Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2016
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 January 5, 2017 was 115,566,107.


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
 
 
Three Months Ended November 30,
(in thousands, except share data)
 
2016
 
2015
Net sales
 
$
1,075,063


$
1,154,859

Costs and expenses:
 



Cost of goods sold
 
943,071


997,242

Selling, general and administrative expenses
 
108,867


101,908

Interest expense
 
13,298

 
18,304

 
 
1,065,236


1,117,454

 
 
 
 
 
Earnings from continuing operations before income taxes
 
9,827


37,405

Income taxes
 
2,653


11,772

Earnings from continuing operations
 
7,174


25,633

 
 





Loss from discontinued operations before income tax benefit
 
(917
)

(572
)
Income tax benefit
 
(18
)

(2
)
Loss from discontinued operations
 
(899
)

(570
)
 
 





Net earnings
 
6,275

 
25,063

Less net earnings attributable to noncontrolling interests
 
—

 
—

Net earnings attributable to CMC
 
$
6,275


$
25,063

 
 



Basic earnings (loss) per share attributable to CMC:
 



Earnings from continuing operations
 
$
0.06


$
0.22

Loss from discontinued operations
 
(0.01
)

—

Net earnings
 
$
0.05


$
0.22

 
 



Diluted earnings (loss) per share attributable to CMC:
 



Earnings from continuing operations
 
$
0.06


$
0.22

Loss from discontinued operations
 
(0.01
)

(0.01
)
Net earnings
 
$
0.05


$
0.21

 
 





Cash dividends per share
 
$
0.12


$
0.12

Average basic shares outstanding
 
115,097,467


116,022,241

Average diluted shares outstanding
 
116,604,789


117,339,445

See notes to unaudited condensed consolidated financial statements.

3




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

 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net earnings attributable to CMC
 
$
6,275

 
$
25,063

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

 

Foreign currency translation adjustment
 
(21,531
)
 
(21,995
)
Net unrealized gain (loss) on derivatives:
 


 


Unrealized holding gain (loss), net of income taxes of $10 and $(147)
 
132

 
(9
)
Reclassification for gain included in net earnings, net of income taxes of $(47) and $(49)
 
(190
)
 
(118
)
Net unrealized loss on derivatives, net of income taxes of $(37) and $(196)
 
(58
)
 
(127
)
Defined benefit obligation:
 


 


Amortization of prior services, net of income taxes of $(2) and $(1)
 
(9
)
 
(1
)
Defined benefit obligation, net of income taxes of $(2) and $(1)
 
(9
)
 
(1
)
Other comprehensive loss
 
(21,598
)
 
(22,123
)
Comprehensive income (loss)
 
$
(15,323
)
 
$
2,940

See notes to unaudited condensed consolidated financial statements.

4



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
November 30, 2016
 
August 31, 2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
465,167

 
$
517,544

Accounts receivable (less allowance for doubtful accounts of $5,652 and $6,427)
 
716,640

 
765,784

Inventories, net
 
633,764

 
652,754

Other current assets
 
97,099

 
112,043

Total current assets
 
1,912,670

 
2,048,125

Property, plant and equipment:
 
 
 
 
Land
 
70,408

 
70,291

Buildings and improvements
 
481,293

 
487,305

Equipment
 
1,638,751

 
1,655,909

Construction in process
 
140,077

 
111,156


 
2,330,529

 
2,324,661

Less accumulated depreciation and amortization
 
(1,437,329
)
 
(1,429,612
)

 
893,200

 
895,049

Goodwill
 
66,114

 
66,373

Other noncurrent assets
 
130,596

 
121,322

Total assets
 
$
3,002,580

 
$
3,130,869

Liabilities and stockholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable-trade
 
$
224,395

 
$
243,532

Accounts payable-documentary letters of credit
 
317

 
5

Accrued expenses and other payables
 
202,847

 
264,112

Current maturities of long-term debt
 
312,892

 
313,469

Total current liabilities
 
740,451

 
821,118

Deferred income taxes
 
50,183

 
63,021

Other long-term liabilities
 
126,693

 
121,351

Long-term debt
 
755,161

 
757,948

Total liabilities
 
1,672,488

 
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 115,549,560 and 114,635,596 shares, respectively
 
1,290

 
1,290

Additional paid-in capital
 
334,039

 
358,745

Accumulated other comprehensive loss
 
(134,512
)
 
(112,914
)
Retained earnings
 
1,365,401

 
1,372,988

Less treasury stock, 13,511,104 and 14,425,068 shares at cost
 
(236,285
)
 
(252,837
)
Stockholders' equity attributable to CMC
 
1,329,933

 
1,367,272

Stockholders' equity attributable to noncontrolling interests
 
159

 
159

Total stockholders' equity
 
1,330,092

 
1,367,431

Total liabilities and stockholders' equity
 
$
3,002,580

 
$
3,130,869

See notes to unaudited condensed consolidated financial statements.

5



COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Cash flows from (used by) operating activities:
 
 
 
 
Net earnings
 
$
6,275

 
$
25,063

Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
30,290

 
31,991

Deferred income taxes
 
(12,418
)
 
(14,058
)
Stock-based compensation
 
8,245

 
6,266

Amortization of interest rate swaps termination gain
 
(1,899
)
 
(1,899
)
Provision for losses on receivables, net
 
1,528

 
2,071

Write-down of inventories
 
508

 
2,657

Asset impairment
 
462

 
—

Tax benefit from stock plans
 
(334
)
 
(25
)
Net (gain) loss on sales of assets and other
 
41

 
(2,830
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
30,085

 
166,661

Advance payments on sale of accounts receivable program, net
 
8,269

 
10,678

Inventories
 
10,678

 
78,700

Accounts payable, accrued expenses and other payables
 
(70,390
)
 
(76,449
)
Changes in other operating assets and liabilities
 
(12,294
)
 
(9,253
)
Net cash flows from (used by) operating activities
 
(954
)
 
219,573

 
 
 
 
 
Cash flows from (used by) investing activities:
 
 
 
 
Capital expenditures
 
(42,965
)
 
(11,169
)
Decrease in restricted cash
 
16,609

 
—

Proceeds from the sale of subsidiaries
 
524

 
—

Proceeds from the sale of property, plant and equipment and other
 
179

 
2,813

Net cash flows used by investing activities
 
(25,653
)
 
(8,356
)
 
 
 
 
 
Cash flows from (used by) financing activities:
 
 
 
 
Cash dividends
 
(13,862
)
 
(13,978
)
Stock issued under incentive and purchase plans, net of forfeitures
 
(7,661
)
 
(7,628
)
Repayments on long-term debt
 
(3,161
)
 
(2,909
)
Tax benefit from stock plans
 
334

 
25

Increase (decrease) in documentary letters of credit, net
 
320

 
(9,752
)
Short-term borrowings, net change
 
—

 
(20,090
)
Treasury stock acquired
 
—

 
(4,555
)
Decrease in restricted cash
 
—

 
1

Net cash flows used by financing activities
 
(24,030
)
 
(58,886
)
Effect of exchange rate changes on cash
 
(1,740
)
 
(466
)
Increase (decrease) in cash and cash equivalents
 
(52,377
)
 
151,865

Cash and cash equivalents at beginning of year
 
517,544

 
485,323

Cash and cash equivalents at end of period
 
$
465,167

 
$
637,188

 
 
 
 
 
Supplemental information:
 
 
 
 
Noncash activities:
 
 
 
 
Liabilities related to additions of property, plant and equipment
 
$
20,202

 
$
7,562

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
 
 
 
 
25,063

 
 
 
25,063

Other comprehensive loss
 
 
 
(22,123
)
 
 
 
 
(22,123
)
Cash dividends ($0.12 per share)
 
 
 
 
(13,978
)
 
 
 
(13,978
)
Treasury stock acquired
 
 
 
 
 
(316,086
)
(4,555
)
 
(4,555
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(25,193
)
 
 
912,939

17,565

 
(7,628
)
Stock-based compensation
 
 
4,965

 
 
 
 
 

4,965

Tax benefit from stock plans
 
 
25

 
 
 
 
 

25

Reclassification of share-based liability awards
 
 
3,035

 
 
 
 
 
3,035

Balance, November 30, 2015
129,060,664

$
1,290

$
348,695

$
(135,658
)
$
1,384,653

(12,828,473
)
$
(232,951
)
$
149

$
1,366,178

 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
6,275

 
 
 
6,275

Other comprehensive loss
 
 
 
(21,598
)
 
 
 
 
(21,598
)
Cash dividends ($0.12 per share)
 
 
 
 
(13,862
)
 
 
 
(13,862
)
Issuance of stock under incentive and purchase plans, net of forfeitures
 
 
(24,213
)
 
 
913,964

16,552

 
(7,661
)
Stock-based compensation
 
 
3,285

 
 
 
 
 
3,285

Tax benefit from stock plans
 
 
334

 
 
 
 
 
334

Reclassification of share-based liability awards
 
 
1,231

 
 
 
 
 
1,231

Reclassification of share-based equity awards
 
 
(5,343
)
 
 
 
 
 
(5,343
)
Balance, November 30, 2016
129,060,664

$
1,290

$
334,039

$
(134,512
)
$
1,365,401

(13,511,104
)
$
(236,285
)
$
159

$
1,330,092

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 condensed consolidated balance sheets and the condensed consolidated statements of earnings, comprehensive income (loss), 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 month period are not necessarily indicative of the results to be expected for the full year.

