ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this Annual Report.
Our discussion and analysis of fiscal year 2021 compared to fiscal year 2020 is included herein. Our discussion and analysis of fiscal year 2020 compared to fiscal year 2019 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2020, which was filed with the SEC on October 15, 2020.
OVERVIEW
As a vertically integrated organization, we manufacture, recycle and fabricate steel and metal products and provide related materials and services through a network including seven EAF mini mills, two EAF micro mills, one rerolling mill, steel fabrication and processing plants, construction-related product warehouses and metal recycling facilities in the U.S. and Poland. Our operations are conducted through two reportable segments: North America and Europe. See Part I, Item 1, "Business" for further information regarding our business and reportable segments.
When considering our results for the period, we evaluate our operating performance by comparing our net sales, in the aggregate and for both of our segments, in the current period to net sales in the corresponding period in the prior year. In doing so, we focus on changes in average selling price per ton and tons shipped for each of our product categories as these are the two variables that typically have the greatest impact on our results of operations. We group our products into three categories: raw materials, steel products and downstream products. Raw materials include ferrous and nonferrous scrap, steel products include rebar, merchant and other steel products, such as billets and wire rod, and downstream products include fabricated rebar and steel fence posts.
Key Performance Indicators
Adjusted EBITDA from continuing operations ("adjusted EBITDA") is used by management to compare and evaluate the period-over-period underlying business operational performance of our segments. Adjusted EBITDA is the sum of the Company's earnings from continuing operations before interest expense, income taxes, depreciation and amortization and impairment expense. Although there are many factors that can impact a segment’s adjusted EBITDA and, therefore, our overall earnings, changes in metal margin of our steel products and downstream products period-over-period is a consistent area of focus for our Company and industry. Metal margin is a metric used by management to monitor the results of our vertically integrated organization. For our steel products, metal margin is the difference between the average selling price per ton of rebar, merchant and other steel products and the cost of ferrous scrap per ton utilized by our steel mills to produce these products. An increase or decrease in input costs can impact profitability of these products when there is no corresponding change in selling prices due to competitive pressures. The metal margin for our downstream products is the difference between the average selling price per ton of fabricated rebar and steel fence post products and the scrap input costs to produce these products. The majority of our downstream products selling prices per ton are fixed at the beginning of a project and these projects last one to two years on average. Because the selling price generally remains fixed over the life of a project, changes in input costs over the life of the project can significantly impact profitability.
Impact of COVID-19
COVID-19 resulted in various government actions globally, including governmental actions in both the U.S. and Poland, designed to slow the spread of the virus. However, because we operate in a critical infrastructure industry, our facilities were allowed to remain open. While we implemented new procedures to support the safety of our employees, the costs were not material. Due to the impact of COVID-19 on the broader economy, average selling prices per ton and volumes decreased for certain product categories during the second half of 2020. However, net sales and volumes in the second half of 2020 were relatively consistent with, or higher than, net sales and volumes in the first half of 2020, and COVID-19 had limited impact on our operations during 2021.
We continue to evaluate the nature and extent of future impacts of the evolving pandemic on our operations and are complying with applicable state and local law and are taking into consideration relevant guidance, including the guidelines of the U.S. Centers for Disease Control and other authorities, to prioritize the health and safety of our employees, families, suppliers,
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customers and communities. Given the dynamic and uncertain nature and duration of the pandemic, we cannot reasonably estimate the long-term impact of COVID-19 on our business, results of operations and overall financial performance.
RESULTS OF OPERATIONS SUMMARY
The following discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations.
Year Ended August 31,
(in thousands, except per share data) 2021 2020
Diluted earnings per share 3.38 2.31
2021 Compared to 2020
Net sales for 2021 increased $1.3 billion, or 23%, compared to 2020. Net sales in our North America segment increased in 2021 compared to 2020, primarily due to a year-over-year increase in steel products average selling prices and raw materials average selling prices, along with a corresponding increase in shipments of steel products and raw materials. Net sales in our Europe segment also increased due to a year-over-year increase in steel products average selling prices in 2021 compared to 2020, coupled with increased shipments of steel products.
Earnings from continuing operations for 2021 increased by $134.6 million, or 48%, compared to 2020, primarily due to year-over-year increases in steel products metal margin per ton in both our North America and Europe segments and an increase in raw materials margin per ton in our North America segment. This increase was partially offset by a year-over-year decrease in downstream products metal margin in our North America segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 2021 decreased $6.5 million compared to 2020. Included in selling, general and administrative expenses in 2020 was a $32.1 million working capital adjustment related to the Acquisition, as defined in Note 2, Changes in Business, in Part II, Item 8 of this Annual Report, recorded subsequent to the end of the allowable one-year measurement period, with no such expense recorded during 2021. During 2021 we experienced a year-over-year increase of $26.5 million in labor-related expenses, which fluctuated due to our increased results in 2021.
Interest Expense
Interest expense in 2021 decreased $9.9 million compared to 2020. Of the year-over-year decrease, $5.0 million resulted from the lower interest rate on the 2031 Notes, which were outstanding during the six months ended August 31, 2021, compared to the interest rate on the 2026 Notes, which were outstanding during the corresponding period in 2020. Additionally, during 2020 we incurred interest expense of $4.7 million related to a term loan which was repaid in the year ended August 31, 2020.
Income Taxes
Our effective income tax rate for 2021 was 22.7% compared to 24.9% for 2020. The year-over-year decrease was primarily due to tax benefits recorded during 2021 associated with the release of state valuation allowances as well as a release of uncertain tax positions due to a lapse in a statute of limitations. These decreases were partially offset by an increase to global intangible low-taxed income expense recorded in 2021 related to a global tax restructuring. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report, for further discussion of our effective tax rate.
SEGMENTS
All amounts are computed and presented in a manner that is consistent with the basis in which we internally disaggregate financial information for the purpose of making operating decisions. See Note 19, Operating Segments, in Part II, Item 8 of this Annual Report, for further information on how we evaluate financial performance of our segments.
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2021 Compared to 2020
North America
Year Ended August 31,
External tons shipped (in thousands)
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 355 $ 238
Steel products metal margin per ton 397 380
Net sales in 2021 increased $901.0 million, or 19%, compared to 2020. The increase in net sales was due, in part, to increased demand in our end-use markets for steel products driven by greater construction and industrial activity in 2021 compared to 2020. Our external tons shipped for raw materials and steel products both increased 8% as a result of the rise in demand. Additionally, increasing ferrous scrap prices throughout 2021 contributed to year-over-year increases of 55% and 22% for raw materials average selling prices per ton and steel products average selling prices per ton, respectively. Net sales for 2021 and 2020 included amortization benefit of $6.0 million and $29.4 million, respectively, related to the unfavorable contract backlog of the Acquired Businesses.
Adjusted EBITDA in 2021 increased $85.4 million compared to 2020. The year-over-year increase in adjusted EBITDA was due to expansion in steel products metal margin per ton and raw materials margin per ton, coupled with the increase in shipments of these products as described above. While the fluctuation in scrap prices and increased demand positively impacted margins for sales of raw materials and steel products, downstream products average selling prices, many of which are fixed at the start of a project, did not keep pace with the increased input costs. Therefore, downstream products metal margin decreased in 2021 compared to 2020 and slightly offset the overall increase in year-over-year results. However, new contract bookings for downstream products during 2021 were reflective of increased input costs. Adjusted EBITDA did not include the $6.0 million or $29.4 million benefit of the amortization of the unfavorable contract backlog in 2021 or 2020, respectively. Adjusted EBITDA included non-cash stock compensation expense of $15.1 million and $12.4 million in 2021 and 2020, respectively.
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Europe
Year Ended August 31,
External tons shipped (in thousands)
Average selling price per ton
Cost of ferrous scrap utilized per ton $ 357 $ 246
Steel products metal margin per ton 255 202
Net sales in 2021 increased $349.9 million, or 50%, compared to 2020. The increase in net sales was driven largely by growing demand for steel products from both construction and industrial end markets and a continued upturn in European manufacturing activity in 2021 compared to 2020. The increase in shipments of steel products was also due, in part, to the startup of a third rolling line during the fourth quarter of 2021. Steel products average selling prices increased $164 per ton year-over-year due to the increased demand in the market coupled with lower rebar imports into Poland in 2021 compared to 2020. Net sales in 2021 were impacted by a favorable foreign currency translation adjustment of $36.9 million due to the decrease in the average value of the U.S. dollar relative to the Polish zloty in 2021, as compared to 2020, which was impacted by an unfavorable foreign currency translation adjustment of $25.1 million.
Adjusted EBITDA in 2021 increased $86.3 million compared to 2020, primarily driven by a $53 per ton, or 26%, expansion in steel products metal margin per ton as the growing demand for steel products caused the average selling price of steel products to outpace the rising input costs of ferrous scrap utilized. Adjusted EBITDA included non-cash stock compensation expense of $2.9 million and $2.0 million in 2021 and 2020, respectively.
Corporate and Other
Year Ended August 31,
Corporate and Other adjusted EBITDA loss in 2021 decreased by $6.0 million compared to 2020. The year-over-year decrease was driven primarily by a $32.1 million charge in 2020 due to a working capital adjustment related to the Acquisition, with no such charge recorded during 2021. This decrease was offset in part by a $16.8 million loss on debt extinguishment recorded in 2021 related to the retirement of the 2026 Notes and a $6.4 million increase in labor-related expenses in 2021 compared to 2020. Adjusted EBITDA included non-cash stock compensation expense of $25.7 million and $17.5 million for 2021 and 2020, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital Resources
Our cash and cash equivalents position remained strong in 2021 with $497.7 million at August 31, 2021 compared to $542.1 million at August 31, 2020. Our cash flows from operations result primarily from sales of steel products and downstream products as described in Part I, Item 1, "Business." Historically, our North America operations have generated the majority of our cash. At August 31, 2021, cash and cash equivalents of $24.1 million were held by our non-U.S. subsidiaries. We use futures or forward contracts to mitigate the risks from fluctuations in metal commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy commodity prices. See Note 10, Derivatives, in Part II, Item 8 of this Annual Report for further information.
