



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
February 28, 2017
 
August 31, 2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
395,546

 
$
517,544

Accounts receivable (less allowance for doubtful accounts of $5,283 and $6,427)
 
774,286

 
765,784

Inventories, net
 
720,786

 
652,754

Other current assets
 
96,422

 
112,043

Total current assets
 
1,987,040

 
2,048,125

Property, plant and equipment:
 
 
 
 
Land
 
76,556

 
70,291

Buildings and improvements
 
489,384

 
487,305

Equipment
 
1,654,942

 
1,655,909

Construction in process
 
186,759

 
111,156


 
2,407,641

 
2,324,661

Less accumulated depreciation and amortization
 
(1,467,297
)
 
(1,429,612
)

 
940,344

 
895,049

Goodwill
 
66,530

 
66,373

Other noncurrent assets
 
137,919

 
121,322

Total assets
 
$
3,131,833

 
$
3,130,869

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
307,488

 
$
243,532

Accounts payable-documentary letters of credit
 
—

 
5

Accrued expenses and other payables
 
220,433

 
264,112

Current maturities of long-term debt
 
312,200

 
313,469

Total current liabilities
 
840,121

 
821,118

Deferred income taxes
 
55,625

 
63,021

Other long-term liabilities
 
121,930

 
121,351

Long-term debt
 
752,137

 
757,948

Total liabilities
 
1,769,813

 
1,763,438

Commitments and contingencies (Note 14)
 

 

Stockholders' equity:
 
 
 
 
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 115,778,772 and 114,635,596 shares, respectively
 
1,290

 
1,290

Additional paid-in capital
 
336,018

 
358,745

Accumulated other comprehensive loss
 
(124,990
)
 
(112,914
)
Retained earnings
 
1,381,869

 
1,372,988

Less treasury stock, 13,281,892 and 14,425,068 shares at cost
 
(232,339
)
 
(252,837
)
Stockholders' equity attributable to CMC
 
1,361,848

 
1,367,272

Stockholders' equity attributable to noncontrolling interests
 
172

 
159

Total stockholders' equity
 
1,362,020

 
1,367,431

Total liabilities and stockholders' equity
 
$
3,131,833

 
$
3,130,869

See notes to unaudited condensed consolidated financial statements.

5



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six Months Ended
(in thousands)
 
February 28,
2017
 
February 29,
2016
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
36,607

 
$
35,565

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
60,789

 
63,541

Stock-based compensation
 
16,156

 
13,106

Deferred income taxes
 
(9,380
)
 
(4,614
)
Amortization of interest rate swaps termination gain
 
(3,798
)
 
(3,798
)
Provision for losses on receivables, net
 
1,381

 
2,740

Write-down of inventories
 
1,205

 
7,949

Asset impairment
 
553

 
—

Net gain on sales of assets and other
 
(195
)
 
(2,767
)
Loss on debt extinguishment
 
—

 
11,365

Tax benefit from stock plans
 
—

 
(55
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
2,162

 
190,622

Proceeds (payments) on sales of accounts receivable programs, net
 
(5,102
)
 
11,504

Inventories
 
(68,456
)
 
111,544

Accounts payable, accrued expenses and other payables
 
9,374

 
(115,002
)
Changes in other operating assets and liabilities
 
(29,313
)
 
11,110

Net cash flows from operating activities
 
11,983

 
332,810

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(90,808
)
 
(62,437
)
Acquisitions, net of cash acquired
 
(25,366
)
 
—

Decrease (increase) in restricted cash
 
21,033

 
(49,145
)
Proceeds from the sale of property, plant and equipment and other
 
700

 
3,060

Proceeds from the sale of subsidiaries
 
524

 
—

Net cash flows used by investing activities
 
(93,917
)
 
(108,522
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Cash dividends
 
(27,726
)
 
(27,839
)
Repayments on long-term debt
 
(6,148
)
 
(205,816
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(5,408
)
 
(5,671
)
Contribution from noncontrolling interests
 
13

 
29

Increase (decrease) in documentary letters of credit, net
 
(5
)
 
(25,815
)
Short-term borrowings, net change
 
—

 
(20,090
)
Treasury stock acquired
 
—

 
(30,595
)
Debt extinguishment costs
 
—

 
(11,013
)
Tax benefit from stock plans
 
—

 
55

Decrease in restricted cash
 
—

 
1

Net cash flows used by financing activities
 
(39,274
)
 
(326,754
)
Effect of exchange rate changes on cash
 
(790
)
 
(1,179
)
Increase (decrease) in cash and cash equivalents
 
(121,998
)
 
(103,645
)
Cash and cash equivalents at beginning of year
 
517,544

 
485,323

Cash and cash equivalents at end of period
 
$
395,546

 
$
381,678

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
35,184

 
$
2,706

See notes to unaudited condensed consolidated financial statements.

