Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – Basis of Presentation
The consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). Investments in unconsolidated affiliates are accounted for using the equity method. Significant intercompany accounts and transactions are eliminated.
The Company owns controlling interests in the following three joint ventures: Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), and Worthington Specialty Processing (“WSP”) (51%). These joint ventures are consolidated with the equity owned by the other joint venture members shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings and other comprehensive income (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included
. Operating results for the three months ended
August 31, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2019 (“fiscal 2019”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2018 (“fiscal 2018”) of Worthington Industries, Inc. (the “2018 Form 10-K”).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
On June 1, 2018, the Company adopted new accounting guidance that replaces most existing revenue recognition guidance under U.S. GAAP. See “NOTE B – Revenue Recognition” for further explanation related to this adoption, including newly required disclosures.
Recently Issued Accounting Standards
In February 2016, new accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the new guidance requires that leased assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings. We are in the process of evaluating the effect this guidance will have on our
consolidated
financial position, results of operations and cash flows, and we have not determined the effect of the new guidance on our ongoing financial reporting.
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our
consolidated
financial position and results of operations; however, we do not expect the new guidance to have a material impact on our ongoing financial reporting.
In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify application of hedge accounting and increase transparency of information about an entity’s risk management
5
activities. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
It is to be applied using a modified retrospective transition approach
for cash flow and net investment hedges existing at the date of adoption. The presentation and disclosure guidance is only required prospectively.
Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on
our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
NOTE B – Revenue Recognition
Through the fiscal year ended May 31, 2018, in accordance with the Company’s historical accounting policies for revenue recognition, the Company recognized revenue upon transfer of title and risk of loss, or in the case of toll processing revenue, upon delivery of the goods, provided persuasive evidence of an arrangement existed, pricing was fixed or determinable and collectability was reasonably assured. We provided, through charges to net sales, for returns and allowances based on experience and current customer activities. We also provided, through charges to net sales, for customer rebates and sales discounts based on specific agreements and recent and anticipated levels of customer activity.
On June 1, 2018, the Company adopted new accounting guidance that replaces most existing revenue recognition guidance under U.S. GAAP, Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“Topic 606”). The new guidance was adopted using the modified retrospective approach as applied to customer contracts that were not complete at the date of adoption, with the cumulative effect recognized in retained earnings. Comparative financial information for reporting periods beginning prior to June 1, 2018, has not been restated and continues to be reported under the previous accounting guidance. The cumulative effect adjustment resulted from a change in the pattern of recognition for the Company’s toll processing and oil & gas equipment revenue streams, which previously were accounted for as point in time and now will be accounted for over time.
The following table outlines the cumulative effect of adopting the new revenue guidance:
(in thousands)
|
May 31, 2018
(As Reported)
|
|
|
Cumulative Effect of Topic 606 Adoption
|
|
|
June 1, 2018
(As Adjusted)
|
|
Consolidated Balance Sheet caption
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
$
|
572,689
|
|
|
$
|
4,706
|
|
|
$
|
577,395
|
|
Total inventories
|
|
454,027
|
|
|
|
(3,452
|
)
|
|
|
450,575
|
|
Prepaid expenses and other current assets
|
|
60,134
|
|
|
|
944
|
|
|
|
61,078
|
|
Deferred income taxes, net
|
|
60,188
|
|
|
|
454
|
|
|
|
60,642
|
|
Retained earnings
|
|
637,757
|
|
|
|
1,174
|
|
|
|
638,931
|
|
Noncontrolling interests
|
|
117,606
|
|
|
|
570
|
|
|
|
118,176
|
|
Under the new guidance, the Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services, including any variable consideration. Under the new revenue guidance, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when a performance obligation is satisfied.
Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both net sales and cost of goods sold at the time control is transferred to the customer. Due to the short term nature of our contracts with customers, we have elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less. When the Company satisfies (or partially satisfies) a performance obligation, prior to being able to invoice the customer, we recognize an unbilled receivable when the right to consideration is unconditional and a contract asset when the right to consideration is conditional. Unbilled receivables and contract assets are included in receivables and prepaid and other current assets, respectively, on the consolidated balance sheets. Additionally, we do not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. Payments from customers are generally due within 30 to 60 days of invoicing, which generally occurs upon shipment or delivery of the goods.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The Company provides its customers with a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs.
