☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4304
___________________________________
COMMERCIAL METALS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
___________________________________
Delaware
75-0725338
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
6565 N. MacArthur Blvd.
Irving, Texas75039
(Address of Principal Executive Offices) (Zip Code)
(214) 689-4300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
CMC
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 6, 2020, 118,650,173 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended November 30,
(in thousands, except share data)
2019
2018
Net sales
$
1,384,708
$
1,277,342
Costs and expenses:
Cost of goods sold
1,146,514
1,118,433
Selling, general and administrative expenses
111,529
117,217
Interest expense
16,578
16,663
1,274,621
1,252,313
Earnings from continuing operations before income taxes
110,087
25,029
Income taxes
27,332
5,609
Earnings from continuing operations
82,755
19,420
Earnings from discontinued operations before income taxes
895
457
Income taxes
302
135
Earnings from discontinued operations
593
322
Net earnings
$
83,348
$
19,742
Basic earnings per share*
Earnings from continuing operations
$
0.70
$
0.17
Earnings from discontinued operations
0.01
—
Net earnings
$
0.70
$
0.17
Diluted earnings per share*
Earnings from continuing operations
$
0.69
$
0.16
Earnings from discontinued operations
—
—
Net earnings
$
0.70
$
0.17
Average basic shares outstanding
118,370,191
117,387,038
Average diluted shares outstanding
119,773,538
118,682,473
See notes to condensed consolidated financial statements.
_________________
*Earnings Per Share ("EPS") is calculated independently for each component and may not sum to Net EPS due to rounding.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended November 30,
(in thousands)
2019
2018
Net earnings
$
83,348
$
19,742
Other comprehensive income, net of income taxes:
Foreign currency translation adjustment
6,924
(9,657
)
Reclassification for translation loss realized upon liquidation of investment in foreign entity
—
(99
)
Foreign currency translation adjustment
6,924
(9,756
)
Net unrealized gain (loss) on derivatives:
Unrealized holding gain (loss)
714
(35
)
Reclassification for loss included in net earnings
(89
)
(42
)
Net unrealized gain (loss) on derivatives
625
(77
)
Defined benefit obligation:
Amortization of prior services
(8
)
(7
)
Reclassification for settlement losses
—
1,316
Defined benefit obligation
(8
)
1,309
Other comprehensive income (loss)
7,541
(8,524
)
Comprehensive income
$
90,889
$
11,218
See notes to condensed consolidated financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
November 30, 2019
August 31, 2019
Assets
Current assets:
Cash and cash equivalents
$
224,797
$
192,461
Accounts receivable (less allowance for doubtful accounts of $8,348 and $8,403)
961,458
1,016,088
Inventories, net
649,681
692,368
Other current assets
178,647
179,088
Total current assets
2,014,583
2,080,005
Property, plant and equipment, net
1,504,308
1,500,971
Goodwill
64,178
64,138
Other noncurrent assets
225,282
113,657
Total assets
$
3,808,351
$
3,758,771
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
243,857
$
288,005
Accrued expenses and other payables
317,455
353,786
Acquired unfavorable contract backlog
26,935
35,360
Current maturities of long-term debt and short-term borrowings
13,717
17,439
Total current liabilities
601,964
694,590
Deferred income taxes
107,069
79,290
Other noncurrent liabilities
218,178
133,620
Long-term debt
1,179,443
1,227,214
Total liabilities
2,106,654
2,134,714
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 118,649,865 and 117,924,938 shares
1,290
1,290
Additional paid-in capital
347,192
358,668
Accumulated other comprehensive loss
(116,585
)
(124,126
)
Retained earnings
1,654,489
1,585,379
Less treasury stock, 10,410,799 and 11,135,726 shares at cost
(184,885
)
(197,350
)
Stockholders' equity
1,701,501
1,623,861
Stockholders' equity attributable to noncontrolling interests
196
196
Total stockholders' equity
1,701,697
1,624,057
Total liabilities and stockholders' equity
$