6



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
 
Common Stock
Additional
Accumulated
Other
 
Treasury Stock
 Non-
 
(in thousands, except share data)
Number of
Shares
Amount
Paid-In
Capital
Comprehensive
Loss
Retained
Earnings
Number of
Shares
Amount
controlling
Interests
Total
Balance, September 1, 2015
129,060,664

$
1,290

$
365,863

$
(113,535
)
$
1,373,568

(13,425,326
)
$
(245,961
)
$
149

$
1,381,374

Net earnings
 
 
 
 
35,565

 
 
 
35,565

Other comprehensive loss
 
 
 
(17,476
)
 
 
 
 
(17,476
)
Cash dividends ($0.24 per share)
 
 
 
 
(27,839
)
 
 
 
(27,839
)
Treasury stock acquired
 
 
 
 
 
(2,255,069
)
(30,595
)
 
(30,595
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(27,640
)
 
 
1,155,466

21,969

 
(5,671
)
Stock-based compensation
 
 
10,321

 
 
 
 
 

10,321

Tax benefit from stock plans
 
 
55

 
 
 
 
 

55

Contribution of noncontrolling interest
 
 
19

 
 
 
 
10

29

Reclassification of share-based liability awards
 
 
3,035

 
 
 
 
 
3,035

Balance, February 29, 2016
129,060,664

$
1,290

$
351,653

$
(131,011
)
$
1,381,294

(14,524,929
)
$
(254,587
)
$
159

$
1,348,798

 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
36,607

 
 
 
36,607

Other comprehensive loss
 
 
 
(12,076
)
 
 
 
 
(12,076
)
Cash dividends ($0.24 per share)
 
 
 
 
(27,726
)
 
 
 
(27,726
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(26,255
)
 
 
1,143,176

20,498

 
(5,757
)
Stock-based compensation
 
 
7,187

 
 
 
 
 
7,187

Contribution of noncontrolling interest
 
 


 
 
 
 
13

13

Reclassification of share-based liability awards
 
 
1,780

 
 
 
 
 
1,780

Reclassification of share-based equity awards
 
 
(5,439
)
 
 
 
 
 
(5,439
)
Balance, February 28, 2017
129,060,664

$
1,290

$
336,018

$
(124,990
)
$
1,381,869

(13,281,892
)
$
(232,339
)
$
172

$
1,362,020

See notes to unaudited condensed consolidated financial statements.

7




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

Accounting Principles
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the fiscal year ended August 31, 2016 filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission ("SEC") and include all normal recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2016. The results of operations for the three and six month periods are not necessarily indicative of the results to be expected for the full year.

Recently Adopted Accounting Pronouncements

In the second quarter of fiscal 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718), issued by the Financial Accounting Standards Board (the "FASB") requiring that the Company recognize all excess tax benefits and tax deficiencies as an income tax expense or benefit when stock awards vest or are settled. Additionally, the guidance allows for an increase in the threshold for net share settlement up to the maximum statutory rate in employees’ applicable jurisdictions without triggering liability classification. The adoption of this guidance had an immaterial impact on income taxes on the Company’s unaudited condensed consolidated statements of earnings for the three and six months ended February 28, 2017. Additionally, the Company has elected to continue to estimate forfeitures. As such, this adoption has no cumulative effect on retained earnings. The Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively, which had an immaterial impact on both net cash from operating activities and net cash used in financing activities for the six months ended February 28, 2017. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods presented on the Company’s consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-16, Business Combinations (Topic 805), issued by the FASB requiring the acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), issued by the FASB requiring an entity to account for fees paid in a cloud computing arrangement as a license of internal-use software. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-02, Consolidation (Topic 810), issued by the FASB modifying the evaluation of whether limited partnerships and similar legal entities are voting interest entities ("VIEs"). The guidance was adopted on a retrospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), issued by the FASB eliminating the concept of extraordinary items. Under this guidance, an entity is no longer allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations. The guidance was adopted on a prospective basis and did not have an impact on the Company's consolidated financial statements.

In the first quarter of fiscal 2017, the Company adopted ASU 2014-13, Consolidation (Topic 810), issued by the FASB providing a measurement alternative to the existing fair value measurement guidance. When the measurement alternative is elected, the financial assets and liabilities are measured using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The guidance was adopted on a retrospective basis and did not have an impact on the Company's consolidated financial statements.