With the exception of the toll processing and oil & gas equipment revenue streams, the Company recognizes revenue at the point in time the performance obligation is satisfied and control of the product is transferred to the customer upon shipment or delivery.
6
Generally, the Company receives and acknowledges purchase orders from its cus
tomer
s
, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, the Company receives a blanket purchase order from its customers, which includes pricing, payment and other terms and conditions, with quantities
defined at the time
each
customer subsequently issues periodic releases against the blanket purchase order.
For the toll processing and oil & gas equipment revenue streams, the Company recognizes revenue over time. Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Revenues are recorded proportionally as costs are incurred. Under Topic 606, the Company has elected to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Certain contracts contain variable consideration, which is not constrained, and primarily include estimated sales returns, customer rebates, and sales discounts which are recorded on an expected value basis. These estimates are based on historical returns, analysis of credit memo data and other known factors. The Company accounts for rebates by recording reductions to revenue for rebates in the same period the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer. The Company does not exercise significant judgments in determining the timing of satisfaction of performance obligations or the transaction price.
The following table summarizes net sales disaggregated by product class and timing of revenue recognition for the period presented:
(in thousands)
|
Reportable Segments
|
|
Three months ended August 31, 2018
|
Steel Processing
|
|
|
Pressure Cylinders
|
|
|
Engineered Cabs
|
|
|
Other
|
|
|
Total
|
|
Product class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
$
|
626,862
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
626,862
|
|
Toll
|
|
33,625
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,625
|
|
Pressure Cylinders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial products
|
|
-
|
|
|
|
152,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,847
|
|
Consumer products
|
|
-
|
|
|
|
116,823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116,823
|
|
Oil & gas equipment
|
|
-
|
|
|
|
30,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,683
|
|
Engineered Cabs
|
|
-
|
|
|
|
-
|
|
|
|
27,252
|
|
|
|
-
|
|
|
|
27,252
|
|
Other
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
Total
|
$
|
660,487
|
|
|
$
|
300,353
|
|
|
$
|
27,252
|
|
|
$
|
15
|
|
|
$
|
988,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
626,862
|
|
|
$
|
289,034
|
|
|
$
|
27,252
|
|
|
$
|
15
|
|
|
$
|
943,163
|
|
Goods and services transferred over time
|
|
33,625
|
|
|
|
11,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,944
|
|
Total
|
$
|
660,487
|
|
|
$
|
300,353
|
|
|
$
|
27,252
|
|
|
$
|
15
|
|
|
$
|
988,107
|
|
The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements as of and for the period ended August 31, 2018 as if the Company continued to follow its accounting policies under the previous revenue recognition guidance.
7
|
August 31, 2018
|
|
(in thousands)
|
As Currently Reported
|
|
|
Topic 606 Adjustments
|
|
|
Balances Without Adoption of Topic 606
|
|
Consolidated Balance Sheet
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
$
|
564,612
|
|
|
$
|
(4,690
|
)
|
|
$
|
559,922
|
|
Total inventories
|
|
494,116
|
|
|
|
4,056
|
|
|
|
498,172
|
|
Prepaid expenses and other current assets
|
|
60,846
|
|
|
|
(1,823
|
)
|
|
|
59,023
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
79,116
|
|
|
|
(450
|
)
|
|
|
78,666
|
|
Shareholders' equity - controlling interest
|
|
919,519
|
|
|
|
(1,413
|
)
|
|
|
918,106
|
|
Noncontrolling interests
|
|
117,855
|
|
|
|
(594
|
)
|
|
|
117,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2018
|
|
(in thousands)
|
As Currently Reported
|
|
|
Topic 606 Adjustments
|
|
|
Balances Without Adoption of Topic 606
|
|
Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
988,107
|
|
|
$
|
(863
|
)
|
|
$
|
987,244
|
|
Cost of goods sold
|
|
845,110
|
|
|
|
604
|
|
|
|
845,714
|
|
Income tax expense
|
|
14,498
|
|
|
|
(4
|
)
|
|
|
14,494
|
|
Net earnings
|
|
56,958
|
|
|
|
(263
|
)
|
|
|
56,695
|
|
Net earnings attributable to noncontrolling interests
|
|
2,016
|
|
|
|
(24
|
)
|
|
|
1,992
|
|
Net earnings attributable to controlling interest
|
|
54,942
|
|
|
|
(239
|
)
|
|
|
54,703
|
|
NOTE C – Investments in Unconsolidated Affiliates
Investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. These include ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero Worthington”) (50%), Worthington Armstrong Venture (“WAVE”) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We received distributions from unconsolidated affiliates totaling $19,989,000 during the three months ended
August 31, 2018
. We have received cumulative distributions from WAVE in excess of our investment balance, which resulted in an amount recorded within other liabilities on our consolidated balance sheets of $52,133,000 at
August 31, 2018
. In accordance with the applicable accounting guidance, we reclassified the negative investment balance to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if the investment balance becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any negative investment balance classified as a liability as income immediately.