3,808,351
$
3,758,771
See notes to condensed consolidated financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended November 30,
(in thousands)
2019
2018
Cash flows from (used by) operating activities:
Net earnings
$
83,348
$
19,742
Adjustments to reconcile net earnings to cash flows from (used by) operating activities:
Depreciation and amortization
40,947
35,182
Deferred income taxes
27,939
(352
)
Amortization of acquired unfavorable contract backlog
(8,331
)
(11,332
)
Stock-based compensation
8,269
4,217
Net gain on disposals of subsidiaries, assets and other
(6,733
)
(1,271
)
Other
1,175
45
Changes in operating assets and liabilities
(196
)
(36,333
)
Beneficial interest in securitized accounts receivable
—
(367,521
)
Net cash flows from (used by) operating activities
146,418
(357,623
)
Cash flows from (used by) investing activities:
Capital expenditures
(45,559
)
(37,914
)
Proceeds from the sale of property, plant and equipment
9,651
1,953
Proceeds from insurance, sale of discontinued operations and other
784
5,798
Acquisitions, net of cash acquired
—
(694,802
)
Beneficial interest in securitized accounts receivable
—
367,521
Net cash flows used by investing activities:
(35,124
)
(357,444
)
Cash flows from (used by) financing activities:
Proceeds from issuance of long-term debt
—
180,000
Repayments of long-term debt
(53,298
)
(7,175
)
Proceeds from accounts receivable programs
27,050
33,439
Repayments under accounts receivable programs
(31,057
)
(45,586
)
Dividends
(14,238
)
(14,116
)
Stock issued under incentive and purchase plans, net of forfeitures
(7,817
)
(6,220
)
Net cash flows from (used by) financing activities
(79,360
)
140,342
Effect of exchange rate changes on cash
196
(353
)
Increase (decrease) in cash, restricted cash and cash equivalents
32,130
(575,078
)
Cash, restricted cash and cash equivalents at beginning of period
193,729
632,615
Cash, restricted cash and cash equivalents at end of period
$
225,859
$
57,537
See notes to condensed consolidated financial statements.
Supplemental information:
Three Months Ended November 30,
(in thousands)
2019
2018
Cash paid for income taxes
$
2,119
$
4,879
Cash paid for interest
20,031
19,807
Noncash activities:
Liabilities related to additions of property, plant and equipment
17,569
19,676
Cash and cash equivalents
$
224,797
$
52,352
Restricted cash
1,062
5,185
Total cash, restricted cash and cash equivalents
$
225,859
$
57,537
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended November 30, 2019
Common Stock
Additional
Accumulated Other
Treasury Stock
Non-
(in thousands, except share data)
Number of Shares
Amount
Paid-In Capital
Comprehensive Loss
Retained Earnings
Number of Shares
Amount
controlling Interests
Total
Balance, September 1, 2019
129,060,664
$
1,290
$
358,668
$
(124,126
)
$
1,585,379
(11,135,726
)
$
(197,350
)
$
196
$
1,624,057
Net earnings
83,348
83,348
Other comprehensive income
7,541
7,541
Dividends ($0.12 per share)
(14,238
)
(14,238
)
Issuance of stock under incentive and purchase plans, net of forfeitures
(20,282
)
724,927
12,465
(7,817
)
Stock-based compensation
8,806
8,806
Balance, November 30, 2019
129,060,664
$
1,290
$
347,192
$
(116,585
)
$
1,654,489
(10,410,799
)
$
(184,885
)
$
196
$
1,701,697
Three Months Ended November 30, 2018
Common Stock
Additional
Accumulated Other
Treasury Stock
Non-
(in thousands, except share data)
Number of Shares
Amount
Paid-In Capital
Comprehensive Loss
Retained Earnings
Number of Shares
Amount
controlling Interests
Total
Balance, September 1, 2018
129,060,664
$
1,290
$
352,674
$
(93,677
)
$
1,446,495
(12,045,106
)
$
(213,385
)
$
186
$
1,493,583
Net earnings
19,742
19,742
Other comprehensive loss
(8,524
)
(8,524
)
Dividends ($0.12 per share)
(14,116
)
(14,116
)
Issuance of stock under incentive and purchase plans, net of forfeitures
(17,090
)
618,643
10,870
(6,220
)
Stock-based compensation
7,309
7,309
Adoption of ASC 606 adjustment
(2,747
)
(2,747
)
Balance, November 30, 2018
129,060,664
$
1,290
$
342,893
$
(102,201
)
$
1,449,374
(11,426,463
)
$
(202,515
)
$
186
$
1,489,027
See notes to condensed consolidated financial statements.