8



In the first quarter of fiscal 2017, the Company adopted ASU 2014-12, Compensation - Stock Compensation (Topic 718), issued by the FASB 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 guidance was followed by the Company prior to its adoption and therefore had no impact on the Company's consolidated financial statements upon adoption.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 805). The standard simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. This guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The standard must be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to early adopt the standard during fiscal 2017. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The standard must be applied prospectively on or after the effective date. Early application of the amendments is allowed with certain restrictions. The Company is currently evaluating the effect that this standard will have 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 with early adoption permitted. 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 as well as determining the Company's planned adoption date.

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

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has modified the standard thereafter. Under the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018, at which point the Company plans to adopt the standard. The standard permits the use of either the retrospective or cumulative effect transition method. The Company currently expects to adopt the standard using the cumulative effect transition method. Upon initial assessment, the Company does not believe the standard will have a material impact on its results of operations or cash flows; however, the Company is in the process of examining contract specific terms within each segment. In addition, the standard includes expanded disclosure requirements, which the Company continues to analyze. As part of the overall evaluation of the standard, the Company is also assessing potential changes to its accounting policies, practices and internal controls over financial reporting to support the standard.

9



NOTE 2. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"), net of income taxes:
 
 
Three Months Ended February 28, 2017
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, November 30, 2016
 
$
(133,786
)
 
$
2,128

 
$
(2,854
)
 
$
(134,512
)
Other comprehensive income before reclassifications
 
9,551

 
310

 
—

 
9,861

Amounts reclassified from AOCI
 
—

 
(330
)
 
(9
)
 
(339
)
Net other comprehensive income (loss)
 
9,551

 
(20
)
 
(9
)
 
9,522

Balance, February 28, 2017
 
$
(124,235
)
 
$
2,108

 
$
(2,863
)
 
$
(124,990
)

 
 
Six Months Ended February 28, 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 (loss) before reclassifications
 
(11,980
)
 
442

 
—

 
(11,538
)
Amounts reclassified from AOCI
 
—

 
(520
)
 
(18
)
 
(538
)
Net other comprehensive loss
 
(11,980
)
 
(78
)
 
(18
)
 
(12,076
)
Balance, February 28, 2017
 
$
(124,235
)
 
$
2,108

 
$
(2,863
)
 
$
(124,990
)

 
 
Three Months Ended February 29, 2016
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, November 30, 2015
 
$
(135,076
)
 
$
2,178

 
$
(2,760
)
 
$
(135,658
)
Other comprehensive income before reclassifications
 
4,211

 
494

 
—

 
4,705

Amounts reclassified from AOCI
 
—

 
(56
)
 
(2
)
 
(58
)
Net other comprehensive income (loss)
 
4,211

 
438

 
(2
)
 
4,647

Balance, February 29, 2016
 
$
(130,865
)
 
$
2,616

 
$
(2,762
)
 
$
(131,011
)
 
 
Six Months Ended February 29, 2016
(in thousands)
 
Foreign Currency Translation
 
Unrealized Gain (Loss) on Derivatives
 
Defined Benefit Obligation
 
Total AOCI
Balance, August 31, 2015
 
$
(113,081
)
 
$
2,305

 
$
(2,759
)
 
$
(113,535
)
Other comprehensive income (loss) before reclassifications
 
(17,784
)
 
485

 
—

 
(17,299
)
Amounts reclassified from AOCI
 
—

 
(174
)
 
(3
)
 
(177
)
Net other comprehensive income (loss)
 
(17,784
)
 
311

 
(3
)
 
(17,476
)
Balance, February 29, 2016
 
$
(130,865
)
 
$
2,616

 
$
(2,762
)
 
$
(131,011
)


10



The significant items reclassified out of AOCI and the corresponding line items in the unaudited condensed consolidated statements of earnings to which the items were reclassified were as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
Components of AOCI (in thousands)
 
Location
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
Unrealized gain (loss) on derivatives:
 

 
 
 
 
 


 
 
Commodity
 
Cost of goods sold
 
$
(33
)
 
$
(59
)
 
$
(125
)
 
$
(110
)
Foreign exchange
 
Net sales
 
329

 
(450
)
 
244

 
(393
)
Foreign exchange
 
Cost of goods sold
 
(172
)
 
426

 
(44
)
 
418

Foreign exchange
 
SG&A expenses
 
138

 
35

 
290

 
70

Interest rate
 
Interest expense
 
132

 
132

 
266

 
266

 
 
 
 
394

 
84

 
631

 
251

Income tax effect
 
Income taxes
 
(64
)
 
(28
)
 
(111
)
 
(77
)
Net of income taxes
 
 
 
$
330

 
$
56

 
$
520

 
$
174

Defined benefit obligation:
 

 
 
 
 
 
 
 
 
Amortization of prior services
 
SG&A expenses
 
$
11

 
$
2

 
$
22

 
$
4

Income tax effect
 
Income taxes
 
(2
)
 
—

 
(4
)
 
(1
)
Net of income taxes
 

 
$
9

 
$
2

 
$
18

 
$
3

Amounts in parentheses reduce earnings.