Recently Adopted Accounting Pronouncements

In the first quarter of fiscal 2017, the Company adopted Accounting Standards Update ("ASU") 2015-16, Business Combinations (Topic 805), issued by the Financial Accounting Standards Board (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.

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 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.

8




In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), simplifying several aspects of accounting for share-based payment transactions, including recognizing excess tax benefits and deficiencies as income tax expense or benefit in the statement of earnings, classifying excess tax benefits and expenses as an operating activity within the statement of cash flows, and an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur. The provisions of this guidance related to excess tax benefits and deficiencies are to be applied on a prospective basis. If elected, the provisions of this guidance related to forfeitures are to be applied using a modified retrospective approach. This guidance is effective for fiscal years, and interim periods therein, beginning after December 15, 2016, with early adoption permitted. The Company intends to early adopt this guidance during fiscal year 2017 and is currently evaluating the impact this guidance will have on its consolidated financial statements.

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 greater. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 with early adoption permitted. 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 new 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. In addition, the standard includes expanded disclosure requirements. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 and will be effective for the Company beginning September 1, 2018, 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 continues to evaluate the available adoption methods and the potential impact this standard will have on the consolidated financial statements. 
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 November 30, 2016
(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
 
(21,531
)
 
132

 
—

 
(21,399
)
Amounts reclassified from AOCI
 
—

 
(190
)
 
(9
)
 
(199
)
Net other comprehensive loss
 
(21,531
)
 
(58
)
 
(9
)
 
(21,598
)
Balance, November 30, 2016
 
$
(133,786
)
 
$
2,128

 
$
(2,854
)
 
$
(134,512
)

 
 
Three Months Ended November 30, 2015
(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 loss before reclassifications
 
(21,995
)
 
(9
)
 
—

 
(22,004
)
Amounts reclassified from AOCI
 
—

 
(118
)
 
(1
)
 
(119
)
Net other comprehensive loss
 
(21,995
)
 
(127
)
 
(1
)
 
(22,123
)
Balance, November 30, 2015
 
$
(135,076
)
 
$
2,178

 
$
(2,760
)
 
$
(135,658
)
 
 
 
 
 
 
 
 
 


9



The significant items reclassified out of AOCI and the corresponding line items in the condensed consolidated statements of earnings to which the items were reclassified were as follows:
 
 
 
 
Three Months Ended November 30,
Components of AOCI (in thousands)
 
Location
 
2016
 
2015
Unrealized gain (loss) on derivatives:
 

 


 
 
Commodity
 
Cost of goods sold
 
$
(92
)
 
$
(51
)
Foreign exchange
 
Net sales
 
(85
)
 
57

Foreign exchange
 
Cost of goods sold
 
128

 
(8
)
Foreign exchange
 
SG&A expenses
 
152

 
35

Interest rate
 
Interest expense
 
134

 
134

 
 
 
 
237

 
167

Income tax effect
 
Income taxes
 
(47
)
 
(49
)
Net of income taxes
 
 
 
$
190

 
$
118

Defined benefit obligation:
 

 
 
 
 
Amortization of prior services
 
SG&A expenses
 
$
11

 
$
2

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

 
$
9

 
$
1

Amounts in parentheses reduce earnings.

10



NOTE 3. SALES OF ACCOUNTS RECEIVABLE

During the fourth quarter of fiscal 2016, the Company 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, Commercial Metals Company 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 the Company. 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 defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement described in Note 7, Credit Arrangements.

At November 30, 2016 and August 31, 2016, under its U.S. sale of trade accounts receivable program, the Company had sold $219.4 million and $215.9 million of trade accounts receivable, respectively, to the financial institutions. At November 30, 2016 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 ($52.3 million as of November 30, 2016) 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. In October 2016, the Company's existing Australian program expired and the Company did not enter into a new program. Under the Polish and Australian programs, the cash advances received were reflected as cash provided by operating activities on the Company's consolidated statements of cash flows.

At November 30, 2016, under its Polish program, the Company had sold $45.8 million of trade accounts receivable to third-party financial institutions. 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 November 30, 2016, no advance payments had been received, and at August 31, 2016, $8.3 million in advance payments had been received.

During the three months ended November 30, 2016 and 2015, cash proceeds from the U.S. and international sale of trade accounts receivable programs were $170.5 million and $134.6 million, respectively, and cash payments to the owners of trade accounts receivable were $178.7 million and $123.9 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 months ended November 30, 2016 and 2015, respectively, and are included in selling, general and administrative expenses in the Company's condensed consolidated statements of earnings.

As of November 30, 2016 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 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.

11



 
 
Three Months Ended November 30, 2016
(in thousands)
 
Total
 
U.S.
 
Australia*
 
Poland
Beginning balance
 
$
289,748

 
$
212,762

 
$
26,662

 
$
50,324

Transfers of accounts receivable
 
556,964

 
470,145

 
16,914

 
69,905

Collections
 
(551,274
)
 
(467,190
)
 
(9,659
)
 
(74,425
)
     Program termination
 
(33,917
)
 
—

 
(33,917
)
 
—

Ending balance
 
$
261,521

 
$
215,717

 
$
—

 
$
45,804

 _________________ 
* Includes the sales of trade accounts receivable activities related to discontinued operations and businesses sold. For the three months ended November 30, 2016, there were no transfers of trade accounts receivable, collections of $3.7 million and program termination of $1.6 million.
 
 
Three Months Ended November 30, 2015
(in thousands)
 
Total
 
U.S.
 
Australia**
 
Poland
Beginning balance
 
$
339,547

 
$
269,778

 
$
18,038

 
$
51,731

Transfers of accounts receivable
 
588,419

 
486,523

 
46,074

 
55,822

Collections
 
(699,104
)
 
(560,171
)
 
(48,826
)
 
(90,107
)
Ending balance
 
$
228,862

 
$
196,130

 
$
15,286

 
$
17,446

 _________________ 
** Includes the sales of trade accounts receivable activities related to discontinued operations and businesses held for sale. For the three months ended November 30, 2015, transfers of trade accounts receivable were $12.3 million and collections were $24.9 million.
NOTE 4. INVENTORIES, NET

As of November 30, 2016 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 November 30, 2016, 59% of the Company's total net inventories were valued using the weighted average cost method and 41% 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 November 30, 2016 and August 31, 2016. At November 30, 2016 and August 31, 2016, $75.9 million and $77.9 million, respectively, of the Company's inventories were in the form of raw materials.

Inventory write-downs were $0.5 million and $2.7 million during the three months ended November 30, 2016 and 2015, respectively.

12




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

 
Foreign currency translation
 
—

 
—

 
—

 
(172
)
 
(98
)
 
(270
)
Balance at November 30, 2016
 
$
9,751

 
$
4,970

 
$
57,637

 
$
2,260

 
$
1,884

 
$
76,502

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

 
$
(493
)
 
$
(155
)
 
$
—

 
$
(10,399
)
 
Foreign currency translation
 
—

 
—

 
—

 
11

 
—

 
11

Balance at November 30, 2016
 
$
(9,751
)
 
$
—

 
$
(493
)
 
$
(144
)
 
$
—

 
$
(10,388
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill, net
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2016
 
$
—

 
$
4,970

 
$
57,144

 
$
2,277

 
$
1,982

 
$
66,373

 
Foreign currency translation
 
—

 
—

 
—

 
(161
)
 
(98
)
 
(259
)
Balance at November 30, 2016
 
$
—

 
$
4,970

 
$
57,144

 
$
2,116

 
$
1,884

 
$
66,114


The total gross carrying amounts of the Company's intangible assets that are subject to amortization were $17.6 million and $18.6 million at November 30, 2016 and August 31, 2016, respectively, and are included in other noncurrent assets on the Company's condensed consolidated balance sheets. Intangible amortization expense from continuing operations was $0.3 million and $1.1 million for the three months ended November 30, 2016 and 2015, respectively. Excluding goodwill, there are no significant intangible assets with indefinite lives.
NOTE 6. 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 November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
(23
)
 
$
11,554

Loss from discontinued operations before income taxes
 
(917
)
 
(572
)
NOTE 7. CREDIT ARRANGEMENTS

During the fourth quarter of fiscal 2014, the Company entered into 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 November 30, 2016 and August 31, 2016. The Company had no amounts drawn under the Credit Agreement at November 30, 2016 and August 31, 2016.


13



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 November 30, 2016, the Company's interest coverage ratio was 4.84 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.

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.

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 November 30, 2016 and August 31, 2016, the unamortized amounts were $9.8 million and $11.6 million, respectively. Amortization of the deferred gain for each of the three months ended November 30, 2016 and 2015 was $1.9 million.