We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows.
8
The following tables summarize combined financial information for our unconsolidated affiliates as of, and for the periods presented:
|
August 31,
|
|
|
May 31,
|
|
(in thousands)
|
2018
|
|
|
2018
|
|
Cash
|
$
|
43,004
|
|
|
$
|
52,812
|
|
Other current assets
|
|
717,270
|
|
|
|
590,578
|
|
Current assets for discontinued operations
|
|
37,474
|
|
|
|
37,640
|
|
Noncurrent assets
|
|
365,396
|
|
|
|
358,927
|
|
Total assets
|
$
|
1,163,144
|
|
|
$
|
1,039,957
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
244,831
|
|
|
|
166,493
|
|
Current liabilities for discontinued operations
|
|
8,243
|
|
|
|
7,142
|
|
Short-term borrowings
|
|
36,215
|
|
|
|
26,599
|
|
Current maturities of long-term debt
|
|
43,131
|
|
|
|
23,243
|
|
Long-term debt
|
|
261,348
|
|
|
|
259,588
|
|
Other noncurrent liabilities
|
|
17,541
|
|
|
|
17,536
|
|
Equity
|
|
551,835
|
|
|
|
539,356
|
|
Total liabilities and equity
|
$
|
1,163,144
|
|
|
$
|
1,039,957
|
|
|
Three Months Ended August 31,
|
|
(in thousands)
|
2018
|
|
|
2017
|
|
Net sales
|
$
|
498,545
|
|
|
$
|
442,624
|
|
Gross margin
|
|
103,812
|
|
|
|
86,235
|
|
Operating income
|
|
72,376
|
|
|
|
57,163
|
|
Depreciation and amortization
|
|
6,477
|
|
|
|
7,193
|
|
Interest expense
|
|
2,925
|
|
|
|
2,492
|
|
Income tax expense
|
|
4,525
|
|
|
|
1,348
|
|
Net earnings from continuing operations
|
|
64,894
|
|
|
|
51,061
|
|
Net earnings from discontinued operations
|
|
1,684
|
|
|
|
1,413
|
|
Net earnings
|
|
66,578
|
|
|
|
52,474
|
|
The amounts presented within the discontinued operations captions in the tables above reflect the international operations of our WAVE joint venture, which are being sold
as part of a broader transaction between the joint venture partner, Armstrong World Industries, Inc. (“AWI”), and Knauf Group, a family-owned manufacturer of building materials headquartered in Germany. WAVE’s portion of the total sales proceeds is expected to be approximately $90,000,000. The transaction is subject to regulatory approvals and other customary closing conditions. During the current quarter, the parties agreed to extend the date by which certain competition clearance conditions were to be satisfied per the original purchase agreement. In exchange, Knauf Group irrevocably agreed to fund the purchase price which was received by AWI in two distributions, the first on August 1, 2018, and the balance on September 15, 2018. Despite the realization of the sales proceeds, there has been no change in the parent-subsidiary relationship and therefore, no change in control. As a result, WAVE’s balance sheet at August 31, 2018, includes a $70,000,000 receivable within current assets for its portion of the proceeds received by AWI prior to quarter end, with an offsetting current liability for deferred proceeds. This $70,000,000 was received by WAVE in September 2018 and subsequently distributed to the joint venture partners in equal amounts.