11



NOTE 3. SALES OF ACCOUNTS RECEIVABLE

During the fourth quarter of fiscal 2016, CMC entered into a fifth amended $200.0 million U.S. sale of trade accounts receivable program which expires on August 15, 2019. 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 formed for the sole purpose of buying and selling trade accounts receivable generated by CMC. CMCRV sells the trade accounts receivable in their entirety to two financial institutions. Under the amended U.S. sale of trade accounts receivable program, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable sold. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The Company accounts for sales of the trade accounts receivable as true sales, and the trade accounts receivable balances that are sold are removed from the consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on the Company's consolidated statements of cash flows. Additionally, the U.S. sale of trade accounts receivable program contains certain cross-default provisions whereby a termination event could occur if the Company defaults under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement described in Note 7, Credit Arrangements.

At February 28, 2017 and August 31, 2016, under its U.S. sale of trade accounts receivable program, the Company had sold $262.3 million and $215.9 million of trade accounts receivable, respectively, to the financial institutions. At February 28, 2017 and August 31, 2016, the Company had no advance payments outstanding on the sale of its trade accounts receivable.
 
In addition to the U.S. sale of trade accounts receivable program described above, the Company's international subsidiaries in Poland and 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 ($54.0 million as of February 28, 2017) 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 provided by operating activities on the Company's unaudited condensed consolidated statements of cash flows. In October 2016, the Company's existing Australian program expired and the Company did not enter into a new program.

At February 28, 2017, under its Polish program, the Company had sold $56.9 million of trade accounts receivable to the third-party financial institution. At August 31, 2016, under its Polish and Australian programs, the Company had sold $85.7 million of trade accounts receivable to third-party financial institutions. At February 28, 2017 and August 31, 2016, $3.2 million and $8.3 million in advance payments had been received, respectively.

During the six months ended February 28, 2017 and February 29, 2016, cash proceeds from the U.S. and international sale of trade accounts receivable programs were $178.8 million and $202.1 million, respectively, and cash payments to the owners of trade accounts receivable were $183.9 million and $190.6 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 $0.2 million and $0.4 million for the three and six months ended February 28, 2017, respectively, and $0.5 million and $0.9 million for the three and six months ended February 29, 2016, respectively, and are included in selling, general and administrative expenses in the Company's unaudited condensed consolidated statements of earnings.

As of February 28, 2017 and August 31, 2016, the deferred purchase price on the Company's U.S. and international sale of trade accounts receivable programs is 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 February 28, 2017
(in thousands)
 
Total
 
U.S.
 
Poland
Beginning balance
 
$
261,521

 
$
215,717

 
$
45,804

Transfers of accounts receivable
 
643,478

 
561,010

 
82,468

Collections
 
(592,553
)
 
(518,008
)
 
(74,545
)
Ending balance
 
$
312,446

 
$
258,719

 
$
53,727



12



 
 
Six Months Ended February 28, 2017
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Poland
Beginning balance
 
$
289,748

 
$
212,762

 
$
26,662

 
$
50,324

Transfers of accounts receivable
 
1,200,442

 
1,031,155

 
16,914

 
152,373

Collections
 
(1,143,827
)
 
(985,198
)
 
(9,659
)
 
(148,970
)
     Program termination
 
(33,917
)
 
—

 
(33,917
)
 
—

Ending balance
 
$
312,446

 
$
258,719

 
$
—

 
$
53,727

 _________________ 
* Includes the sales of trade accounts receivable activities related to discontinued operations and businesses sold. For the six months ended February 28, 2017, there were no transfers of trade accounts receivable, collections of $3.7 million and program termination of $1.6 million.
 
 
Three Months Ended February 29, 2016
(in thousands)
 
Total
 
U.S.
 
Australia**
 
Poland
Beginning balance
 
$
228,862

 
$
196,130

 
$
15,286

 
$
17,446

Transfers of accounts receivable
 
537,774

 
432,900

 
37,256

 
67,618

Collections
 
(534,762
)
 
(435,995
)
 
(39,159
)
 
(59,608
)
Ending balance
 
$
231,874

 
$
193,035

 
$
13,383

 
$
25,456

_________________
** Includes the sales of accounts receivable activities related to businesses held for sale (transfers of accounts receivable of $11.1 million and collections of $11.9 million for the three months ended February 29, 2016).
 