We have a diverse and generally stable customer base, and regularly maintain a substantial amount of accounts receivable. We actively monitor our accounts receivable and, based on market conditions and customers' financial condition, record allowances when we believe accounts are uncollectible. We use credit insurance 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 17% of total receivables at August 31, 2021.
The table below reflects our sources, facilities and availability of liquidity as of August 31, 2021. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, for additional information.
(in thousands) Total Facility Availability
__________________________________
* We believe we have access to additional financing and refinancing, if needed.
We anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be sufficient to fund operations and meet our short-term and long-term cash requirements, including our scheduled debt repayments, payments for our contractual obligations, capital expenditures, working capital needs, dividends, share repurchases and other prudent uses of our capital, as needed. However, we will continue to assess our liquidity needs. In the event of sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
As of August 31, 2021 and 2020, we had no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Share Repurchase Program
Under our share repurchase program, we may repurchase shares from time to time for cash in the open market or privately negotiated transactions in accordance with applicable federal securities laws. The timing and the amount of repurchases, if any, will be 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 our common stock and may be modified, suspended, extended or terminated at any time without prior notice. We did not purchase any shares of common stock during 2021, 2020 or 2019. See Note 15, Capital Stock, in Part II, Item 8 of this Annual Report for further information on the share repurchase program.
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2021 Compared to 2020
Operating Activities
Net cash flows from operating activities were $228.5 million and $791.2 million in 2021 and 2020, respectively. Net earnings increased by $133.4 million year-over-year, offset by a $651.2 million year-over-year net increase in cash used by operating assets and liabilities ("working capital") and an $89.5 million year-over-year decrease in cash flows from deferred income taxes and other long-term taxes. The increase in cash used by working capital is a result of rising volumes and values of inventory and average selling prices in both of our segments. These operating changes are reflected in increased cash outflow from inventories and a rise in accounts receivable, partially offset by increased accounts payable and a nine day decrease in operating working capital days from 2021 to 2020. See Note 12, Income Tax, in Part II, Item 8 of this Annual Report, for more information on the change in deferred taxes. Also contributing to the offset of working capital was a $23.3 million year-over-year decrease in amortization of acquired unfavorable contract backlog and a $15.1 million increase in loss on debt extinguishment.
Investing Activities
Net cash flows used by investing activities were $162.1 million and $192.9 million during 2021 and 2020, respectively. The $30.8 million decrease in net cash flows used by investing activities was primarily due to changes in acquisition and disposition activity, which resulted in a $16.2 million decline in cash outflows for acquisitions year-over-year and a $14.6 million increase in cash proceeds from the sale of property, plant and equipment and other in 2021 compared to 2020.
We estimate that our 2022 capital spending will range from $450 million to $500 million, which is expected to cover certain construction costs for our third micro mill and normal capital expenditures. We regularly assess our capital spending based on current and expected results.
Financing Activities
Net cash flows used by financing activities were $109.4 million and $247.8 million during 2021 and 2020, respectively. The $138.4 million reduction in net cash flows used by financing activities is a result of decreased net debt repayments, which were $32.5 million in 2021 and $187.3 million in 2020. Partially offsetting this reduction in net cash flows used by financing activities was $13.1 million of debt extinguishment costs related to early retirement of our 2026 Notes in 2021. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, for additional information regarding long-term debt transactions.
Contractual Obligations and Commitments
Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, leases for properties and equipment and purchase obligations as part of normal operations. See Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report, for more information regarding scheduled maturities of our long-term debt. See Note 7, Leases, in Part II, Item 8 of this Annual Report for additional information on leases. Interest payable associated with our long-term debt was approximately $45.3 million due in the twelve months following August 31, 2021 and $200.0 million due thereafter. Additionally, the Company has a U.S. federal repatriation tax obligation resulting from the repatriation tax provisions of the Tax Cuts and Jobs Act (“TCJA”), of which $2.2 million was due in the twelve months following August 31, 2021 and $18.8 million is due thereafter.
As of August 31, 2021, our undiscounted purchase obligations were approximately $638.5 million due in the next twelve months and $228.0 million due thereafter under purchase orders and "take or pay" arrangements. These purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement, and exclude agreements with variable terms for which we are unable to estimate the minimum amounts. The "take or pay" arrangements are multi-year commitments with minimum annual purchase requirements and are entered into primarily for purchases of commodities used in operations such as electrodes and natural gas.
Of the purchase obligations due within the twelve months following August 31, 2021, approximately 25% were for consumable production inputs, such as ferroalloys, 25% were for the construction of our third micro mill, 21% were for commodities and 10% were for capital expenditures on existing operating machinery and equipment. Of the purchase obligations due thereafter, 65% are for commodities and 25% are for the construction of our third micro mill. The remainder of the purchase obligations were for goods and services in the normal course of business.
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We provide certain eligible employees benefits pursuant to our nonqualified Benefit Restoration Plan ("BRP") equal to amounts that would have been available under our tax qualified plans under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), but for limitations of ERISA, tax laws and regulations. We did not include estimated payments related to the BRP in the above description of contractual obligations and commitments. Refer to Note 14, Employees' Retirement Plans, in Part II, Item 8 of this Annual Report, for more information on the BRP.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain transactions that governmental agencies, our insurance providers and suppliers require. At August 31, 2021, we had committed $27.6 million under these arrangements, of which $3.0 million reduced availability under the Credit Agreement (as defined in Note 8, Credit Arrangements, in Part II, Item 8 of this Annual Report).
CONTINGENCIES
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. Liabilities and costs associated with litigation-related loss contingencies require estimates and judgments based on our knowledge of the facts and circumstances surrounding each matter and the advice of our legal counsel. We record liabilities for litigation-related losses when a loss is probable and we can reasonably estimate the amount of the loss. We evaluate the measurement of recorded liabilities each reporting period based on the current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution of litigation-related loss contingencies may differ materially from the estimated liability recorded at a particular balance sheet date. Changes in estimates are recorded in earnings in the period in which such changes occur. We do not believe that any currently pending legal proceedings to which we are a party will have a material adverse effect, individually or in the aggregate, on our results of operations, cash flows or financial condition. See Note 17, Commitments and Contingencies, in Part II, Item 8 of this Annual Report, for more information.
Environmental and Other Matters
The information set forth in Note 17, Commitments and Contingencies, in Part II, Item 8 of this Annual Report is hereby incorporated by reference.
General
We are subject to federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.
Metals recycling was our original business, and it has been one of our core businesses for over a century. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well-intentioned, may expose us and our industry to potentially significant risks. We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications.
We incurred environmental expenses of $49.8 million, $46.6 million and $42.5 million for 2021, 2020 and 2019, respectively. The expenses included the cost of disposal, environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. In addition, during 2021, we spent $3.1 million in capital expenditures related to costs directly associated with environmental compliance. Our accrued environmental liabilities were $7.1 million and $3.4 million, of which $2.3 million and $2.7 million, respectively, were classified as other long-term liabilities, as of August 31, 2021 and 2020, respectively.
Solid and Hazardous Waste
We generate wastes, including hazardous wastes, that are subject to the Federal Resource Conservation and Recovery Act and comparable state and local statutes where we operate. These statutes, regulations and laws may limit our disposal options with respect to certain wastes.
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We currently own or lease, and in the past we have owned or leased, properties that have been used in our operations. Although we have used operating and disposal practices that were industry standard at the time, wastes may have been disposed of or released on or under the properties or on or under locations where such wastes have been taken for disposal in a manner that is now understood to pose a contamination threat. We are currently involved in the investigation and remediation of several such properties we have been named as a PRP at a number of contaminated sites, none of which involve real estate we ever owned or upon which we have ever conducted operations.
State and federal laws applicable to wastes and contaminated properties have gradually become more strict over time. There is no guarantee that the EPA or individual states will not adopt more stringent requirements for the handling of, or make changes to the exemptions upon which we rely for, the wastes that we generate. Similarly, some materials which are not currently classified as waste may be deemed solid or hazardous waste in the future. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. Any such change could result in an increase in our costs to manage and dispose of waste which could have a material adverse effect on our business, results of our operations and financial condition.
Superfund
The EPA, or an equivalent state agency, has notified us that we are considered a PRP at several sites, none of which involve real estate we ever owned or upon which we have ever conducted operations. We may be obligated under CERCLA, or similar state statutes, to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA or third-parties for such activities and pay costs for associated damages to natural resources. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time may contest, our liability. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs, and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. Based on currently available information, which is in many cases preliminary and incomplete, we had $0.5 million and $0.7 million accrued as of August 31, 2021 and 2020, respectively, in connection with CERCLA sites. We have accrued for these liabilities based upon our best estimates. The amounts paid and the expenses incurred on these sites for 2021, 2020 and 2019 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.
Management believes that adequate provisions have been made in the Company's 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.
Clean Water Act
The Clean Water Act ("CWA") imposes restrictions and strict controls regarding the discharge of wastes into waters of the U.S., a term broadly defined, or into publicly owned treatment works. These controls have become more stringent over time, and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into federal waters or into publicly owned treatment works and comparable permits may be required at the state level. The CWA and many state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA's regulations and comparable state statutes may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge or non-compliance with permit requirements, we may be liable for penalties, costs and injunctive relief.
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Clean Air Act
Our operations are subject to regulations at the federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increase scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources may be required to construct emission sources using what is referred to as the Best Available Control Technology, or in any areas that are not meeting NAAQS, using methods that satisfy requirements for the Lowest Achievable Emission Rate. Additionally, the EPA has implemented, and is continuing to implement, new, more stringent standards for NAAQS, including fine particulate matter. Compliance with new standards could require additional expenditures.
Climate Change
The potential impacts of climate change on the Company’s business and results of operations and potential future climate change regulations in the jurisdictions in which the Company operates are highly uncertain. See the risk factors entitled “Increased regulation associated with climate change could impose significant additional costs on both our steelmaking and metals recycling operations” and "Physical impacts of climate change could have a material adverse effect on our costs and operations" in Part I, Item 1A, "Risk Factors" of this Annual Report.