NOTE D – Impairment of Long-Lived Assets
As a result of changes in the facts and circumstances related to the planned sale of the Company’s
cryogenics business in Turkey, Worthington Aritas, the Company lowered its estimate of fair value less cost to sell to $7,000,000 resulting in an impairment charge of $2,381,000 during the three months ended August 31, 2018. Fair value was determined using observable (Level 2) inputs.
NOTE E – Restructuring and Other Expense (Income), net
We consider restructuring activities to be programs whereby we fundamentally change our operations such as closing and consolidating manufacturing facilities or moving manufacturing of a product to another location. Restructuring activities may also involve substantial realignment of the management structure of a business unit in response to changing market conditions.
9
A progression of the liabilities associated with
our restructuring activities, combined with a reconciliation to the r
estructuring and other income, net
financial statement caption, in our consolidated statement of earnings is summarized below for the period presented:
|
|
Balance, as of
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Balance, as of
|
|
(in thousands)
|
|
May 31, 2018
|
|
|
(income)
|
|
|
Payments
|
|
|
Adjustments
|
|
|
August 31, 2018
|
|
Early retirement and severance
|
|
$
|
1,116
|
|
|
$
|
904
|
|
|
$
|
(658
|
)
|
|
$
|
2
|
|
|
$
|
1,364
|
|
Facility exit and other costs
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
10
|
|
|
|
132
|
|
|
|
$
|
1,116
|
|
|
|
1,026
|
|
|
$
|
(658
|
)
|
|
$
|
12
|
|
|
$
|
1,496
|
|
Net gain on sale of assets
|
|
|
|
|
|
|
(1,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other income, net
|
|
|
|
|
|
$
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and facility exit costs in the table above resulted primarily from activities related to the ongoing consolidation of the Company’s industrial gas operations in Portugal following the acquisition of AMTROL in the prior year. During the
three
months ended August 31, 2018, the Company also completed the sale of two oil & gas manufacturing facilities resulting in a net gain of $1,962,000. The total liability associated with our restructuring activities as of August 31, 2018 is expected to be paid in the next twelve months.
NOTE F – Contingent Liabilities and Commitments
We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, would not significantly affect our consolidated financial position or future results of operations. We also believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.
NOTE G – Guarantees
We do not have guarantees that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of
August 31, 2018
, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $8,118,000 at
August 31, 2018
. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amount has been recognized in our consolidated financial statements.
We also had in place $13,912,000 of outstanding stand-by letters of credit issued to third-party service providers at August 31, 2018. No amounts were drawn against them at August 31, 2018.
NOTE H – Debt and Receivables Securitization
We
maintain a $500,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders. On February 16, 2018, the Company amended the terms of the Credit Facility, extending the maturity by three years to February 2023. Debt issuance costs of $805,000 were incurred as a result of the renewal. These costs have been deferred and will be amortized over the life of the Credit Facility to interest expense. Borrowings under the Credit Facility have maturities of up to one year. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime rate or Overnight Bank Funding Rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at
August 31, 2018
. As discussed in “
NOTE G – Guarantees,”
we provided $13,912,000 in letters of credit for third-party beneficiaries as of
August 31, 2018
. While not drawn against at
August 31, 2018
, $12,800,000 of these letters of credit were issued against availability under the Credit Facility, leaving $487,200,000 available at
August 31, 2018
.
We also maintain a $50,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”) which matures in January 2019. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $50,000,000 of undivided ownership interests in this pool of accounts receivable to a third-party bank. We retain an undivided interest in this pool and are subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables more than 90 days past due, receivables offset by an allowance for doubtful accounts due to bankruptcy or other cause, concentrations over certain limits with specific customers and certain reserve amounts, we believe additional risk of loss is minimal.
As of August 31, 2018, no undivided ownership interests in this pool of accounts receivable had been sold.