 
Six Months Ended February 29, 2016
(in thousands)
 
Total
 
U.S.
 
Australia***
 
Poland
Beginning balance
 
$
339,547

 
$
269,778

 
$
18,038

 
$
51,731

Transfers of accounts receivable
 
1,126,193

 
919,423

 
83,330

 
123,440

Collections
 
(1,233,866
)
 
(996,166
)
 
(87,985
)
 
(149,715
)
Ending balance
 
$
231,874

 
$
193,035

 
$
13,383

 
$
25,456

 _________________ 
*** Includes the sales of trade accounts receivable activities related to discontinued operations and businesses held for sale. For the six months ended February 29, 2016, transfers of trade accounts receivable were $23.4 million and collections were $36.8 million.
NOTE 4. INVENTORIES, NET

As of February 28, 2017 and August 31, 2016, inventories were stated at the lower of cost or net realizable value. The Company determines inventory cost for its Americas Recycling, Americas Mills, Americas Fabrication and International Mill segments using the weighted average cost method. The Company determines inventory cost for its International Marketing and Distribution segment using the specific identification method. At February 28, 2017, 65% of the Company's total net inventories were valued using the weighted average cost method and 35% of the Company's total net inventories were valued using the specification identification method.

The majority of the Company's inventories are in the form of semi-finished and finished goods. The Company’s business model, with the exception of the International Marketing and Distribution segment, is such that products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. Inventories in the International Marketing and Distribution segment are sold as finished goods. As such, work in process inventories were not material at February 28, 2017 and August 31, 2016. At February 28, 2017 and August 31, 2016, $113.0 million and $77.9 million, respectively, of the Company's inventories were in the form of raw materials.

Inventory write-downs were $0.7 million and $1.2 million during the three and six months ended February 28, 2017, respectively, and were $5.3 million and $7.9 million during the three and six months ended February 29, 2016, respectively.

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
Goodwill, gross
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
9,751

 
$
4,970

 
$
57,637

 
$
2,432

 
$
1,982

 
$
76,772

 
Acquisitions
 
—

 
—

 
306

 
—

 
—

 
306

 
Foreign currency translation
 
—

 
—

 
—

 
(98
)
 
(58
)
 
(156
)
Balance at February 28, 2017
 
$
9,751

 
$
4,970

 
$
57,943

 
$
2,334

 
$
1,924

 
$
76,922

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated impairment losses
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(155
)
 
$
—

 
$
(10,399
)
 
Foreign currency translation
 
—

 
—

 
—

 
7

 
—

 
7

Balance at February 28, 2017
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(148
)
 
$
—

 
$
(10,392
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
—

 
$
4,970

 
$
57,144

 
$
2,277

 
$
1,982

 
$
66,373

 
Acquisitions
 
—

 
—

 
306

 
—

 
—

 
306

 
Foreign currency translation
 
—

 
—

 
—

 
(91
)
 
(58
)
 
(149
)
Balance at February 28, 2017
 
$
—

 
$
4,970

 
$
57,450

 
$
2,186

 
$
1,924

 
$
66,530


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $19.8 million and $18.6 million at February 28, 2017 and August 31, 2016, respectively, and are included in other noncurrent assets on the Company's unaudited condensed consolidated balance sheets. Intangible amortization expense from continuing operations was $0.7 million and $1.0 million for the three and six months ended February 28, 2017, respectively, and $1.0 million and $2.1 million for the three and six months ended February 29, 2016, respectively. Excluding goodwill, there are no significant intangible assets with indefinite lives.
NOTE 6. CHANGES IN BUSINESS

Acquisitions

On December 12, 2016, the Company completed the purchase of substantially all of the assets of Continental Concrete Structures, Inc. ("CCS"), a fabricator of post-tensioning cable and related products for commercial and public construction projects with a facility in Alpharetta, Georgia. In addition, CCS provides professional design and value engineering services to the construction industry throughout North America. This acquisition complements the Company’s current rebar fabrication business and continues its strategy of creating value for customers. The operating results of this facility are included in the Americas Fabrication reporting segment.

On January 9, 2017, the Company completed the purchase of substantially all of the assets of Associated Steel Workers, Limited ("ASW"), a steel fabrication facility in Kapolei, Hawaii. This acquisition continues the vertical integration model of the Company by extending our geographic reach, establishing a fabrication operation in Hawaii and expanding our presence in the Hawaiian market. The operating results of this facility are included in the Americas Fabrication reporting segment.