DIVIDENDS
We have paid quarterly cash dividends for 228 consecutive quarters. We paid quarterly dividends in 2021 and 2020 at the rate of $0.12 per share of CMC common stock, and our dividend for the fourth quarter of 2021 will be paid at $0.14 per share of CMC common stock.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preceding discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. We evaluate the appropriateness of these estimates and assumptions, including those related to revenue recognition, income taxes, inventory cost, acquisitions, goodwill, long-lived assets and contingencies, on an ongoing basis. Estimates and assumptions are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results in future periods could differ materially from these estimates. Judgments and estimates related to critical accounting policies used in the preparation of the consolidated financial statements include the following.
Revenue Recognition
Revenue from contracts where the Company provides fabricated rebar and installation services is recognized over time using an input method based on costs incurred compared to total estimated costs. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method based on tons shipped compared to total estimated tons. Significant judgment is required to evaluate total estimated costs used in the input method and total estimated tons in the output method. If total estimated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgment in determining the transaction price. See Note 4, Revenue Recognition, in Part II, Item 8 of this Annual Report, for further details.
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Income Taxes
We periodically assess the likelihood of realizing our deferred tax assets and maintain a valuation allowance to reduce certain deferred tax assets to amounts that we believe are more likely than not to be realized. We base our judgment of the recoverability of our deferred tax assets primarily on historical earnings, our estimate of current and expected future earnings, prudent and feasible tax planning strategies and current and future ownership changes. At August 31, 2021 and 2020, we had a valuation allowance of $278.1 million and $281.8 million, respectively, against our deferred tax assets. Of these amounts, $7.7 million and $28.6 million at August 31, 2021 and 2020, respectively, relate to net operating loss and credit carryforwards in certain state jurisdictions that are subject to estimation. The remaining valuation allowance primarily relates to net operating loss carryforwards in certain foreign jurisdictions, which the Company does not expect to realize.
Inventory Cost
We state inventories at the lower of cost or net realizable value, which is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adjustments to inventory may be due to changes in price levels, obsolescence, damage, physical deterioration and other causes. Any adjustments required to reduce the carrying value of inventory to net realizable value are recorded as a charge to cost of goods sold. Based on our review of inventories, obsolete or slow-moving inventories are not significant as of August 31, 2021 and current market conditions are favorable in our end-use markets.
Acquisitions
The Company accounts for business combinations under the acquisition method of accounting, which requires assets acquired and liabilities assumed to be recorded at their estimated fair value at the date of acquisition. The fair value is estimated by the Company using valuation techniques and Level 3 inputs, including expected future cash flows and discount rates. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions.
Goodwill
Goodwill is tested for impairment at the reporting unit level annually and whenever events or circumstances indicate that the carrying value may not be recoverable. Our reporting units represent an operating segment or one level below an operating segment. We use an income and a market approach to calculate the fair value of our reporting units. To calculate the fair value of our reporting units using the income approach, management uses a discounted cash flow model which includes a number of significant assumptions and estimates regarding future cash flows such as discount rates, volumes, prices, capital expenditures and the impact of current market conditions. These estimates could be materially impacted by adverse changes in market conditions.
For 2021 and 2020, the annual goodwill impairment analysis did not result in any impairment charges. The Company has goodwill of $66.1 million, of which $51.1 million relates to a reporting unit within the North America operating segment. As of August 31, 2021, based on the results of the Company’s annual impairment testing, the fair value of this reporting unit exceeded its carrying value by 41%. An increase or decrease of 1% to the discount rate or terminal growth rate would not result in an impairment charge for this reporting unit. Management does not believe that it is reasonably likely that our reporting units will fail the goodwill impairment test in the near term, as the determined fair value of all reporting units with goodwill substantially exceeded their carrying value.
See Note 6, Goodwill and Other Intangible Assets, in Part II, Item 8 of this Annual Report, for additional information.
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Long-Lived Assets
We evaluate the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the net carrying value may not be recoverable from the undiscounted future cash flows from operations. Events or circumstances that could trigger an impairment review of a long-lived asset or asset group include, but are not limited to: (i) a significant decrease in the market price of the asset, (ii) a significant adverse change in the extent or manner that the asset is used or in its physical condition, (iii) a significant adverse change in legal factors or in the business climate that could affect the value of the asset, (iv) an accumulation of costs significantly in excess of original expectation for the acquisition or construction of the asset, (v) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast of continuing losses associated with the use of the asset and (vi) a more-likely-than-not expectation that the asset will be sold or disposed of significantly before the end of its previously estimated useful life. If an impairment exists, the net carrying values are reduced to fair values. Our operations are capital intensive. The estimates of undiscounted future cash flows used during an impairment review of a long-lived asset or asset group require judgments and assumptions of future cash flows that are expected to arise as a direct result of the use and eventual disposition of the asset or asset group. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer's perspective on future cash flows. For the long-lived asset groups that were tested for recoverability as a result of current period operating or cash flow loss combined with a history of operating or cash flow losses, the undiscounted cash flows would require a decrease of at least 24% to result in an impairment.
Contingencies
In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and governmental investigations, including environmental matters. We may incur settlements, fines, penalties or judgments in connection with some of these matters. While we are unable to estimate the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals when a loss is probable and the amount can be reasonably estimated. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent uncertainties of the estimation process and the uncertainties involved in litigation. We believe that we have adequately provided for these contingencies in our consolidated financial statements. We also believe that the outcomes will not materially affect our results of operations, our financial position or our cash flows.
Other Accounting Policies and New Accounting Pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, in Part II, Item 8 of this Annual Report.
FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the meaning of the federal securities laws with respect to general economic conditions, key macro-economic drivers that impact our business, the effects of ongoing trade actions, the effects of continued pressure on the liquidity of our customers, potential synergies and organic growth provided by acquisitions and strategic investments, demand for our products, metal margins, the effect of COVID-19 and related governmental and economic responses thereto, the ability to operate our steel mills at full capacity, future availability and cost of supplies of raw materials and energy for our operations, share repurchases, legal proceedings, the undistributed earnings of our non-U.S. subsidiaries, U.S. non-residential construction activity, international trade, capital expenditures, our liquidity and our ability to satisfy future liquidity requirements, estimated contractual obligations and our expectations or beliefs concerning future events. The statements in this report that are not historical statements, are forward-looking statements. These forward-looking statements can generally be identified by phrases such as we or our management "expects," "anticipates," "believes," "estimates," "future," "intends," "may," "plans to," "ought," "could," "will," "should," "likely," "appears," "projects," "forecasts," "outlook" or other similar words or phrases, as well as by discussions of strategy, plans, or intentions.
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Our forward-looking statements are based on management's expectations and beliefs as of the time this Annual Report 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 any other changes. Important factors that could cause actual results to differ materially from our expectations include those described in Part I, Item 1A, "Risk Factors" of this Annual Report as well as the following:
•changes in economic conditions which affect demand for our products or construction activity generally, and the impact of such changes on the highly cyclical steel industry;
•rapid and significant changes in the price of metals, potentially impairing our inventory values due to declines in commodity prices or reducing the profitability of our downstream contracts due to rising commodity pricing;
•impacts from COVID-19 on the economy, demand for our products, global supply chain and on our operations, including the responses of governmental authorities to contain COVID-19 and the impact of various COVID-19 vaccines;
•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 existing and future laws, regulations and other legal requirements and judicial decisions that govern our business, including increased environmental regulations associated with climate change and greenhouse gas emissions;
•involvement in various environmental matters that may result in fines, penalties or judgments;
•potential limitations in our or our customers' abilities to access credit and non-compliance by our customers;
•activity in repurchasing shares of our common stock under our repurchase program;
•financial covenants and restrictions on the operation of our business contained in agreements governing our debt;
•our inability to close the sale of our Rancho Cucamonga property, including if the buyer were to terminate the purchase agreement during its 60 day due diligence review period;
•our ability to successfully identify, consummate and integrate acquisitions, and the effects that acquisitions may have on our financial leverage;
•risks associated with acquisitions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable antitrust legislation and other regulatory and third party consents and approvals;
•operating and startup risks, as well as market risks associated with the commissioning of new projects could prevent us from realizing anticipated benefits and could result in a loss of all or a substantial part of our investments;
•lower than expected future levels of revenues and higher than expected future costs;
•failure or inability to implement growth strategies in a timely manner;
•impact of goodwill impairment charges;
•impact of long-lived asset impairment charges;
•currency fluctuations;
•global factors, such as trade measures, military conflicts and political uncertainties, including the impact of the Biden administration on current trade regulations, such as Section 232 trade tariffs and quotas, tax legislation and other regulations which might adversely impact our business;
•availability and pricing of electricity, electrodes and natural gas for mill operations;
•ability to hire and retain key executives and other employees;
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•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 security;
•ability to make necessary capital expenditures;
•availability and pricing of raw materials and other items over which we exert little influence, including scrap metal, energy and insurance;
•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; and
•civil unrest, protests and riots.
You should refer to the "Risk Factors" disclosed in our periodic and current reports filed with the SEC for information regarding additional risks which would cause actual results to be significantly different from those expressed or implied by these forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. Accordingly, readers of this Annual Report are cautioned not to place undue reliance on any forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Approach to Mitigating Market Risk
See Note 10, Derivatives, in Part II, Item 8 of this Annual Report, for disclosure regarding our approach to mitigating market risk and for summarized market risk information by year. Also, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, in Part II, Item 8 of this Annual Report, for additional information. We utilized the following types of derivative instruments during 2021 in accordance with our risk management program. None of the instruments were entered into for speculative purposes.
Currency Exchange Forward Contracts
The Company's global operations expose it to risks from fluctuations in foreign currency exchange rates. We enter into currency exchange forward contracts as economic hedges of trade commitments denominated in currencies other than the functional currency of CMC or its subsidiaries. No single foreign currency poses a material risk to us.