At November 30, 2016, 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 November 30, 2016
 
November 30, 2016
 
August 31, 2016
2023 Notes
 
4.875%
 
$
330,000

 
$
330,000

2018 Notes
 
6.40%
 
407,718

 
408,874

2017 Notes
 
5.74%
 
301,858

 
302,601

Other, including equipment notes
 
 
 
32,437

 
34,166

Total debt
 
 
 
1,072,013

 
1,075,641

     Less debt issuance costs
 
 
 
3,960

 
4,224

Total amounts outstanding
 
 
 
1,068,053

 
1,071,417

     Less current maturities
 
 
 
312,892

 
313,469

Long-term debt
 
 
 
$
755,161

 
$
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 November 30, 2016 and August 31, 2016, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of PLN 175 million ($41.6 million) and PLN 175 million ($44.8 million), respectively. The uncommitted credit facilities as of November 30, 2016 have expiration dates ranging from March 2017 to November 2017, which CMCP intends to renew upon

14



expiration. At November 30, 2016 and August 31, 2016, no amounts were outstanding under these facilities. During the three months ended November 30, 2016 and 2015, CMCP had no borrowings and no repayments under its uncommitted credit facilities.

The Company capitalized $1.6 million and $0.5 million of interest in the cost of property, plant and equipment during the three months ended November 30, 2016 and 2015, respectively. Cash paid for interest during the three months ended November 30, 2016 and 2015 was $8.4 million and $9.0 million, 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.

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 condensed consolidated balance sheet. During the three months ended November 30, 2016, the Company spent $16.5 million for qualified construction, development, and equipping activities for the micro-mill. The balance remaining in restricted cash was $5.2 million and $21.7 million at November 30, 2016 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 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. 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.


15



At November 30, 2016, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $265.8 million and $31.2 million, respectively. At November 30, 2015, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $306.3 million and $33.5 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of November 30, 2016:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
1,822

 MT
Copper
 
Long
 
237

 MT
Copper
 
Short
 
5,160

 MT
Zinc
 
Long
 
22

 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 condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three months ended November 30, 2016 and 2015. 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 condensed consolidated statements of earnings: 
 
 
 
 
Three Months Ended November 30,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2016
 
2015
Commodity
 
Cost of goods sold
 
$
(4,629
)
 
$
2,172

Foreign exchange
 
Cost of goods sold
 
(8
)
 
50

Foreign exchange
 
SG&A expenses
 
4,049

 
5,219

Gain (loss) before income taxes
 
 
 
$
(588
)
 
$
7,441


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 November 30,
 
Location
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
(22
)
 
$
144

Foreign exchange
 
Cost of goods sold
 
1,086

 
(994
)
Gain (loss) before income taxes
 
 
 
$
1,064

 
$
(850
)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
22

 
$
(145
)
Foreign exchange
 
Cost of goods sold
 
(1,086
)
 
994

Gain (loss) before income taxes
 
 
 
$
(1,064
)
 
$
849



16



Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended November 30,
 
2016
 
2015
Commodity
 
$
99

 
$
(477
)
Foreign exchange
 
33

 
468

Gain (loss), net of income taxes
 
$
132

 
$
(9
)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2016
 
2015
Commodity
 
Cost of goods sold
 
$
(92
)
 
$
(51
)
Foreign exchange
 
Net sales
 
(85
)
 
57

Foreign exchange
 
Cost of goods sold
 
128

 
(8
)
Foreign exchange
 
SG&A expenses
 
152

 
35

Interest rate
 
Interest expense
 
134

 
134

Gain before income taxes
 
 
 
237

 
167

Income taxes
 
Income taxes
 
(47
)
 
(49
)
Gain, net of income taxes
 
 
 
$
190

 
$
118


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 condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at November 30, 2016 and August 31, 2016. The fair value of the Company's derivative instruments on the condensed consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
November 30, 2016
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
89

 
$
4

Commodity — not designated for hedge accounting
 
108

 
584

Foreign exchange — designated for hedge accounting
 
1,595

 
1,398

Foreign exchange — not designated for hedge accounting
 
3,055

 
750

Derivative assets (other current assets)*
 
$
4,847

 
$
2,736

 
Derivative Liabilities (in thousands)
 
November 30, 2016
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
—

 
$
5

Commodity — not designated for hedge accounting
 
3,211

 
117

Foreign exchange — designated for hedge accounting
 
360

 
902

Foreign exchange — not designated for hedge accounting
 
1,498

 
1,161

Derivative liabilities (accrued expenses and other payables)*
 
$
5,069

 
$
2,185

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

As of November 30, 2016, 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.

17



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)
 
November 30, 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)
 
$
385,371

 
$
385,371

 
$
—

 
$
—

Commodity derivative assets (2)
 
197

 
108

 
89

 
—

Foreign exchange derivative assets (2)
 
4,650

 
—

 
4,650

 
—

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivative liabilities (2)
 
3,211

 
3,211

 
—

 
—

Foreign exchange derivative liabilities (2)
 
1,858

 
—

 
1,858

 
—


 
 
 
 
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 months ended November 30, 2016 and 2015, 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.

18




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 condensed consolidated balance sheets were as follows:
 
 
 
 
November 30, 2016
 
August 31, 2016
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2023 Notes (1)
 
Level 2
 
$
330,000

 
$
334,643

 
$
330,000

 
$
332,010

2018 Notes (1)
 
Level 2
 
407,718

 
428,805

 
408,874

 
432,303

2017 Notes (1)
 
Level 2
 
301,858

 
303,093

 
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 months ended November 30, 2016 and 2015 was 27.0% and 31.5%, 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 months ended November 30, 2016, the tax rate was lower than the statutory income tax rate of 35%. Items that benefited the effective tax rate include:
i.
the proportion of our global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19%,
ii.
benefit under Section 199 of the Internal Revenue Code related to domestic production activity income, and
iii.
a non-taxable gain on assets related to our non-qualified Benefits Restoration Plan (“BRP”).

For the three months ended November 30, 2015, the tax rate was lower than the statutory income tax rate of 35%. Items that benefited the effective tax rate include:
i.
the proportion of our global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19%, and
ii.
benefit under Section 199 of the Internal Revenue Code related to domestic production activity income.

In both the three months ended November 30, 2016 and 2015, the effective tax rate was negatively impacted by losses from operations in certain jurisdictions in which the Company maintains a valuation allowance, thus providing no benefit for such losses.

The Company’s effective income tax rate from discontinued operations for the three months ended November 30, 2016 and 2015 was 2.0% and 0.4%, respectively. The increase in the Company's effective income tax rate from discontinued operations for the three months ended November 30, 2016 and 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 was recorded. The tax benefit related to discontinued operations was the result of nominal pre-tax losses from discontinued operations which are subject to U.S. tax.

The Company made net payments of $1.8 million and $4.7 million for income taxes during the three months ended November 30, 2016 and 2015, respectively.

As of November 30, 2016 and August 31, 2016, the reserve for unrecognized income tax benefits related to the accounting for uncertainty in income taxes was $9.5 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 months ended November 30, 2016, 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 November 30, 2017, 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

19



be finalized. As a result, the total amount of unrecognized income tax benefits may decrease by approximately $1.3 million, which would reduce the provision for income taxes by $1.3 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 — 2012 and forward, with the exception of the R&D credit issue discussed below
U.S. States — 2009 and forward
Foreign — 2009 and forward

During the fiscal year ended August 31, 2016, the Company completed an IRS exam for the years 2009 through 2011 and received confirmation from the United States Congress Joint Committee on Taxation that all matters were settled with the exception of R&D credits, which are still under review. In addition, the Company is under examination by certain state revenue authorities for the years 2009 through 2015. Management believes the Company's recorded income tax liabilities as of November 30, 2016 sufficiently reflect the anticipated outcome of these examinations.
NOTE 12. STOCK-BASED COMPENSATION PLANS

The Company's stock-based compensation plans are described, and informational disclosures provided, in Note 16, Stock-Based Compensation Plans, to the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016. During the three months ended November 30, 2016 and 2015, restricted stock units and performance stock units accounted for under the equity method totaling 0.9 million and 1.5 million, respectively, were granted at a weighted-average fair value of $15.77 and $16.02, respectively.

Additionally, during the three months ended November 30, 2016 and 2015, the Company granted 872,739 and 430,376 equivalent shares, respectively, of performance stock units and restricted stock units accounted for under the liability method. During the three months ended November 30, 2016, certain restricted stock units and performance stock units that were previously accounted for under the equity method were modified to allow optionality related to the net share settlement feature, which resulted in these awards now being accounted for under the liability method. The fair value of liability awards is remeasured each reporting period and is recognized ratably over the service period. The Company incurred expenses of $3.9 million as a result of the modification and increased stock value at November 30, 2016 compared to no material adjustments for the three months ended November 30, 2015. As of November 30, 2016, the Company had 2,115,788 equivalent shares accounted for under the liability method outstanding. The Company expects 2,016,444 equivalent shares to vest.

In general, the restricted stock units granted during fiscal 2017, 2016, and 2015 vest ratably over a period of three years. However, certain restricted stock units granted during fiscal 2017 and 2015 cliff vest after a period of three years. Additionally, certain restricted stock units granted during fiscal 2015 vest after a specified service period during which one-third of each such award vests on the second anniversary of the grant date, and the remaining two-thirds of each such award vests on the third anniversary of the grant date. For certain restricted stock units granted during fiscal 2014, 25% vests on the second anniversary of the grant date; 25% vests on the third anniversary of the grant date and the remaining 50% vests 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 2017, 2016, and 2015 will vest after a period of three years.

