Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
Selected statements contained in this Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based, in whole or in part, on managements beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could
cause actual results to differ materially from such forward-looking statements, please refer to the Safe Harbor Statement in the beginning of this Annual Report on Form 10-K and Part I Item 1A. Risk Factors
of this Annual Report on Form 10-K.
Introduction
Worthington Industries, Inc. is a corporation formed under the laws of the State of Ohio (individually, the
Registrant or Worthington Industries or, collectively with the subsidiaries of Worthington Industries, Inc., we, our, Worthington or the Company). Founded in 1955, Worthington
is primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products. Our manufactured metal products include: pressure cylinders for liquefied petroleum gas (LPG), compressed
natural gas (CNG), oxygen, refrigerant and other industrial gas storage; hand torches and filled hand torch cylinders; propane-filled camping cylinders; helium-filled balloon kits; steel and fiberglass tanks and processing equipment
primarily for the oil and gas industry; cryogenic pressure vessels for liquefied natural gas (LNG) and other gas storage applications; engineered cabs and operator stations and cab components; and, through joint ventures, suspension grid
systems for concealed and lay-in panel ceilings; laser welded blanks; light gauge steel framing for commercial and residential construction; and current and past model automotive service stampings. Our number one goal is to increase shareholder
value, which we seek to accomplish by optimizing existing operations, developing and commercializing new products and applications, and pursuing strategic acquisitions and joint ventures.
As of May 31, 2017, excluding our joint ventures, we operated 30 manufacturing facilities worldwide, principally in
three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs. Our remaining operating segment consists of Worthington Energy Innovations (WEI), which does not
meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, and therefore is combined and reported in the Other category.
We also held equity positions in 11 joint ventures, which operated 50 manufacturing facilities worldwide, as of
May 31, 2017. Five of these joint ventures are consolidated with the equity owned by the other joint venture member(s) shown as noncontrolling interests in our consolidated balance sheets, and the other joint venture member(s) portion of
net earnings and other comprehensive income shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. The
remaining six of these joint ventures are accounted for using the equity method.
Overview
The Companys performance during fiscal 2017 was highlighted by record earnings at Steel Processing, modest
improvement at Pressure Cylinders and Engineered Cabs, and a decline in earnings from the Companys unconsolidated joint ventures. At Steel Processing, favorable pricing spreads, which benefited from significant inventory holding gains in the
current year, combined with higher overall volume, increased margins. Pressure Cylinders performance was mixed, as earnings growth in the consumer products business was partially offset by weakness in the industrial products and oil &
gas equipment businesses. Engineered Cabs results also improved as cost reduction efforts led to an increase in gross margin and lower selling, general and administrative expense.
Equity in net income of unconsolidated affiliates (equity income) decreased 4% in fiscal 2017 to $110.0
million on lower contributions from WAVE due to accelerated customer purchases in the fourth quarter of fiscal 2016, lower offload business at ArtiFlex and the impact of the consolidation of the Worthington Specialty Processing (WSP)
joint venture into Steel Processing effective March 1, 2016. We received distributions of $102.0 million from our unconsolidated affiliates during fiscal 2017.
28
Recent Business Developments
|
|
|
During the first quarter of fiscal 2017, the Company completed the exit of the businesses within its former Construction Services operating segment.
|
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|
|
On October 1, 2016, the Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the
consolidation of the Cryogenics business into the Industrial Products business unit.
|
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|
|
Effective June 1, 2017, we made certain organizational changes impacting the internal reporting and management structure of Packaging
Solutions. As a result of these organizational changes, management responsibilities and internal reporting were realigned, moving from the Steel Processing operating segment to the Engineered Cabs operating segment, where we expect to achieve
synergies in design engineering and manufacturing development.
|
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|
On June 2, 2017, the Company acquired AMTROL, a leading manufacturer of pressure cylinders and water system tanks with operations in the U.S.
and Europe. The total purchase price was $283.0 million and is subject to adjustment based on closing working capital. A portion of the purchase price was used to settle certain indebtedness and other liabilities assumed by the Company in the
transaction. The acquisition was funded primarily with cash on hand.
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On June 28, 2017, the Board of Directors of Worthington Industries (the Board) declared a quarterly dividend of $0.21 per share, an
increase of $0.01 per share from the previous quarterly rate. The dividend is payable on September 29, 2017 to shareholders of record on September 15, 2017.
|
Market & Industry Overview
We sell our
products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for fiscal 2017 and fiscal 2016 is illustrated in the following chart:
The automotive industry is one of the largest consumers of flat-rolled steel, and thus
the largest end market for our Steel Processing operating segment. Approximately 62% of the net sales of our Steel Processing operating segment are to the automotive market. North American vehicle production, primarily by Ford, General Motors and
FCA US (the Detroit Three automakers), has a considerable impact on the activity within this operating segment. The majority of the net sales of three of our unconsolidated joint ventures are also to the automotive end market.
29
Approximately 12% of the net sales of our Steel Processing operating segment
and 49% of the net sales of our Engineered Cabs operating segment are to the construction market. The construction market is also the predominant end market for two of our unconsolidated joint ventures: WAVE and ClarkDietrich. While the market price
of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including U.S. gross domestic product (GDP), the Dodge Index of construction contracts and, in
the case of ClarkDietrich, trends in the relative price of framing lumber and steel.
Substantially all of the
net sales of our Pressure Cylinders operating segment, and approximately 26% and 51% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, industrial, lawn and
garden, agriculture, oil & gas equipment, heavy truck, mining, forestry and appliance. Given the many different products that make up these net sales and the wide variety of end markets, it is very difficult to detail the key market
indicators that drive this portion of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing these operating segments.
We use the following information to monitor our costs and demand in our major end markets:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017 vs.
2016
|
|
|
2016 vs.
2015
|
|
U.S. GDP (% growth year-over-year)
1
|
|
|
1.6
|
%
|
|
|
1.9
|
%
|
|
|
2.5
|
%
|
|
|
-0.3
|
%
|
|
|
-0.6
|
%
|
Hot-Rolled Steel ($ per ton)
2
|
|
$
|
601
|
|
|
$
|
437
|
|
|
$
|
591
|
|
|
$
|
164
|
|
|
$
|
(154
|
)
|
Detroit Three Auto Build (000s vehicles)
3
|
|
|
9,216
|
|
|
|
9,296
|
|
|
|
9,069
|
|
|
|
(80
|
)
|
|
|
227
|
|
No. America Auto Build (000s vehicles)
3
|
|
|
18,329
|
|
|
|
18,181
|
|
|
|
17,145
|
|
|
|
148
|
|
|
|
1,036
|
|
Zinc ($ per pound)
4
|
|
$
|
1.13
|
|
|
$
|
0.80
|
|
|
$
|
0.98
|
|
|
$
|
0.33
|
|
|
$
|
(0.18
|
)
|
Natural Gas ($ per mcf)
5
|
|
$
|
3.01
|
|
|
$
|
2.31
|
|
|
$
|
3.60
|
|
|
$
|
0.70
|
|
|
$
|
(1.29
|
)
|
On-Highway Diesel Fuel Prices ($ per gallon)
6
|
|
$
|
2.58
|
|
|
$
|
2.40
|
|
|
$
|
3.38
|
|
|
$
|
0.18
|
|
|
$
|
(0.98
|
)
|
Crude Oil - WTI ($ per barrel)
6
|
|
$
|
48.80
|
|
|
$
|
42.67
|
|
|
$
|
73.16
|
|
|
$
|
6.13
|
|
|
$
|
(30.49
|
)
|
1
2016/2015
figures based on revised actuals
2
CRU
Hot-Rolled Index; period average
3
IHS
Global
4
LME Zinc; period average
5
NYMEX Henry Hub Natural Gas; period average
6
Energy Information Administration; period average
U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our
products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasing U.S. GDP growth rates generally indicate a weaker economy.
Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative (SG&A) expense.
The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating
results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price
environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs.
30
The following table presents the average quarterly market price per ton of
hot-rolled steel during fiscal 2017, fiscal 2016 and fiscal 2015:
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Fiscal Year
|
|
(Dollars per ton
1
)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
1st Quarter
|
|
$
|
617
|
|
|
$
|
461
|
|
|
$
|
673
|
|
2nd Quarter
|
|
$
|
544
|
|
|
$
|
419
|
|
|
$
|
651
|
|
3rd Quarter
|
|
$
|
608
|
|
|
$
|
381
|
|
|
$
|
578
|
|
4th Quarter
|
|
$
|
636
|
|
|
$
|
486
|
|
|
$
|
464
|
|
Annual Avg.
|
|
$
|
601
|
|
|
$
|
437
|
|
|
$
|
591
|
|
1
CRU
Hot-Rolled Index
No single customer contributed more than 10% of our consolidated net sales during fiscal
2017. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During fiscal 2017, vehicle
production for the Detroit Three automakers was down 1%, while North American vehicle production as a whole increased 1%.
Certain other commodities, such as zinc, natural gas and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plant operations and indirectly through
transportation and freight expense.
31
Results of Operations
Fiscal 2017 Compared to Fiscal 2016
Consolidated Operations
The following table presents consolidated operating results for the periods indicated:
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|
|
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|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
% of
Net sales
|
|
|
2016
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
3,014.1
|
|
|
|
100.0
|
%
|
|
$
|
2,819.7
|
|
|
|
100.0
|
%
|
|
$
|
194.4
|
|
Cost of goods sold
|
|
|
2,478.2
|
|
|
|
82.2
|
%
|
|
|
2,367.1
|
|
|
|
83.9
|
%
|
|
|
111.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
535.9
|
|
|
|
17.8
|
%
|
|
|
452.6
|
|
|
|
16.1
|
%
|
|
|
83.3
|
|
Selling, general and administrative expense
|
|
|
316.4
|
|
|
|
10.5
|
%
|
|
|
297.4
|
|
|
|
10.5
|
%
|
|
|
19.0
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
0.0
|
%
|
|
|
26.0
|
|
|
|
0.9
|
%
|
|
|
(26.0
|
)
|
Restructuring and other expense
|
|
|
6.4
|
|
|
|
0.2
|
%
|
|
|
7.2
|
|
|
|
0.3
|
%
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
213.1
|
|
|
|
7.1
|
%
|
|
|
122.0
|
|
|
|
4.3
|
%
|
|
|
91.1
|
|
Miscellaneous income
|
|
|
3.8
|
|
|
|
0.1
|
%
|
|
|
11.3
|
|
|
|
0.4
|
%
|
|
|
(7.5
|
)
|
Interest expense
|
|
|
(29.8
|
)
|
|
|
-1.0
|
%
|
|
|
(31.7
|
)
|
|
|
-1.1
|
%
|
|
|
(1.9
|
)
|
Equity in net income of unconsolidated affiliates
|
|
|
110.0
|
|
|
|
3.6
|
%
|
|
|
115.0
|
|
|
|
4.1
|
%
|
|
|
(5.0
|
)
|
Income tax expense
|
|
|
(79.2
|
)
|
|
|
-2.6
|
%
|
|
|
(59.0
|
)
|
|
|
-2.1
|
%
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
217.9
|
|
|
|
7.2
|
%
|
|
|
157.6
|
|
|
|
5.6
|
%
|
|
|
60.3
|
|
Net earnings attributable to noncontrolling interests
|
|
|
13.4
|
|
|
|
0.4
|
%
|
|
|
13.9
|
|
|
|
0.5
|
%
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest
|
|
$
|
204.5
|
|
|
|
6.8
|
%
|
|
$
|
143.7
|
|
|
|
5.1
|
%
|
|
$
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income by unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
78.3
|
|
|
|
|
|
|
$
|
82.7
|
|
|
|
|
|
|
$
|
(4.4
|
)
|
ClarkDietrich
|
|
|
17.3
|
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
|
|
2.7
|
|
Serviacero
|
|
|
7.2
|
|
|
|
|
|
|
|
6.3
|
|
|
|
|
|
|
|
0.9
|
|
ArtiFlex
|
|
|
7.0
|
|
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
(3.3
|
)
|
WSP
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
(1.7
|
)
|
Other
|
|
|
0.2
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110.0
|
|
|
|
|
|
|
$
|
115.0
|
|
|
|
|
|
|
$
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017 net earnings attributable to controlling interest increased $60.8 million
over fiscal 2016. Net sales and operating highlights were as follows:
|
|
|
Net sales increased $194.4 million over fiscal 2016. The increase was driven by higher average direct selling prices in Steel Processing, which
favorably impacted net sales by $156.9 million, partially offset by lower volume in Engineered Cabs and certain Pressure Cylinders businesses. Net sales were also favorably impacted by the consolidation of the WSP joint venture, which contributed
net sales of $49.6 million. For additional information regarding the consolidation of WSP, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note O
Acquisitions of this Annual Report on Form 10-K.
|
|
|
|
Gross margin increased $83.3 million over fiscal 2016. The increase was driven primarily by higher gross margin at Steel Processing, up $68.9
million on an improved pricing spread and contributions from the consolidation of WSP. The remaining improvement in gross margin was driven by increases in Pressure Cylinders, where strength in consumer products was partially offset by weakness in
industrial products and oil & gas equipment.
|
|
|
|
SG&A expense increased $19.0 million over fiscal 2016. The consolidation of WSP and the impact of prior year acquisitions in Pressure Cylinders
accounted for $8.1 million of the increase. The remaining increase in SG&A expense was driven primarily by higher profit sharing and bonus expense and an increase in accrued legal costs, which were up a combined $14.2 million. Overall, SG&A
expense as a percent of sales was flat as compared to the prior year.
|
32
|
|
|
Impairment charges of $26.0 million in fiscal 2016 consisted of $23.0 million related to the impairment of certain long-lived assets in our
oil & gas equipment business and $3.0 million related to the September 30, 2015 closure of the Engineered Cabs facility in Florence, South Carolina. For additional information regarding these impairment charges, refer to Item 8.
Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note C Goodwill and Other Long-Lived Assets of this Annual Report on Form 10-K.
|
|
|
|
Restructuring and other expense totaled $6.4 million in fiscal 2017. A total of $3.4 million related to activities within Pressure Cylinders,
including $2.0 million of costs incurred in connection with a plant consolidation at our cryogenics joint venture in Turkey. The remaining activity related to ongoing costs associated with previously completed plant closures in Steel Processing and
Engineered Cabs. For additional information, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note D Restructuring and Other Expense of this Annual Report
on Form 10-K.
|
|
|
|
Miscellaneous income decreased $7.5 million from fiscal 2016. The decrease was primarily the result of a $6.9 million pre-tax gain related to the
consolidation of WSP in the prior year. The gain represents the difference between the fair value of the Companys previously-held ownership interest in WSP and its carrying value at the acquisition date. For additional information, refer to
Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note O Acquisitions of this Annual Report on Form 10-K.
|
|
|
|
Interest expense decreased $1.9 million from fiscal 2016. The decrease was driven primarily by lower average short-term borrowings. For additional
information, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note G Debt and Receivables Securitization of this Annual Report on Form 10-K.
|
|
|
|
Equity income decreased $5.0 million from fiscal 2016 to $110.0 million. The decrease was driven by lower contributions from WAVE due to accelerated
customer purchases in the fourth quarter of fiscal 2016, lower offload business at ArtiFlex and the impact of the consolidation of WSP. The impact of these items was partially offset by higher contributions from ClarkDietrich, up $2.7 million
despite a $4.5 million favorable impact related to legal settlements in the prior year. We received distributions of $102.0 million from our unconsolidated affiliates during fiscal 2017. For additional financial information regarding our
unconsolidated affiliates, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note B Investments in Unconsolidated Affiliates of this Annual Report on Form
10-K.
|
|
|
|
Income tax expense increased $20.2 million over fiscal 2016 due to higher earnings, partially offset by a $13.1 million increase in tax benefits
associated with share-based payment awards. Fiscal 2017 income tax expense reflects an effective tax rate attributable to controlling interest of 27.9% vs. 29.1% in fiscal 2016. The 27.9% rate is lower than the federal statutory rate of 35%
primarily as a result of tax benefits associated with share-based payment awards, benefits from the qualified production activities deduction, lower rates on foreign income, offset partially by state and local income taxes. For additional
information, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note L Income Taxes of this Annual Report on Form 10-K.
|
33
Segment Operations
Steel Processing
The following table presents a
summary of operating results for our Steel Processing operating segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
% of
Net sales
|
|
|
2016
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
2,074.8
|
|
|
|
100.0
|
%
|
|
$
|
1,843.7
|
|
|
|
100.0
|
%
|
|
$
|
231.1
|
|
Cost of goods sold
|
|
|
1,757.0
|
|
|
|
84.7
|
%
|
|
|
1,594.8
|
|
|
|
86.5
|
%
|
|
|
162.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
317.8
|
|
|
|
15.3
|
%
|
|
|
248.9
|
|
|
|
13.5
|
%
|
|
|
68.9
|
|
Selling, general and administrative expense
|
|
|
145.5
|
|
|
|
7.0
|
%
|
|
|
132.8
|
|
|
|
7.2
|
%
|
|
|
12.7
|
|
Restructuring and other expense
|
|
|
1.8
|
|
|
|
0.1
|
%
|
|
|
4.1
|
|
|
|
0.2
|
%
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
170.5
|
|
|
|
8.2
|
%
|
|
$
|
112.0
|
|
|
|
6.1
|
%
|
|
$
|
58.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
1,364.5
|
|
|
|
|
|
|
$
|
1,245.1
|
|
|
|
|
|
|
$
|
119.4
|
|
Tons shipped (in thousands)
|
|
|
4,070
|
|
|
|
|
|
|
|
3,523
|
|
|
|
|
|
|
|
547
|
|
Net sales and operating highlights were as follows:
|
|
|
Net sales increased $231.1 million over fiscal 2016 driven primarily by higher average direct selling prices, which increased net sales by $156.9
million. The remaining increase was due to higher overall volume, including $49.6 million related to the consolidation of the WSP joint venture. The mix of direct versus toll tons processed was 52% to 48% compared to 58% to 42% in fiscal 2016. The
change in mix was driven primarily by the consolidation of WSP.
|
|
|
|
Operating income increased $58.5 million over fiscal 2016 on higher gross margin, partially offset by higher SG&A expense. Favorable pricing
spreads, which benefited from significant inventory holding gains in the current year compared to inventory holding losses in the prior year, and higher direct volume increased gross margin by $71.6 million and $10.8 million, respectively. This was
partially offset by higher manufacturing expenses driven by higher profit sharing and bonus expense, an increase in healthcare costs and production/start-up costs associated with new production lines at our TWB joint venture. SG&A expense
increased $12.7 million on higher allocated corporate costs, the consolidation of WSP, and higher profit sharing and bonus expense. Restructuring and other expense in fiscal 2017 consisted primarily of costs related to the closure of our stainless
steel business, Precision Specialty Metals (PSM).
|
34
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
% of
Net sales
|
|
|
2016
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
829.8
|
|
|
|
100.0
|
%
|
|
$
|
844.9
|
|
|
|
100.0
|
%
|
|
$
|
(15.1
|
)
|
Cost of goods sold
|
|
|
625.5
|
|
|
|
75.4
|
%
|
|
|
649.3
|
|
|
|
76.8
|
%
|
|
|
(23.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
204.3
|
|
|
|
24.6
|
%
|
|
|
195.6
|
|
|
|
23.2
|
%
|
|
|
8.7
|
|
Selling, general and administrative expense
|
|
|
146.8
|
|
|
|
17.7
|
%
|
|
|
143.8
|
|
|
|
17.0
|
%
|
|
|
3.0
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
23.0
|
|
|
|
2.7
|
%
|
|
|
(23.0
|
)
|
Restructuring and other expense
|
|
|
3.4
|
|
|
|
0.4
|
%
|
|
|
0.4
|
|
|
|
0.0
|
%
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
54.1
|
|
|
|
6.5
|
%
|
|
$
|
28.4
|
|
|
|
3.4
|
%
|
|
$
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
338.4
|
|
|
|
|
|
|
$
|
359.8
|
|
|
|
|
|
|
$
|
(21.4
|
)
|
Net sales by principal class of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products
|
|
$
|
315.0
|
|
|
|
|
|
|
$
|
293.2
|
|
|
|
|
|
|
$
|
21.8
|
|
Industrial products
|
|
|
341.2
|
|
|
|
|
|
|
|
362.7
|
|
|
|
|
|
|
|
(21.5
|
)
|
Alternative fuels
|
|
|
111.3
|
|
|
|
|
|
|
|
98.7
|
|
|
|
|
|
|
|
12.6
|
|
Oil & gas equipment
|
|
|
62.3
|
|
|
|
|
|
|
|
90.3
|
|
|
|
|
|
|
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pressure Cylinders
|
|
$
|
829.8
|
|
|
|
|
|
|
$
|
844.9
|
|
|
|
|
|
|
$
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units shipped by principal class of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products
|
|
|
60,665,420
|
|
|
|
|
|
|
|
61,631,907
|
|
|
|
|
|
|
|
(966,487
|
)
|
Industrial products
|
|
|
10,155,628
|
|
|
|
|
|
|
|
10,484,892
|
|
|
|
|
|
|
|
(329,264
|
)
|
Alternative fuels
|
|
|
512,257
|
|
|
|
|
|
|
|
422,630
|
|
|
|
|
|
|
|
89,627
|
|
Oil & gas equipment
|
|
|
2,308
|
|
|
|
|
|
|
|
3,668
|
|
|
|
|
|
|
|
(1,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pressure Cylinders
|
|
|
71,335,613
|
|
|
|
|
|
|
|
72,543,097
|
|
|
|
|
|
|
|
(1,207,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $15.1 million from fiscal 2016. The decrease was driven by lower volumes in the oil & gas equipment and industrial
products businesses, partially offset by improvements in consumer products and alternative fuels. Softness in the oil & gas equipment market led to a 31%, or $28.0 million, decline in net sales. However, this market began to show signs of
improvement in the fourth quarter of fiscal 2017. Net sales in the industrial products business were down $21.5 million on lower volume due to weaker demand for our refillable propane cylinder products, as well as softness for high pressure
industrial cylinders in Europe.
|
|
|
|
Operating income increased $25.7 million over fiscal 2016 on lower impairment and restructuring charges, which declined a combined $20.0 million.
The remaining increase was driven by improvements in the consumer products business, up on the combined impact of higher pricing spreads and an improved product mix, partially offset by declines in the industrial products and oil & gas
equipment businesses.
|
35
Engineered Cabs
The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(In millions)
|
|
2017
|
|
|
% of
Net sales
|
|
|
2016
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
101.4
|
|
|
|
100.0
|
%
|
|
$
|
121.9
|
|
|
|
100.0
|
%
|
|
$
|
(20.5
|
)
|
Cost of goods sold
|
|
|
92.5
|
|
|
|
91.2
|
%
|
|
|
116.2
|
|
|
|
95.3
|
%
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
8.9
|
|
|
|
8.8
|
%
|
|
|
5.7
|
|
|
|
4.7
|
%
|
|
|
3.2
|
|
Selling, general and administrative expense
|
|
|
15.4
|
|
|
|
15.2
|
%
|
|
|
18.4
|
|
|
|
15.1
|
%
|
|
|
(3.0
|
)
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
3.0
|
|
|
|
2.5
|
%
|
|
|
(3.0
|
)
|
Restructuring and other expense
|
|
|
1.2
|
|
|
|
1.2
|
%
|
|
|
3.6
|
|
|
|
3.0
|
%
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(7.7
|
)
|
|
|
-7.6
|
%
|
|
$
|
(19.3
|
)
|
|
|
-15.8
|
%
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
46.1
|
|
|
|
|
|
|
$
|
57.3
|
|
|
|
|
|
|
$
|
(11.2
|
)
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $20.5 million from fiscal 2016 on lower volumes due to declines in market demand.
|
|
|
|
Operating loss improved $11.6 million to $7.7 million on lower impairment and restructuring charges and the impact of cost reduction efforts, which
led to margin improvements and a 16% decline in SG&A expense.
|
36
Other
The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are
also included in the Other category, including costs associated with our captive insurance company. The Other category also includes the results of our former Construction Services operating segment, on a historical basis, through May 31, 2016.
The following table presents a summary of operating results for the Other category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
% of
Net sales
|
|
|
2016
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
8.0
|
|
|
|
100.0
|
%
|
|
$
|
9.2
|
|
|
|
100.0
|
%
|
|
$
|
(1.2
|
)
|
Cost of goods sold
|
|
|
3.2
|
|
|
|
40.0
|
%
|
|
|
6.9
|
|
|
|
75.0
|
%
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
4.8
|
|
|
|
60.0
|
%
|
|
|
2.3
|
|
|
|
25.0
|
%
|
|
|
2.5
|
|
Selling, general and administrative expense
|
|
|
8.6
|
|
|
|
107.5
|
%
|
|
|
2.2
|
|
|
|
23.9
|
%
|
|
|
6.4
|
|
Restructuring and other income
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(0.9
|
)
|
|
|
-9.8
|
%
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(3.8
|
)
|
|
|
-47.5
|
%
|
|
$
|
1.0
|
|
|
|
10.9
|
%
|
|
$
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $1.2 million from fiscal 2016. The decrease was driven by the exit of the Construction Services business, partially offset by
improvement at WEI.
|
|
|
|
Operating loss of $3.8 million in the current year was driven primarily by higher SG&A expense, up $6.4 million due primarily to higher profit
sharing and bonus expense and an increase in accrued legal costs. Gross margin increased $2.5 million on higher contributions from WEI and a lower loss in the Construction Services business, which ceased operations during the first quarter of fiscal
2017.
|
37
Fiscal 2016 Compared to Fiscal 2015
Consolidated Operations
The following table
presents consolidated operating results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2016
|
|
|
% of
Net sales
|
|
|
2015
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
2,819.7
|
|
|
|
100.0
|
%
|
|
$
|
3,384.2
|
|
|
|
100.0
|
%
|
|
$
|
(564.5
|
)
|
Cost of goods sold
|
|
|
2,367.1
|
|
|
|
83.9
|
%
|
|
|
2,920.7
|
|
|
|
86.3
|
%
|
|
|
(553.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
452.6
|
|
|
|
16.1
|
%
|
|
|
463.5
|
|
|
|
13.7
|
%
|
|
|
(10.9
|
)
|
Selling, general and administrative expense
|
|
|
297.4
|
|
|
|
10.5
|
%
|
|
|
295.9
|
|
|
|
8.7
|
%
|
|
|
1.5
|
|
Impairment of goodwill and long-lived assets
|
|
|
26.0
|
|
|
|
0.9
|
%
|
|
|
100.1
|
|
|
|
3.0
|
%
|
|
|
(74.1
|
)
|
Restructuring and other expense
|
|
|
7.2
|
|
|
|
0.3
|
%
|
|
|
6.9
|
|
|
|
0.2
|
%
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
122.0
|
|
|
|
4.3
|
%
|
|
|
60.6
|
|
|
|
1.8
|
%
|
|
|
61.4
|
|
Miscellaneous income
|
|
|
11.3
|
|
|
|
0.4
|
%
|
|
|
0.8
|
|
|
|
0.0
|
%
|
|
|
10.5
|
|
Interest expense
|
|
|
(31.7
|
)
|
|
|
-1.1
|
%
|
|
|
(35.8
|
)
|
|
|
-1.1
|
%
|
|
|
(4.1
|
)
|
Equity in net income of unconsolidated affiliates
|
|
|
115.0
|
|
|
|
4.1
|
%
|
|
|
87.5
|
|
|
|
2.6
|
%
|
|
|
27.5
|
|
Income tax expense
|
|
|
(59.0
|
)
|
|
|
-2.1
|
%
|
|
|
(25.8
|
)
|
|
|
-0.8
|
%
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
157.6
|
|
|
|
5.6
|
%
|
|
|
87.3
|
|
|
|
2.6
|
%
|
|
|
70.3
|
|
Net earnings attributable to noncontrolling interests
|
|
|
13.9
|
|
|
|
0.5
|
%
|
|
|
10.5
|
|
|
|
0.3
|
%
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest
|
|
$
|
143.7
|
|
|
|
5.1
|
%
|
|
$
|
76.8
|
|
|
|
2.3
|
%
|
|
$
|
66.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income by unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
82.7
|
|
|
|
|
|
|
$
|
70.6
|
|
|
|
|
|
|
$
|
12.1
|
|
ClarkDietrich
|
|
|
14.6
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
11.7
|
|
Serviacero
|
|
|
6.3
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
3.0
|
|
ArtiFlex
|
|
|
10.3
|
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
3.1
|
|
WSP
|
|
|
1.7
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
(1.2
|
)
|
Other
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115.0
|
|
|
|
|
|
|
$
|
87.5
|
|
|
|
|
|
|
$
|
27.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 net earnings attributable to controlling interest increased $66.9 million
over fiscal 2015. Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $564.5 million from fiscal 2015. The decrease was driven by lower average selling prices in Steel Processing due to the lower
market price of steel and by lower volume in Pressure Cylinders and Engineered Cabs, partially offset by the impact of acquisitions.
|
|
|
|
Gross margin decreased $10.9 million from fiscal 2015 on lower volume, partially offset by an improved pricing spread in Steel Processing and lower
manufacturing expenses across many of our businesses.
|
|
|
|
SG&A expense increased $1.5 million over fiscal 2015 driven by higher profit sharing and bonus expense and the impact of acquisitions.
|
|
|
|
Impairment charges of $26.0 million in fiscal 2016 consisted of $23.0 million related to the impairment of certain long-lived assets in the
oil & gas equipment business within Pressure Cylinders and $3.0 million related to the closure of the Engineered Cabs facility in Florence, South Carolina. Impairment charges in the prior year related primarily to the impairment of goodwill
and other long-lived assets in Engineered Cabs. For additional information regarding these impairment charges, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note C
Goodwill and Other Long-Lived Assets of this Annual Report on Form 10-K.
|
38
|
|
|
Restructuring and other expense of $7.2 million in fiscal 2016 was driven primarily by costs associated with the closure of the PSM facility in
Steel Processing and the Florence, South Carolina facility in Engineered Cabs, partially offset by a net gain of $6.9 million related to asset disposals. For additional information, refer to Item 8. Financial Statements and
Supplementary Data Notes to Consolidated Financial Statements Note D Restructuring and Other Expense of this Annual Report on Form 10-K.
|
|
|
|
Miscellaneous income increased $10.5 million over fiscal 2015. The increase was primarily the result of a $6.9 million pre-tax gain related to the
consolidation of WSP. The gain represents the difference between the fair value of the Companys previously-held ownership in WSP and its carrying value at the acquisition date. For additional information, refer to Item 8.
Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note O Acquisitions of this Annual Report on Form 10-K.
|
|
|
|
Interest expense of $31.7 million was $4.1 million lower than the prior fiscal year. The decrease was driven by lower average debt levels as a
result of a decrease in working capital requirements due to the lower average market price of steel. For additional information, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial
Statements Note G Debt and Receivables Securitization of this Annual Report on Form 10-K.
|
|
|
|
Equity income increased $27.5 million over fiscal 2015 to $115.0 million on higher contributions from WAVE and ClarkDietrich, up $12.1 million and
$11.7 million, respectively, over the prior year. The equity portion of income from ClarkDietrich includes a $4.5 million net legal settlement gain related to successful disparagement litigation against several competitors in an industry trade
association. We received distributions of $86.5 million from our unconsolidated affiliates during fiscal 2016. For additional financial information regarding our unconsolidated affiliates, refer to Item 8. Financial Statements and
Supplementary Data Notes to Consolidated Financial Statements Note B Investments in Unconsolidated Affiliates of this Annual Report on Form 10-K.
|
|
|
|
Income tax expense increased $33.2 million over fiscal 2015 due to higher earnings and an approximately $5.3 million benefit related to foreign tax
credits recorded in fiscal 2015, partially offset by a $3.2 million tax benefit representing excess tax benefits from share-based payment awards recorded in income tax expense resulting from the adoption of new accounting guidance as described in
Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note A Summary of Significant Accounting Policies Recently Adopted Accounting Standards of this Annual
Report on Form 10-K.
|
Fiscal 2016 income tax expense reflected an effective tax rate
attributable to controlling interest of 29.1% vs. 25.1% in fiscal 2015. The 29.1% rate is lower than the federal statutory rate of 35% primarily as a result of lower tax rates on foreign income, benefits from the qualified production activities
deduction, and the adoption of the new accounting guidance described above with respect to share-based payment awards, offset partially by state and local income taxes. For additional information, refer to Item 8. Financial Statements
and Supplementary Data Notes to Consolidated Financial Statements Note L Income Taxes of this Annual Report on Form 10-K.
39
Segment Operations
Steel Processing
The following table presents a
summary of operating results for our Steel Processing operating segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2016
|
|
|
% of
Net sales
|
|
|
2015
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
1,843.7
|
|
|
|
100.0
|
%
|
|
$
|
2,145.7
|
|
|
|
100.0
|
%
|
|
$
|
(302.0
|
)
|
Cost of goods sold
|
|
|
1,594.8
|
|
|
|
86.5
|
%
|
|
|
1,910.5
|
|
|
|
89.0
|
%
|
|
|
(315.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
248.9
|
|
|
|
13.5
|
%
|
|
|
235.2
|
|
|
|
11.0
|
%
|
|
|
13.7
|
|
Selling, general and administrative expense
|
|
|
132.8
|
|
|
|
7.2
|
%
|
|
|
123.4
|
|
|
|
5.8
|
%
|
|
|
9.4
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
3.1
|
|
|
|
0.1
|
%
|
|
|
(3.1
|
)
|
Restructuring and other expense
|
|
|
4.1
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
112.0
|
|
|
|
6.1
|
%
|
|
$
|
108.7
|
|
|
|
5.1
|
%
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
1,245.1
|
|
|
|
|
|
|
$
|
1,567.3
|
|
|
|
|
|
|
$
|
(322.2
|
)
|
Tons shipped (in thousands)
|
|
|
3,523
|
|
|
|
|
|
|
|
3,510
|
|
|
|
|
|
|
|
13
|
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $302.0 million from fiscal 2015 as lower average steel prices led to lower average selling prices, reducing net sales by
approximately $260.5 million. The remaining decrease in net sales was due to the closure of the Companys stainless steel business, PSM, partially offset by contributions from recent acquisitions. The mix of direct versus toll tons processed
was 58% to 42% compared to 59% to 41% in fiscal 2015.
|
|
|
|
Operating income increased $3.3 million over fiscal 2015. The increase was driven by an improved pricing spread and lower inventory holding losses.
Higher SG&A expense, driven by the impact of acquisitions and higher profit sharing and bonus expense, combined with fiscal 2016 restructuring activities partially offset the overall increase in operating income. Restructuring and other expense
in fiscal 2016 consisted primarily of costs related to the closure of PSM ($7.0 million), which were partially offset by a net gain related to the disposal of the remaining fixed assets of our legacy Baltimore steel processing facility ($3.0
million). The $3.1 million impairment charge in fiscal 2015 related to the closure of the PSM facility.
|
40
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2016
|
|
|
% of
Net sales
|
|
|
2015
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
844.9
|
|
|
|
100.0
|
%
|
|
$
|
1,001.4
|
|
|
|
100.0
|
%
|
|
$
|
(156.5
|
)
|
Cost of goods sold
|
|
|
649.3
|
|
|
|
76.8
|
%
|
|
|
783.8
|
|
|
|
78.3
|
%
|
|
|
(134.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
195.6
|
|
|
|
23.2
|
%
|
|
|
217.6
|
|
|
|
21.7
|
%
|
|
|
(22.0
|
)
|
Selling, general and administrative expense
|
|
|
143.8
|
|
|
|
17.0
|
%
|
|
|
141.1
|
|
|
|
14.1
|
%
|
|
|
2.7
|
|
Impairment of long-lived assets
|
|
|
23.0
|
|
|
|
2.7
|
%
|
|
|
11.9
|
|
|
|
1.2
|
%
|
|
|
11.1
|
|
Restructuring and other expense
|
|
|
0.4
|
|
|
|
0.0
|
%
|
|
|
6.4
|
|
|
|
0.6
|
%
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
28.4
|
|
|
|
3.4
|
%
|
|
$
|
58.2
|
|
|
|
5.8
|
%
|
|
$
|
(29.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
359.8
|
|
|
|
|
|
|
$
|
474.3
|
|
|
|
|
|
|
$
|
(114.5
|
)
|
|
|
|
|
|
|
Net sales by principal class of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products
|
|
$
|
293.2
|
|
|
|
|
|
|
$
|
296.6
|
|
|
|
|
|
|
$
|
(3.4
|
)
|
Industrial products*
|
|
|
362.7
|
|
|
|
|
|
|
|
353.0
|
|
|
|
|
|
|
|
9.7
|
|
Mississippi*
|
|
|
-
|
|
|
|
|
|
|
|
26.8
|
|
|
|
|
|
|
|
(26.8
|
)
|
Alternative fuels
|
|
|
98.7
|
|
|
|
|
|
|
|
94.5
|
|
|
|
|
|
|
|
4.2
|
|
Oil & gas equipment
|
|
|
90.3
|
|
|
|
|
|
|
|
230.5
|
|
|
|
|
|
|
|
(140.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pressure Cylinders
|
|
$
|
844.9
|
|
|
|
|
|
|
$
|
1,001.4
|
|
|
|
|
|
|
$
|
(156.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units shipped by principal class of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products
|
|
|
61,631,907
|
|
|
|
|
|
|
|
65,506,424
|
|
|
|
|
|
|
|
(3,874,517
|
)
|
Industrial products*
|
|
|
10,484,892
|
|
|
|
|
|
|
|
10,171,453
|
|
|
|
|
|
|
|
313,439
|
|
Mississippi*
|
|
|
-
|
|
|
|
|
|
|
|
5,278,597
|
|
|
|
|
|
|
|
(5,278,597
|
)
|
Alternative fuels
|
|
|
422,630
|
|
|
|
|
|
|
|
431,954
|
|
|
|
|
|
|
|
(9,324
|
)
|
Oil & gas equipment
|
|
|
3,668
|
|
|
|
|
|
|
|
10,246
|
|
|
|
|
|
|
|
(6,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pressure Cylinders
|
|
|
72,543,097
|
|
|
|
|
|
|
|
81,398,674
|
|
|
|
|
|
|
|
(8,855,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Mississippi, an industrial gas facility, was sold in May 2015. It has been identified separately so as not to distort the industrial products
comparisons as the products previously produced at the Mississippi facility have been discontinued.
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $156.5 million from fiscal 2015 on lower volume, particularly in the oil & gas equipment business where volumes
decreased 64%. Volumes in fiscal 2016 were also negatively impacted by the May 2015 disposition of our high-pressure cylinders business in Mississippi, which generated sales of $26.8 million in fiscal 2015.
|
|
|
|
Operating income decreased $29.8 million from fiscal 2015 as declines in the oil & gas equipment business more than offset improvements in
the industrial products and consumer products businesses resulting from lower commodity input prices and lower overall manufacturing costs. Impairment charges in fiscal 2016 related to the partial write-off of certain long-lived assets in the
oil & gas equipment business.
|
41
Engineered Cabs
The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(In millions)
|
|
2016
|
|
|
% of
Net sales
|
|
|
2015
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
121.9
|
|
|
|
100.0
|
%
|
|
$
|
193.0
|
|
|
|
100.0
|
%
|
|
$
|
(71.1
|
)
|
Cost of goods sold
|
|
|
116.2
|
|
|
|
95.3
|
%
|
|
|
180.5
|
|
|
|
93.5
|
%
|
|
|
(64.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
5.7
|
|
|
|
4.7
|
%
|
|
|
12.5
|
|
|
|
6.5
|
%
|
|
|
(6.8
|
)
|
Selling, general and administrative expense
|
|
|
18.4
|
|
|
|
15.1
|
%
|
|
|
26.1
|
|
|
|
13.5
|
%
|
|
|
(7.7
|
)
|
Impairment of long-lived assets
|
|
|
3.0
|
|
|
|
2.5
|
%
|
|
|
83.9
|
|
|
|
43.5
|
%
|
|
|
(80.9
|
)
|
Restructuring and other expense (income)
|
|
|
3.6
|
|
|
|
3.0
|
%
|
|
|
(0.3
|
)
|
|
|
-0.2
|
%
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(19.3
|
)
|
|
|
-15.8
|
%
|
|
$
|
(97.2
|
)
|
|
|
-50.4
|
%
|
|
$
|
77.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost
|
|
$
|
57.3
|
|
|
|
|
|
|
$
|
89.3
|
|
|
|
|
|
|
$
|
(32.0
|
)
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $71.1 million from fiscal 2015 due to declines in market demand in most lines of business combined with the impact of the
January 2015 sale of the assets of Advanced Component Technologies, Inc. and the September 2015 closure of Florence, South Carolina facility.
|
|
|
|
Operating loss decreased $77.9 million from fiscal 2015 due primarily to lower impairment and restructuring charges. Excluding the impact of
impairment and restructuring charges, the operating loss was $0.9 million lower than fiscal 2015 as a result of lower SG&A expense, partially offset by a decrease in gross margin. Fiscal 2016 impairment charges consisted of $3.0 million related
to the closure of the Florence, South Carolina facility. Impairment charges in fiscal 2015 consisted of $44.9 million for the full write off of goodwill and $39.0 million for other long-lived assets. For additional information regarding these
impairment charges, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note C Goodwill and Other Long-Lived Assets of this Annual Report on Form 10-K.
|
42
Other
The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are
also included in the Other category, including costs associated with our captive insurance company. The Other category also includes the results of our former Construction Services operating segment, on a historical basis, through May 31, 2016.
The following table presents a summary of operating results for the Other category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31,
|
|
(Dollars in millions)
|
|
2016
|
|
|
% of
Net sales
|
|
|
2015
|
|
|
% of
Net sales
|
|
|
Increase/
(Decrease)
|
|
Net sales
|
|
$
|
9.2
|
|
|
|
100.0
|
%
|
|
$
|
44.1
|
|
|
|
100.0
|
%
|
|
$
|
(34.9
|
)
|
Cost of goods sold
|
|
|
6.9
|
|
|
|
75.0
|
%
|
|
|
45.9
|
|
|
|
104.1
|
%
|
|
|
(39.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (loss)
|
|
|
2.3
|
|
|
|
25.0
|
%
|
|
|
(1.8
|
)
|
|
|
-4.1
|
%
|
|
|
4.1
|
|
Selling, general and administrative expense
|
|
|
2.2
|
|
|
|
23.9
|
%
|
|
|
5.3
|
|
|
|
12.0
|
%
|
|
|
(3.1
|
)
|
Restructuring and other expense (income)
|
|
|
(0.9
|
)
|
|
|
-9.8
|
%
|
|
|
1.9
|
|
|
|
4.3
|
%
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
1.0
|
|
|
|
10.9
|
%
|
|
$
|
(9.0
|
)
|
|
|
-20.4
|
%
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and operating highlights were as follows:
|
|
|
Net sales decreased $34.9 million from fiscal 2015. The decrease was driven by a decline in both the Construction Services, which the Company has
exited, and the WEI businesses.
|
|
|
|
Operating income of $1.0 million represents a $10.0 million improvement over the $9.0 million operating loss recognized in fiscal 2015. The
improvement resulted from lower losses within Construction Services, which the Company has exited, and a net gain within restructuring and other income related to the sale of real estate in our legacy metal framing business.
|
Liquidity and Capital Resources
During fiscal 2017, we generated $335.7 million of cash from operating activities, invested $68.4 million in property,
plant and equipment, and paid $50.7 million of dividends on our common shares. The following table summarizes our consolidated cash flows for each period shown:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended May 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
335.7
|
|
|
$
|
413.3
|
|
Net cash used by investing activities
|
|
|
(63.0
|
)
|
|
|
(127.0
|
)
|
Net cash used by financing activities
|
|
|
(78.8
|
)
|
|
|
(233.2
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
193.9
|
|
|
|
53.1
|
|
Cash and cash equivalents at beginning of period
|
|
|
84.2
|
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
278.1
|
|
|
$
|
84.2
|
|
|
|
|
|
|
|
|
|
|
We believe we have access to adequate resources to meet our needs for normal operating
costs, capital expenditures, debt repayments, dividend payments and working capital for our existing businesses. These resources include cash and cash equivalents, cash provided by operating activities and unused lines of credit. We also believe we
have adequate access to the financial markets to allow us to be in a position to sell long-term debt or equity securities. We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose
to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. However, should we seek such additional capital, there can be no assurance that we
43
would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or
increase our interest costs. On July 19, 2017, we filed a universal automatic shelf registration statement on Form S-3ASR with the Securities and Exchange Commission. The registration statement permits us to offer debt securities, common shares
or any combination of these securities, from time to time, in one or more public offerings.
Operating Activities
Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due
to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices, requiring
higher levels of inventory and accounts receivable. During economic slowdowns or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.
Net cash provided by operating activities was $335.7 million during fiscal 2017 compared to $413.3 million in fiscal
2016. The $77.6 million decrease in net cash provided by operating activities was driven primarily by an increase in working capital levels as a result of higher average steel prices, partially offset by higher net earnings. Net cash provided by
operating activities in fiscal 2016 benefited from declining working capital levels as a result of declining steel prices and lower overall volumes.
Investing Activities
Net cash used by investing
activities was $63.0 million during fiscal 2017 compared to $127.0 million in fiscal 2016, a decrease of $64.0 million. The decrease was driven primarily by the absence of acquisitions in fiscal 2017 and lower capital expenditures, which decreased
$28.6 million. During fiscal 2016, we spent a combined $34.2 million, net of cash acquired, for the net assets of the CryoScience business of Taylor Wharton and the net assets of NetBraze, LLC.