Commodity Futures Contracts
The Company's product lines expose it to risks from fluctuations in metal commodity prices and natural gas, electricity and other energy commodity prices. We base pricing in some of our sales and purchase contracts on metal commodity futures exchange quotes, which we determine at the beginning of the contract. Due to the volatility of the metal commodity indices, we enter into metal commodity futures contracts for copper and aluminum. These futures contracts mitigate the risk of unanticipated declines in gross margin due to the price volatility of the underlying commodities. We also enter into energy derivatives to mitigate the risk of unanticipated declines in gross margin due to the price volatility of electricity and natural gas.
The following tables provide certain information regarding the foreign exchange forward contracts and commodity futures contracts discussed above.
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The fair value of our foreign currency exchange forward contract commitments as of August 31, 2021 were as follows:
Functional Currency Foreign Currency
__________________________________
(1) Most foreign currency exchange forward contracts mature within one year. The range of hedge rates represents functional to foreign currency conversion rates.
The fair value of our commodity futures contract commitments as of August 31, 2021 were as follows:
__________________________________
MT = Metric ton
MW(h) = Megawatt hour
(1) All commodity futures contract commitments mature within one year, except for the electricity contract commitment which has a maturity date of December 31, 2030.
(2) There is no terminal exchange for electricity as it is a bilateral agreement with a counterparty.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Commercial Metals Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Commercial Metals Company and subsidiaries (the “Company”) as of August 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 31, 2021, of the Company and our report dated October 14, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
October 14, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Commercial Metals Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Commercial Metals Company and subsidiaries (the “Company”) as of August 31, 2021 and 2020, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended August 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 14, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition — Revenue from Fabricated Product Contracts with Customers in the North America Segment — Refer to Notes 1 and 4 to the Financial Statements
Critical Audit Matter Description
The Company has certain fabricated product contracts with customers in its North America segment for delivering fabricated steel products, which may also include providing installation services. Each fabricated product contract represents a single performance obligation and revenue is recognized over time as fabricated steel products are delivered and installation services are provided, if applicable. Revenue from contracts where the Company provides fabricated product and installation services is recognized over time using an input method in which the measure of progress is based on contract costs incurred to date compared to total estimated contract costs. Revenue from contracts where the Company provides fabricated product only is recognized over time using an output method in which the measure of progress is based on tons shipped compared to total estimated tons.
The accounting for these contracts involves significant judgment by management to estimate total costs used in the input method and total tons used in the output method. For the year ended August 31, 2021, North America segment revenue was $5.7 billion; of which 10% represents revenue recognized over time using an input method and 9% represents revenue
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recognized over time using an output method. The remaining 81% of revenue in the North America segment was recognized concurrent with the transfer of control or as amounts are billed to the customer.
We identified revenue recognized over time for certain fabricated product contracts in the North America segment as a critical audit matter because of the significant judgments made by management to estimate total costs for the input method and total tons for the output method. Auditing such estimates required extensive audit effort due to the volume and complexity of contracts and required a high degree of auditor judgment to evaluate the reasonableness of management’s estimates used to recognize revenue over time.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of total costs and total tons used to recognize revenue over time for certain fabricated product contracts in the North America segment included the following, among others:
•We tested the effectiveness of management’s controls over the calculation of contract costs incurred to date compared to total estimated contract costs for the input method, and management’s controls over the calculation of tons shipped compared to total estimated tons for the output method.
•We selected a sample of fabricated product contracts with customers that were recognized over time, for both the input method and the output method, and we performed the following:
◦Obtained the contracts, including any change orders, management’s estimated contract costs or tons, including any revisions to date, and evaluated whether the contracts were properly included in management’s calculation of revenue based on the terms and conditions of each contract.
◦Obtained a schedule of costs or tons incurred to date by contract and tested such schedule for completeness and accuracy by obtaining supporting documents for fabricated steel products delivered and installation services provided, if applicable, and evaluated whether the costs or tons were properly included in the costs incurred to date.
◦Evaluated management’s estimated cost to complete the contract, including remaining quantities and costs, by comparing the estimates to management’s job cost forecasts, and performing corroborating inquiries with the Company’s project managers.
◦Tested the mathematical accuracy of management’s calculation of revenue recognized over time for each selection.
•For a sample of contracts, we evaluated management’s ability to accurately estimate total costs and total tons by comparing actual costs and actual tons at completion to management’s previous estimates for such contracts.
Goodwill — A Reporting Unit within the North America Segment — Refer to Notes 1 and 6 to the Financial Statements
Critical Audit Matter Description
The Company has goodwill of $66.1 million, of which $51.1 million relates to a reporting unit within the North America segment. Goodwill is tested for impairment at the reporting unit level annually and whenever events or circumstances indicate that the carrying value may not be recoverable. The Company’s goodwill impairment assessment involves comparing the fair value of each reporting unit to its carrying value. The Company estimates the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. The determination of fair value using the income approach is based on the present value of estimated future cash flows, which requires management to make significant estimates and assumptions of revenue growth rates and operating margins, and selection of the discount rate. The determination of the fair value using the market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit.
At August 31, 2021, based on the results of the Company’s annual impairment testing, no impairment was recognized as the fair value of this reporting unit exceeded its carrying value.
We identified the Company’s goodwill impairment assessment for this reporting unit as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of this reporting unit. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions of future cash flows based on estimates of revenue growth rates and operating margins and selection of the discount rate for the income approach, and multiples of earnings for the market approach.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the goodwill impairment assessment for the reporting unit within the North America segment included the following, among others:
•We tested the effectiveness of controls over the goodwill impairment assessment, including management’s controls over forecasts of future cash flows based on estimates of revenue growth rates and operating margins and the selection of the discount rate for the income approach, and determination of multiples of earnings for the market approach.
•We evaluated the reasonableness of management’s forecasts of future cash flows based on revenue growth rates and operating margins by comparing the forecasts to (1) historical revenues and operating margins, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists:
◦We evaluated the reasonableness of the valuation methodologies.
◦We evaluated the reasonableness of the discount rate used in the income approach by testing the underlying source information and the mathematical accuracy of the calculations and developing an independent range of estimated discount rates and comparing that range to the discount rate used in the Company’s valuation.
◦We evaluated the multiples of earnings used in the market approach, including testing the underlying source information and mathematical accuracy of the calculations.
/s/ Deloitte & Touche LLP
Dallas, Texas
October 14, 2021
We have served as the Company’s auditor since 1959.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
Year Ended August 31,
Costs and expenses:
Earnings (loss) from discontinued operations before income taxes — 1,907 (528)
Earnings (loss) from discontinued operations — 1,201 (686)
Basic earnings (loss) per share
Earnings from continuing operations $ 3.43 $ 2.34 $ 1.69
Earnings (loss) from discontinued operations — 0.01 (0.01)
Diluted earnings (loss) per share
Earnings from continuing operations $ 3.38 $ 2.31 $ 1.67
Earnings (loss) from discontinued operations — 0.01 (0.01)
See notes to consolidated financial statements.
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Year Ended August 31,
Other comprehensive income (loss), net of income taxes:
Foreign currency translation
Derivatives
Reclassification for realized gain (2,377) (304) (244)
Defined benefit plans
Reclassification for settlement losses and other 53 33 1,291
See notes to consolidated financial statements.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 2021 2020
Assets
Current assets:
Assets held for sale 25,083 —
Property, plant and equipment:
Liabilities and stockholders' equity
Current liabilities:
Acquired unfavorable contract backlog — 6,035
Borrowings under accounts receivable facilities 26,560 —
Commitments and contingencies (Note 17)
Stockholders' equity:
Stockholders' equity attributable to noncontrolling interests 232 212
See notes to consolidated financial statements.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31,
Cash flows from (used by) operating activities:
Net gain on disposals of subsidiaries, assets and other (8,807) (4,213) (2,281)
Amortization of acquired unfavorable contract backlog (6,035) (29,367) (74,784)
Changes in operating assets and liabilities, net of acquisitions:
Beneficial interest in securitized accounts receivable — — (367,521)
Cash flows from (used by) investing activities:
Beneficial interest in securitized accounts receivable — — 367,521
Cash flows from (used by) financing activities:
Debt extinguishment costs (13,128) — —
Debt issuance costs (2,830) — —
Contribution from noncontrolling interest 20 16 10
Effect of exchange rate changes on cash (790) 759 (598)
See notes to consolidated financial statements.
Year Ended August 31,
Supplemental information:
Noncash activities:
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Common Stock Treasury Stock
Contribution of noncontrolling interest 10 10
Reclassification of share-based liability awards 2,927 2,927
Contribution of noncontrolling interest 16 16
Reclassification of share-based liability awards 2,510 2,510
Contribution of noncontrolling interest 20 20
Reclassification of share-based liability awards 5,419 5,419
See notes to consolidated financial statements.
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COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Commercial Metals Company ("CMC") and its subsidiaries (collectively, the "Company," "we," "our" or "us") manufacture, recycle and fabricate steel and metal products and provide related materials and services through a network of facilities that includes seven electric arc furnace ("EAF") mini mills, two EAF micro mills, one rerolling mill, steel fabrication and processing plants, construction-related product warehouses and metal recycling facilities in the United States ("U.S.") and Poland.
The Company has two reportable segments: North America and Europe.
North America
The North America segment is a vertically integrated network of recycling facilities, steel mills and fabrication operations located in the U.S. The recycling facilities process ferrous and nonferrous scrap metals (collectively known as "raw materials") for use by manufacturers of new metal products. The steel mills manufacture finished long steel products including reinforcing bar ("rebar"), merchant bar, light structural and other special sections as well as semi-finished billets for rerolling and forging applications (collectively known as "steel products"). The fabrication operations primarily manufacture fabricated rebar and steel fence posts (collectively known as "downstream products"). The strategy in North America is to optimize the Company's vertically integrated value chain to maximize profitability by obtaining the lowest possible input costs and highest possible selling prices. The Company operates the recycling facilities to provide low-cost scrap to the steel mills and the fabrication operations to optimize the steel mill volumes. The North America segment's products are sold primarily to steel mills and foundries, construction, fabrication and other manufacturing industries.
Europe
The Europe segment is a vertically integrated network of recycling facilities, an EAF mini mill and fabrication operations located in Poland. The steel products manufactured by this segment include rebar, merchant bar and wire rod as well as semi-finished billets. In addition, the downstream products manufactured by this segment's fabrication operations include fabricated rebar, fabricated mesh, assembled rebar cages and other fabricated rebar by-products. The Europe segment's products are sold primarily to fabricators, manufacturers, distributors and construction companies.