Total stock-based compensation expense, including fair value remeasurements, for the three months ended November 30, 2016 and 2015 of $8.2 million and $6.3 million, respectively, was included in selling, general and administrative expenses on the Company's condensed consolidated statements of earnings.

20




NOTE 13. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE ATTRIBUTABLE TO CMC

The calculations of basic and diluted earnings per share from continuing operations for the three months ended November 30, 2016 and 2015 were as follows: 
 
 
Three Months Ended November 30,
(in thousands, except share data)
 
2016
 
2015
Earnings from continuing operations attributable to CMC
 
$
7,174

 
$
25,633

 
 
 
 
 
Basic earnings per share:
 
 
 
 
       Shares outstanding for basic earnings per share
 
115,097,467

 
116,022,241

 
 
 
 
 
Basic earnings per share attributable to CMC
 
$
0.06

 
$
0.22

 
 
 
 
 
Diluted earnings per share:
 
 
 
 
       Shares outstanding for basic earnings per share
 
115,097,467

 
116,022,241

Effect of dilutive securities:
 
 
 
 
Stock-based incentive/purchase plans
 
1,507,322

 
1,317,204

Shares outstanding for diluted earnings per share
 
116,604,789

 
117,339,445

 
 
 
 
 
Diluted earnings per share attributable to CMC
 
$
0.06

 
$
0.22

 
 
 
 
 
Anti-dilutive shares not included above
 
130,989

 
818,546

 _________________ 
CMC's restricted stock is included in the number of shares of common stock issued and outstanding, but is omitted from the basic earnings per share calculation until the shares vest.
During the first quarter of fiscal 2015, CMC's Board of Directors authorized a share repurchase program under which the Company may repurchase up to $100.0 million of shares of CMC common stock. The Company did not purchase any shares of CMC common stock during the three months ended November 30, 2016. During the three months ended November 30, 2015, the Company purchased 316,086 shares of CMC common stock at an average purchase price of $14.41 per share. The Company had remaining authorization to purchase $27.6 million of common stock at November 30, 2016.
NOTE 14. COMMITMENTS AND CONTINGENCIES

In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. See Note 19, Commitments and Contingencies, to the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
The Company has received notices from the U.S. Environmental Protection Agency ("EPA") or state agencies with similar responsibility that it is considered a potentially responsible party ("PRP") at several sites, none owned by the Company, and may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") or similar state statute to conduct remedial investigations, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. The Company is involved in litigation or administrative proceedings with regard to several of these sites in which the Company is contesting, or at the appropriate time may contest, its liability at the sites. In addition, the Company has received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Some of these environmental matters or other proceedings may result in fines, penalties or judgments being assessed against the Company. At both November 30, 2016 and August 31, 2016, the Company had accrued $0.7 million for cleanup and remediation costs in connection with CERCLA sites. The estimation process is based on currently available information, which is in many cases preliminary and incomplete. Total environmental liabilities, including with respect to CERCLA sites, were $3.2 million and $3.3 million as of November 30, 2016 and August 31, 2016, respectively, of which $2.1 million was classified as other long-term liabilities as of both November 30, 2016 and August 31, 2016. These amounts have not been discounted to their present values. Due to evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material.

21



Management believes that adequate provisions have been made in the Company's unaudited condensed consolidated financial statements for the potential impact of these contingencies and that the outcomes of the suits and proceedings described above, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on the business, results of operations or financial condition of the Company.
NOTE 15. BUSINESS SEGMENTS

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

The Company structures its business into the following five reporting segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill and International Marketing and Distribution. See Note 1, Nature of Operations, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016, for more information about the reporting segments, including the types of products and services from which each reporting segment derives its net sales. Corporate contains net earnings on BRP assets and short-term investments as well as expenses of the Company's corporate headquarters and interest expense related to its long-term debt.

The financial information presented for the International Marketing and Distribution segment excludes the operations of the Australian steel distribution business. This operation has been classified as discontinued operations in the consolidated statements of earnings. See Note 6, Discontinued Operations, for more information.

The Company uses adjusted operating profit (loss) from continuing operations to compare and evaluate the financial performance of its segments. Adjusted operating profit (loss) is the sum of the Company's earnings from continuing operations before income taxes, interest expense and discounts on sales of accounts receivable. Intersegment sales are generally priced at prevailing market prices. Certain corporate administrative expenses are allocated to the segments based upon the nature of the expense. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016.



22



The following is a summary of certain financial information from continuing operations by reportable segment:
 
 
Three Months Ended November 30, 2016
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
154,362

 
$
203,331

 
$
335,277

 
$
134,190

 
$
246,153

 
$
1,750

 
$
—

 
$
1,075,063

Intersegment sales
 
22,346

 
143,834

 
3,123

 
211

 
2,007

 
—

 
(171,521
)
 
—

Net sales
 
176,708

 
347,165

 
338,400

 
134,401

 
248,160

 
1,750

 
(171,521
)
 
1,075,063

Adjusted operating profit (loss) from continuing operations
 
(5,098
)
 
36,949

 
6,711

 
9,973

 
(966
)
 
(24,013
)
 
(204
)
 
23,352

Total assets as of November 30, 2016*
 
194,056

 
791,063

 
629,925

 
360,428

 
560,109

 
950,717

 
(484,859
)
 
3,001,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2015
 
 
Americas
 
International
 
 
 
 
 
 
(in thousands)
 
Recycling
 
Mills
 
Fabrication
 
Mill
 
Marketing and Distribution
 
Corporate
 
Eliminations
 
Continuing Operations
Net sales-unaffiliated customers
 
$
154,836

 
$
217,641

 
$
379,481

 
$
120,448

 
$
280,062

 
$
2,391

 
$
—

 
$
1,154,859

Intersegment sales
 
24,371

 
166,891

 
2,833

 
—

 
2,975

 
—

 
(197,070
)
 
—

Net sales
 
179,207

 
384,532

 
382,314

 
120,448

 
283,037

 
2,391

 
(197,070
)
 
1,154,859

Adjusted operating profit (loss)
 
(6,548
)
 
59,064

 
21,345

 
2,771

 
(2,169
)
 
(18,072
)
 
(330
)
 
56,061

Total assets as of August 31, 2016*
 
188,873

 
798,481

 
659,165

 
372,492

 
564,068

 
1,034,053

 
(493,050
)
 
3,124,082

 _________________ 
* Excludes total assets from discontinued operations of $1.2 million at November 30, 2016 and $6.8 million at August 31, 2016.

Reconciliations of earnings from continuing operations to adjusted operating profit from continuing operations are provided below:
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Earnings from continuing operations
 
$
7,174


$
25,633

Income taxes
 
2,653


11,772

Interest expense
 
13,298


18,304

Discounts on sales of accounts receivable
 
227


352

Adjusted operating profit from continuing operations
 
$
23,352


$
56,061

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

In the following discussion, references to "we," "us," "our" or the "Company" mean Commercial Metals Company and its consolidated subsidiaries, unless the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto, which are included in this Quarterly Report on Form 10-Q, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016. This discussion contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission ("SEC") or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled "Forward-Looking Statements" in Item 2 of this Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016. We do not undertake any obligation to update, amend or clarify any forward-looking statements to reflect changed

23




assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.
CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations. In the table below, we have included financial measures that were not derived in accordance with accounting principles generally accepted in the United States ("GAAP").
 
 
Three Months Ended November 30,
(in thousands, except per share data)
 
2016
 
2015
Net sales*
 
$
1,075,063

 
$
1,154,859

Earnings from continuing operations
 
7,174

 
25,633

Adjusted operating profit from continuing operations+
 
23,352

 
56,061

Adjusted EBITDA from continuing operations+
 
53,799

 
87,700

Diluted net earnings per share attributable to CMC
 
0.05

 
0.21

 _________________ 
* Excludes divisions classified as discontinued operations.
+ Non-GAAP financial measure.

Adjusted Operating Profit from Continuing Operations

Adjusted operating profit from continuing operations is the sum of our earnings from continuing operations before income taxes, interest expense and discounts on sales of accounts receivable. Adjusted operating profit from continuing operations should not be considered as an alternative to earnings from continuing operations or net earnings, as determined by GAAP. Management uses adjusted operating profit from continuing operations to evaluate the financial performance of CMC. For added flexibility, we may sell certain trade accounts receivable both in the U.S. and internationally. We consider sales of accounts receivable as an alternative source of liquidity to finance our operations, and we believe that removing these costs provides a clearer perspective of CMC's operating performance. Adjusted operating profit from continuing operations may be inconsistent with similar measures presented by other companies.