Capital expenditures reflect cash used for investment in property, plant and equipment and are presented below by
reportable business segment (this information excludes cash flows related to acquisition and divestiture activity):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
May 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Steel Processing
|
|
$
|
40.8
|
|
|
$
|
42.1
|
|
Pressure Cylinders
|
|
|
24.8
|
|
|
|
29.9
|
|
Engineered Cabs
|
|
|
0.8
|
|
|
|
6.9
|
|
Other
|
|
|
2.0
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
68.4
|
|
|
$
|
97.0
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures were $68.4 million in fiscal 2017. Significant capital expenditures
in fiscal 2017 included $11.2 million to expand capacity at TWB, our consolidated laser welding joint venture, $9.4 million to expand galvanizing capacity at our steel processing facility in Delta, Ohio, and $6.8 million to expand capacity and
capabilities at our alternative fuels cylinder facility in Pomona, California.
Investment activities are
largely discretionary and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and any such opportunities may require additional financing.
There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms when required. On June 2, 2017, we
acquired AMTROL, a leading manufacturer of pressure cylinders and water system tanks, for $283.0 million. The purchase price was funded primarily with available cash.
44
Financing Activities
Net cash used by financing activities was $78.8 million in fiscal 2017 compared to $233.2 million in fiscal 2016. The
decrease from fiscal 2016 was driven primarily by the absence of share repurchases and lower repayments of short-term borrowings.
Long-term debt
Our senior unsecured long-term debt is rated investment grade by both Moodys Investors Service, Inc. and Standard & Poors
Ratings Group. We typically use the net proceeds from long-term debt for acquisitions, refinancing of outstanding debt, capital expenditures and general corporate purposes. As of May 31, 2017, we were in compliance with our long-term financial
debt covenants. Our long-term debt agreements do not include ratings triggers or material adverse change provisions.
On September 26, 2014, our consolidated joint venture in Turkey, Worthington Aritas, executed a five-year term loan denominated in Euros. As of May 31, 2017, we had borrowed $28.7 million
against the facility. The facility bears interest at a variable rate based on EURIBOR. The applicable variable rate was 1.5% at May 31, 2017. On October 15, 2014, we entered into an interest rate swap to fix the interest rate on
60% of the borrowings outstanding under this facility at 2.015% starting on December 26, 2014 through September 26, 2019. Borrowings against the facility were used for the construction of a cryogenics manufacturing facility in Turkey.
Short-term borrowings
Our short-term debt agreements do not include ratings triggers or
material adverse change provisions. We were in compliance with our short-term financial debt covenants at May 31, 2017.
Short-term borrowings at May 31, 2017 totaled $123,000 and consisted of amounts outstanding under various credit facilities maintained by our consolidated joint venture, Worthington Aritas.
We maintain a $500.0 million multi-year revolving credit facility (the Credit Facility) with a
group of lenders that matures in April 2020. Borrowings under the Credit Facility typically have maturities of less than one year and given that our intention has been to repay them within a year, they have been classified as short-term borrowings
within current liabilities on our consolidated balance sheets. However, we can also extend the term of amounts borrowed by renewing these borrowings for the term of the Credit Facility. We have the option to borrow at rates equal to an applicable
margin over the LIBOR, Prime or Fed Funds rates. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at May 31, 2017. As discussed in Item 8. Financial Statements
and Supplementary Data Notes to Consolidated Financial Statements Note F Guarantees, we provided $15.3 million in letters of credit for third-party beneficiaries as of May 31, 2017. While not drawn against at
May 31, 2017, $13.6 million of these letters of credit were issued against availability under the Credit Facility, leaving $486.4 million available at May 31, 2017.
We maintain a $100.0 million revolving trade accounts receivable securitization facility (the AR Facility)
which matures in January 2018. 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 $100.0 million 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 May 31, 2017, no undivided ownership
interests in this pool of accounts receivable had been sold.
Common shares
We declared
dividends at a quarterly rate of $0.20 per common share for each quarter of fiscal 2017 compared to $0.19 per common share for each quarter of fiscal 2016. Dividends paid on our common shares totaled $50.7 million and $47.2 million during fiscal
2017 and fiscal 2016, respectively. On June 28, 2017, the Board declared a quarterly dividend of $0.21 per common share. The dividend is payable on September 29, 2017 to shareholders of record on September 15, 2017.
45
On June 25, 2014, the Board authorized the repurchase of up to
10,000,000 of our outstanding common shares. A total of 5,953,855 common shares have been repurchased under this authorization, leaving 4,046,145 common shares available for repurchase.
No common shares were repurchased under this authorization during fiscal 2017 due to the anticipated investment
opportunity in AMTROL as described in
Recent Business Developments
. During fiscal 2016, we repurchased 3,500,000 common shares having an aggregate cost of $99,847,000 under this authorization. During fiscal 2015, we repurchased
4,176,187 common shares having an aggregate cost of $127,360,000, including 2,453,855 under this authorization.
The common shares available for repurchase under this authorization may be purchased from time to time, with
consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant factors. Repurchases may be made on the open market or through
privately negotiated transactions.
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared
at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and
other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments will continue in the future.
Contractual Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual cash obligations as of May 31, 2017. Certain of these contractual obligations are reflected in our consolidated balance sheet, while others are
disclosed as future obligations in accordance with U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
(in millions)
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
13
Years
|
|
|
45
Years
|
|
|
After
5 Years
|
|
Short-term borrowings
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Long-term debt
|
|
|
581.1
|
|
|
|
6.7
|
|
|
|
174.1
|
|
|
|
-
|
|
|
|
400.3
|
|
Interest expense on long-term debt
|
|
|
179.6
|
|
|
|
28.5
|
|
|
|
55.4
|
|
|
|
36.6
|
|
|
|
59.1
|
|
Operating leases
|
|
|
40.5
|
|
|
|
10.0
|
|
|
|
15.8
|
|
|
|
7.9
|
|
|
|
6.8
|
|
Royalty obligations
|
|
|
12.0
|
|
|
|
2.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
813.3
|
|
|
$
|
47.3
|
|
|
$
|
249.3
|
|
|
$
|
48.5
|
|
|
$
|
468.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on long-term debt is computed by using the rates of interest on the
debt, including impacts of the related interest rate hedge. Royalty obligations relate to a trademark license agreement executed in connection with the acquisition of Coleman Cylinders in fiscal 2012. Due to the uncertainty regarding the timing of
future cash outflows associated with the unfunded portion of our pension benefit obligations and our unrecognized tax benefits, we are unable to make a reliable estimate of the periods of cash settlement and have not included these amounts in the
contractual cash obligations table above. For additional information, refer to Item 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Note K Employee Pension Plans and
Note L Income Taxes of this Annual Report on Form 10-K.
46
The following table summarizes our other commercial commitments as of
May 31, 2017. These commercial commitments are not reflected in our consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment Expiration by Period
|
|
(in millions)
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3
Years
|
|
|
4-5
Years
|
|
|
After
5 Years
|
|
Guarantees
|
|
$
|
9.3
|
|
|
$
|
9.3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Standby letters of credit
|
|
|
15.3
|
|
|
|
15.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
|
$
|
24.6
|
|
|
$
|
24.6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have
a material current or future effect on our consolidated financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of May 31, 2017, 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 $9.3 million at May 31, 2017. Based on
current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amounts have been recognized in our consolidated financial statements.
Recently Adopted Accounting Standards
In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying
amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably
over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs of $2.1 million and $2.5 million have been presented as a component of the carrying amount of
long-term debt reported in our consolidated balance sheets as of May 31, 2017 and May 31, 2016, respectively.
In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction with a business combination. The amended guidance requires the acquirer to
recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company adopted this
amended guidance on a prospective basis effective June 1, 2016.
In March 2016, amended accounting
guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory
withholding requirements, and classification in the statement of cash flows. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted.
The Company elected to early adopt this amended accounting guidance during the fourth quarter of fiscal 2016. The impact resulting from the adoption of this amended guidance is summarized below.
47
|
|
|
Income Tax Accounting
The amended accounting guidance requires all excess tax benefits and tax deficiencies to be recognized as
an income tax benefit or expense on a prospective basis in the period of adoption. The adoption of this provision of the amended accounting guidance resulted in the recognition of excess tax benefits of $16.2 million and $3.2 million in income tax
expense, rather than in paid-in capital, during fiscal 2017 and fiscal 2016, respectively. As the adoption was on a prospective basis, fiscal 2015 has not been restated.
|
|
|
|
Forfeitures
The Company has elected to continue to estimate the number of awards expected to vest, as permitted by the amended
accounting guidance, rather than electing to account for forfeitures as they occur.
|
|
|
|
Statement of Cash Flows Presentation
The amended accounting guidance requires excess tax benefits to be classified as an operating
activity in the statement of cash flows. Previously, excess tax benefits were presented as a cash inflow from financing activities and cash outflow from operating activities. The Company has elected to present these changes on a prospective basis
and therefore fiscal 2015 has not been adjusted to conform with the current presentation.
|
Recently Issued Accounting
Standards
In May 2014, amended accounting guidance was issued that replaces most existing revenue
recognition guidance under U.S. GAAP. The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was
issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and
implementation of guidance related to licensing. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of
either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. While we have not yet
identified any material changes in the timing of revenue recognition, our evaluation is ongoing and not complete. We plan to adopt the amended guidance in the first quarter of fiscal 2019.
In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance
requires that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended
guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not
expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In February 2016, amended accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amended guidance requires that lease assets and
liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amended 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. 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 amended guidance on our ongoing financial reporting.
48
In March 2016, amended accounting guidance was issued regarding derivatives
instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge
accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either
prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
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, and we have not determined the
effect of the amended guidance on our ongoing financial reporting.
In August 2016, amended accounting
guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. 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
amended guidance on our ongoing financial reporting.
In October 2016, amended accounting guidance was issued
that requires the income tax consequences of an intra-entity transfer on an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. 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 have not determined the
effect of the guidance on our ongoing financial reporting.
In November 2016, amended accounting guidance was
issued that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a
material impact on our consolidated cash flows.
In January 2017, amended accounting guidance was issued to
clarify the definition of a business to provide additional guidance to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The amended guidance is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position
or results of operations.
In January 2017, amended accounting guidance was issued to simplify the goodwill
impairment calculation, by removing Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The
amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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.
In March 2017, amended accounting guidance was issued that requires an employer to report the service cost component of pension and postretirement benefits in the same line item as other current employee
compensation costs. Additionally, other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside of income from operations. The amended guidance is effective for fiscal years
beginning after December 15, 2017, 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, and have not
determined the effect on our ongoing financial reporting.
49
In May 2017, amended accounting guidance was issued to provide guidance
about which changes to the terms or conditions of a share-based payment award require application of modification accounting. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
Environmental
We do not believe that compliance with environmental laws has or will have a material effect on our capital expenditures, future results of operations or financial position or competitive position.
Inflation
The effects of inflation on our operations were not significant during the periods presented in the consolidated financial statements.
Critical Accounting Policies
The discussion and
analysis of our consolidated financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, inventories, intangible assets, accrued liabilities, income and other tax accruals and contingencies
and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that reflect our significant judgments and uncertainties that could potentially result in materially different results under different
assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, as discussed below, our consolidated financial position or results of operations could be materially
different if we were to report under different conditions or to use different assumptions in the application of such policies. We believe the following accounting policies are the most critical to us, as these are the primary areas where financial
information is subject to our estimates, assumptions and judgment in the preparation of our consolidated financial statements.
Revenue Recognition:
We recognize revenue upon transfer of title and risk of loss, or in the case of toll processing revenue, upon delivery of the goods, provided evidence of an arrangement exists,
pricing is fixed and determinable and the ability to collect is probable. In circumstances where the collection of payment is not probable at the time of shipment, we defer recognition of revenue until payment is collected. We provide for returns
and allowances based on historical experience and current customer activities.
Receivables:
In order
to ensure that our receivables are properly valued, we utilize two contra-receivable accounts: returns and allowances and allowance for doubtful accounts. Returns and allowances are used to record estimates of returns or other allowances resulting
from quality, delivery, discounts or other issues affecting the value of receivables. This account is estimated based on historical trends and current market conditions, with the offset to net sales.
The allowance for doubtful accounts is used to record the estimated risk of loss related to the customers inability
to pay. This allowance is maintained at a level that we consider appropriate based on factors that affect collectability, such as the financial health of our customers, historical trends of charge-offs and recoveries and current economic and market
conditions. As we monitor our receivables, we identify customers that may have payment problems, and we adjust the allowance accordingly, with the offset to SG&A expense. Account balances are charged off against the allowance when recovery is
considered remote.
50
We review our receivables on an ongoing basis to ensure that they are
properly valued and collectible. Based on this review, we believe our related reserves are appropriate. The allowance for doubtful accounts decreased approximately $1.1 million during fiscal 2017 to $3.4 million.
While we believe our allowance for doubtful accounts is adequate, changes in economic conditions, the financial health of
customers and bankruptcy settlements could impact our future earnings. If the economic environment and market conditions deteriorate, particularly in the automotive and construction end markets where our exposure is greatest, additional bad debt
reserves may be required.
Inventory Valuation:
Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out method for all inventories. This assessment requires the use of significant estimates to determine replacement cost, cost to complete, normal profit margin and the ultimate selling price of the
inventory. Due to a decline in steel prices in fiscal 2015, the replacement cost of our inventory was lower than what was reflected in our records at May 31, 2015. Accordingly, we recorded a lower of cost or market adjustment of $1.7 million at
May 31, 2015 to reflect this lower value. The entire amount related to our Steel Processing operating segment and was recorded in cost of goods sold. We believe our inventories were valued appropriately as of May 31, 2017 and May 31,
2016.
Impairment of Definite-Lived Long-Lived Assets
: We review the carrying value of our long-lived
assets, including intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Impairment testing involves a comparison of
the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds
the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, if any, to be recognized. An impairment loss is recognized to the extent that the carrying amount of the asset or asset group
exceeds its fair value.
Fiscal 2017:
During the fourth quarter of fiscal 2017,
events and circumstances related to the long-lived assets of the Companys cryogenics joint venture in Turkey indicated the potential for impairment. The Companys current estimate of the undiscounted future cash flows indicated that
the carrying amount of $40.0 million was expected to be recovered. However, the estimated undiscounted future cash flows for this asset group did not exceed book value by a significant amount (approximately 12% at May 31,
2017). Therefore, it is reasonably possible that any change in the estimate of undiscounted cash flows may result in the need to write down these assets to fair value.
Fiscal 2016:
Due to the decline in oil prices and resulting reduced demand for products,
management determined that an impairment indicator was present for the long-lived assets in the oil & gas equipment business within Pressure Cylinders. The Company had tested the five asset groups in its oil & gas equipment
business for impairment during the fourth quarter of fiscal 2015 and again in the first quarter of fiscal 2016. In each of these tests, the Companys estimate of the undiscounted future cash flows for each asset group indicated that the
carrying amounts were expected to be recovered as of those measurement dates.