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned subsidiaries and certain variable interest entities ("VIEs") for which the Company is the primary beneficiary. Intercompany account balances and transactions have been eliminated.
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of net sales and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue recognition, income taxes, carrying value of inventory, acquisitions, goodwill, long-lived assets and contingencies. Actual results could differ significantly from these estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with original maturities of three months or less at the date of purchase.
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Revenue Recognition and Allowance for Doubtful Accounts
Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration received or expected to be received in exchange for those goods or services. The Company's performance obligations arise from (i) sales of raw materials, steel products and downstream products and (ii) installation services performed by its fabrication operations. The shipment of products to customers is considered a fulfillment activity and amounts billed to customers for shipping and freight are included in net sales, and the related costs are included in cost of goods sold. Net sales are presented net of taxes. Revenue related to raw materials and steel products in the North America and Europe segments and downstream products in the Europe segment is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt. Revenue related to steel fence posts and other downstream products in the North America segment not discussed below is recognized equal to billing under an available practical expedient.
Each fabricated rebar contract sold by the North America segment represents a single performance obligation and revenue is recognized over time. For contracts where the Company provides fabricated rebar and installation services, revenue is recognized over time using an input measure of progress based on contract costs incurred to date compared to total estimated contract costs ("input measure"). This input measure provides a reasonable depiction of the Company’s progress towards satisfaction of the performance obligation as there is a direct relationship between costs incurred by the Company and the transfer of the fabricated rebar and installation services. Revenue from fabricated rebar contracts where the Company does not provide installation services is recognized over time using an output measure of progress based on tons shipped compared to total estimated tons ("output measure"). This output measure provides a reasonable depiction of the transfer of contract value to the customer, as there is a direct relationship between the units shipped by the Company and the transfer of the fabricated rebar. If total estimated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete or total planned quantity is recorded in the period in which such revisions are identified.
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing and a liability when revenue is recognized subsequent to invoicing. Payment terms and conditions vary by contract type, although the Company generally requires customers to pay 30 days after the Company satisfies the performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined the contracts do not include a significant financing component.
The Company maintains an allowance for doubtful accounts for the accounts receivable we estimate will not be collected based on market conditions, customers' financial condition and other factors. Historically, these allowances have not been material. The Company reviews and sets credit limits for each customer. The Europe segment uses credit insurance to ensure payment in accordance with the terms of sale. Generally, collateral is not required. Approximately 17% and 13% of total receivables at August 31, 2021 and 2020, respectively, were secured by credit insurance.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the weighted average cost method.
Elements of cost in finished goods inventory in addition to the cost of material include depreciation, amortization, utilities, consumable production inputs, maintenance, production, wages and transportation costs. Additionally, the costs of departments that support production, including materials management and quality control, are allocated to inventory.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance is expensed as incurred. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. Depreciation and amortization is recorded on a straight-line basis over the following estimated useful lives:
Buildings 7 to 40 years
Land improvements 3 to 25 years
Leasehold improvements 3 to 15 years
Equipment 3 to 25 years
The Company evaluates impairment of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For each asset or group of assets held for use with indicators of impairment, the
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Company compares the sum of the estimated future cash flows generated by the asset or group of assets with its associated net carrying value. If the net carrying value of the asset or group of assets exceeds estimated undiscounted future cash flows, the excess of the net carrying value over estimated fair value is charged to impairment loss. Properties held for sale are reported at the lower of their carrying amount or their estimated sales price, less estimated costs to sell.
Leases
The Company's leases are primarily for real property and equipment. The Company determines if an arrangement is a lease at inception of a contract if the terms state the Company has the right to direct the use of, and obtain substantially all the economic benefits from, a specific asset identified in the contract. The right-of-use ("ROU") assets represent the Company's right to use the underlying assets for the lease term, and the lease liabilities represent the obligation to make lease payments arising from the leases. The Company records its ROU assets in other noncurrent assets, its current lease liabilities in accrued expenses and other payables and its noncurrent lease liabilities in other noncurrent liabilities. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments to be made over the lease term. Certain of the Company's lease agreements contain options to extend the lease. The Company evaluates these options on a lease-by-lease basis, and if the Company determines it is reasonably certain to be exercised, the lease term includes the extension. The Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments, and lease expense is recognized on a straight-line basis over the lease term. The incremental borrowing rate is the rate of interest the Company could borrow on a collateralized basis over a similar term with similar payments. The Company does not record leases with an initial term of twelve months or less (“short-term leases”).
Certain of the Company's lease agreements include payments for certain variable costs not determinable upon lease commencement, including mileage, utilities, fuel and inflation adjustments. These variable lease payments are recognized in cost of goods sold and selling, general and administrative expenses, but are not included in the ROU asset or lease liability balances. The Company's lease agreements do not contain any material residual value guarantees, restrictions or covenants.
Government Assistance
Government assistance, including non-monetary grants, herein collectively referred to as grants, are not recognized until there is reasonable assurance that the Company will comply with the conditions of the grant and the Company will receive the grant.
Generally, government grants fall into two categories: grants related to assets and grants related to income. Grants related to assets are government grants for the purchase, construction or other acquisition of long-lived assets. The Company accounts for grants related to assets as deferred income with the offset to an asset account, such as fixed assets, on the consolidated balance sheets. Non-monetary grants are recognized at fair value. The Company recognizes the deferred income on grants related to depreciable assets in profit or loss on a systematic basis over the useful life of the asset, which, consistent with the Company's fixed assets policy, is straight-line. The period over which grants are recognized depends on the terms of the agreement. Grants related to specific expenses already incurred are recognized in profit or loss in the period in which the grant becomes receivable. Grants related to non-depreciable assets may require the fulfillment of certain obligations. In such cases, these grants are recognized in profit or loss over the periods that bear the cost of meeting the obligations.
Grants related to income are any grants that are not considered grants related to assets, such as grants to compensate for certain expenses. Grants related to income are recognized as a reduction in the related expense in the period that the recognition criteria are met. See Note 9, New Markets Tax Credit Transactions.
Goodwill and Other Intangible Assets
Goodwill is tested for impairment at the reporting unit level annually and whenever events or circumstances indicate that the carrying value may not be recoverable.
To evaluate goodwill for impairment, the Company utilizes a quantitative test that compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is indicated in the amount that the carrying value exceeds the fair value of the reporting unit, not to exceed the goodwill value for the reporting unit. The Company's reporting units represent an operating segment or one level below an operating segment.
The Company estimates the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. Under the income approach, the Company determines the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and
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operating margins, taking into account industry and market conditions. The discount rate is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the reporting unit. The market approach estimates fair value based on market multiples of earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. See Note 6, Goodwill and Other Intangible Assets, for additional information on the Company's annual goodwill impairment analysis.
Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment charges are recorded on finite-lived intangible assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.
Contingencies
The Company accrues for claims and litigation, including environmental investigation and remediation costs, when they are both probable and the amount can be reasonably estimated. Environmental costs are based upon estimates regarding the sites for which the Company will be responsible, the scope and cost of work to be performed at each site, the portion of costs that will be shared with other parties and the timing of remediation. Where timing and amounts cannot be reasonably determined, a range is estimated and the lower end of the range is recorded.
Stock-Based Compensation
The Company recognizes stock-based equity and liability awards at fair value. The fair value of each stock-based equity award is estimated at the grant date using the Black-Scholes or Monte Carlo pricing model. Total compensation cost of the stock-based equity award is amortized over the requisite service period using the accelerated method of amortization for grants with graded vesting or the straight-line method for grants with cliff vesting. Stock-based liability awards are measured at fair value at the end of each reporting period and will fluctuate based on the price of CMC common stock and performance relative to the targets.
Income Taxes
CMC and its U.S. subsidiaries file a consolidated federal income tax return. Deferred income taxes are provided for temporary differences between financial statement and income tax bases of assets and liabilities. The principal differences are described in Note 12, Income Tax. Benefits from income tax credits are reflected currently in earnings. The Company records income tax positions based on a more likely than not threshold that the tax positions will be sustained on examination by the taxing authorities having full knowledge of all relevant information. The Company classifies interest and any statutory penalties recognized on a tax position as income tax expense.
Foreign Currencies
The functional currency of the Company's Polish operations is the local currency, the Polish zloty ("PLN"). Translation adjustments are reported as a component of accumulated other comprehensive income or loss. Transaction gains (losses) from transactions denominated in currencies other than the functional currency related to continuing operations were immaterial for 2021, 2020 and 2019.
Derivative Financial Instruments
The Company recognizes derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Derivatives that are not designated as hedges are adjusted to fair value through net earnings. Changes in the fair value of derivatives that are designated as hedges are recognized depending on the nature of the hedge. In the case of fair value hedges, changes are recognized as an offset against the change in fair value of the hedged balance sheet item. When the derivative is designated as a cash flow hedge and is highly effective, changes are recognized in other comprehensive income.
When a derivative instrument is sold, terminated, exercised or expires, the gain or loss is recorded in the consolidated statement of earnings for fair value hedges, and the cumulative unrealized gain or loss, which had been recognized in the statement of comprehensive income, is reclassified to the consolidated statement of earnings for cash flow hedges. Additionally, when hedged items are sold or extinguished, or the anticipated transaction being hedged is no longer expected to occur, the Company recognizes the gain or loss on the designated hedged financial instrument.
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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. Level 1 represents unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 represents quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable, either directly or indirectly. Level 3 represents valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Recently Adopted Accounting Pronouncements
On September 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended, (“ASU 2016-02”), using the modified retrospective transition approach. ASU 2016-02 requires a lessee to recognize an ROU asset and a lease liability on its balance sheet for all leases with terms longer than twelve months. The Company’s financial statements for periods prior to September 1, 2019 were not modified for the application of this ASU. Upon adoption of ASU 2016-02, the Company recorded the following amounts associated with operating leases in its consolidated balance sheet at September 1, 2019: $113.4 million of ROU assets in other noncurrent assets, $30.9 million of lease liabilities in accrued expenses and other payables and $84.9 million of lease liabilities in other noncurrent liabilities. There was no impact to the opening balance of retained earnings as a result of implementing ASU 2016-02. The Company elected the package of three practical expedients available under the ASU. Additionally, the Company implemented appropriate changes to internal processes and controls to support recognition, subsequent measurement and disclosures.