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the year ended August 31, 2019 ("2019Form 10-K") filed by Commercial Metals Company ("CMC," and together with its consolidated subsidiaries, the "Company") with the Securities and Exchange Commission (the "SEC") and include all normal recurring adjustments necessary to present fairly the condensed consolidated balance sheets and the condensed consolidated statements of earnings, comprehensive income, cash flows and stockholders' equity for the periods indicated. These notes should be read in conjunction with the consolidated financial statements included in the 2019Form 10-K. The results of operations for the three month period are not necessarily indicative of the results to be expected for the full fiscal year.
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 a right-of-use ("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 condensed consolidated balance sheet at September 1, 2019: $113.4 million of ROU assets, in other noncurrent assets, $30.9 million in accrued expenses and other payables and $84.9 million 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.
The Company's leases are primarily for office space, land 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 ROU assets represent the Company's right to use the underlying assets for the lease term and its lease liabilities represent the obligation to make lease payments arising from the leases. 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”) in its condensed consolidated balance sheets.
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.
NOTE 2. CHANGES IN BUSINESS
Acquisition
On November 5, 2018 (the "Acquisition Date"), the Company completed the acquisition of 33rebar fabrication facilities in the United States ("U.S."), as well as four electric arc furnace ("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, was $701.2 million, and was funded through a combination of domestic cash on-hand and borrowings under a term loan (the "Term Loan").
8
The purchase price paid was allocated between the acquired mills and fabrication facilities. The results of operations of the Acquired Businesses are reflected in the Company’s condensed consolidated financial statements from the Acquisition Date. The purchase price was allocated among assets acquired and liabilities assumed at fair value and was finalized on November 5, 2019. There were no changes during the quarter ended November 30, 2019 from the amounts disclosed in Note 3, Acquisition, to the consolidated financial statements in the 2019Form 10-K.
Pro Forma Supplemental Information
Supplemental information on an unaudited pro forma basis is presented below as if the acquisition of the Acquired Businesses (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 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.
Three Months Ended November 30,
(in thousands)
2018
2017*
Pro forma net sales
$
1,557,032
$
1,417,583
Pro forma net earnings (loss)
38,059
(4,749
)
_________________
*Non-recurring acquisition and integration costs of approximately $43.3 million incurred have been included in pro forma net earnings for the three months ended November 30, 2017.
Facility Closure
In October 2019, the Company decided to close the melting operations at its Rancho Cucamonga facility. Due to this decision, the Company recorded $6.3 million of expense in the three months ended November 30, 2019 related to severance, pension curtailment and vendor agreement terminations. At November 30, 2019, the remaining liability to be paid related to these expenses was $3.9 million and was included in accrued expenses and other payables on the Company's condensed consolidated balance sheets.
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables reflect the changes in accumulated other comprehensive income (loss) ("AOCI"):
Three Months Ended November 30, 2019
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, August 31, 2019
$
(121,498
)
$
1,106
$
(3,734
)
$
(124,126
)
Other comprehensive income (loss) before reclassifications
6,924
882
(10
)
7,796
Amounts reclassified from AOCI
—
(110
)
—
(110
)
Income taxes
—
(147
)
2
(145
)
Net other comprehensive income (loss)
6,924
625
(8
)
7,541
Balance, November 30, 2019
$
(114,574
)
$
1,731
$
(3,742
)
$
(116,585
)
Three Months Ended November 30, 2018
(in thousands)
Foreign Currency Translation
Unrealized Gain (Loss) on Derivatives
Defined Benefit Obligation
Total AOCI
Balance, August 31, 2018
$
(92,637
)
$
1,356
$
(2,396
)
$
(93,677
)
Other comprehensive income (loss) before reclassifications
(9,657
)
(52
)
(11
)
(9,720
)
Amounts reclassified from AOCI
(99
)
(42
)
1,666
1,525
Income taxes
—
17
(346
)
(329
)
Net other comprehensive income (loss)
(9,756
)
(77
)
1,309
(8,524
)
Balance, November 30, 2018
$
(102,393
)
$
1,279
$
(1,087
)
$
(102,201
)
9
Items reclassified out of AOCI were immaterial for the three months ended November 30, 2019 and 2018. Thus, the corresponding line items in the condensed consolidated statements of earnings to which the items were reclassified are not presented.