10
NOTE
I
– Other Comprehensive Income
The following table summarizes the tax effects on each component of OCI for the three months ended August 31:
|
Three months ended August 31,
|
|
|
2018
|
|
|
2017
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(3,695
|
)
|
|
$
|
-
|
|
|
$
|
(3,695
|
)
|
|
$
|
15,872
|
|
|
$
|
-
|
|
|
$
|
15,872
|
|
Pension liability adjustment
|
|
-
|
|
|
|
(97
|
)
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Cash flow hedges
|
|
(2,527
|
)
|
|
|
557
|
|
|
|
(1,970
|
)
|
|
|
2,993
|
|
|
|
(1,106
|
)
|
|
|
1,887
|
|
Other comprehensive income (loss)
|
$
|
(6,222
|
)
|
|
$
|
460
|
|
|
$
|
(5,762
|
)
|
|
$
|
18,865
|
|
|
$
|
(1,112
|
)
|
|
$
|
17,753
|
|
NOTE J – Changes in Equity
The following table summarizes the changes in equity by component and in total for the period presented:
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Loss,
|
|
|
Retained
|
|
|
|
|
|
|
controlling
|
|
|
|
|
|
(in thousands)
|
|
Capital
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Total
|
|
|
Interests
|
|
|
Total
|
|
Balance at May 31, 2018
|
|
$
|
295,592
|
|
|
$
|
(14,580
|
)
|
|
$
|
637,757
|
|
|
$
|
918,769
|
|
|
$
|
117,606
|
|
|
$
|
1,036,375
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
54,942
|
|
|
|
54,942
|
|
|
|
2,016
|
|
|
|
56,958
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
(5,745
|
)
|
|
|
-
|
|
|
|
(5,745
|
)
|
|
|
(17
|
)
|
|
|
(5,762
|
)
|
Common shares issued, net of withholding tax
|
|
|
(4,091
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,091
|
)
|
|
|
-
|
|
|
|
(4,091
|
)
|
Common shares in NQ plans
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
152
|
|
Stock-based compensation
|
|
|
4,838
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,838
|
|
|
|
-
|
|
|
|
4,838
|
|
ASC 606 transition adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,174
|
|
|
|
1,174
|
|
|
|
570
|
|
|
|
1,744
|
|
Purchases and retirement of common shares
|
|
|
(4,003
|
)
|
|
|
-
|
|
|
|
(32,849
|
)
|
|
|
(36,852
|
)
|
|
|
-
|
|
|
|
(36,852
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,668
|
)
|
|
|
(13,668
|
)
|
|
|
-
|
|
|
|
(13,668
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,320
|
)
|
|
|
(2,320
|
)
|
Balance at August 31, 2018
|
|
$
|
292,488
|
|
|
$
|
(20,325
|
)
|
|
$
|
647,356
|
|
|
$
|
919,519
|
|
|
$
|
117,855
|
|
|
$
|
1,037,374
|
|
On September 27, 2017, the Board of Directors of Worthington Industries, Inc. authorized the repurchase of up to 6,828,855 of the outstanding common shares of Worthington Industries, Inc. The total number of common shares available for repurchase at August 31, 2018 was 5,700,000.
The following table summarizes the changes in accumulated other comprehensive loss for the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Pension
|
|
|
|
|
|
|
Other
|
|
|
|
Currency
|
|
|
Liability
|
|
|
Cash Flow
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Loss
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
(4,987
|
)
|
|
$
|
(16,071
|
)
|
|
$
|
6,478
|
|
|
$
|
(14,580
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(3,678
|
)
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(3,709
|
)
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,496
|
)
|
|
|
(2,496
|
)
|
Income taxes
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
557
|
|
|
|
460
|
|
Balance as of August 31, 2018
|
|
$
|
(8,665
|
)
|
|
$
|
(16,168
|
)
|
|
$
|
4,508
|
|
|
$
|
(20,325
|
)
|
|
(a)
|
The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed in “NOTE O – Derivative Instruments and Hedging Activities.”
|
11
NOTE
K
– Stock-Based Compensation
Non-Qualified Stock Options
During the
three
months ended August 31, 2018, we granted non-qualified stock options covering a total of 87,300 common shares under our stock-based compensation plans. The option price of $42.91 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $12.55 per share. The calculated pre-tax stock-based compensation expense for these stock options, after an estimate for forfeitures, is $975,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:
Dividend yield
|
|
|
2.01
|
%
|
Expected volatility
|
|
|
33.04
|
%
|
Risk-free interest rate
|
|
|
2.77
|
%
|
Expected term (years)
|
|
|
6.0
|
|
Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.