During the second quarter of
fiscal 2016, the continued decline of oil prices further reduced the demand for oil & gas equipment products, causing a significant decrease in the long-term cash flow projections of that business. Based on these revised cash flow
projections, the Company determined that long-lived assets of two of the facilities with a combined carrying amount of $59.9 million were impaired and wrote them down to their estimated fair value of $36.9 million, resulting in an impairment charge
of $23.0 million. Fair value was based on expected future cash flows using Level 3 inputs under Accounting Standard Codification (ASC) 820. The cash flows are those expected to be generated by market participants, discounted at an
appropriate rate for the risks inherent in those cash flow projections, or 13%. Because of deteriorating market conditions (i.e., rising interest rates and declining marketplace demand), it is possible that our estimate of discounted cash flows may
change resulting in the need to adjust our determination of fair value.
During the first quarter of fiscal
2016, management finalized its plan to close the Engineered Cabs facility in Florence, South Carolina and transfer the majority of the business to the Engineered Cabs facility in Greeneville, Tennessee. Under the plan, certain machinery and
equipment was transferred to the Greeneville facility to support
51
higher volume requirements. Management reevaluated the recoverability of the remaining assets and determined that long-lived assets with a carrying value of $4.1 million were impaired. As a
result, these long-lived assets were written down to their estimated fair value of $1.1 million resulting in an impairment charge of $3.0 million during the first quarter of fiscal 2016. The Company ceased production at the Florence facility on
September 30, 2015.
Impairment of Indefinite-Lived Long-Lived
Assets
: Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate
that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimation of the fair value of each reporting unit. A reporting unit is defined as
an operating segment or one level below an operating segment. With the exception of Pressure Cylinders, we test goodwill at the operating segment level as we have determined that the characteristics of the reporting units within each operating
segment are similar and allow for their aggregation in accordance with the applicable accounting guidance. For our Pressure Cylinders operating segment, the oil & gas equipment business has been treated as a separate reporting unit since
the second quarter of fiscal 2016.
The goodwill impairment test consists of comparing the fair value of each
reporting unit, determined using discounted cash flows, to each reporting units respective carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, there is no impairment. If the carrying amount of the
reporting unit exceeds its estimated fair value, goodwill impairment is indicated. The amount of the impairment is determined by comparing the fair value of the net assets of the reporting unit, excluding goodwill, to its estimated fair value, with
the difference representing the implied fair value of the goodwill. If the implied fair value of the goodwill is lower than its carrying value, the difference is recorded as an impairment charge in our consolidated statement of earnings. The
impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset to its carrying value. If the carrying value of the intangible asset exceeds its fair value, the difference is recorded as an
impairment charge in our consolidated statement of earnings.
As a result of the fiscal 2016 impairment of the
oil & gas equipment assets noted above, the Company also performed an impairment review of the goodwill of the Pressure Cylinders reporting unit during the second quarter of fiscal 2016. The Company first assessed the reporting unit
structure and determined that it was no longer appropriate to aggregate the oil & gas equipment component with the rest of Pressure Cylinders for purposes of goodwill impairment testing. This determination was driven by changes in the
economic characteristics of the oil & gas equipment business as a result of sustained low oil prices, which indicated that the risk profile and prospects for growth and profitability were no longer similar to the other components of
Pressure Cylinders. In accordance with the applicable accounting guidance, the Company allocated a portion of Pressure Cylinders goodwill totaling $26.0 million to the oil & gas equipment reporting unit using a relative fair value approach.
A subsequent comparison of the fair values of the oil & gas equipment and the Pressure Cylinders reporting units, determined using discounted cash flows, to their respective carrying values indicated that a step 2 calculation to quantify a
potential impairment was not required. The key assumptions that drive the fair value calculations are projected cash flows and the discount rate. Prior to the allocation of goodwill, the Company tested the goodwill of the old Pressure Cylinders
reporting unit for impairment and determined that fair value exceeded carrying value by a significant amount.
During the third quarter of fiscal 2015, the Company concluded that an interim impairment test of the goodwill of its
Engineered Cabs reporting unit was necessary. This conclusion was based on certain indicators of impairment, including the decision to close the Companys unprofitable Engineered Cabs facility in Florence, South Carolina, and significant
downward revisions to forecasted cash flows as a result of continued weakness in the mining and agricultural end markets and higher than expected manufacturing costs.
Prior to conducting the goodwill impairment test, the Company first evaluated the other long-lived assets of the
Engineered Cabs reporting unit for recoverability. Recoverability was tested using future cash flow projections based on managements long-range estimates of market conditions. The sum of the undiscounted future cash flows for the customer
relationship intangible asset and the property, plant and equipment of the Florence facility were less than their respective carrying values. As a result, these assets were written down to their respective fair values, resulting in impairment
charges of $22.4 million for the customer relationship intangible asset and $14.3 million for the property, plant and equipment of the Florence asset group during the third quarter of fiscal 2015.
52
In addition to the above, the Company also determined that sufficient
indicators of potential impairment existed to require an interim goodwill analysis of the Engineered Cabs reporting unit. A comparison of the fair value of the Engineered Cabs operating segment, determined using discounted cash flows, to its
carrying value indicated potential goodwill impairment. After a subsequent review of the fair value of the net assets of Engineered Cabs, it was determined that the implied fair value of goodwill was $0 and, as a result, the entire $44.9 million
goodwill balance was written off during the third quarter of fiscal 2015.
We performed our annual impairment
evaluation of goodwill and other indefinite-lived intangible assets during the fourth quarter of fiscal 2017 and concluded that the fair value of each reporting unit exceeded its carrying value; therefore, no additional impairment charges were
recognized.
Accounting for Derivatives and Other Contracts at Fair Value:
We
use derivatives in the normal course of business to manage our exposure to fluctuations in commodity prices, foreign currency exchange rates and interest rates. Fair values for these contracts are based upon valuation methodologies deemed
appropriate in the circumstances; however, the use of different assumptions could affect the estimated fair values.
Stock-Based Compensation:
All share-based awards, including those to employees and non-employee directors, are recorded as expense in the consolidated statements of earnings
based on the fair value of the award at the date of grant.
Income Taxes:
In
accordance with the authoritative accounting guidance
,
we account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that
some, or a portion, of the deferred tax assets will not be realized. We provide a valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized.
In accordance with accounting literature related to uncertainty in income taxes
,
tax benefits from uncertain tax
positions that are recognized in the financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
We have reserves for taxes and associated interest and penalties that may become payable in future years as a result of
audits by taxing authorities. It is our policy to record these in income tax expense. While we believe the positions taken on previously filed tax returns are appropriate, we have established the tax and interest reserves in recognition that various
taxing authorities may challenge our positions. The tax reserves are analyzed periodically, and adjustments are made as events occur to warrant adjustment to the reserves, such as lapsing of applicable statutes of limitations, conclusion of tax
audits, additional exposure based on current calculations, identification of new issues, and release of administrative guidance or court decisions affecting a particular tax issue.
Self-Insurance Reserves:
We are largely self-insured with respect to workers
compensation, general and automobile liability, property damage, employee medical claims and other potential losses. In order to reduce risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims
in excess of the deductible amounts. We maintain reserves for the estimated cost to settle open claims, which includes estimates of legal costs expected to be incurred, as well as an estimate of the cost of claims that have been incurred but not
reported. These estimates are based on actuarial valuations that take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, general economic
factors and other assumptions believed to be reasonable under the circumstances. The estimated reserves for these liabilities could be affected if future occurrences and claims differ from assumptions used and historical trends. Facility
consolidations, a focus on safety initiatives and an emphasis on property loss prevention and product quality have resulted in an improvement in our loss history and the related assumptions used to analyze many of the current self-insurance
reserves. We will continue to review these reserves on a quarterly basis, or more frequently if factors dictate a more frequent review is warranted.
The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by U.S. GAAP, with a lesser need for our judgment in their application. There are also areas in which our judgment in selecting an available alternative would not produce a materially different result.
53
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Worthington Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Worthington Industries, Inc. and subsidiaries (the Company) as of
May 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the years in the
three-year
period ended May 31, 2017. In
connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Worthington Industries, Inc. and subsidiaries as of May 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the
three-year
period ended May 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Worthington Industries, Inc.s internal control over financial reporting as of
May 31, 2017, based on criteria established in
Internal Control Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 24, 2017
expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
Columbus, Ohio
July 24, 2017
56
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
278,081
|
|
|
$
|
84,188
|
|
Receivables, less allowances of $3,444 and $4,579 at May 31, 2017 and May 31, 2016, respectively
|
|
|
486,730
|
|
|
|
439,688
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
185,001
|
|
|
|
162,427
|
|
Work in process
|
|
|
95,630
|
|
|
|
86,892
|
|
Finished products
|
|
|
73,303
|
|
|
|
70,016
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
353,934
|
|
|
|
319,335
|
|
Income taxes receivable
|
|
|
7,164
|
|
|
|
10,535
|
|
Assets held for sale
|
|
|
9,654
|
|
|
|
10,079
|
|
Prepaid expenses and other current assets
|
|
|
55,406
|
|
|
|
51,290
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,190,969
|
|
|
|
915,115
|
|
Investments in unconsolidated affiliates
|
|
|
208,591
|
|
|
|
191,826
|
|
Goodwill
|
|
|
247,673
|
|
|
|
246,067
|
|
Other intangible assets, net of accumulated amortization of $63,134 and $49,532 at May 31, 2017 and May 31, 2016,
respectively
|
|
|
82,781
|
|
|
|
96,164
|
|
Other assets
|
|
|
24,841
|
|
|
|
29,254
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
22,077
|
|
|
|
18,537
|
|
Buildings and improvements
|
|
|
297,951
|
|
|
|
256,973
|
|
Machinery and equipment
|
|
|
961,542
|
|
|
|
945,951
|
|
Construction in progress
|
|
|
27,616
|
|
|
|
48,156
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
1,309,186
|
|
|
|
1,269,617
|
|
Less: accumulated depreciation
|
|
|
738,697
|
|
|
|
686,779
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
|
570,489
|
|
|
|
582,838
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,325,344
|
|
|
$
|
2,061,264
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
57
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
368,071
|
|
|
$
|
290,432
|
|
Short-term borrowings
|
|
|
123
|
|
|
|
2,651
|
|
Accrued compensation, contributions to employee benefit plans and related taxes
|
|
|
86,201
|
|
|
|
75,105
|
|
Dividends payable
|
|
|
13,698
|
|
|
|
13,471
|
|
Other accrued items
|
|
|
41,551
|
|
|
|
45,056
|
|
Income taxes payable
|
|
|
4,448
|
|
|
|
2,501
|
|
Current maturities of long-term debt
|
|
|
6,691
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
520,783
|
|
|
|
430,078
|
|
Other liabilities
|
|
|
61,498
|
|
|
|
63,487
|
|
Distributions in excess of investment in unconsolidated affiliate
|
|
|
63,038
|
|
|
|
52,983
|
|
Long-term debt
|
|
|
571,796
|
|
|
|
577,491
|
|
Deferred income taxes, net
|
|
|
34,300
|
|
|
|
17,379
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,251,415
|
|
|
|
1,141,418
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity controlling interest:
|
|
|
|
|
|
|
|
|
Preferred shares, without par value; authorized 1,000,000 shares; issued and outstanding none
|
|
|
-
|
|
|
|
-
|
|
Common shares, without par value; authorized 150,000,000 shares; issued and outstanding, 2017 62,802,456 shares,
2016 61,533,668 shares
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
303,391
|
|
|
|
298,984
|
|
Accumulated other comprehensive loss, net of taxes of $5,310 and $4,768 at May 31, 2017 and May 31, 2016,
respectively
|
|
|
(27,775
|
)
|
|
|
(28,565
|
)
|
Retained earnings
|
|
|
676,019
|
|
|
|
522,952
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity controlling interest
|
|
|
951,635
|
|
|
|
793,371
|
|
Noncontrolling interests
|
|
|
122,294
|
|
|
|
126,475
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,073,929
|
|
|
|
919,846
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,325,344
|
|
|
$
|
2,061,264
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
3,014,108
|
|
|
$
|
2,819,714
|
|
|
$
|
3,384,234
|
|
Cost of goods sold
|
|
|
2,478,203
|
|
|
|
2,367,121
|
|
|
|
2,920,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
535,905
|
|
|
|
452,593
|
|
|
|
463,533
|
|
Selling, general and administrative expense
|
|
|
316,373
|
|
|
|
297,402
|
|
|
|
295,920
|
|
Impairment of goodwill and long-lived assets
|
|
|
|
|
|
|
25,962
|
|
|
|
100,129
|
|
Restructuring and other expense
|
|
|
6,411
|
|
|
|
7,177
|
|
|
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
213,121
|
|
|
|
122,052
|
|
|
|
60,557
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous income, net
|
|
|
3,764
|
|
|
|
11,267
|
|
|
|
795
|
|
Interest expense
|
|
|
(29,796
|
)
|
|
|
(31,670
|
)
|
|
|
(35,800
|
)
|
Equity in net income of unconsolidated affiliates
|
|
|
110,038
|
|
|
|
114,966
|
|
|
|
87,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
297,127
|
|
|
|
216,615
|
|
|
|
113,028
|
|
Income tax expense
|
|
|
79,190
|
|
|
|
58,987
|
|
|
|
25,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
217,937
|
|
|
|
157,628
|
|
|
|
87,256
|
|
Net earnings attributable to noncontrolling interests
|
|
|
13,422
|
|
|
|
13,913
|
|
|
|
10,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest
|
|
$
|
204,515
|
|
|
$
|
143,715
|
|
|
$
|
76,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
62,443
|
|
|
|
62,469
|
|
|
|
66,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to controlling interest
|
|
$
|
3.28
|
|
|
$
|
2.30
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
64,874
|
|
|
|
64,755
|
|
|
|
68,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to controlling interest
|
|
$
|
3.15
|
|
|
$
|
2.22
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net earnings
|
|
$
|
217,937
|
|
|
$
|
157,628
|
|
|
$
|
87,256
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
1,342
|
|
|
|
4,716
|
|
|
|
(34,229
|
)
|
Pension liability adjustment, net of tax
|
|
|
2,242
|
|
|
|
(2,058
|
)
|
|
|
(3,738
|
)
|
Cash flow hedges, net of tax
|
|
|
(2,822
|
)
|
|
|
22,208
|
|
|
|
(11,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
762
|
|
|
|
24,866
|
|
|
|
(49,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