NOTE 4. REVENUE RECOGNITION
In the Americas Mills, Americas Recycling, and International Mill segments, revenue is recognized at a point in time concurrent with the transfer of control, which usually occurs, depending on shipping terms, upon shipment or customer receipt.
In the Americas Fabrication segment, each contract represents a single performance obligation. Revenue is either recognized over time or equal to billing under an available practical expedient. For contracts where the Company provides fabricated product and installation services, revenue is recognized over time using an input method. For the three months ended November 30, 2019, these contracts represent approximately 26% of net sales in the Americas Fabrication segment. For these contracts, the measure of progress is based on contract costs incurred to date compared to total estimated contract costs, which provides a reasonable depiction of the Company’s progress towards satisfaction of the performance obligation as there is a direct relationship between costs incurred by the Company and the transfer of the fabricated product and installation services. Revenue from contracts where the Company does not provide installation services is recognized over time using an output method. For the three months ended November 30, 2019, these contracts represent approximately 23% of net sales in the Americas Fabrication segment. For these contracts, the Company uses tons shipped compared to total estimated tons, which provides a reasonable depiction of the transfer of contract value to the customer, as there is a direct relationship between the units shipped by the Company and the transfer of the fabricated product. Significant judgment is required to evaluate total estimated costs used in the input method and total estimated tons in the output method. If estimated total consolidated costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues, costs to complete or total planned quantity is recorded in the period in which such revisions are identified. The Company does not exercise significant judgment in determining the transaction price. For the three months ended November 30, 2019, the remaining 51% of net sales in the Americas Fabrication segment is recognized as amounts are billed to the customer.
Payment terms and conditions vary by contract type, although the Company generally requires customers to pay within 30 days of invoice date. The timing of revenue recognition for certain Americas Fabrication contracts, as described above, 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 after invoicing. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined the contracts do not include a significant financing component.
The following table provides information about assets and liabilities from contracts with customers.
(in thousands)
November 30, 2019
August 31, 2019
Contract assets (included in other current assets)
$
89,507
$
103,805
Contract liabilities (included in accrued expenses and other payables)
34,037
37,165
The amount of revenue reclassified from August 31, 2019 contract liabilities during the three months ended November 30, 2019 was approximately $14.5 million.
Remaining Performance Obligations
As of November 30, 2019, $799.1 million has been allocated to remaining performance obligations in the Americas Fabrication segment, excluding those contracts where revenue is recognized equal to billing. Of this amount, the Company estimates the remaining performance obligations will be recognized as revenue as follows: 40%in the first twelve months, 48%in the following twelve months, and 12%thereafter. The duration of contracts in the Americas Mills, Americas Recycling, and International Mill segments are typically less than one year.
10
Disaggregation of Revenue
The following tables display revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Three Months Ended November 30, 2019
(in thousands)
Americas Recycling
Americas Mills
Americas Fabrication
International Mill
Corporate and Other
Total
Steel products
$
115
$
441,163
$
499,727
$
157,944
$
—
$
1,098,949
Ferrous scrap
58,302
6,748
—
212
—
65,262
Nonferrous scrap
113,218
3,355
—
1,993
—
118,566
Construction materials
—
—
67,466
—
—
67,466
Other
516
22,926
3,184
4,891
2,948
34,465
Total
$
172,151
$
474,192
$
570,377
$
165,040
$
2,948
$
1,384,708
Three Months Ended November 30, 2018
(in thousands)
Americas Recycling
Americas Mills
Americas Fabrication
International Mill
Corporate and Other
Total
Steel products
$
239
$
347,965
$
374,807
$
217,770
$
—
$
940,781
Ferrous scrap
111,654
9,142
—
275
—
121,071
Nonferrous scrap
128,075
3,180
—
2,941
—
134,196
Construction materials
—
—
57,171
—
—
57,171
Other
213
13,384
2,580
5,687
2,259
24,123
Total
$
240,181
$
373,671
$
434,558
$
226,673
$
2,259
$
1,277,342
NOTE 5. INVENTORIES, NET
The majority of the Company's inventories are in the form of semi-finished and finished goods. Under the Company’s business model, products are sold to external customers in various stages, from semi-finished billets through fabricated steel, leading these categories to be combined. As such, at November 30, 2019 and August 31, 2019, work in process inventories were immaterial. At November 30, 2019 and August 31, 2019, the Company's raw materials inventories were $129.5 million and $143.7 million, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill by reportable segment at November 30, 2019 is detailed in the following table:
(in thousands)
Americas Recycling
Americas Mills
Americas Fabrication
International Mill
Consolidated
Goodwill, gross*
$
9,543
$
4,970
$
57,428
$
2,426
$
74,367
Accumulated impairment losses*
(9,543
)
—
(493
)
(153
)
(10,189
)
Goodwill, net*
$
—
$
4,970
$
56,935
$
2,273
$
64,178
_________________
* The change in balance from August 31, 2019 was immaterial.