Reconciliations of earnings from continuing operations to adjusted operating profit from continuing operations are provided below:
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Earnings from continuing operations
 
$
7,174

 
$
25,633

Income taxes
 
2,653

 
11,772

Interest expense
 
13,298

 
18,304

Discounts on sales of accounts receivable
 
227

 
352

Adjusted operating profit from continuing operations
 
$
23,352

 
$
56,061


Adjusted EBITDA from Continuing Operations

Adjusted EBITDA from continuing operations is the sum of earnings from continuing operations before net earnings attributable to noncontrolling interests, interest expense and income taxes. It also excludes CMC's largest recurring non-cash charge, depreciation and amortization, as well as long-lived asset impairment charges, which are also non-cash. Adjusted EBITDA from continuing operations should not be considered as an alternative to earnings from continuing operations or net earnings, or as a better measure of liquidity than net cash flows from operating activities, as determined by GAAP. However, we believe that adjusted EBITDA from continuing operations provides relevant and useful information, which is often used by analysts, creditors and other interested parties in our industry. Additionally, adjusted EBITDA from continuing operations is the target benchmark

24



for our annual and long-term cash incentive performance plans for management. Adjusted EBITDA from continuing operations may be inconsistent with similar measures presented by other companies.

There were no net earnings attributable to noncontrolling interests during the three months ended November 30, 2016 and November 30, 2015.

Reconciliations of earnings from continuing operations to adjusted EBITDA from continuing operations are provided below:
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Earnings from continuing operations
 
$
7,174


$
25,633

Interest expense
 
13,298


18,304

Income taxes
 
2,653


11,772

Depreciation and amortization
 
30,286


31,991

Impairment charges
 
388

 
—

Adjusted EBITDA from continuing operations
 
$
53,799


$
87,700


Summary

Net sales for the three months ended November 30, 2016 decreased $79.8 million, or 7%, compared to the corresponding period in fiscal 2016 primarily due to decreases in the average selling prices and volumes for our Americas Mills, Americas Fabrication and International Marketing and Distribution segments. Average selling prices and volumes for our Americas Mills and Americas Fabrication segments were adversely impacted by declining U.S. steel and commodity pricing and continued import pressures in the U.S. during the three months ended November 30, 2016 compared to the corresponding period in fiscal 2016. Average selling prices and volumes for our International Marketing and Distribution segment decreased primarily due a decline in volumes of a high value product within the portfolio of our raw materials trading business headquartered in the U.S and our decision to exit the United Kingdom steel trading business in the fourth quarter of fiscal 2016. In contrast, our International Mill segment recorded an increase in net sales due to a 14% increase in shipments, primarily driven by strong demand in the construction sector for rebar and merchant products as well as lower rebar imports due to the threat of potential anti-subsidy filings against Belarus.

Earnings from continuing operations for the three months ended November 30, 2016 decreased $18.5 million, or 72%, compared to the corresponding period in fiscal 2016. Adjusted operating profit from continuing operations for the three months ended November 30, 2016 decreased $32.7 million, or 58%, compared to the corresponding period in fiscal 2016, primarily driven by our Americas Mills and Americas Fabrication segments. In addition to the decline in average selling prices and volumes discussed above, average metal margins for our Americas Mills and Americas Fabrication segments decreased 17% and 13%, respectively, compared to the three months ended November 30, 2015. In contrast, our International Mill segment recorded an increase in adjusted operating profit due to the increase in shipments discussed above, partially offset by a 3% decline in average metal margin.

Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations for the three months ended November 30, 2016 increased $7.0 million, compared to the corresponding period in fiscal 2016. The increase was primarily due to a $4.2 million increase in expense related to mark-to-market adjustments associated with our outstanding equity awards accounted for as liability awards as a result of our increased stock value at November 30, 2016. Additionally, severance expenses increased $2.5 million, gains on the disposal of assets decreased $2.4 million, and we recognized a $1.6 million net unfavorable impact from foreign currency transactions and foreign exchange derivative activities, in each case compared to the first three months of fiscal 2016.

Interest Expense

Interest expense for the three months ended November 30, 2016 decreased $5.0 million compared to the three months ended November 30, 2015. The decrease in interest expense was primarily due to the repayment of long-term notes in the second quarter of fiscal 2016, which reduced interest expense by $3.5 million for the three months ended November 30, 2016, compared to the corresponding period in the prior fiscal year. See Note 7, Credit Arrangements, of this Quarterly Report on Form 10-Q for additional information regarding the repayment of long-term notes. Also decreasing interest expense is the construction of the steel micro-mill in Durant, Oklahoma, which increased capitalized interest by an additional $1.2 million for the three months ended November 30, 2016, compared to the three months ended November 30, 2015.


25



Income Taxes

Our effective income tax rate from continuing operations for the three months ended November 30, 2016 was 27.0%, compared with 31.5% for the three months ended November 30, 2015. The decrease in our effective income tax rate from continuing operations for the three months ended November 30, 2016 was largely attributable to an increase in the proportion of global income from operations earned in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19%. Our effective income tax rates can also be impacted by state and local taxes as well as by earnings or losses from foreign jurisdictions. State and local taxes are generally consistent while the composition of domestic and foreign earnings can create larger fluctuations in our effective tax rate.
We intend to indefinitely reinvest all undistributed earnings of our non-U.S. subsidiaries. While not expected, if a repatriation occurs in the future, we would be required to provide for income taxes on repatriated earnings from our non-U.S. subsidiaries. Determination of the unrecognized deferred income tax liability related to the undistributed earnings of our non-U.S. subsidiaries is a complex, hypothetical calculation and is therefore impracticable to present in this Quarterly Report on Form 10-Q.
SEGMENT OPERATING DATA

Unless otherwise indicated, all dollar amounts below are from continuing operations and calculated before income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 15, Business Segments, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Americas Recycling
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
176,708


$
179,207

Adjusted operating loss
 
(5,098
)

(6,548
)
Average selling price (per short ton)
 
 
 
 
Average ferrous selling price
 
$
186

 
$
173

Average nonferrous selling price
 
1,816

 
1,781

Short tons shipped (in thousands)
 
 
 
 
Ferrous tons shipped
 
405

 
389

Nonferrous tons shipped
 
49

 
52

Total tons shipped
 
454

 
441


Net sales for the three months ended November 30, 2016 decreased $2.5 million, or 1%, compared to the corresponding period in fiscal 2016 primarily due to insurance settlement revenue of $2.5 million recorded during the three months ended November 30, 2015. Net sales were positively impacted by a $13 per short ton increase in average ferrous selling prices and a 4% increase in ferrous tons shipped. Average nonferrous selling prices increased $35 per short ton while nonferrous tons shipped decreased 6%. Nonferrous shipments decreased as lower prices during the fourth quarter of fiscal 2016 as compared to the fourth quarter of fiscal 2015 slowed material flow during the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016.
 
Adjusted operating loss decreased $1.5 million for the three months ended November 30, 2016 compared to the corresponding period in fiscal 2016. During the first quarter of fiscal 2017, the increase in average nonferrous selling prices discussed above coupled with a decrease in average nonferrous material costs resulted in a 38% improvement in average nonferrous metal margin compared to the first quarter of fiscal 2016. Additionally, during the first quarter of fiscal 2017, labor and employee benefit expenses decreased 11% per short ton compared to the same period in fiscal 2016.


26



Americas Mills
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
347,165

 
$
384,532

Adjusted operating profit
 
36,949

 
59,064

Average price (per short ton)
 
 
 
 
Finished goods selling price
 
$
507

 
$
567

Total sales
 
499

 
556

Cost of ferrous scrap consumed
 
201

 
198

Metal margin
 
298

 
358

Ferrous scrap purchase price
 
171

 
158

Short tons (in thousands)
 
 
 
 
Tons melted
 
615

 
613

Tons rolled
 
589

 
589

Tons shipped
 
635

 
640


In our Americas Mills segment we include our five domestic steel mills, (four commonly referred to as "minimills" and one commonly referred to as a "micro-mill"), our micro-mill currently under construction in Oklahoma, and the recycling locations which directly support the steel mills.

Net sales for the three months ended November 30, 2016 decreased $37.4 million, or 10%, compared to the corresponding period in fiscal 2016. The decrease in net sales for the three months ended November 30, 2016 was due to a decrease in average selling price of $57 per short ton coupled with a 1% decrease in tons shipped when compared to the corresponding period in fiscal 2016. Average selling prices decreased as a result of continued import pressures in the U.S. and continued volatility of scrap pricing which combined to create a soft pricing environment for mill products. During the three months ended November 30, 2016, shipments of our finished products decreased approximately 13 thousand short tons due to lower demand from the service center industry while shipments of our semi-finished products increased approximately eight thousand short tons due to improving conditions in the oil and gas industry.

Adjusted operating profit for the three months ended November 30, 2016 decreased $22.1 million compared to the corresponding period in fiscal 2016. During the three months ended November 30, 2016, the decrease in average selling prices discussed above and a $3 per short ton increase in the average cost of ferrous scrap consumed resulted in a 17% decrease in average metal margin compared to the three months ended November 30, 2015, due to continued import pressure in the U.S. and the volatility of scrap pricing. Additionally, labor and employee benefit expenses increased 5% per short ton during the three months ended November 30, 2016 compared to the three months ended November 30, 2015. Partially offsetting the margin compression were reductions in certain expenses for the three months ended November 30, 2016 compared to three months ended November 30, 2015, largely attributable to decreases in: (i) freight expenses of 8% per short ton due to reduced fuel costs and (ii) repairs and maintenance expenses of $1.5 million due to variances in the timing and amounts of routine maintenance and equipment enhancements conducted in the normal course of business.