Service-Based Restricted Common Shares
During the three months ended
August 31, 2018
, we granted an aggregate of 105,025 service-based restricted common shares under our stock-based compensation plans. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the respective dates of grant, or $43.09 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $4,027,000 and will be recognized on a straight-line basis over the three-year service-based vesting period.
Performance Share Awards
We have awarded performance shares to certain key employees under our stock-based compensation plans. These performance shares are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the three-year periods ending May 31, 2019, 2020 and 2021. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period. The fair values of our performance shares are determined by the closing market prices of the underlying common shares at the respective grant dates of the performance shares and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the
three
months ended August 31, 2018, we granted performance share awards covering an aggregate of 53,000 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $2,274,000 and will be recognized over the three-year performance period.
NOTE L – Income Taxes
Income tax expense for the
three
months ended August 31, 2018 and 2017 reflected estimated annual effective income tax rates of 23.2% and 30.5%, respectively. The annual effective income tax rates exclude any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of Worthington Aritas (a foreign corporation) and TWB’s wholly-owned foreign corporations is reported in our consolidated tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2019 could be materially different from the forecasted rate as of August 31, 2018.
12
NOTE
M
– Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the periods presented:
|
Three Months Ended August 31,
|
|
(in thousands, except per share amounts)
|
2018
|
|
|
2017
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest -
|
|
|
|
|
|
|
|
income available to common shareholders
|
$
|
54,942
|
|
|
$
|
45,534
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to
|
|
|
|
|
|
|
|
controlling interest - weighted average common shares
|
|
58,731
|
|
|
|
62,444
|
|
Effect of dilutive securities
|
|
1,890
|
|
|
|
2,146
|
|
Denominator for diluted earnings per share attributable to
|
|
|
|
|
|
|
|
controlling interest - adjusted weighted average common shares
|
|
60,621
|
|
|
|
64,590
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest
|
$
|
0.94
|
|
|
$
|
0.73
|
|
Diluted earnings per share attributable to controlling interest
|
$
|
0.91
|
|
|
$
|
0.70
|
|
Stock options covering 148,004 common shares have been excluded from the computation of diluted earnings per share for the three months ended August 31, 2018 because the effect of their inclusion would have been “anti-dilutive” for the period.
13
NOT
E
N
– Segment Operations
The following table presents summarized financial information for our reportable segments as of, and for the periods presented:
|
Three Months Ended August 31,
|
|
(in thousands)
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
660,487
|
|
|
$
|
543,491
|
|
Pressure Cylinders
|
|
300,353
|
|
|
|
269,811
|
|
Engineered Cabs
|
|
27,252
|
|
|
|
31,946
|
|
Other
|
|
15
|
|
|
|
2,989
|
|
Total net sales
|
$
|
988,107
|
|
|
$
|
848,237
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
39,660
|
|
|
$
|
32,872
|
|
Pressure Cylinders
|
|
14,733
|
|
|
|
10,458
|
|
Engineered Cabs
|
|
(4,311
|
)
|
|
|
(361
|
)
|
Other
|
|
829
|
|
|
|
(744
|
)
|
Total operating income
|
$
|
50,911
|
|
|
$
|
42,225
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
-
|
|
|
$
|
-
|
|
Pressure Cylinders
|
|
2,381
|
|
|
|
-
|
|
Engineered Cabs
|
|
-
|
|
|
|
-
|
|
Other
|
|
-
|
|
|
|
-
|
|
Total impairment of long-lived assets
|
$
|
2,381
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income), net
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
(9
|
)
|
|
$
|
279
|
|
Pressure Cylinders
|
|
(927
|
)
|
|
|
1,877
|
|
Engineered Cabs
|
|
-
|
|
|
|
4
|
|
Other
|
|
-
|
|
|
|
144
|
|
Total restructuring and other expense (income), net
|
$
|
(936
|
)
|
|
$
|
2,304
|
|
|
August 31,
|
|
|
May 31,
|
|
(in thousands)
|
2018
|
|
|
2018
|
|
Total assets
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
1,029,852
|
|
|
$
|
999,238
|
|
Pressure Cylinders
|
|
1,131,120
|
|
|
|
1,147,268
|
|
Engineered Cabs
|
|
64,333
|
|
|
|
66,456
|
|
Other
|
|
384,870
|
|
|
|
408,825
|
|
Total assets
|
$
|
2,610,175
|
|
|
$
|
2,621,787
|
|
NOTE O – Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.