NOTE 2. CHANGES IN BUSINESS
2019 Acquisition
On November 5, 2018 (the "Acquisition Date"), the Company completed an acquisition (the "Acquisition") of 33 rebar fabrication facilities in the U.S., as well as four EAF mini mills located in Knoxville, Tennessee, Jacksonville, Florida, Sayreville, New Jersey and Rancho Cucamonga, California from Gerdau S.A., hereinafter collectively referred to as the "Acquired Businesses." The total cash purchase price, including working capital adjustments made within the allowable one-year measurement period, was $701.2 million, and was funded through a combination of domestic cash on-hand and a term loan which was repaid during 2020. The purchase price paid was allocated between the acquired mills and fabrication facilities' assets acquired and liabilities assumed at fair value, and the purchase price accounting was finalized on November 5, 2019.
During 2020, the Company recorded a $32.1 million charge due to a working capital adjustment related to the Acquisition. This charge was recorded subsequent to the end of the allowable one-year measurement period in selling, general and administrative expenses on the consolidated statement of earnings in 2020. The related liability was recorded in accrued expenses and other payables in the consolidated balance sheet at August 31, 2020.
The results of operations of the Acquired Businesses were reflected in the Company’s consolidated financial statements from the Acquisition Date. The Acquired Businesses' net sales and earnings before income taxes included in the Company's consolidated statement of earnings and consolidated statement of comprehensive income in 2019 were $1.4 billion and $132.7 million, respectively.
Pro Forma Supplemental Information
Supplemental information on an unaudited pro forma basis is presented below as if the Acquisition occurred on September 1, 2017. The pro forma financial information is presented for comparative purposes only, based on significant estimates and assumptions, which the Company believes to be reasonable, but not necessarily indicative of future results of operations or the results that would have been reported if the Acquisition had been completed on September 1, 2017. These results were not used as part of management's analysis of the financial results and performance of the Company or the Acquired Businesses. These results are adjusted, where possible, for transaction and integration-related costs.
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(1) The impact of the amortization of unfavorable contract backlog has been removed from the pro forma net sales for the year ended August 31, 2019.
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Other Acquisitions
On July 21, 2020, the Company acquired substantially all of the assets of AZZ's Continuous Galvanized Rebar business ("GalvaBar") located in Tulsa, Oklahoma. GalvaBar manufactures galvanized rebar with a zinc alloy coating produced through a proprietary process to provide corrosion protection and post-fabrication formability. This acquisition complements the Company's existing concrete reinforcement capabilities. The operating results of GalvaBar are included in the North America segment.
On February 3, 2020, the Company's subsidiary CMC Poland Sp. z.o.o. ("CMCP") acquired P.P.U. Ecosteel Sp. z.o.o. ("Ecosteel"), a steel mesh producer located in Zawiercie, Poland. This acquisition complements CMCP's existing mesh production and increases sales to other markets in Europe. The operating results of Ecosteel are included in the Europe segment.
The acquisitions of GalvaBar and Ecosteel were not material individually, or in the aggregate, to the Company's financial position or results of operations; therefore pro-forma operating results and other disclosures for the acquisitions are not presented as the results would not be significantly different than reported results.
Facility Closures and Dispositions
In October 2019, the Company closed the melting operations at its Rancho Cucamonga facility, which is part of the North America segment. In August 2020, the Company announced plans to sell its Rancho Cucamonga facility.Additionally, in September 2021, the Company ceased operations at a rebar fabrication facility adjacent to the Rancho Cucamonga facility. Due to these closures, the Company recorded $13.8 million and $9.8 million of expense related to asset impairments, severance, pension curtailment, environmental obligations and vendor agreement terminations in 2021 and 2020, respectively. The dispositions did not meet the criteria for discontinued operations. As of August 31, 2021, the associated assets of the Rancho Cucamonga facility and the rebar fabrication facility, comprised of property, plant and equipment, net, met the criteria for classification as held for sale in the Company's consolidated balance sheet. As such, the Company has classified $24.9 million within assets held for sale in the Company's consolidated balance sheet as of August 31, 2021.
On September 29, 2021, the Company entered into a definitive agreement to sell the assets associated with the facilities. Gross proceeds from the sale will total approximately $300 million. The transaction is subject to customary closing conditions and purchase price adjustments and is expected to close during the second quarter of 2022.
In 2020, the Company idled six facilities in its North America segment and recorded $6.2 million of expense related to severance and ROU and other long-lived asset impairments.
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NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) ("AOCI") was comprised of the following:
Other comprehensive loss before reclassifications (29,718) (7) (3,346) (33,071)
Reclassification for (gain) loss 6 (375) — (369)
Reclassification for gain — (2,826) — (2,826)
The items reclassified out of AOCI were not material for 2021, 2020 and 2019.
NOTE 4. REVENUE RECOGNITION
Revenue from Contracts with Customers
Each fabricated rebar contract sold by the North America segment represents a single performance obligation. Revenue from contracts where the Company provides fabricated rebar and installation services is recognized over time using an input measure and these contracts represented approximately 10% of net sales in the North America segment in 2021 and 12% of net sales in the North America segment in 2020 and 2019. Revenue from contracts where the Company does not provide installation services is recognized over time using an output measure and these contracts represented approximately 9%, 11% and 9% of net sales in the North America segment in 2021, 2020 and 2019, respectively. The remaining net sales in the North America segment were recognized at a point in time concurrent with the transfer of control or as amounts were billed to the customer under an available practical expedient.
The following table provides information about assets and liabilities from contracts with customers:
Contract assets (included in accounts receivable) $ 64,168 $ 53,275
The entire contract liability as of August 31, 2020 was recognized in 2021.
Remaining Performance Obligations
As of August 31, 2021, a total of $799.3 million has been allocated to remaining performance obligations in the North America segment, related to those contracts where revenue is recognized using an input or output measure. Of this amount, the Company estimates that approximately 70% of the remaining performance obligations will be recognized during 2022. The duration of all other contracts in the North America and Europe segments are typically less than one year.
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NOTE 5. INVENTORIES
The majority of the Company's inventories are in the form of semi-finished and finished goods. Under the Company’s business
model, products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. As such, at August 31, 2021 and 2020, work in process inventories were not material. At August 31, 2021 and 2020, the Company's raw materials inventories were $286.1 million and $123.9 million, respectively.
Inventory write-downs were immaterial for 2021, 2020 and 2019.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table details the changes in the carrying amount of goodwill by reportable segment:
(in thousands) North America Europe Consolidated
Goodwill, gross
Foreign currency translation — 195 195
Foreign currency translation — (98) (98)
Accumulated impairment
Foreign currency translation — (12) (12)
Foreign currency translation — 5 5
Goodwill, net
Foreign currency translation — 183 183
Foreign currency translation — (93) (93)
As of August 31, 2021 and 2020, the excess of the fair value over the carrying value of each reporting unit was substantial. There were no goodwill impairment charges in 2021, 2020 or 2019.
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The following intangible assets subject to amortization are included in other noncurrent assets on the Company's consolidated balance sheets:
In connection with the Acquisition, the Company recorded an unfavorable contract backlog liability of $110.2 million. The unfavorable contract backlog liability had a net carrying amount of $6.0 million at August 31, 2020 and was fully amortized at August 31, 2021. Amortization of the unfavorable contract backlog liability was $6.0 million, $29.4 million and $74.8 million for 2021, 2020 and 2019, respectively, and was recorded as an increase to net sales in the Company's consolidated statements of earnings.
Perpetual lease rights are amortized over an estimated useful life of 80 years. All other intangible assets with definitive lives are amortized over estimated useful lives ranging from 5 to 15 years. Excluding goodwill, the Company does not have any other significant intangible assets with indefinite lives. Amortization expense for intangible assets was $2.1 million in 2021 and 2020, and $2.2 million in 2019. Estimated amounts of amortization expense for the next five years are as follows:
Year Ended August 31, (in thousands)
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NOTE 7. LEASES
The following table presents the components of the total leased assets and lease liabilities and their classification in the Company's consolidated balance sheets:
Assets:
Finance assets Property, plant and equipment, net 55,308 50,642
Liabilities:
Operating lease liabilities:
Current Accrued expenses and other payables $ 26,433 $ 27,604
Long-term Other noncurrent liabilities 93,409 95,810
Finance lease liabilities:
The components of lease cost were as follows:
Year Ended August 31,
Finance lease expense:
Interest on lease liabilities 2,213 1,792
Variable and short-term lease expense 20,096 17,020
The weighted average remaining lease term and discount rate for operating and finance leases are presented in the following table:
Weighted average remaining lease term (years)
Operating leases 6.2 6.3
Finance leases 3.6 3.8
Weighted average discount rate
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Cash flow and other information related to leases is included in the following table:
Year Ended August 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases $ 31,686 $ 36,063
Operating cash outflows from finance leases 2,228 1,720
Financing cash outflows from finance leases 16,016 12,774
ROU assets obtained in exchange for lease obligations:
Future maturities of lease liabilities at August 31, 2021 are presented in the following table:
(in thousands) Operating Leases Finance Leases
NOTE 8. CREDIT ARRANGEMENTS
Long-term debt was as follows:
Weighted Average Interest Rate as of August 31, 2021 Year Ended August 31,
In February 2021, the Company issued $300.0 million of 3.875% Senior Notes due February 2031 (the "2031 Notes"). Issuance costs associated with the 2031 Notes were $4.9 million in 2021. Interest on 2031 Notes is payable semiannually.