On March 6, 2017, the Company completed the purchase of certain assets from OmniSource Corporation, a wholly owned subsidiary of Steel Dynamics, Inc., consisting of seven recycling facilities located in the southeast United States (the "Recycling Assets"), which are in close proximity to CMC’s minimill in Cayce, South Carolina. These facilities are expected to provide synergies with our other operations in the region. The operating results of these facilities will be included in the Americas Recycling reporting segment.


14



The acquisitions of CCS, ASW and the Recycling Assets are not material, individually or in the aggregate, to the Company's financial position or results of operations; therefore, pro forma operating results for the acquisitions are not presented since the results would not be significantly different than reported results.

Discontinued Operations

During the first quarter of fiscal 2015, the Company decided to exit and sell its steel distribution business in Australia and 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 Australian steel distribution business was previously included in the International Marketing and Distribution reporting segment.

Financial information for discontinued operations was as follows:
 
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Net sales
 
$
1

 
$
9,953

 
$
(22
)
 
$
21,507

Earnings (loss) from discontinued operations before income taxes (benefit)
 
726

 
(446
)
 
(191
)
 
(1,018
)
NOTE 7. CREDIT ARRANGEMENTS

The Company has a fourth amended and restated credit agreement (the "Credit Agreement") for a revolving credit facility of $350.0 million with a maturity date of June 26, 2019. The maximum availability under the Credit Agreement can be increased to $500.0 million with bank approval. The Company's obligation under its Credit Agreement is collateralized by its U.S. inventory. The Credit Agreement'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 $3.0 million at both February 28, 2017 and August 31, 2016. The Company had no amounts drawn under the Credit Agreement at February 28, 2017 and August 31, 2016.

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, 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 Agreement bear interest based on the Eurocurrency rate, a base rate, or the London Interbank Offered Rate ("LIBOR").

At February 28, 2017, the Company's interest coverage ratio was 5.65 to 1.00, and the Company's debt to capitalization ratio was 0.44 to 1.00.

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.

In August 2008, the Company issued $500.0 million of 7.35% senior unsecured notes due in August 2018 (the "2018 Notes"). During the third quarter of fiscal 2010, the Company entered into hedging 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 February 2016, the Company accepted for purchase approximately $100.2 million of the outstanding principal amount of its 2018 Notes through a cash tender offer. The Company recognized expenses of approximately $6.0 million related to the early extinguishment of this debt, which are included in loss on debt extinguishment in the unaudited condensed consolidated statements of earnings for the three and six months ended February 29, 2016.

In July 2007, the Company issued $400.0 million of 6.50% senior unsecured notes due in July 2017 (the "2017 Notes"). During the third quarter of fiscal 2011, the Company entered into hedging transactions which reduced the Company's effective interest rate on these notes to 5.74% per annum. Interest on these notes is payable semiannually. In February 2016, the Company accepted for purchase $100.0 million of the outstanding principal amount of its 2017 Notes though a cash tender offer. The Company recognized expenses of approximately $5.4 million related to the early extinguishment of this debt, which are included in loss on

15



debt extinguishment in the unaudited condensed consolidated statements of earnings for the three and six months ended February 29, 2016.

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 February 28, 2017 and August 31, 2016, the unamortized amounts were $7.8 million and $11.6 million, respectively. Amortization of the deferred gain for each of the three and six months ended February 28, 2017 and February 29, 2016 was $1.9 million and $3.8 million, respectively.

At February 28, 2017, the Company was in compliance with all covenants contained in its debt agreements.

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 February 28, 2017
 
February 28, 2017
 
August 31, 2016
2023 Notes
 
4.875%
 
$
330,000

 
$
330,000

2018 Notes
 
6.40%
 
406,562

 
408,874

2017 Notes
 
5.74%
 
301,115

 
302,601

Other, including equipment notes
 
 
 
30,356

 
34,166

Total debt
 
 
 
1,068,033

 
1,075,641

     Less debt issuance costs
 
 
 
3,696

 
4,224

Total amounts outstanding
 
 
 
1,064,337

 
1,071,417

     Less current maturities
 
 
 
312,200

 
313,469

Long-term debt
 
 
 
$
752,137

 
$
757,948


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

At both February 28, 2017 and August 31, 2016, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN 175 million ($43.0 million) and PLN 175 million ($44.8 million), respectively. The uncommitted credit facilities as of February 28, 2017 have expiration dates ranging from March 2017 to November 2017, which CMCP intends to renew upon expiration. At February 28, 2017 and August 31, 2016, no amounts were outstanding under these facilities. During the six months ended February 28, 2017 and February 29, 2016, CMCP had no borrowings and no repayments under its uncommitted credit facilities.