The total gross carrying amounts of the Company's intangible assets subject to amortization were $21.0 million and $20.8 million, and the total net carrying amount was $12.8 million and $13.3 million at November 30, 2019 and August 31, 2019, respectively. These assets were included in other noncurrent assets on the Company's condensed consolidated balance sheets. Intangible amortization expense from continuing operations related to such intangible assets was $0.5 million for the three months ended November 30, 2019 and 2018. Excluding goodwill, the Company did not have any significant intangible assets with indefinite lives at November 30, 2019.
11
In connection with the Acquisition, the Company recorded an unfavorable contract backlog liability of $110.2 million. At November 30, 2019 and August 31, 2019, the net carrying amount of the liability was $26.9 million and $35.4 million, respectively. Amortization of the unfavorable contract backlog for the three months ended November 30, 2019 and 2018 was $8.3 million and $11.3 million, respectively, and was recorded as an increase to net sales in the Company’s condensed consolidated statements of earnings.
NOTE 7. LEASES
The following table presents the components of the total leased assets and lease liabilities and their classification in the Company's condensed consolidated balance sheet at November 30, 2019:
(in thousands)
Classification in Condensed Consolidated Balance Sheet
November 30, 2019
Assets:
Operating assets
Other noncurrent assets
$
111,230
Finance assets
Property, plant and equipment, net
39,226
Total leased assets
150,456
Liabilities:
Operating lease liabilities:
Current
Accrued expenses and other payables
28,614
Long-term
Other noncurrent liabilities
84,843
Total operating lease liabilities
113,457
Finance lease liabilities:
Current
Current maturities of long-term debt and short-term borrowings
11,878
Long-term
Long-term debt
27,835
Total finance lease liabilities
39,713
Total lease liabilities
$
153,170
The components of lease cost were as follows:
(in thousands)
Three Months Ended November 30, 2019
Operating lease expense
$
8,790
Finance lease expense:
Amortization of assets
2,165
Interest on lease liabilities
401
Total finance lease expense
2,566
Variable and short term-lease expense
3,933
Total lease expense
$
15,289
The weighted-average remaining lease term and discount rate for operating and finance leases are presented in the following table:
November 30, 2019
Weighted-average remaining lease term (years)
Operating leases
5.3
Finance leases
3.9
Weighted-average discount rate
Operating leases
3.769
%
Finance leases
4.222
%
12
Cash flow and other information related to leases is included in the following table:
(in thousands)
Three Months Ended November 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases
$
8,746
Operating cash outflows from finance leases
336
Financing cash outflows from finance leases
3,298
ROU assets obtained in exchange for lease obligations:
Operating leases
6,369
Finance leases
5,312
Maturities of lease liabilities at November 30, 2019 are presented in the following table:
(in thousands)
Operating Leases
Finance Leases
Year 1
$
32,436
$
13,300
Year 2
27,186
10,712
Year 3
21,872
8,260
Year 4
17,542
6,488
Year 5
9,494
4,124
Thereafter
18,342
267
Total lease payments
126,872
43,151
Less: Imputed interest
13,415
3,438
Present value of lease liabilities
$
113,457
$
39,713
Future maturities of lease liabilities at August 31, 2019, prior to adoption of ASU 2016-02, are presented in the following table:
Twelve Months Ended August 31,
(in thousands)
Total
2020
2021
2022
2023
2024
Thereafter
Capital lease obligations
$
41,331
13,104
10,004
7,758
5,831
3,904
730
Long-term non-cancelable operating leases
$
124,817
34,511
27,383
22,074
17,433
10,478
12,938
13
NOTE 8. CREDIT ARRANGEMENTS
Long-term debt at November 30, 2019 and August 31, 2019 was as follows:
(in thousands)
Weighted Average Interest Rate at November 30, 2019