218,699
|
|
|
|
182,494
|
|
|
|
37,636
|
|
Comprehensive income attributable to noncontrolling interests
|
|
|
13,394
|
|
|
|
16,640
|
|
|
|
7,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to controlling interest
|
|
$
|
205,305
|
|
|
$
|
165,854
|
|
|
$
|
29,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss,
Net of Tax
|
|
|
Retained
Earnings
|
|
|
Total
|
|
|
Noncontrolling
Interests
|
|
|
Total
|
|
(in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
Balance at May 31, 2014
|
|
|
67,408,484
|
|
|
$
|
-
|
|
|
$
|
262,610
|
|
|
$
|
(3,581
|
)
|
|
$
|
591,783
|
|
|
$
|
850,812
|
|
|
$
|
94,070
|
|
|
$
|
944,882
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,785
|
|
|
|
76,785
|
|
|
|
10,471
|
|
|
|
87,256
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,123
|
)
|
|
|
-
|
|
|
|
(47,123
|
)
|
|
|
(2,497
|
)
|
|
|
(49,620
|
)
|
Acquisition of dHybrid Systems, LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,082
|
|
|
|
4,082
|
|
Common shares issued, net of withholding tax
|
|
|
909,181
|
|
|
|
-
|
|
|
|
2,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,910
|
|
|
|
-
|
|
|
|
2,910
|
|
Theoretical common shares in NQ plans
|
|
|
-
|
|
|
|
-
|
|
|
|
14,560
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,560
|
|
|
|
-
|
|
|
|
14,560
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
26,837
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,837
|
|
|
|
-
|
|
|
|
26,837
|
|
Purchases and retirement of common shares
|
|
|
(4,176,187
|
)
|
|
|
-
|
|
|
|
(17,839
|
)
|
|
|
-
|
|
|
|
(109,521
|
)
|
|
|
(127,360
|
)
|
|
|
-
|
|
|
|
(127,360
|
)
|
Dividends to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,189
|
)
|
|
|
(15,189
|
)
|
Cash dividends declared ($0.72 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,309
|
)
|
|
|
(48,309
|
)
|
|
|
-
|
|
|
|
(48,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2015
|
|
|
64,141,478
|
|
|
$
|
-
|
|
|
$
|
289,078
|
|
|
$
|
(50,704
|
)
|
|
$
|
510,738
|
|
|
$
|
749,112
|
|
|
$
|
90,937
|
|
|
$
|
840,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,715
|
|
|
|
143,715
|
|
|
|
13,913
|
|
|
|
157,628
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,139
|
|
|
|
-
|
|
|
|
22,139
|
|
|
|
2,727
|
|
|
|
24,866
|
|
Acquisition of Worthington Specialty Processing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,004
|
|
|
|
28,004
|
|
Common shares issued, net of withholding tax
|
|
|
892,190
|
|
|
|
-
|
|
|
|
8,707
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,707
|
|
|
|
-
|
|
|
|
8,707
|
|
Theoretical common shares in NQ plans
|
|
|
-
|
|
|
|
-
|
|
|
|
960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
960
|
|
|
|
-
|
|
|
|
960
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
16,534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,534
|
|
|
|
-
|
|
|
|
16,534
|
|
Purchases and retirement of common shares
|
|
|
(3,500,000
|
)
|
|
|
-
|
|
|
|
(16,295
|
)
|
|
|
-
|
|
|
|
(83,552
|
)
|
|
|
(99,847
|
)
|
|
|
-
|
|
|
|
(99,847
|
)
|
Dividends to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,106
|
)
|
|
|
(9,106
|
)
|
Cash dividends declared ($0.76 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,949
|
)
|
|
|
(47,949
|
)
|
|
|
-
|
|
|
|
(47,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2016
|
|
|
61,533,668
|
|
|
$
|
-
|
|
|
$
|
298,984
|
|
|
$
|
(28,565
|
)
|
|
$
|
522,952
|
|
|
$
|
793,371
|
|
|
$
|
126,475
|
|
|
$
|
919,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
204,515
|
|
|
|
204,515
|
|
|
|
13,422
|
|
|
|
217,937
|
|
Other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
790
|
|
|
|
-
|
|
|
|
790
|
|
|
|
(28
|
)
|
|
|
762
|
|
Common shares issued, net of withholding tax
|
|
|
1,268,788
|
|
|
|
-
|
|
|
|
(9,075
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,075
|
)
|
|
|
-
|
|
|
|
(9,075
|
)
|
Theoretical common shares in NQ plans
|
|
|
-
|
|
|
|
-
|
|
|
|
1,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,259
|
|
|
|
-
|
|
|
|
1,259
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
13,158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,158
|
|
|
|
-
|
|
|
|
13,158
|
|
Purchase of noncontrolling interest in dHybrid
|
|
|
-
|
|
|
|
-
|
|
|
|
(935
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(935
|
)
|
|
|
(1,953
|
)
|
|
|
(2,888
|
)
|
Dividends to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,622
|
)
|
|
|
(15,622
|
)
|
Cash dividends declared ($0.80 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,448
|
)
|
|
|
(51,448
|
)
|
|
|
-
|
|
|
|
(51,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
|
62,802,456
|
|
|
$
|
-
|
|
|
$
|
303,391
|
|
|
$
|
(27,775
|
)
|
|
$
|
676,019
|
|
|
$
|
951,635
|
|
|
$
|
122,294
|
|
|
$
|
1,073,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
217,937
|
|
|
$
|
157,628
|
|
|
$
|
87,256
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
86,793
|
|
|
|
84,699
|
|
|
|
85,089
|
|
Impairment of goodwill and long-lived assets
|
|
|
-
|
|
|
|
25,962
|
|
|
|
100,129
|
|
Provision for (benefit from) deferred income taxes
|
|
|
18,443
|
|
|
|
7,354
|
|
|
|
(39,960
|
)
|
Bad debt expense
|
|
|
269
|
|
|
|
346
|
|
|
|
259
|
|
Equity in net income of unconsolidated affiliates, net of distributions
|
|
|
(8,023
|
)
|
|
|
(29,473
|
)
|
|
|
(12,299
|
)
|
Net (gain) loss on assets
|
|
|
7,951
|
|
|
|
(12,996
|
)
|
|
|
3,277
|
|
Stock-based compensation
|
|
|
14,349
|
|
|
|
15,836
|
|
|
|
17,916
|
|
Excess tax benefits stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,178
|
)
|
Gain on previously held equity interest in WSP
|
|
|
-
|
|
|
|
(6,877
|
)
|
|
|
-
|
|
Changes in assets and liabilities, net of impact of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(39,927
|
)
|
|
|
66,117
|
|
|
|
32,011
|
|
Inventories
|
|
|
(34,599
|
)
|
|
|
66,351
|
|
|
|
54,108
|
|
Prepaid expenses and other current assets
|
|
|
985
|
|
|
|
18,327
|
|
|
|
(15,295
|
)
|
Other assets
|
|
|
1,905
|
|
|
|
(4,530
|
)
|
|
|
1,617
|
|
Accounts payable and accrued expenses
|
|
|
67,492
|
|
|
|
20,180
|
|
|
|
(83,190
|
)
|
Other liabilities
|
|
|
2,097
|
|
|
|
4,460
|
|
|
|
(9,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
335,672
|
|
|
|
413,384
|
|
|
|
214,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in property, plant and equipment
|
|
|
(68,386
|
)
|
|
|
(97,036
|
)
|
|
|
(96,255
|
)
|
Investment in notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,300
|
)
|
Acquisitions, net of cash acquired
|
|
|
-
|
|
|
|
(34,206
|
)
|
|
|
(105,291
|
)
|
Investments in unconsolidated affiliates
|
|
|
-
|
|
|
|
(5,595
|
)
|
|
|
(8,230
|
)
|
Proceeds from sale of assets and insurance
|
|
|
5,422
|
|
|
|
9,797
|
|
|
|
14,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(62,964
|
)
|
|
|
(127,040
|
)
|
|
|
(203,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (repayments of) short-term borrowings, net issuance costs
|
|
|
(2,528
|
)
|
|
|
(85,843
|
)
|
|
|
79,047
|
|
Proceeds from long-term debt, net of issuance costs
|
|
|
-
|
|
|
|
921
|
|
|
|
30,572
|
|
Principal payments on long-term debt
|
|
|
(874
|
)
|
|
|
(862
|
)
|
|
|
(102,852
|
)
|
Proceeds from issuance of common shares, net of tax withholdings
|
|
|
(9,075
|
)
|
|
|
8,707
|
|
|
|
2,910
|
|
Excess tax benefitsstock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
7,178
|
|
Payments to noncontrolling interests
|
|
|
(15,622
|
)
|
|
|
(9,106
|
)
|
|
|
(13,379
|
)
|
Repurchase of common shares
|
|
|
-
|
|
|
|
(99,847
|
)
|
|
|
(127,360
|
)
|
Dividends paid
|
|
|
(50,716
|
)
|
|
|
(47,193
|
)
|
|
|
(46,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(78,815
|
)
|
|
|
(233,223
|
)
|
|
|
(170,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
193,893
|
|
|
|
53,121
|
|
|
|
(159,012
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
84,188
|
|
|
|
31,067
|
|
|
|
190,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
278,081
|
|
|
$
|
84,188
|
|
|
$
|
31,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended May 31, 2017, 2016 and 2015
Note A Summary of
Significant Accounting Policies
Consolidation:
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 five joint ventures: Spartan Steel Coating, LLC (Spartan) (52%), TWB Company, L.L.C. (TWB) (55%), Worthington Arıtaş Basınçlı Kaplar Sanayi
(Worthington Aritas) (75%), Worthington Energy Innovations, LLC (WEI) (75%), 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 (loss) (OCI) shown as net earnings or comprehensive income attributable to noncontrolling
interests in our consolidated statements of earnings and comprehensive income, respectively. On January 1, 2017, the Company acquired the minority membership interest in dHybrid Systems, LLC (dHybrid) from the noncontrolling member
in a non-cash transaction. The difference between the fair value of the noncontrolling interest and its carrying value was recorded as a reduction to additional paid-in capital in the amount of $935,000 (net of tax of $539,000).
Use of Estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States (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.
Cash and Cash Equivalents:
We
consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. This assessment requires the
use of significant estimates to determine replacement cost, cost to complete, normal profit margin and the ultimate selling price of the inventory. Due to a decline in steel prices in the fiscal year ended May 31, 2015 (fiscal
2015), the replacement cost of our inventory was lower than what was reflected in our records at May 31, 2015. Accordingly, we recorded a lower of cost or market adjustment of $1,716,000 at May 31, 2015 to reflect this lower value.
The entire amount related to our Steel Processing operating segment and was recorded in cost of goods sold. We believe our inventories were valued appropriately as of May 31, 2017 and 2016.
Derivative Financial Instruments:
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, currency exchange risk and commodity price risk. All derivative instruments are accounted
for using mark-to-market accounting. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. Gains and
losses on fair value hedges are recognized in current period earnings in the same line as the underlying hedged item. The effective portion of gains and losses on cash flow hedges is deferred as a component of accumulated other comprehensive income
or loss (AOCI) and recognized in earnings at the time the hedged item affects earnings, in the same financial statement caption as the underlying hedged item. Ineffectiveness of the hedges during the fiscal year ended May 31, 2017
(fiscal 2017), the fiscal year ended May 31, 2016 (fiscal 2016) and fiscal 2015 was immaterial. Classification in the consolidated statements of earnings of gains and losses related to derivative instruments that do not
qualify for hedge accounting is determined based on the underlying intent of the instruments. Cash flows related to derivative instruments are generally classified as operating activities in our consolidated statements of cash flows.
63
In order for hedging relationships to qualify for hedge accounting under
current accounting guidance, we formally document each hedging relationship and its risk management objective. This documentation includes the hedge strategy, the hedging instrument, the hedged item, the nature of the risk being hedged, how hedge
effectiveness will be assessed prospectively and retrospectively as well as a description of the method used to measure hedge ineffectiveness.
Derivative instruments are executed only with highly-rated counterparties. No credit loss is anticipated on existing instruments, and no material credit losses have been experienced to date. We monitor
our positions, as well as the credit ratings of counterparties to those positions.
We discontinue hedge
accounting when it is determined that the derivative instrument is no longer effective in offsetting the hedged risk, expires or is sold, is terminated or is no longer designated as a hedging instrument because it is unlikely that a forecasted
transaction will occur or we determine that designation of the hedging instrument is no longer appropriate. In all situations in which hedge accounting is discontinued and the derivative instrument is retained, we continue to carry the derivative
instrument at its fair value on the consolidated balance sheet and recognize any subsequent changes in its fair value in net earnings immediately. When it is probable that a forecasted transaction will not occur, we discontinue hedge accounting and
immediately recognize the gains and losses that were accumulated in AOCI.
Refer to Note P
Derivative Instruments and Hedging Activities for additional information regarding the consolidated balance sheet location and the risk classification of our derivative instruments.
Risks and Uncertainties
: As of May 31, 2017, excluding our joint ventures, we operated
30 manufacturing facilities worldwide, principally in three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders, and Engineered Cabs. Our remaining operating segment consists of WEI, which
does not meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, and therefore is combined and reported in the Other Category. We also held equity positions in 11 joint ventures, which operated 50
manufacturing facilities worldwide, as of May 31, 2017. Our largest end market is the automotive industry, which comprised 43%, 42%, and 38% of consolidated net sales in fiscal 2017, fiscal 2016, and fiscal 2015, respectively. Our international
operations represented 7%, 6%, and 4% of consolidated net sales and 4%, 8%, and (4)% of net earnings attributable to controlling interest in fiscal 2017, fiscal 2016, and fiscal 2015, respectively, and 11% and 12% of consolidated net assets as of
May 31, 2017 and May 31, 2016, respectively. As of May 31, 2017, approximately 9% of our consolidated labor force was represented by collective bargaining agreements. The concentration of credit risks from financial instruments
related to the markets we serve is not expected to have a material adverse effect on our consolidated financial position, cash flows or future results of operations.
In fiscal 2017, our largest customer accounted for approximately 9% of our consolidated net sales, and our ten largest
customers accounted for approximately 34% of our consolidated net sales. A significant loss of, or decrease in, business from any of these customers could have an adverse effect on our consolidated net sales and financial results if we cannot obtain
replacement business. Also, due to consolidation within the industries we serve, including the construction, automotive and retail industries, our sales may be increasingly sensitive to deterioration in the financial condition of, or other adverse
developments with respect to, one or more of our largest customers.
Our principal raw material is flat-rolled
steel, which we purchase from multiple primary steel producers. The steel industry as a whole has been cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. This volatility can significantly
affect our steel costs. In an environment of increasing prices for steel and other raw materials, in general, competitive conditions may impact how much of the price increases we can pass on to our customers. To the extent we are unable to pass on
future price increases in our raw materials to our customers, our financial results could be adversely affected. Also, if steel prices decrease, in general, competitive conditions may impact how quickly we must reduce our prices to our customers,
and we could be forced to use higher-priced raw materials to complete orders for which the selling prices have decreased. Declining steel prices could also require us to write-down the value of our inventories to reflect current market pricing.
Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and consolidation may continue. Accordingly, if delivery from a major steel supplier is disrupted, it
may be more difficult to obtain an alternative supply than in the past.
64
Receivables:
We review our receivables on an
ongoing basis to ensure that they are properly valued and collectible. This is accomplished through two contra-receivable accounts: returns and allowances and allowance for doubtful accounts. Returns and allowances are used to record estimates of
returns or other allowances resulting from quality, delivery, discounts or other issues affecting the value of receivables. This account is estimated based on historical trends and current market conditions, with the offset to net sales. The returns
and allowances account increased approximately $685,000 during fiscal 2017 to $6,738,000.
The allowance for
doubtful accounts is used to record the estimated risk of loss related to the customers inability to pay. This allowance is maintained at a level that we consider appropriate based on factors that affect collectability, such as the financial
health of our customers, historical trends of charge-offs and recoveries and current economic and market conditions. As we monitor our receivables, we identify customers that may have payment problems, and we adjust the allowance accordingly, with
the offset to selling, general and administrative (SG&A) expense. Account balances are charged off against the allowance when recovery is considered remote. The allowance for doubtful accounts decreased approximately $1,135,000
during fiscal 2017 to $3,444,000.