Interest Rate Risk Management
– We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
14
Foreign Currency Exchange Risk Management
– We conduct busine
ss in several major international currencies and are therefore subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposur
e. Such contracts limit exposure to both favorable and unfavorable currency exchange rate fluctuations. The translation of foreign currencies into U
.
S
.
dollars also subjects us to exposure related to fluctuating currency exchange rates; however, derivati
ve instruments are not used to manage this risk.
Commodity Price Risk Management
– We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative contracts to manage the associated price risk.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty, and management believes the risk of loss is remote and, in any event, would not be material.
Refer to "NOTE P – Fair Value" for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.
The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at
August 31, 2018
:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
3,133
|
|
|
Accounts payable
|
|
$
|
179
|
|
|
|
Other assets
|
|
|
-
|
|
|
Other liabilities
|
|
|
36
|
|
Totals
|
|
|
|
$
|
3,133
|
|
|
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
1,789
|
|
|
Accounts payable
|
|
$
|
916
|
|
|
|
Other assets
|
|
|
217
|
|
|
Other liabilities
|
|
|
438
|
|
|
|
|
|
|
2,006
|
|
|
|
|
|
1,354
|
|
Foreign exchange contracts
|
|
Receivables
|
|
|
5
|
|
|
Accounts payable
|
|
|
-
|
|
Totals
|
|
|
|
$
|
2,011
|
|
|
|
|
$
|
1,354
|
|
Total derivative instruments
|
|
|
|
$
|
5,144
|
|
|
|
|
$
|
1,569
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $1,392,000 increase in receivables with a corresponding increase in accounts payable.
15
The following table summarizes the fair value of our derivative instruments and the respective line
s
in which they were recorded in the consolidated balance sheet at
May 31, 2018
:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
6,385
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
|
Other assets
|
|
|
68
|
|
|
Other liabilities
|
|
|
-
|
|
Totals
|
|
|
|
$
|
6,453
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
4,749
|
|
|
Accounts payable
|
|
$
|
613
|
|
|
|
Other assets
|
|
|
221
|
|
|
Other liabilities
|
|
|
158
|
|
|
|
|
|
|
4,970
|
|
|
|
|
|
771
|
|
Foreign exchange contracts
|
|
Receivables
|
|
|
-
|
|
|
Accounts payable
|
|
|
75
|
|
Totals
|
|
|
|
$
|
4,970
|
|
|
|
|
$
|
846
|
|
Total derivative instruments
|
|
|
|
$
|
11,423
|
|
|
|
|
$
|
846
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $351,000 increase in receivables with a corresponding increase in accounts payable.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.
The following table summarizes our cash flow hedges outstanding at
August 31, 2018
:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date
|
Commodity contracts
|
|
$
|
12,181
|
|
|
September 2018 - September 2019
|
16
The following table summarizes the
gain
(loss)
recognized in OCI and the gain (loss)
reclassified from AOCI into earnings for derivative instruments designated as cash flow hedges for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain (Loss)
|
|
|
Reclassified
|
|
Reclassified
|
|
|
Portion)
|
|
Portion)
|
|
|
|
Recognized
|
|
|
from
|
|
from
|
|
|
and Excluded
|
|
and Excluded
|
|
|
|
in OCI
|
|
|
AOCI
|
|
AOCI
|
|
|
from
|
|
from
|
|
|
|
(Effective
|
|
|
(Effective
|
|
(Effective
|
|
|
Effectiveness
|
|
Effectiveness
|
|
(in thousands)
|
|
Portion)
|
|
|
Portion)
|
|
Portion)
|
|
|
Testing
|
|
Testing
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended August 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
(31
|
)
|
|
Cost of goods sold
|
|
$
|
2,543
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
-
|
|
|
Interest expense
|
|
|
(47
|
)
|
|
Interest expense
|
|
|
-
|
|
Totals
|
|
$
|
(31
|
)
|
|
|
|
$
|
2,496
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended August 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
3,734
|
|
|
Cost of goods sold
|
|
$
|
4,168
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
3,064
|
|
|
Interest expense
|
|
|
(363
|
)
|
|
Interest expense
|
|
|
-
|
|
Totals
|
|
$
|
6,798
|
|
|
|
|
$
|
3,805
|
|
|
|
|
$
|
-
|
|
The estimated net amount of the losses recognized in AOCI at
August 31, 2018
expected to be reclassified into net earnings within the succeeding twelve months is $3,847,000 (net of tax of $1,205,000). This amount was computed using the fair value of the cash flow hedges at
August 31, 2018
, and will change before actual reclassification from OCI to net earnings during the fiscal years ending
May 31, 2019
and May 31, 2020.