27



Americas Fabrication
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
338,400

 
$
382,314

Adjusted operating profit
 
6,711

 
21,345

Average selling price (excluding stock and buyout sales) (per short ton)
 
 
 
 
Rebar
 
$
747

 
$
860

Structural
 
2,162

 
2,354

Post
 
832

 
867

Short tons shipped (in thousands)
 
 
 
 
Rebar
 
248

 
249

Structural
 
7

 
7

Post
 
18

 
21


Net sales for the three months ended November 30, 2016 decreased $43.9 million, or 11%, compared to the corresponding period in fiscal 2016. The decrease in net sales for the three months ended November 30, 2016 was primarily due to a 12% decrease in the average composite selling price. Import pressure throughout fiscal 2016 resulted in falling steel commodity prices and lower pricing on projects booked during fiscal 2016. Our fabrication backlog run out can be nine months or more, and as such, projects booked in fiscal 2016 at lower prices negatively impacted the average composite selling price during the first quarter of fiscal 2017.

Adjusted operating profit for the three months ended November 30, 2016 decreased $14.6 million, compared to the corresponding period in fiscal 2016. The decrease in adjusted operating profit for the first quarter of fiscal 2017 was primarily due to a 13% decrease in average composite metal margin as the average composite selling price decreased faster than the decrease in average composite material cost, compared to the first quarter of fiscal 2016. Additionally, this segment benefited from a $2.4 million gain on the sale of fixed assets during the first quarter of fiscal 2016.

International Mill
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
134,401

 
$
120,448

Adjusted operating profit
 
9,973

 
2,771

Average price (per short ton)
 
 
 
 
Total sales
 
$
397

 
$
408

Cost of ferrous scrap consumed
 
202

 
207

Metal margin
 
195

 
201

Ferrous scrap purchase price
 
172

 
166

Short tons (in thousands)
 
 
 
 
Tons melted
 
354

 
320

Tons rolled
 
313

 
300

Tons shipped
 
316

 
278



28



Net sales for the three months ended November 30, 2016 increased $14.0 million, or 12%, compared to the corresponding period in fiscal 2016. The increase in net sales for the three months ended November 30, 2016 was primarily due to a 14% increase in tons shipped, primarily driven by strong demand in the construction sector for rebar and merchant products as well as lower rebar imports due to the threat of potential anti-subsidy filings against Belarus. During the three months ended November 30, 2016, the increased volumes were partially offset by a decrease in average selling price of 3% as a result of a change in product mix with greater net sales from our semi-finished products as opposed to our finished products compared to the three months ended November 30, 2015. Additionally, the increase in net sales for the three months ended November 30, 2016 reflects unfavorable foreign currency fluctuation impacts of approximately $3.8 million due to the strengthening of the U.S. dollar in relation to the zloty.

Adjusted operating profit for the three months ended November 30, 2016 increased $7.2 million, compared to the corresponding period in fiscal 2016. The increase in adjusted operating profit for the first quarter of fiscal 2017 resulted from the increase in tons shipped discussed above, partially offset by a 3% per short ton decrease in average metal margin due to the decline in selling prices discussed above which outpaced the decline in the cost of ferrous scrap consumed. Changes in the U.S. dollar relative to other currencies did not have a material impact on the change in this segment's adjusted operating profit for the three months ended November 30, 2016.

International Marketing and Distribution
 
 
Three Months Ended November 30,
(in thousands)
 
2016
 
2015
Net sales
 
$
248,160

 
$
283,037

Adjusted operating loss
 
(966
)
 
(2,169
)

Net sales for the three months ended November 30, 2016 decreased $34.9 million, or 12%, compared to the corresponding period in fiscal 2016. The decrease in net sales for the three months ended November 30, 2016 was primarily due to a decline in volumes sold of a high value product within the portfolio of our raw materials trading business headquartered in the U.S. Additionally, during the first quarter of fiscal 2017, our operations in the United Kingdom experienced a decline in volumes as a result of our decision to exit the United Kingdom steel trading business in the fourth quarter of fiscal 2016 and a decline in average selling price driven by the strengthening of the U.S. dollar in relation to the British Pound, in each case compared to the first quarter of fiscal 2016.

Adjusted operating loss for the three months ended November 30, 2016 decreased $1.2 million compared to the corresponding period in fiscal 2016. The decrease in adjusted operating loss was primarily due to improved margins for our steel trading business headquartered in the U.S. as a result of marginal improvements within the energy market and the effects of anti-dumping cases. Further decreasing adjusted operating loss for the three months ended November 30, 2016, was the wind-down of our steel distribution business in the United Kingdom, which contributed to lower margins in the first quarter of fiscal 2016. These improved margins were partially offset by a decline in margins for our operations in Asia. Changes in the U.S. dollar relative to other currencies did not have a material impact on the change in this segment's adjusted operating loss for the three months ended November 30, 2016.

Corporate

Our corporate expenses for the three months ended November 30, 2016 increased $5.9 million, compared to the corresponding period in fiscal 2016. The increase in corporate expenses for the three months ended November 30, 2016 was primarily due to a $4.2 million increase in expense related to mark-to-market adjustments associated with our outstanding equity awards accounted for as liability awards as a result of our increased stock value at November 30, 2016.

DISCONTINUED OPERATIONS DATA

In the first quarter of fiscal 2015, we decided to exit our steel distribution business in Australia, which met the definition of a discontinued operation. As a result, our steel distribution business in Australia has been presented as a discontinued operation for all periods. During the fourth quarter of fiscal 2015, the Company completed the sale of six locations that were a part of the Australian steel distribution business and ceased all operations at three other locations that were part of the Australian steel distribution business. As of August 31, 2015, one location remained for sale and in the fourth quarter of fiscal 2016, the Company completed the sale of the remaining location. Our Australian steel distribution business was previously included in the International Marketing and Distribution segment.

29



OUTLOOK

Our second fiscal quarter has historically been slower as a result of a seasonal downturn in construction activity due to winter weather conditions and holidays. Several indicators point to potential improvements in market conditions during our fiscal 2017. Non-residential construction, our primary end use market in the U.S., has improved over the last several months. Non-residential construction spending increased 9% and non-residential construction starts increased 29% year over year for the quarter ending November 30, 2016. Additionally, the Architectural Billings Index for the southern U.S., an important geography for CMC, has remained strong for the last several quarters. We are optimistic about potential investments in infrastructure which may begin to develop during our fiscal 2017 as a result of the Fixing America’s Surface Transportation ("FAST") Act. Ferrous scrap pricing improved during November and December 2016, which we expect will support finished goods pricing and re-entry into the market by customers anticipating a market bottom. Finally, the change in the political leadership following the U.S. elections may result in more favorable business conditions and economic growth in the medium and long terms. Potential changes in the regulatory environment related to trade, taxes, infrastructure spending and other matters may bode well for the domestic steel industry and we are well positioned to capitalize on any such changes.
LIQUIDITY AND CAPITAL RESOURCES

See Note 7, Credit Arrangements, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

While we believe the lending institutions participating in our credit arrangements are financially capable, it is important to note that the banking and capital markets periodically experience volatility that may limit our ability to raise capital. Additionally, changes to our credit rating by any rating agency may impact our ability to raise capital and our financing costs.

The table below reflects our sources, facilities and availability of liquidity as of November 30, 2016:
(in thousands)
 
Total Facility
 
Availability
Cash and cash equivalents
 
$
465,167

 
465,167

Revolving credit facility
 
350,000

 
$
346,983

U.S. receivables sale facility
 
200,000

 
119,266

International accounts receivable sales facilities
 
47,556

 
47,556

Bank credit facilities — uncommitted
 
41,611

 
41,611

Notes due from 2017 to 2023
 
1,029,818

 
*

Equipment notes
 
32,437

 
*

 _________________
* We believe we have access to additional financing and refinancing, if needed.

As of November 30, 2016, we had $300.0 million of 6.50% Senior Notes due July 2017 (the "2017 Notes"), $399.8 million of 7.35% Senior Notes due August 2018 (the "2018 Notes") and $330.0 million of 4.875% Senior Notes due May 2023 (the "2023 Notes" and together with the 2017 Notes and the 2018 Notes, the "Notes"). The Notes require interest only payments until maturity. We expect cash on hand and cash generated from operations to be sufficient to meet all interest and principal payments due within the next twelve months, and we believe we will be able to obtain additional financing or to refinance these notes when they mature.

At November 30, 2016 and August 31, 2016, CMC Poland Sp. z.o.o. ("CMCP") had uncommitted credit facilities with several banks of Polish zloty ("PLN") 175 million ($41.6 million) and PLN 175 million ($44.8 million), respectively. As of November 30, 2016, the uncommitted credit facilities have expiration dates ranging from March 2017 to November 2017, which CMCP intends to renew upon expiration. At November 30, 2016 and August 31, 2016, no amounts were outstanding under these facilities. During the three months ended November 30, 2016, and November 30, 2015, CMCP had no borrowings or repayments under its uncommitted credit facilities.

With bank approval, the maximum availability under our $350.0 million revolving credit facility (the "Credit Agreement") can be increased to $500.0 million. Our obligation under the Credit Agreement is collateralized by our 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 November 30, 2016. The Company had no amounts drawn under its revolving credit facilities at November 30, 2016 and August 31, 2016.