In May 2018, the Company issued $350.0 million of 5.750% Senior Notes due April 2026 (the "2026 Notes"). In February 2021, the Company accepted for purchase $77.8 million of the outstanding principal amount of the 2026 Notes through a cash
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tender offer. Following the expiration of the cash tender offer on February 18, 2021, the Company redeemed the remaining outstanding principal amount of the 2026 Notes. In 2021, the Company recognized a $16.8 million loss on debt extinguishment related to the retirement of the 2026 Notes.
In July 2017, the Company issued $300.0 million of 5.375% Senior Notes due July 2027 (the "2027 Notes"). Interest on the 2027 Notes is payable semiannually.
In May 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 March 2021, the Company entered into a Fifth Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with a revolving credit facility (the "Revolver") of $400.0 million and a maturity date in March 2026, replacing the Fourth Amended and Restated Credit Agreement with a revolving credit facility of $350.0 million and a maturity date in June 2022. The maximum availability under the Revolver can be increased to $650.0 million with bank approval. The Company's obligations under the Credit Agreement are collateralized by its North America inventory. The Credit Agreement's capacity includes a $50.0 million sub-limit for the issuance of stand-by letters of credit. The Company had no amounts drawn under the Revolver or the previous revolving credit facility at August 31, 2021 or 2020. The availability under the Revolver and the previous revolving credit facility was reduced by outstanding stand-by letters of credit of $3.0 million at August 31, 2021 and 2020.
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. Loans under the Credit Agreement bear interest based on the Eurocurrency rate, a base rate, or the LIBOR rate. At August 31, 2021, the Company's interest coverage ratio was 14.61 to 1.00 and the Company's debt to capitalization ratio was 0.31 to 1.00.
In August 2020, the Company entered into an agreement through its subsidiary, CMCP, which allowed for a delayed draw Term Loan facility (the "Poland Term Loan") in the maximum aggregate principal amount of up to PLN 250.0 million. The proceeds of the Poland Term Loan were used to finance an addition of a third rolling line in Poland, which was completed during 2021. At August 31, 2020, PLN 150.0 million, or $40.7 million, was outstanding. An incremental principal amount of PLN 50.0 million, or $13.7 million, was drawn in March 2021, resulting in a final maximum aggregate principal amount under the facility, PLN 190.5 million, or $49.7 million, outstanding, as of August 31, 2021. CMCP is required to make quarterly interest and principal payments on the Poland Term Loan with interest based on the Warsaw Interbank Offer Rate ("WIBOR") plus a margin. The Poland Term Loan has a maturity date of August 2026.
The Company also has credit facilities in Poland, through its subsidiary, CMCP, available to support working capital, short-term cash needs, letters of credit, financial assurance and other trade finance-related matters. During the third and fourth quarters of 2021, CMCP amended certain terms of its credit facilities in Poland increasing the total credit facilities from PLN 275.0 million, or $74.6 million, at August 31, 2020, to PLN 300.0 million, or $78.3 million as of August 31, 2021. Prior to the amendments, the credit facilities expired in March 2022. The amended credit facilities expire in March 2024 and August 2024 for PLN 250.0 million and PLN 50.0 million, respectively. At August 31, 2021 and 2020, no amounts were outstanding under these facilities. CMCP had no borrowings or repayments under its credit facilities in 2021, and $22.4 million borrowings and $22.4 million repayments under its credit facilities in 2020. The available balance of these credit facilities was reduced by outstanding stand-by letters of credit, guarantees and/or other financial assurance instruments, which totaled $5.7 million and $0.8 million at August 31, 2021 and 2020, respectively.
At August 31, 2021, the Company was in compliance with all of the covenants contained in its credit arrangements.
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The scheduled maturities of the Company's long-term debt, excluding obligations related to finance leases, are included in the table below. See Note 7, Leases, for scheduled maturities of finance leases.
Year Ended August 31, (in thousands)
Total long-term debt, excluding finance leases 1,025,778
Less debt issuance costs 8,141
Total long-term debt outstanding, excluding finance leases $ 1,017,637
The Company capitalized $2.8 million, $2.5 million and $0.3 million of interest in the cost of property, plant and equipment during 2021, 2020 and 2019, respectively.
Accounts Receivable Facilities
In April 2021, the Company amended certain terms of the U.S. trade accounts receivable facility (the "U.S. Facility"), reducing the maximum facility from $200.0 million as of August 31, 2020, to $150.0 million, and extending the expiration date from November 2021 to March 2023. Under the U.S. Facility, CMC contributes, and certain of its subsidiaries transfer without recourse, certain eligible trade accounts receivable to CMC Receivables, Inc. ("CMCRV"), a wholly-owned subsidiary of CMC. CMCRV is structured to be a bankruptcy-remote entity formed for the sole purpose of facilitating transfers of trade accounts receivable generated by the Company. CMCRV transfers the trade accounts receivable in their entirety to two financial institutions. Under the U.S. Facility, with the consent of both CMCRV and the program's administrative agent, the amount advanced by the financial institutions can be increased to a maximum of $300.0 million for all trade accounts receivable. The remaining portion of the purchase price of the trade accounts receivable takes the form of subordinated notes from the respective financial institutions. These notes will be satisfied from the ultimate collection of the trade accounts receivable after payment of certain fees and other costs. The U.S. Facility contains certain cross-default provisions whereby a termination event could occur if the Company defaulted under certain of its credit arrangements. The covenants contained in the receivables purchase agreement are consistent with the Credit Agreement. Advances taken under the U.S. Facility incur interest based on LIBOR plus a margin. The Company had no advance payments outstanding under the U.S. Facility at August 31, 2021 and 2020.
In addition to the U.S. Facility, the Company's subsidiary in Poland transfers trade accounts receivable to financial institutions without recourse (the "Poland Facility"). In August 2021, the Company amended certain terms of its Poland Facility, increasing the maximum allowable advance of eligible trade accounts receivable from PLN 198.0 million, or $53.7 million, as of August 31, 2020 to PLN 288.0 million, or $75.2 million, as of August 31, 2021. Advances taken under the Poland Program incur interest based on the WIBOR plus a margin. The Company had PLN 101.7 million, or $26.6 million, advance payments outstanding under the Poland Facility at August 31, 2021 and none at August 31, 2020.
The transfer of receivables under the U.S. and Poland Facilities do not qualify to be accounted for as sales. Therefore, any advances outstanding under these programs are recorded as debt on the Company's consolidated balance sheets.
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NOTE 9. NEW MARKETS TAX CREDIT TRANSACTIONS
During 2016 and 2017, the Company entered into three New Markets Tax Credit (“NMTC”) transactions with U.S. Bancorp Community Development Corporation, a Minnesota corporation ("USBCDC"). The NMTC transactions relate to the construction and equipping of the micro mill in Durant, Oklahoma, as well as a rebar spooler and automated T-post shop located on the same site.
The transactions qualified through the New Markets Tax Credit program provided for in the Community Renewal Tax Relief Act of 2000 (the "NMTC Program"), as the micro mill, spooler and T-post shop are located in an eligible zone designated by the Internal Revenue Service ("IRS") and are considered eligible business activities for the NMTC Program. Under the NMTC Program, an investor that makes a capital investment, which, in turn, together with leverage loan sources, is used to make a Qualifying Equity Investment (a "QEI") in an entity that (i) qualifies as a Community Development Entity ("CDE"), (ii) has applied for and been granted an allocation of a portion of the total federal funds available to fund the credits (an "NMTC Allocation") and (iii) uses a minimum specified portion of the QEI to make a Qualified Low Income Community Investment up to the maximum amount of the CDE’s NMTC Allocation will be entitled to claim, over a period of seven years, federal nonrefundable tax credits in an amount equal to 39% of the QEI amount. NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.
In general, the three NMTC transactions were structured similarly. USBCDC made a capital contribution to an investment fund and Commonwealth Acquisition Holdings, Inc., a wholly-owned subsidiary of the Company (“Commonwealth”), made a loan to the investment fund. The investment fund used the proceeds from the capital contribution and the loan to make a QEI into a CDE, which, in turn, makes loans of the QEIs to the operating subsidiaries of the Company with terms similar to the loans by Commonwealth.
The following table summarizes the key terms and conditions for each of the three NMTC transactions ($ in millions):
By its capital contributions to the investment funds (exclusive of Twain Investment Fund 222) (collectively, the "Funds"), USBCDC is entitled to substantially all the benefits derived from the NMTCs. These transactions include a put/call provision whereby the Company may be obligated or entitled to repurchase USBCDC’s interest in the Funds at the end of a seven-year period, in the case of the USBCDC Investment Fund 156, LLC and Twain Investment Fund 249, LLC or an eight-year period, in the case of Twain Investment Fund 219, LLC (each of such periods, an "Exercise Period"). The Company believes USBCDC will exercise the put options following the end of the respective Exercise Periods. The value attributed to the put/call is immaterial. The Company is required to follow various regulations and contractual provisions that apply to the NMTC transactions. Non-compliance with applicable requirements could result in unrealized projected tax benefits and, therefore, could require the Company to indemnify USBCDC for any loss or recapture of NMTCs related to the financing until the Company's obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with these transactions.
The Company has determined that the Funds are VIEs, of which the Company is the primary beneficiary and has consolidated them in accordance with ASC Topic 810, Consolidation. USBCDC’s contributions are included in other noncurrent liabilities in the consolidated balance sheets. Direct costs incurred in structuring the transactions were deferred and are recognized as expense over each Exercise Period. Incremental costs to maintain the structures during the compliance periods are recognized as incurred.
The Company has determined that Twain Investment Fund 222 is a VIE, of which the Company is not the primary beneficiary and has therefore treated the QEI of $2.1 million as debt. The obligation represents the Company's maximum exposure to loss and is included in long-term debt in the consolidated balance sheets.
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NOTE 10. DERIVATIVES
The Company's global operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, interest rates and natural gas, electricity and other energy prices. 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 price volatility in these commodities, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) energy derivatives to mitigate the risk related to price volatility of electricity and natural gas.
The Company considers the total notional value of its futures and forward contracts as the best measure of the volume of derivative transactions. At August 31, 2021, the notional values of the Company's foreign currency and commodity contract commitments were $389.5 million and $213.4 million, respectively. At August 31, 2020, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $138.5 million and $195.8 million, respectively.