While we believe our allowance for doubtful accounts is adequate, changes
in economic conditions, the financial health of customers and bankruptcy settlements could impact our future earnings. If the economic environment and market conditions deteriorate, particularly in the automotive and construction end markets where
our exposure is greatest, additional reserves may be required.
Property and
Depreciation:
Property, plant and equipment are carried at cost and depreciated using the straight-line method. Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment over 3 to 20 years.
Depreciation expense was $73,268,000, $68,886,000 and $64,666,000 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Accelerated depreciation methods are used for income tax purposes.
Goodwill and Other Long-Lived Assets:
We use the purchase method of accounting for all
business combinations and recognize amortizable and indefinite-lived intangible assets separately from goodwill. The acquired assets and assumed liabilities in an acquisition are measured and recognized based on their estimated fair values at the
date of acquisition, with goodwill representing the excess of the purchase price over the fair value of the identifiable net assets. A bargain purchase may occur, wherein the fair value of identifiable net assets exceeds the purchase price, and a
gain is then recognized in the amount of that excess. Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, during the fourth quarter, or more frequently if events or changes in
circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimation of the fair value of each reporting unit. A
reporting unit is defined as an operating segment or one level below an operating segment. With the exception of Pressure Cylinders, we test goodwill at the operating segment level as we have determined that the characteristics of the reporting
units within each operating segment are similar and allow for their aggregation in accordance with the applicable accounting guidance. For our Pressure Cylinders operating segment, the oil & gas equipment business has been treated as a
separate reporting unit since the second quarter of fiscal 2016.
The goodwill impairment test consists of
comparing the fair value of each reporting unit, determined using discounted cash flows, to each reporting units respective carrying value. If the estimated fair value of a reporting unit exceeds its carrying value, there is no impairment. If
the carrying amount of the reporting unit exceeds its estimated fair value, goodwill impairment is indicated. The amount of the goodwill impairment is determined by comparing the fair value of the net assets of the reporting unit, excluding
goodwill, to its estimated fair value, with the difference representing the implied fair value of the goodwill. If the implied fair value of the goodwill is lower than its carrying value, the difference is recorded as an impairment charge in our
consolidated statements of earnings. The impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset to its carrying value. If the carrying value of the indefinite-lived intangible asset
exceeds its fair value, the difference is recorded as an impairment charge in our consolidated statements of earnings.
We review the carrying value of our long-lived assets, including intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset or asset group may not be recoverable. Impairment testing involves a comparison of the sum of the undiscounted future cash
65
flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying
amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, if any, to be recognized. The impairment loss recognized is equal to the amount that the carrying value of the asset
or asset group exceeds its fair value.
Our impairment testing for both goodwill and other long-lived assets,
including intangible assets with finite useful lives, is largely based on cash flow models that require significant judgment and require assumptions about future volume trends, revenue and expense growth rates; and, in addition, external factors
such as changes in economic trends and cost of capital. Significant changes in any of these assumptions could impact the outcomes of the tests performed. See Note C Goodwill and Other Long-Lived Assets for additional details
regarding these assets and related impairment testing.
Leases:
Certain lease agreements contain
fluctuating or escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the lease term. Leasehold improvements made by the lessee, whether funded by the lessee or by landlord allowances or
incentives, are recorded as leasehold improvement assets and will be amortized over the shorter of the economic life or the lease term. These incentives are recorded as deferred rent and amortized as reductions in rent expense over the lease term.
Stock-Based Compensation:
At May 31, 2017, we had stock-based compensation
plans for our employees as well as our non-employee directors as described more fully in Note J Stock-Based Compensation. All share-based awards, including grants of stock options and restricted common shares, are recorded as
expense in the consolidated statements of earnings based on their grant-date fair values.
Revenue
Recognition
: We recognize revenue upon transfer of title and risk of loss, or in the case of toll processing revenue, upon delivery of the goods, provided evidence of an arrangement exists, pricing is fixed and
determinable and the ability to collect is probable. We provide, through charges to net sales, for returns and allowances based on experience and current customer activities. We also provide, through charges to net sales, for customer rebates and
sales discounts based on specific agreements and recent and anticipated levels of customer activity. In circumstances where the collection of payment is not probable at the time of shipment, we defer recognition of revenue until payment is
collected.
Advertising Expense:
Advertising costs are expensed as incurred and
included in SG&A expense. Advertising expense was $14,822,000, $13,970,000, and $11,153,000 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Shipping and Handling Fees and Costs:
Shipping and handling fees billed to customers are included in net sales. Shipping and handling costs incurred are included in cost of
goods sold.
Environmental Costs:
Environmental costs are capitalized if the
costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Costs related to environmental contamination treatment and cleanup are charged to expense as incurred.
Statements of Cash Flows:
Supplemental cash flow information was as follows for the fiscal
years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest paid, net of amount capitalized
|
|
$
|
29,826
|
|
|
$
|
30,431
|
|
|
$
|
36,190
|
|
Income taxes paid, net of refunds
|
|
$
|
55,652
|
|
|
$
|
50,750
|
|
|
$
|
67,825
|
|
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 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.
66
Income Taxes:
We account for income taxes
using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and the
financial reporting basis of our assets and liabilities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that all, or a portion, of the deferred tax assets will not be realized. We provide a
valuation allowance for deferred income tax assets when it is more likely than not that a portion of such deferred income tax assets will not be realized.
Tax benefits from uncertain tax positions that are recognized in the consolidated financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement.
We have reserves for income taxes and associated interest and penalties
that may become payable in future years as a result of audits by taxing authorities. It is our policy to record these in income tax expense. While we believe the positions taken on previously filed tax returns are appropriate, we have established
the tax and interest reserves in recognition that various taxing authorities may challenge our positions. The tax reserves are analyzed periodically, and adjustments are made as events occur to warrant adjustment to the reserves, such as lapsing of
applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues and release of administrative guidance or court decisions affecting a particular tax issue.
Self-Insurance Reserves:
We are largely self-insured with respect to workers
compensation, general and automobile liability, property damage, employee medical claims and other potential losses. In order to reduce risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims
in excess of the deductible amounts. We maintain reserves for the estimated cost to settle open claims, which includes estimates of legal costs expected to be incurred, as well as an estimate of the cost of claims that have been incurred but not
reported. These estimates are based on actuarial valuations that take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, general economic
factors and other assumptions believed to be reasonable under the circumstances. The estimated reserves for these liabilities could be affected if future occurrences and claims differ from the assumptions used and historical trends.
Recently Adopted Accounting Standards:
In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying
amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably
over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs of $2,146,000 and $2,491,000 have been presented as a component of the carrying amount of
long-term debt reported in our consolidated balance sheets as of May 31, 2017 and May 31, 2016, respectively. For additional information, refer to Note G Debt and Receivables Securitization.
In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in
conjunction with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather
than retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016.
In March 2016, amended accounting guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in the statement of cash flows. The amended guidance is effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt this amended accounting guidance during the fourth quarter of fiscal 2016. The impact resulting from the adoption of this amended
guidance is summarized below.
67
|
|
|
Income Tax Accounting
The amended accounting guidance requires all excess tax benefits and tax deficiencies to be recognized as an
income tax benefit or expense on a prospective basis in the period of adoption. The adoption of this provision of the amended accounting guidance resulted in the recognition of excess tax benefits of $16,243,000 and $3,178,000 in income tax expense,
rather than in paid-in capital, during fiscal 2017 and fiscal 2016, respectively. As the adoption was on a prospective basis, fiscal 2015 has not been restated.
|
|
|
|
Forfeitures
The Company has elected to continue to estimate the number of awards expected to vest, as permitted by the amended
accounting guidance, rather than electing to account for forfeitures as they occur.
|
|
|
|
Statement of Cash Flows Presentation
The amended accounting guidance requires excess tax benefits to be classified as an operating
activity in the statement of cash flows. Previously, excess tax benefits were presented as a cash inflow from financing activities and cash outflow from operating activities. The Company has elected to present these changes on a prospective basis
and therefore fiscal 2015 has not been adjusted to conform with the current presentation.
|
Recently Issued Accounting
Standards:
In May 2014, amended accounting guidance was issued that replaces most existing revenue
recognition guidance under U.S. GAAP. The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was
issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and
implementation of guidance related to licensing. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of
either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. While we have not yet
identified any material changes in the timing of revenue recognition, our evaluation is ongoing and not complete. We plan to adopt the amended guidance in the first quarter of fiscal 2019.
In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance
requires that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended
guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not
expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In February 2016, amended accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amended guidance requires that lease assets and
liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amended 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. We are in the process of evaluating the effect this guidance will
have on our consolidated financial position and results of operations, and we have not determined the effect of the amended guidance on our ongoing financial reporting.
68
In March 2016, amended accounting guidance was issued regarding derivatives
instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge
accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either
prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
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, and we have not determined the
effect of the amended guidance on our ongoing financial reporting.
In August 2016, amended accounting
guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. 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
amended guidance on our ongoing financial reporting.
In October 2016, amended accounting guidance was issued
that requires the income tax consequences of an intra-entity transfer on an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. 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 have not determined the
effect of the guidance on our ongoing reporting.
In November 2016, amended accounting guidance was issued
that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material
impact on our consolidated cash flows.
In January 2017, amended accounting guidance was issued to clarify the
definition of a business to provide additional guidance to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The amended guidance is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of
operations.
In January 2017, amended accounting guidance was issued to simplify the goodwill impairment
calculation, by removing Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The amended
guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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.
In March 2017, amended accounting guidance was issued that requires an employer to report the service cost component of pension and postretirement benefits in the same line item as other current employee
compensation costs. Additionally, other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside of income from operations. The amended guidance is effective for fiscal years
beginning after December 15, 2017, 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, and have not
determined the effect on our ongoing financial reporting.
69
In May 2017, amended accounting guidance was issued to provide guidance
about which changes to the terms or conditions of a share-based payment award require application of modification accounting. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
Note B Investments in Unconsolidated Affiliates
Our 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) (50%), Worthington Armstrong Venture
(WAVE) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We
received distributions from unconsolidated affiliates totaling $102,015,000, $86,513,000, and $78,297,000 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. 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 $63,038,000 and $52,983,000 at May 31, 2017 and 2016, respectively. In accordance with the applicable accounting guidance, we
reclassified the negative balance to the liability 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 it 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 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 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.
The following table presents combined information regarding the financial position of our unconsolidated affiliates
accounted for using the equity method as of May 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Cash
|
|
$
|
55,541
|
|
|
$
|
112,122
|
|
Other current assets
|
|
|
559,021
|
|
|
|
446,796
|
|
Noncurrent assets
|
|
|
361,106
|
|
|
|
352,370
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
975,668
|
|
|
$
|
911,288
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
156,947
|
|
|
$
|
112,491
|
|
Short-term borrowings
|
|
|
8,172
|
|
|
|
11,398
|
|
Current maturities of long-term debt
|
|
|
5,827
|
|
|
|
3,297
|
|
Long-term debt
|
|
|
268,711
|
|
|
|
266,942
|
|
Other noncurrent liabilities
|
|
|
21,380
|
|
|
|
21,034
|
|
Equity
|
|
|
514,631
|
|
|
|
496,126
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
975,668
|
|
|
$
|
911,288
|
|
|
|
|
|
|
|
|
|
|
70
The following table presents summarized financial information for our four
largest unconsolidated affiliates as of, and for the fiscal years ended May 31. All other unconsolidated affiliates are combined and presented in the Other category, including WSP through March 1, 2016. On March 1, 2016, the Company
obtained effective control over the operations of WSP and, as a result, began consolidating its financial results within Steel Processing. For additional information, refer to Note O Acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
400,987
|
|
|
$
|
393,718
|
|
|
$
|
382,451
|
|
ClarkDietrich
|
|
|
711,735
|
|
|
|
615,609
|
|
|
|
576,171
|
|
Serviacero
|
|
|
275,315
|
|
|
|
260,337
|
|
|
|
277,385
|
|
ArtiFlex
|
|
|
208,922
|
|
|
|
219,510
|
|
|
|
183,029
|
|
Other
|
|
|
17,784
|
|
|
|
74,214
|
|
|
|
91,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,614,743
|
|
|
$
|
1,563,388
|
|
|
$
|
1,510,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
207,035
|
|
|
$
|
207,143
|
|
|
$
|
181,102
|
|
ClarkDietrich
|
|
|
128,098
|
|
|
|
95,427
|
|
|
|
65,530
|
|
Serviacero
|
|
|
37,080
|
|
|
|
15,328
|
|
|
|
17,028
|
|
ArtiFlex
|
|
|
22,829
|
|
|
|
30,181
|
|
|
|
24,145
|
|
Other
|
|
|
(4,313
|
)
|
|
|
13,142
|
|
|
|
14,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
390,729
|
|
|
$
|
361,221
|
|
|
$
|
302,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
167,157
|
|
|
$
|
172,721
|
|
|
$
|
147,603
|
|
ClarkDietrich
|
|
|
68,696
|
|
|
|
33,897
|
|
|
|
10,436
|
|
Serviacero
|
|
|
29,975
|
|
|
|
11,110
|
|
|
|
14,036
|
|
ArtiFlex
|
|
|
15,519
|
|
|
|
22,612
|
|
|
|
16,476
|
|
Other
|
|
|
(8,407
|
)
|
|
|
6,910
|
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
272,940
|
|
|
$
|
247,250
|
|
|
$
|
193,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
4,871
|
|
|
$
|
4,120
|
|
|
$
|
4,150
|
|
ClarkDietrich
|
|
|
12,718
|
|
|
|
14,289
|
|
|
|
16,638
|
|
Serviacero
|
|
|
3,862
|
|
|
|
3,508
|
|
|
|
3,462
|
|
ArtiFlex
|
|
|
5,850
|
|
|
|
6,105
|
|
|
|
7,258
|
|
Other
|
|
|
698
|
|
|
|
3,081
|
|
|
|
4,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
27,999
|
|
|
$
|
31,103
|
|
|
$
|
35,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
7,183
|
|
|
$
|
6,635
|
|
|
$
|
6,412
|
|
ClarkDietrich
|
|
|
20
|
|
|
|
80
|
|
|
|
138
|
|
Serviacero
|
|
|
89
|
|
|
|
114
|
|
|
|
201
|
|
ArtiFlex
|
|
|
1,429
|
|
|
|
1,650
|
|
|
|
1,973
|
|
Other
|
|
|
|
|
|
|
(10
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
8,721
|
|
|
$
|
8,469
|
|
|
$
|
8,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
5,626
|
|
|
$
|
2,449
|
|
|
$
|
2,539
|
|
ClarkDietrich
|
|
|
|
|
|
|
|
|
|
|
|
|
Serviacero
|
|
|
11,740
|
|
|
|
6,249
|
|
|
|
7,844
|
|
ArtiFlex
|
|
|
(2
|
)
|
|
|
289
|
|
|
|
105
|
|
Other
|
|
|
(2
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
17,362
|
|
|
$
|
9,040
|
|
|
$
|
10,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE
|
|
$
|
154,866
|
|
|
$
|
164,132
|
|
|
$
|
138,670
|
|
ClarkDietrich
|
|
|
69,122
|
|
|
|
58,539
|
|
|
|
11,799
|
|
Serviacero
|
|
|
18,140
|
|
|
|
6,246
|
|
|
|
8,429
|
|
ArtiFlex
|
|
|
14,092
|
|
|
|
20,673
|
|
|
|
14,398
|
|
Other
|
|
|
(5,472
|
)
|
|
|
8,516
|
|
|
|
4,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earnings
|
|
$
|
250,748
|
|
|
$
|
258,106
|
|
|
$
|
178,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
At May 31, 2017, $28,803,000 of our consolidated retained earnings
represented undistributed earnings of our unconsolidated affiliates, net of tax.