30




Under the Credit Agreement, we are 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 2017 Notes and the 2018 Notes and each day thereafter that the 2017 Notes and the 2018 Notes are outstanding, we 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 LIBOR rate. At November 30, 2016, our interest coverage ratio was 4.84 to 1.00 and our debt to capitalization ratio was 0.44 to 1.00.

At November 30, 2016, we were in compliance with all of the covenants contained in our debt agreements.

Our foreign operations generated approximately 28% of our net sales during the first quarter of fiscal 2017, and as a result, our foreign operations had cash and cash equivalents of approximately $64.0 million at November 30, 2016. Historically, our U.S. operations have generated the majority of our cash, which has been used to fund the cash needs of our U.S. operations as well as our foreign operations. Additionally, our U.S. operations have access to the $350.0 million credit facility described above and the $200.0 million sale of accounts receivable program described below. We intend to indefinitely reinvest all undistributed earnings of our non-U.S. subsidiaries. If a repatriation of earnings occurs in the future, we would be required to provide for income taxes on dividends from our non-U.S. subsidiaries. Determination of the unrecognized deferred income tax liability related to the undistributed earnings of our non-U.S. subsidiaries is not practicable because of the complexities with its hypothetical calculation.

We regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, we record allowances as soon as we believe accounts are uncollectible. Continued pressure on the liquidity of our customers could result in additional allowances as we make our assessments in the future. We use credit insurance both in the U.S. and internationally to mitigate the risk of customer insolvency. We estimate that the amount of credit insured receivables (and those covered by export letters of credit) was approximately 28% of total receivables at November 30, 2016.

For added flexibility, we may sell certain accounts receivable both in the U.S. and internationally. See Note 3, Sales of Accounts Receivable, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information. Our U.S. sale of accounts receivable program contains certain cross-default provisions whereby a termination event could occur if we default under certain of our credit arrangements. Additionally, our U.S. sale of accounts receivable program contains covenants that are consistent with the covenants contained in the Credit Agreement.

We utilize documentary letter of credit programs whereby we assign certain trade accounts payable associated with trading transactions entered into by our marketing and distribution divisions. These letters of credit allow for payment at a future date and are used as an additional source of working capital financing. These letters of credit are issued under uncommitted lines of credit, which are in addition to and separate from our contractually committed credit facility and are not included in our overall liquidity analysis. We did not have any material amounts of documentary letters of credit outstanding at November 30, 2016 and August 31, 2016, respectively. The amount of documentary letters of credit outstanding during the period can fluctuate as a result of the level of activity and volume of materials purchased during the period as well as a result of their length and timing to maturity.

During the first quarter of fiscal 2015, CMC's Board of Directors authorized a share repurchase program under which we may repurchase up to $100.0 million of shares of CMC common stock. We intend to repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. The timing and the amount of repurchases, if any, are determined by management based on an evaluation of market conditions, capital allocation alternatives and other factors. The share repurchase program does not require us to purchase any dollar amount or number of shares of CMC common stock and may be modified, suspended, extended or terminated at any time without prior notice. We did not purchase any shares of CMC common stock during the three months ended November 30, 2016. During the three months ended November 30, 2015, we purchased 316,086 shares of CMC common stock at an average purchase price of $14.41 per share.

31




Cash Flows

Operating Activities
Our cash flows from operating activities result primarily from the sale of steel and related products, and to a lesser extent, sales of nonferrous metal products and other raw materials used in steel manufacturing. We have a diverse and generally stable customer base. From time to time, we use futures or forward contracts to mitigate the risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. See Note 9, Derivatives and Risk Management, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information.

Net cash flows used by operating activities were $1.0 million during the first three months of fiscal 2017 compared to net cash flows from operating activities of $219.6 million during the first three months of fiscal 2016. Net earnings decreased $18.8 million during the first three months of fiscal 2017 compared to the same period in the prior fiscal year. Net earnings were impacted by the following non-cash items and items included in net earnings for which the cash effects did not relate to operating activities: $8.2 million stock-based compensation and $0.5 million write-down of inventories during first three months of fiscal 2017, compared to $6.3 million stock-based compensation, $2.7 million write-down of inventories and $2.8 million net gain on sale of fixed assets and other during the first three months of fiscal 2016. Cash used by changes in operating assets and liabilities was $33.7 million during the first three months of fiscal 2017 compared to cash from changes in operating assets and liabilities of $170.3 million during the corresponding period in fiscal 2016 with the following significant changes:

Accounts receivable - Cash generated from accounts receivable decreased $136.6 million during the first three months of fiscal 2017 compared to the same period of fiscal 2016. The decrease in cash from accounts receivable primarily relates to the change in consolidated net sales period over period as consolidated net sales from the fourth quarter of fiscal 2016 to the first quarter of fiscal 2017 decreased $141.1 million, and consolidated net sales from the fourth quarter of fiscal 2015 to the first quarter of fiscal 2016 decreased $274.5 million. Additionally, days sales outstanding during the first three months of fiscal 2017 deteriorated three days while days sales outstanding during the same period in fiscal 2016 improved one day.

Inventories - Cash generated from inventories decreased $68.0 million during the first three months of fiscal 2017 compared to the first three months of fiscal 2016. Cash generated from inventories decreased primarily due to our Americas Mills and International Marketing and Distribution segments as inventory levels decreased at a slower pace during the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Additionally, inventory levels for our Americas Recycling segment increased during the first quarter of fiscal 2017 compared to a decrease in inventory levels during the first quarter of fiscal 2016. In contrast, days sales in inventories during the first quarter of fiscal 2017 deteriorated four days while days sales in inventories during the first quarter of fiscal 2016 deteriorated nine days.

Investing Activities
Net cash flows used by investing activities increased $17.3 million during the first three months of fiscal 2017 compared to the same period in the prior fiscal year. The largest factor contributing to the use of cash was an increase in capital expenditures of $31.8 million, primarily due to expenditures for the construction of a new steel micro-mill in Durant, Oklahoma, partially offset by a decrease in restricted cash of $16.6 million primarily used for the construction of the new steel micro-mill in Durant, Oklahoma.

We expect our total capital expenditures for fiscal 2017 to be between $250 million and $300 million. We regularly assess our capital spending and reevaluate our requirements based on current and expected results.

Financing Activities
Net cash flows used by financing activities decreased $34.9 million during the first three months of fiscal 2017 compared to the same period in the prior fiscal year. The decrease primarily resulted from a decrease in net payments on short-term borrowings of $20.1 million, a $0.3 million increase in the level of usage of documentary letters of credit during the first three months of fiscal 2017 compared to a $9.8 million decrease in the level of usage of documentary letters of credit during the first three months of fiscal 2016, and a $4.6 million decrease in purchases of CMC common stock compared to the same period in the prior fiscal year. The amount of documentary letters of credit outstanding during the period can fluctuate as a result of the level of activity and volume of materials purchased during the period as well as a result of their length and timing to maturity.

We anticipate our current cash balances, cash flows from operations and our available credit sources will be sufficient to meet our cash needs, make scheduled payments for our contractual obligations, capital expenditures, working capital, share repurchases, dividends and other prudent deployment of our capital. However, in the event of sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternative and take appropriate steps to obtain sufficient additional funds.

32




CONTRACTUAL OBLIGATIONS

There were no material changes to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016. Our estimated contractual obligations for the twelve months ending November 30, 2017 are approximately $1.0 billion and primarily constitute expenditures incurred in connection with normal revenue producing activities as well as repayments of long-term debt due in July 2017.

Other Commercial Commitments

We maintain stand-by letters of credit to provide support for certain transactions that our insurance providers and suppliers request. At November 30, 2016, we had committed $24.1 million under these arrangements.
OFF-BALANCE SHEET ARRANGEMENTS

For added flexibility, we may sell certain trade accounts receivable both in the U.S. and internationally. We utilize proceeds from the sales of the trade accounts receivables as an alternative to short-term borrowings, effectively managing our overall borrowing costs and providing an additional source of working capital. We account for sales of the trade accounts receivables as true sales and the trade accounts receivable balances that are sold are removed from the condensed consolidated balance sheets. The cash advances received are reflected as cash provided by operating activities on our condensed consolidated statements of cash flows. See Note 3, Sales of Accounts Receivable, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
CONTINGENCIES

See Note 14, Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information.

In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including with respect to environmental matters. We may incur settlements, fines, penalties or judgments in connection with these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition.

33



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, with respect to U.S. construction activity, demand for our products, the effects of global steel overcapacity and international trade, share repurchases, legal proceedings, economic conditions, prices, changes in political and regulatory conditions, our financial condition, results of operations, capital projects, and capital expenditures, estimated contractual obligations, cash flows, liquidity and business, and our expectations or beliefs concerning future events and financial results. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "intends," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases. There are inherent risks and uncertainties in any forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements.