Economic (Non-designated) Hedges
We enter into foreign exchange contracts to manage our foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.
The following table summarizes our economic (non-designated) derivative instruments outstanding at
August 31, 2018
:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date(s)
|
Commodity contracts
|
|
$
|
27,961
|
|
|
September 2018 - February 2020
|
Foreign exchange contracts
|
|
|
6,647
|
|
|
September 2018 - May 2019
|
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
In Earnings for the
|
|
|
|
Location of Gain (Loss)
|
|
Three Months Ended August 31,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
2018
|
|
|
2017
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(2,197
|
)
|
|
$
|
2,334
|
|
Foreign exchange contracts
|
|
Miscellaneous income, net
|
|
|
(1,506
|
)
|
|
|
(208
|
)
|
Total
|
|
|
|
$
|
(3,703
|
)
|
|
$
|
2,126
|
|
The gain (loss) on the foreign exchange contract derivatives significantly offsets the gain (loss) on the hedged item.
17
NOTE
P
– Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1 – Observable prices in active markets for identical assets and liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Recurring Fair Value Measurements
At
August 31, 2018
, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
5,144
|
|
|
$
|
-
|
|
|
$
|
5,144
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
5,144
|
|
|
$
|
-
|
|
|
$
|
5,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
1,569
|
|
|
$
|
-
|
|
|
$
|
1,569
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,569
|
|
|
$
|
-
|
|
|
$
|
1,569
|
|
At
May 31, 2018
, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
$
|
-
|
|
|
$
|
11,423
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
846
|
|
|
$
|
-
|
|
|
$
|
846
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
846
|
|
|
$
|
-
|
|
|
$
|
846
|
|
|
(1)
|
The fair value of our derivative instruments is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “
NOTE O – Derivative Instruments and Hedging Activities
” for additional information regarding our use of derivative instruments.
|
18
Non-Recurring Fair Value Measurements
At
August 31, 2018
, our assets measured at fair value on a non-recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held for sale (1)
|
|
$
|
-
|
|
|
$
|
7,000
|
|
|
$
|
-
|
|
|
$
|
7,000
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
7,000
|
|
|
$
|
-
|
|
|
$
|
7,000
|
|
At
May 31, 2018
, our assets measured at fair value on a non-recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held for sale (1)
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
$
|
30,000
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
1)
|
During the fourth quarter of fiscal 2018, management committed to a plan to sell the Company’s cryogenics business in Turkey, Worthington Aritas, and certain underperforming oil & gas equipment assets within Pressure Cylinders. In accordance with the applicable accounting guidance, the net assets in each asset group were recorded at the lower of net book value or fair value less costs to sell. The book value of Worthington Aritas exceeded its fair market value of $9,000,000, resulting in an impairment charge of $42,422,000. The book value of the oil & gas equipment asset group also exceeded its estimated fair market value of $21,000,000, resulting in an impairment charge of $10,497,000.
|
During the first quarter of fiscal 2019, the Company completed the sale of the oil & gas equipment assets described above. In addition, the Company lowered its estimate of the fair value of Worthington Aritas to $7,000,000, resulting in an impairment charge of $2,381,000.
The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $748,878,000 and $757,069,000 at
August 31, 2018
and
May 31, 2018
, respectively. The carrying amount of long-term debt, including current maturities, was $750,058,000 and $750,368,000 at
August 31, 2018
and
May 31, 2018
, respectively.
19