The following table provides information regarding the Company's commodity contract commitments as of August 31, 2021:
Commodity Long/Short Total
Aluminum Long 1,900 MT
Copper Long 578 MT
Copper Short 8,244 MT
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MT = Metric Ton
MW(h) = Megawatt hour
The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.
Commodity derivatives not designated as hedging instruments resulted in a loss, before income taxes, of $18.0 million and $6.0 million in 2021 and 2020, respectively, and a gain, before income taxes, of $1.7 million in 2019, recorded in cost of goods sold within the consolidated statements of earnings. Commodity derivatives accounted for as cash flow hedging instruments resulted in a net gain of $35.4 million and a net loss of $12.1 million recognized in the consolidated statements of comprehensive income in 2021 and 2020, respectively. As these derivatives were new in 2020 and did not begin to settle until 2021, there were no amounts recognized in the consolidated statements of comprehensive income in 2019. See Note 11, Fair Value, for the fair value of the Company's derivative instruments recorded in the consolidated balance sheets.
NOTE 11. FAIR VALUE
The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. See Note 1, Nature of Operations and Summary of Significant Accounting Policies, for definitions of the three levels within the hierarchy.
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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
Assets:
Foreign exchange derivative assets (2) 2,537 — 2,537 —
Liabilities:
Commodity derivative liabilities (2) 1,352 1,352 — —
Foreign exchange derivative liabilities (2) 1,880 — 1,880 —
Fair Value Measurements at Reporting Date Using
Assets:
Commodity derivative assets (2) 202 202 — —
Foreign exchange derivative assets (2) 1,484 — 1,484 —
Liabilities:
Foreign exchange derivative liabilities (2) 459 — 459 —
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(1) Investment deposit accounts are short-term in nature, and the value is determined by principal plus interest. The investment portfolio mix can change each period based on the Company's assessment of investment options.
(2) Derivative assets and liabilities classified as Level 1 are commodity futures contracts valued based on quoted market prices in the London Metal Exchange or the New York Mercantile Exchange. Amounts in Level 2 are based on broker quotes in the over-the-counter market. Derivatives classified as Level 3 are described below. Further discussion regarding the Company's use of derivative instruments is included in Note 10, Derivatives.
The fair value estimate of the Level 3 commodity derivative is based on an internally developed discounted cash flow model primarily utilizing unobservable inputs in which there is little or no market data. The Company forecasts future energy rates using a range of historical prices ("floating rate"). The following table summarizes the floating rate during 2021 and 2020, which is the only significant unobservable input used in the Company's discounted cash flow model:
Floating Rate (PLN)
Year Ended August 31, Low High Average
Below is a reconciliation of the beginning and ending balances of the Level 3 commodity derivative recognized in the consolidated statements of comprehensive income. The fluctuation in energy rates over time may cause volatility in the fair value estimate and is the primary reason for the unrealized gains and losses in other comprehensive income ("OCI") in 2021 and 2020.
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(in thousands) Level 3 Commodity Derivative
Balance at September 1, 2019 $ —
New commodity contract 1,083
Unrealized holding loss(1) (16,090)
Reclassification for loss included in net earnings(2) —
Unrealized holding gain(1) 43,798
Reclassification for gain included in net earnings(2) (2,378)
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(1) Unrealized holding gains/(losses) are included in OCI in the consolidated statements of comprehensive income.
(2) (Gains)/losses included in net earnings are recorded in cost of goods sold in the consolidated statements of earnings.
There were no material non-recurring fair value remeasurements in 2021 or 2020.
The carrying values of the Company's short-term items, including documentary letters of credit and notes payable, approximate fair value due to their short-term nature.
The carrying values and estimated fair values of the Company's financial assets and liabilities that are not required to be measured at fair value on the consolidated balance sheets were as follows:
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(1) The fair value of the Notes were determined based on indicated market values.
(2) The Poland Term Loan and short-term borrowings contain variable interest rates and carrying value approximates fair value.
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NOTE 12. INCOME TAX
The components of earnings from continuing operations before income taxes were as follows:
Year Ended August 31,
The income taxes (benefit) included in the consolidated statements of earnings were as follows:
Year Ended August 31,
Current:
Deferred:
Income taxes on discontinued operations — 706 158
A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations, including material items impacting the effective income tax rate, is as follows:
Year Ended August 31,
Foreign tax impairment on valuation of subsidiaries (1) (29,866) 5,084 (29,697)
TCJA - Toll charge and related foreign tax credits — — 7,410
Effective income tax rate from continuing operations 22.7 % 24.9 % 26.0 %
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(1) Fully offset by a valuation allowance.
(2) 2021 includes the tax effect of a gain recognized in connection with a global tax restructuring.
(3) State and local taxes in 2021 includes a $19.9 million benefit related to the release of certain state valuation allowances.
The Company plans to repatriate the current and future earnings from the Europe segment and recorded an immaterial amount of tax expense related to such future distributions. The Company considers all undistributed earnings of its non-U.S. subsidiaries prior to August 31, 2019 to be indefinitely reinvested and has not recorded deferred tax liabilities on such earnings.
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The income tax effects of significant temporary differences giving rise to deferred tax assets and liabilities were as follows:
Deferred tax assets:
Deferred compensation and employee benefits 64,693 32,293
Valuation allowance for deferred tax assets (278,099) (281,849)
Deferred tax liabilities:
Net operating losses giving rise to deferred tax assets consist of $428.3 million of state net operating losses and $961.6 million of foreign net operating losses that expire in varying amounts beginning in 2022 (with certain amounts having indefinite carryforward periods). These assets will be reduced as income tax expense is recognized in future periods.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. The Company's valuation allowances primarily relate to net operating loss and credit carryforwards in certain state and foreign jurisdictions for which utilization is uncertain. During fiscal 2021, the Company recorded a net $3.8 million decrease in valuation allowances. As of August 31, 2021, management determined that there is sufficient positive evidence to release $19.9 million of valuation allowances for certain state jurisdictions where deferred tax assets are now more likely than not to be realized. No change was made with respect to the realizability of foreign deferred tax assets, causing the Company to increase such valuation allowances by $17.1 million during fiscal 2021.
A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:
Change for tax positions of prior years — — 5,531
Reductions due to lapse of statute of limitations (3,121) — —
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(1)The full balance of unrecognized income tax benefits in each year, if recognized, would have impacted the Company’s effective income tax rate at the end of each respective year.
At August 31, 2021 and 2020, accrued interest and penalties related to uncertain tax positions was not material.
The Company files income tax returns in the U.S. and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The following is a summary of all fiscal years that are open to examination.
U.S. Federal — 2018 and forward
U.S. States — 2017 and forward
Foreign — 2014 and forward
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NOTE 13. STOCK-BASED COMPENSATION PLANS
The Company's stock-based compensation plans provide for the issuance of incentive and nonqualified stock options, restricted stock awards and performance-based awards. The Compensation Committee of CMC's Board of Directors (the "Compensation Committee") approves all awards that are granted under the Company's stock-based compensation plans. Stock-based compensation expense for 2021, 2020 and 2019 of $43.7 million, $31.9 million and $25.1 million, respectively, was primarily included in selling, general and administrative expenses on the Company's consolidated statements of earnings. As of August 31, 2021, total unrecognized compensation cost related to unvested stock-based compensation arrangements was $13.7 million, which is expected to be recognized over a weighted average period of three years.
The following table summarizes the total awards granted:
Restricted StockAwards/Units PerformanceAwards
As of August 31, 2021, the Company had 5,264,516 shares of common stock available for future grants.
Restricted Stock Units
Restricted stock units issued under the Company's stock-based compensation plans may not be sold, transferred, pledged or assigned until service-based restrictions lapse. The restricted stock units generally vest and are converted to shares of the Company's common stock in three equal installments on each of the first three anniversaries of the date of grant,. Generally, upon termination of employment, restricted stock units that have not vested are forfeited. Other than awards granted to certain executives, which continue to vest following qualifying retirement, a pro-rata portion of the unvested restricted stock awarded will vest and become payable upon death, disability or qualifying retirement.
The estimated fair value of the restricted stock units is based on the closing price of the Company's common stock on the date of grant, discounted for the expected dividend yield through the vesting period. Compensation cost related to the restricted stock units is recognized ratably over the service period and is included in equity on the Company's consolidated balance sheets.
Performance Stock Units
Performance stock units issued under the Company's stock-based compensation plans may not be sold, transferred, pledged or assigned until service-based restrictions lapse and any performance objectives have been attained as established by the Compensation Committee. Recipients of these awards generally must be actively employed by and providing services to the Company on the last day of the performance period in order to receive an award payout. Other than awards granted to certain executives, which continue to vest following qualifying retirement, a pro-rata portion of the performance stock units will vest and become payable at the end of the performance period upon death, disability or qualifying retirement.
Compensation cost for performance stock units is accrued based on the probable outcome of specified performance conditions, net of estimated forfeitures. The Company accrues compensation cost if it is probable that the performance conditions will be met. The Company reassesses the probability of meeting the specified performance conditions at the end of each reporting period and adjusts compensation cost, as necessary, based on the probability of achieving the performance conditions. If the performance conditions are not met at the end of the performance period, the Company reverses the related compensation cost.
Performance targets established by the Compensation Committee for performance stock units awarded in 2021, 2020 and 2019 were weighted 75% based on the Company's cumulative EBITDA targets and positive return on invested capital for the fiscal year in which the awards were granted and the succeeding two fiscal years, as approved by CMC's Board of Directors in the respective year's business plan, and 25% based on a three year relative total stockholder return metric. Performance stock units awarded will be settled in shares of the Company's common stock. Award payouts range from a threshold of 50% to a maximum of 200% for each portion of the target awards. The performance stock units awarded in 2021 and 2020 associated with the cumulative EBITDA targets have been classified as liability awards since the final EBITDA target will not be set until the third year of the performance period. Consequently, these awards were included in accrued expenses and other payables on the Company's consolidated balance sheets. The fair value of these performance stock units is remeasured each reporting period and is recognized ratably over the service period. The performance stock units associated with the total stockholder return