Our forward-looking statements are based on management's expectations and beliefs as of the time this Quarterly Report on Form 10-Q is filed with the SEC or, with respect to any document incorporated by reference, as of the time such document was prepared. Although we believe that our expectations are reasonable, we can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Except as required by law, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some of the important factors that could cause actual results to differ materially from our expectations include the following:

•
conditions, including the ongoing recovery from the last recession, continued sovereign debt problems in the Euro-zone and construction activity or lack thereof, and their impact in a highly cyclical industry;

•
rapid and significant changes in the price of metals, potentially impairing our inventory values due to declines in commodity prices;

•
excess capacity in our industry, particularly in China, and product availability from competing steel mills and other steel suppliers including import quantities and pricing;

•
compliance with and changes in environmental laws and regulations, including increased regulation associated with climate change and greenhouse gas emissions;

•
involvement in various environmental matters that may result in fines, penalties or judgments;

•
potential limitations in our or our customers' ability to access credit and non-compliance by our customers with our existing commercial contracts and commitments;

•
activity in repurchasing shares of our common stock under our repurchase program;

•
financial covenants and restrictions on the operation of our business contained in agreements governing our debt;

•
currency fluctuations;

•
global factors, including political uncertainties and military conflicts;

•
availability of electricity and natural gas for mill operations;

•
ability to hire and retain key executives and other employees;

•
competition from other materials or from competitors that have a lower cost structure or access to greater financial resources;

•
information technology interruptions and breaches in data security;

•
ability to make necessary capital expenditures to fund our mills;

•
availability and pricing of raw materials over which we exert little influence, including scrap metal, energy, insurance and supply prices;

•
unexpected equipment failures;

•
losses or limited potential gains due to hedging transactions;

•
litigation claims and settlements, court decisions, regulatory rulings and legal compliance risks;

•
risk of injury or death to employees, customers or other visitors to our operations;

34




•
increased costs related to health care reform legislation; and

•
those factors listed under Part I, Item 1A, Risk Factors, included in our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2016.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Compared to the information set forth in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016, the U.S. dollar equivalent of the Company's total gross foreign currency exchange contract commitments increased $7.4 million, or 3%. Forward contracts denominated in Polish zloty and the Australian dollar with a U.S. dollar functional currency increased $31.5 million and $11.2 million, respectively, compared to August 31, 2016. Additionally, the Company's short copper contracts increased by $12.3 million. These increases were partially offset by forward contracts denominated in the British pound with a U.S. dollar functional currency and forward contracts denominated in the U.S. dollar with a Thai baht functional currency, which decreased $12.1 million and $9.5 million, respectively, compared to August 31, 2016. There were no other material changes.
ITEM 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods, and includes controls and procedures designed to ensure that such information is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and they have concluded that as of that date, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended November 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

35



PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in lawsuits associated with the normal conduct of its businesses and operations. It is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that these actions could be decided unfavorably to the Company. We believe that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon our results of operations, cash flows or financial condition, and, where appropriate, these actions are being vigorously contested.

We are subject to laws and regulations relating to protection of the environment. It is not possible to quantify with certainty the potential impact of actions relating to environmental matters, particularly remediation and other compliance efforts that our subsidiaries may undertake in the future. We believe, however, compliance with current environmental protection laws (before taking into account estimated recoveries from third parties) will not have a material adverse effect upon our results of operations, cash flows or financial condition.
ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about purchases by the Company during the quarter ended November 30, 2016 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

Issuer Purchases of Equity Securities

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
September 1, 2016 - September 30, 2016
 
—

 
—

 
—

 
$
27,598,706

October 1, 2016 - October 31, 2016
 
—

 
—

 
—

 
27,598,706

November 1, 2016 - November 30, 2016
 
—

 
—

 
—

 
27,598,706

Total
 
—

 
 
 
—

 
 
 _________________ 
(1)
 During the first quarter of fiscal 2015, the Company announced that CMC's Board of Directors had authorized a share repurchase program under which the Company may repurchase up to $100.0 million of shares of CMC common stock. The share repurchase program does not require the Company to purchase any dollar amount or number of shares of CMC common stock and may be modified, suspended, extended or terminated by the Company at any time without prior notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
ITEM 5. OTHER INFORMATION

Not applicable.

36



ITEM 6.
EXHIBITS

3.1(a)
Restated Certificate of Incorporation dated March 2, 1989 (filed as Exhibit 3(i) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(b)
Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (filed as Exhibit 3(i)(a) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(c)
Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (filed as Exhibit 3(i)(b) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(d)
Certificate of Amendment of Restated Certificate of Incorporation dated January 30, 2004 (filed as Exhibit 3(i)(d) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 and incorporated herein by reference).
 
 
3.1(e)
Certificate of Amendment of Restated Certificate of Incorporation dated January 26, 2006 (filed as Exhibit 3(i) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2006 and incorporated herein by reference).
 
 
3.1(f)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock (filed as Exhibit 2 to Commercial Metals Company's Form 8-A filed August 3, 1999 and incorporated herein by reference).
 
 
3.2
Third Amended and Restated Bylaws (filed as Exhibit 3(ii) to Commercial Metals Company's Annual Report on Form 10-K for the year ended August 31, 2015 and incorporated herein by reference).
 
 
10.1*
Separation Agreement, dated September 29, 2016, by and between Commercial Metals Company and John C. Elmore (filed as Exhibit 10.1 to Commercial Metals Company’s Form 8-K filed on September 30, 2016 and incorporated herein by reference).
 
 
10.2*
Second Amendment to Employment Agreement, dated September 30, 2016, by and between Commercial Metals Company and Tracy L. Porter (filed as Exhibit 10.1 to Commercial Metals Company’s Form 8-K filed on October 3, 2016 and incorporated herein by reference).
 
 
10.3*
Fifth Amendment to Terms and Conditions of Employment, dated November 28, 2016, by and between Commercial Metals Company and Joseph Alvarado (filed herewith).
 
 
10.4*
Third Amendment to Terms and Conditions of Employment dated November 28, 2016, by and between Commercial Metals Company and Barbara R. Smith (filed as Exhibit 99.1 to Commercial Metals Company’s Form 8-K filed on November 29, 2016 and incorporated herein by reference).
 
 
31.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 to the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
Certification of Mary Lindsey, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
32.2
Certification of Mary Lindsey, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
101
The following financial information from Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings (Unaudited), (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (iii) the Condensed Consolidated Balance Sheets (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), (v) the Condensed Consolidated Statements of Stockholders' Equity (Unaudited) and (vi) the Notes to Condensed Consolidated Financial Statements (Unaudited) (submitted electronically herewith).

* Denotes management contract or compensatory plan.

37



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
COMMERCIAL METALS COMPANY
 
 
January 9, 2017
/s/ Mary Lindsey
 
Mary Lindsey
 
Vice President and Chief Financial Officer
(Duly authorized officer and principal financial officer of the registrant)





38



INDEX TO EXHIBITS

3.1(a)
Restated Certificate of Incorporation dated March 2, 1989 (filed as Exhibit 3(i) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(b)
Certificate of Amendment of Restated Certificate of Incorporation dated February 1, 1994 (filed as Exhibit 3(i)(a) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(c)
Certificate of Amendment of Restated Certificate of Incorporation dated February 17, 1995 (filed as Exhibit 3(i)(b) to Commercial Metals Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2009 and incorporated herein by reference).
 
 
3.1(d)
Certificate of Amendment of Restated Certificate of Incorporation dated January 30, 2004 (filed as Exhibit 3(i)(d) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 and incorporated herein by reference).
 
 
3.1(e)
Certificate of Amendment of Restated Certificate of Incorporation dated January 26, 2006 (filed as Exhibit 3(i) to Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 2006 and incorporated herein by reference).
 
 
3.1(f)
Certificate of Designation, Preferences and Rights of Series A Preferred Stock (filed as Exhibit 2 to Commercial Metals Company's Form 8-A filed August 3, 1999 and incorporated herein by reference).
 
 
3.2
Third Amended and Restated Bylaws (filed as Exhibit 3(ii) to Commercial Metals Company's Annual Report on Form 10-K for the year ended August 31, 2015 and incorporated herein by reference).
 
 
10.1*
Separation Agreement, dated September 29, 2016, by and between Commercial Metals Company and John C. Elmore (filed as Exhibit 10.1 to Commercial Metals Company’s Form 8-K filed on September 30, 2016 and incorporated herein by reference).
 
 
10.2*
Second Amendment to Employment Agreement, dated September 30, 2016, by and between Commercial Metals Company and Tracy L. Porter (filed as Exhibit 10.1 to Commercial Metals Company’s Form 8-K filed on October 3, 2016 and incorporated herein by reference).
 
 
10.3*
Fifth Amendment to Terms and Conditions of Employment, dated November 28, 2016, by and between Commercial Metals Company and Joseph Alvarado (filed herewith).
 
 
10.4*
Third Amendment to Terms and Conditions of Employment dated November 28, 2016, by and between Commercial Metals Company and Barbara R. Smith (filed as Exhibit 99.1 to Commercial Metals Company’s Form 8-K filed on November 29, 2016 and incorporated herein by reference).
 
 
31.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 to the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
Certification of Mary Lindsey, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
Certification of Joseph Alvarado, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
32.2
Certification of Mary Lindsey, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
101
The following financial information from Commercial Metals Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings (Unaudited), (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (iii) the Condensed Consolidated Balance Sheets (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited), (v) the Condensed Consolidated Statements of Stockholders' Equity (Unaudited) and (vi) the Notes to Condensed Consolidated Financial Statements (Unaudited) (submitted electronically herewith).

* Denotes management contract or compensatory plan.

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