The Company capitalized $2.1 million and $3.7 million of interest in the cost of property, plant and equipment during the three and six months ended February 28, 2017, respectively, and $0.5 million and $1.0 million for the three and six months ended February 29, 2016, respectively. Cash paid for interest during the three and six months ended February 28, 2017 was $24.7 million and $33.1 million, respectively, and $31.9 million and $40.9 million during the three and six months ended February 29, 2016, respectively.
NOTE 8. NEW MARKETS TAX CREDIT TRANSACTIONS

In the second quarter of fiscal 2016, the Company entered into a financing transaction with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"), related to the development, construction and equipping of a steel micro-mill in Durant, Oklahoma. To effect the transaction, USBCDC made a capital contribution to USBCDC Investment Fund 156, LLC, a Missouri limited liability company (the "Investment Fund"). Additionally, Commonwealth Acquisitions Holdings, Inc., a wholly owned subsidiary of CMC ("Commonwealth"), made a loan to the Investment Fund. The transaction qualified under the New Markets Tax Credit Program (the "NMTC Program") provided for in the Community Renewal Tax Relief Act of 2000 (the "Act"). The NMTC Program is intended to induce capital investment in qualified low-income communities. The Act permits taxpayers to claim credits against federal income taxes for up to 39% of qualified investments in certain community development entities (“CDEs”). CDEs are privately managed entities that are certified to make qualified low-income community investments to qualified projects.


16



Commonwealth loaned $35.3 million to the Investment Fund at an interest rate of approximately 1.08% per year and with a maturity date of December 24, 2045 (the "Commonwealth Loan"). The Investment Fund also received capital contributions from USBCDC in the aggregate amount of $17.7 million (the "USBCDC Equity"). The Investment Fund used $51.5 million of the proceeds received from the Commonwealth Loan and the USBCDC Equity to make qualified equity investments ("QEIs") into certain CDEs, which, in turn, used $50.7 million of the QEIs to make loans to CMC Steel Oklahoma, LLC, a wholly owned subsidiary of CMC, with terms similar to the Commonwealth Loan and as partial financing for the construction, development and equipping of a new steel micro-mill in Durant, Oklahoma. The proceeds of the loans from the CDEs were recorded as restricted cash and included in other current assets in the accompanying unaudited condensed consolidated balance sheet. During the three and six months ended February 28, 2017, the Company spent $4.5 million and $21.0 million, respectively, for qualified construction, development, and equipping activities for the micro-mill. The balance remaining in restricted cash was $0.7 million and $21.7 million at February 28, 2017 and August 31, 2016, respectively.

By virtue of its capital contribution to the Investment Fund, USBCDC is entitled to substantially all of the benefits derived from the new markets tax credits ("NMTCs"). This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase USBCDC's interest in the Investment Fund. The Company believes USBCDC will exercise the put option in December 2022 at the end of the recapture period. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC Program. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require the Company to indemnify USBCDC for any loss or recapture of NMTCs related to the financing until such time as the Company's obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement.

The Company has determined that the Investment Fund is a VIE, of which the Company is the primary beneficiary and has consolidated it in accordance with the accounting standard for consolidation. USBCDC's contribution is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. Direct costs incurred in structuring the financing arrangement are deferred and will be recognized as expense over the seven year recapture period. Incremental costs to maintain the structure during the compliance period are recognized as incurred.
NOTE 9. 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.

At February 28, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $256.4 million and $36.3 million, respectively. At February 29, 2016, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $296.5 million and $30.1 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of February 28, 2017:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
2,630

 MT
Aluminum
 
Short
 
325

 MT
Copper
 
Long
 
419

 MT
Copper
 
Short
 
4,808

 MT
Zinc
 
Long
 
15

 MT
 _________________
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's unaudited condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and six months ended February 28, 2017 and February 29, 2016. Certain foreign currency and commodity contracts were not designated as hedges

17



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: 
 
 
 
 
Three Months Ended
 
Six Months Ended
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Commodity
 
Cost of goods sold
 
$
(146
)
 
$
(224
)
 
$
(4,775
)
 
$
1,948

Foreign exchange
 
Net sales
 
—

 
(4
)
 
—

 
(4
)
Foreign exchange
 
Cost of goods sold
 
(25
)
 
31

 
(33
)
 
81

Foreign exchange
 
SG&A expenses
 
(678
)
 
10,495

 
3,371

 
15,714

Gain (loss) before income taxes
 
 
 
$
(849
)
 
$
10,298

 
$
(1,437
)
 
$
17,739


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.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
Location
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Foreign exchange
 
Net sales
 
$
66

 
$
(61
)
 
$
44

 
$
83

Foreign exchange
 
Cost of goods sold
 
(1,693
)
 
183

 
(607
)
 
(811
)
Gain (loss) before income taxes
 
 
 
$
(1,627
)
 
$
122

 
$
(563
)
 
$
(728
)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
Location
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Foreign exchange
 
Net sales
 
$
(66
)
 
$
62

 
$
(44
)
 
$
(83
)
Foreign exchange
 
Cost of goods sold
 
1,693

 
(183
)
 
607

 
811

Gain (loss) before income taxes
 
 
 
$
1,627

 
$
(121
)
 
$
563

 
$
728


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended
 
Six Months Ended
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Commodity
 
$
118

 
$
253

 
$
217

 
$
(224
)
Foreign exchange
 
192

 
241

 
225

 
709

Gain, net of income taxes
 
$
310

 
$
494

 
$
442

 
$
485


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
Location
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Commodity
 
Cost of goods sold
 
$
(33
)
 
$
(59
)
 
$
(125
)
 
$
(110
)
Foreign exchange
 
Net sales
 
329

 
(450
)
 
244

 
(393
)
Foreign exchange
 
Cost of goods sold
 
(172
)
 
426

 
(44
)
 
418

Foreign exchange
 
SG&A expenses
 
138

 
35

 
290

 
70

Interest rate
 
Interest expense
 
132

 
132

 
266

 
266

Gain before income taxes
 
 
 
394

 
84

 
631

 
251

Income taxes
 
Income taxes
 
(64
)
 
(28
)
 
(111
)
 
(77
)
Gain, net of income taxes
 
 
 
$
330

 
$
56

 
$
520

 
$
174



18



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 February 28, 2017 and August 31, 2016. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
February 28, 2017
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
170

 
$
4

Commodity — not designated for hedge accounting
 
277

 
584

Foreign exchange — designated for hedge accounting
 
631

 
1,398

Foreign exchange — not designated for hedge accounting
 
1,169

 
750

Derivative assets (other current assets)*
 
$
2,247

 
$
2,736

 
Derivative Liabilities (in thousands)
 
February 28, 2017
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
—

 
$
5

Commodity — not designated for hedge accounting
 
595

 
117

Foreign exchange — designated for hedge accounting
 
718

 
902

Foreign exchange — not designated for hedge accounting
 
777

 
1,161

Derivative liabilities (accrued expenses and other payables)*
 
$
2,090

 
$
2,185

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

As of February 28, 2017, substantially all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months. All of the instruments are highly liquid and were not entered into for trading purposes.

19



NOTE 10. 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)
 
February 28, 2017
 
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)
 
$
290,329

 
$
290,329

 
$
—

 
$
—

Commodity derivative assets (2)
 
447

 
277

 
170

 
—

Foreign exchange derivative assets (2)
 
1,800

 
—

 
1,800

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
595

 
595

 
—

 
—

Foreign exchange derivative liabilities (2)
 
1,495

 
—

 
1,495

 
—


 
 
 
 
Fair Value Measurements at Reporting Date Using
(in thousands)
 
August 31, 2016
 
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)
 
$
278,759

 
$
278,759

 
$
—

 
$
—

Commodity derivative assets (2)
 
588

 
584

 
4

 
—

Foreign exchange derivative assets (2)
 
2,148

 
—

 
2,148

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
122

 
117

 
5

 
—

Foreign exchange derivative liabilities (2)
 
2,063

 
—

 
2,063

 
—

 _________________ 
(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 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 9, Derivatives and Risk Management.

There were no material non-recurring fair value remeasurements during the three and six months ended February 28, 2017 and February 29, 2016, respectively.

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.

20




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:
 
 
 
 
February 28, 2017
 
August 31, 2016
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2023 Notes (1)
 
Level 2
 
$
330,000

 
$
335,775

 
$
330,000

 
$
332,010

2018 Notes (1)
 
Level 2
 
406,562

 
430,304

 
408,874

 
432,303

2017 Notes (1)
 
Level 2
 
301,115

 
305,250

 
302,601

 
311,250

_________________
(1) The fair value of the notes is determined based on indicated market values.
NOTE 11. INCOME TAX

The Company's effective income tax rate from continuing operations for the three and six months ended February 28, 2017 was 25.2% and 25.6%, respectively, compared with 16.0% and 27.5% for the three and six months ended February 29, 2016, respectively. The effective tax rate is determined by computing the estimated annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the appropriate period. Several factors determine the Company's effective tax rate, including the mix and amount of global earnings, the impact of loss companies for which no tax benefit is available due to valuation allowances, audit related adjustments, and the impact of permanent tax adjustments.

For the three and six months ended February 28, 2017 and February 29, 2016, the tax rate was lower than the statutory income tax rate of 35%. Items that impacted the effective tax rate included:

i.
the proportion of the Co