Note C Goodwill and Other Long-Lived Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill during fiscal 2017 and fiscal 2016 by reportable business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel
Processing
|
|
|
Pressure
Cylinders
|
|
|
Engineered
Cabs
|
|
|
Other
|
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
6,587
|
|
|
$
|
226,761
|
|
|
$
|
44,933
|
|
|
$
|
127,245
|
|
|
$
|
405,526
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,933
|
)
|
|
|
(121,594
|
)
|
|
|
(166,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,587
|
|
|
|
226,761
|
|
|
|
-
|
|
|
|
5,651
|
|
|
|
238,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and purchase accounting adjustments
|
|
|
458
|
|
|
|
6,713
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,171
|
|
Translation adjustments
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
6,610
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
7,045
|
|
|
|
233,371
|
|
|
|
44,933
|
|
|
|
127,245
|
|
|
|
412,594
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,933
|
)
|
|
|
(121,594
|
)
|
|
|
(166,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,045
|
|
|
|
233,371
|
|
|
|
-
|
|
|
|
5,651
|
|
|
|
246,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and purchase accounting adjustments
|
|
|
854
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
854
|
|
Translation adjustments
|
|
|
-
|
|
|
|
752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854
|
|
|
|
752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
7,899
|
|
|
|
234,123
|
|
|
|
44,933
|
|
|
|
127,245
|
|
|
|
414,200
|
|
Accumulated impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,933
|
)
|
|
|
(121,594
|
)
|
|
|
(166,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,899
|
|
|
$
|
234,123
|
|
|
$
|
-
|
|
|
$
|
5,651
|
|
|
$
|
247,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information regarding the Companys acquisitions, refer to Note
O Acquisitions.
72
Other Intangible Assets
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives, which
range from one to 20 years. The following table summarizes other intangible assets by class as of May 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
14,501
|
|
|
$
|
-
|
|
|
$
|
14,501
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived intangibles
|
|
|
14,501
|
|
|
|
-
|
|
|
|
14,501
|
|
|
|
-
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
96,262
|
|
|
$
|
45,822
|
|
|
$
|
96,072
|
|
|
$
|
35,561
|
|
Non-compete agreements
|
|
|
9,443
|
|
|
|
7,751
|
|
|
|
9,422
|
|
|
|
6,237
|
|
Technology / know-how
|
|
|
21,755
|
|
|
|
5,607
|
|
|
|
21,689
|
|
|
|
3,865
|
|
Other
|
|
|
3,954
|
|
|
|
3,954
|
|
|
|
4,012
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangibles
|
|
|
131,414
|
|
|
|
63,134
|
|
|
|
131,195
|
|
|
|
49,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
145,915
|
|
|
$
|
63,134
|
|
|
$
|
145,696
|
|
|
$
|
49,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $13,525,000, $15,813,000, and $20,422,000 in fiscal 2017,
fiscal 2016 and fiscal 2015, respectively.
Amortization expense for each of the next five fiscal years is
estimated to be:
|
|
|
|
|
(in thousands)
|
|
|
|
2018
|
|
$
|
13,181
|
|
2019
|
|
$
|
10,759
|
|
2020
|
|
$
|
8,373
|
|
2021
|
|
$
|
7,802
|
|
2022
|
|
$
|
5,468
|
|
Impairment of Long-Lived Asset
Fiscal 2017:
During the fourth quarter of fiscal 2017, events and circumstances related to
the long-lived assets of the Companys cryogenics joint venture in Turkey indicated the potential for impairment. The Companys current estimate of the undiscounted future cash flows indicated that the carrying amount of $39,990,000 was
expected to be recovered. However, the estimated undiscounted future cash flows for this asset group did not exceed book value by a significant amount (approximately 12% at May 31, 2017). Therefore, it is reasonably possible that any change in
the estimate of undiscounted cash flows may result in the need to write down these assets to fair value.
Fiscal 2016:
Due to the decline in oil prices and resulting reduced demand for products,
management determined that an impairment indicator was present for the long-lived assets in the oil & gas equipment business within Pressure Cylinders. The Company had tested the five asset groups in its oil & gas equipment
business for impairment during the fourth quarter of fiscal 2015 and again in the first quarter of fiscal 2016. In each of these tests, the Companys estimate of the undiscounted future cash flows for each asset group indicated that the
carrying amounts were expected to be recovered as of those measurement dates.
73
During the second quarter of fiscal 2016, the continued decline of oil
prices further reduced the demand for oil & gas equipment products, causing a significant decrease in the long-term cash flow projections of that business. Based on these revised cash flow projections, the Company determined that long-lived
assets of two of the facilities with a combined carrying amount of $59,895,000 were impaired and wrote them down to their estimated fair value of $36,933,000, resulting in an impairment charge of $22,962,000. Fair value was based on expected future
cash flows using Level 3 inputs under Accounting Standard Codification (ASC) 820. The cash flows are those expected to be generated by market participants, discounted at an appropriate rate for the risks inherent in those cash flow
projections, or 13%. Because of deteriorating market conditions (i.e., rising interest rates and declining marketplace demand), it is possible that our estimate of discounted cash flows may change resulting in the need to adjust our determination of
fair value.
As a result of the impairment of the oil & gas equipment assets noted above, the Company
also performed an impairment review of the goodwill of the Pressure Cylinders reporting unit during the second quarter of fiscal 2016. The Company first assessed the reporting unit structure and determined that it was no longer appropriate to
aggregate the oil & gas equipment component with the rest of Pressure Cylinders for purposes of goodwill impairment testing. This determination was driven by changes in the economic characteristics of the oil & gas equipment
business as a result of sustained low oil prices, which indicated that the risk profile and prospects for growth and profitability were no longer similar to the other components of Pressure Cylinders. In accordance with the applicable accounting
guidance, the Company allocated a portion of Pressure Cylinders goodwill totaling $25,982,000 to the Oil & Gas Equipment reporting unit using a relative fair value approach. A subsequent comparison of the fair values of the Oil &
Gas Equipment and the Pressure Cylinders reporting units, determined using discounted cash flows, to their respective carrying values indicated that a step 2 calculation to quantify a potential impairment was not required. The key assumptions that
drive the fair value calculations are projected cash flows and the discount rate. Prior to the allocation of goodwill, the Company tested the goodwill of the old Pressure Cylinders reporting unit for impairment and determined that fair value
exceeded carrying value by a significant amount.
During the first quarter of fiscal 2016, management
finalized its plan to close the Engineered Cabs facility in Florence, South Carolina and transfer the majority of the business to the Engineered Cabs facility in Greeneville, Tennessee. Under the plan, certain machinery and equipment was transferred
to the Greeneville facility to support higher volume requirements. Management reevaluated the recoverability of the remaining assets and determined that long-lived assets with a carrying value of $4,059,000 were impaired. As a result, these
long-lived assets were written down to their estimated fair value of $1,059,000 resulting in an impairment charge of $3,000,000 during the first quarter of fiscal 2016. The Company ceased production at the Florence facility on September 30,
2015.
Fiscal 2015:
During the fourth quarter of fiscal 2015, we determined that
indicators of impairment were present with regard to intangible assets related to our compressed natural gas (CNG) fuel systems joint venture, dHybrid. Recoverability of the identified asset group was tested using future cash flow
projections based on managements long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the
intangible assets were written down to their fair value, resulting in an impairment charge of $2,344,000.
During the third quarter of fiscal 2015, the Company concluded that an interim impairment test of the goodwill of its
Engineered Cabs reporting unit was necessary. This conclusion was based on certain indicators of impairment, including the decision to close the Companys Engineered Cabs facility in Florence, South Carolina and significant downward
revisions to forecasted cash flows as a result of continued weakness in the mining and agricultural end markets and higher than expected manufacturing costs.
Prior to conducting the goodwill impairment test, the Company first evaluated the other long-lived assets of the Engineered Cabs reporting unit for recoverability. Recoverability was tested using future
cash flow projections based on managements long-range estimates of market conditions. The sums of the undiscounted future cash flows for the customer relationship intangible asset and the property, plant and equipment of the Florence, South
Carolina facility were less than their respective carrying values. As a result, these assets were written down to their respective fair values, resulting in impairment charges of $22,356,000 for the customer relationship intangible asset and
$14,311,000 for the property, plant and equipment of the Florence asset group during the third quarter of fiscal 2015. As noted above, an additional impairment charge related to the Florence asset group was later recognized during the first quarter
of fiscal 2016.
74
As noted above, the Company determined that indicators of potential
impairment existed to require an interim goodwill analysis of the Engineered Cabs reporting unit. A comparison of the fair value of the Engineered Cabs reporting unit, determined using discounted cash flows, to its carrying value indicated that a
step 2 calculation to quantify the potential impairment was required. After a subsequent review of the fair value of the net assets of Engineered Cabs, it was determined that the implied fair value of goodwill was $0 and, accordingly, the entire
$44,933,000 goodwill balance was written-off during the third quarter of fiscal 2015. The key assumptions used in the fair value calculations were projected cash flows and the discount rate.
During the second quarter of fiscal 2015, management committed to a plan to sell the assets of the Advanced Component
Technologies, Inc. (ACT) business within Engineered Cabs. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell, resulting in an impairment
charge of $2,389,000. During the third quarter of fiscal 2015, the Company completed the sale of these assets and recognized a gain of $332,000.
Also during the second quarter of fiscal 2015, we determined that indicators of impairment were present at the Companys aluminum high-pressure cylinder business in New Albany, Mississippi, and at
the Companys military construction business due to current and projected operating losses. Recoverability of the identified asset groups was tested using future cash flow projections based on managements long-range estimates of market
conditions. The sum of the undiscounted future cash flows was less than the net book value of the asset groups. In accordance with the applicable accounting guidance, the net assets were written down to their fair values, resulting in impairment
charges of $3,221,000 and $1,179,000, respectively.
During the fourth quarter of fiscal 2014, the Company
committed to a plan to sell its 60% ownership interest in Worthington Nitin Cylinders, a consolidated joint venture in India, and Precision Specialty Metals (PSM), a stainless steel business. Accordingly, at May 31, 2014, the net
assets of these businesses were recorded as assets held for sale at the lower of their fair values or net book values, less selling costs. During the first half of fiscal 2015, changes in facts and circumstances related to these businesses indicated
that the Company needed to reassess the fair value of these assets. As a result, additional impairment charges of $6,346,000 and $3,050,000, respectively, were recorded. The Company completed the sale of Worthington Nitin Cylinders during the second
quarter of fiscal 2016.
Note D Restructuring and Other Expense
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.
A progression of the liabilities associated with our restructuring activities, combined with a
reconciliation to the restructuring and other expense financial statement caption in our consolidated statement of earnings for fiscal 2017, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Beginning
Balance
|
|
|
Expense
|
|
|
Payments
|
|
|
Adjustments
|
|
|
Ending
Balance
|
|
Early retirement and severance
|
|
$
|
1,831
|
|
|
$
|
1,854
|
|
|
$
|
(3,505
|
)
|
|
$
|
73
|
|
|
$
|
253
|
|
Facility exit and other costs
|
|
|
653
|
|
|
|
3,752
|
|
|
|
(3,916
|
)
|
|
|
47
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,484
|
|
|
|
5,606
|
|
|
$
|
(7,421
|
)
|
|
$
|
120
|
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale of assets
|
|
|
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense
|
|
|
|
|
|
$
|
6,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
During fiscal 2017, the following actions were taken related to the
Companys restructuring activities:
|
|
|
The Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the consolidation of the
Cryogenics business unit into the Industrial Products business unit. In connection with this matter, the Company recognized severance expense of $1,356,000 related to permanent headcount reductions.
|
|
|
|
In connection with the closure of the Companys stainless steel business, Precision Specialty Metals, Inc. (PSM), the Company
recognized $1,999,000 of facility exit costs and a credit to severance expense of $106,000.
|
|
|
|
In connection with the closure of the Engineered Cabs facility in Florence, South Carolina, the Company recognized facility exit costs of $504,000.
The Company also recognized a net gain of $104,000 related to the disposal of assets.
|
|
|
|
In connection with the consolidation of the Companys existing cryogenics facility in Istanbul, Turkey, to its Greenfield facility in Bandirma,
Turkey, the Company recognized facility exit costs of $1,299,000 and severance expense of $699,000. The consolidation is substantially complete.
|
|
|
|
The Company sold the remaining real estate of the legacy Advanced Component Technologies, Inc. (ACT) business within Engineered Cabs for
cash proceeds of $700,000, resulting in a loss of $822,000.
|
|
|
|
In connection with other non-significant restructuring activities, the Company recognized a credit to severance expense of $95,000 and a credit to
facility exit costs of $50,000. The Company also recognized a net loss on disposal of assets of $87,000.
|
The total liability as of May 31, 2017 is expected to be paid in the next twelve months.
Note E Contingent Liabilities and Commitments
Legal Proceedings
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.
Insurance Recoveries
On August 19, 2013, a fire
occurred at our Pressure Cylinders facility in Kienberg, Austria, in the building that houses the massing process in the production of acetylene cylinders. The other portions of the Austrian facility were not damaged; however, the massing process
building sustained extensive damage and was rendered inoperable. Additionally, we incurred incremental business interruption costs. The Company had business interruption and property damage insurance and, as a result, the fire did not have a
material adverse impact on the Companys consolidated financial results.
During fiscal 2015, the Company
received proceeds of $1,248,000 representing advance payments for the replacement value of damaged equipment. These proceeds were in excess of the $243,000 remaining book value of the assets, resulting in a gain of $1,005,000 within miscellaneous
income.
76
Total proceeds received related to insurance claims since the date of loss
have been as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
Property and equipment
|
|
$
|
6,892
|
|
Business interruption
|
|
|
5,521
|
|
Other expenses
|
|
|
1,001
|
|
|
|
|
|
|
Total insurance proceeds
|
|
$
|
13,414
|
|
|
|
|
|
|
Proceeds for business interruption related to the loss of profits since the date of the
fire and have been recorded as a reduction of manufacturing expense, and totaled $2,653,000 during fiscal 2015. Proceeds for other expenses represent reimbursement for incremental expenses related to the fire and were recorded as an offset to
manufacturing expense, and totaled $256,000 during fiscal 2015. This claim was settled during the third quarter of fiscal 2015.
Note F
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 May 31, 2017, 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 $9,277,000 at May 31, 2017. Based on current facts and
circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amounts have been recognized in our consolidated financial statements.
We also had in place $15,294,000 of outstanding stand-by letters of credit issued to third-party service providers at
May 31, 2017. The fair value of these guarantee instruments, based on premiums paid, was not material and no amounts were drawn against them at May 31, 2017.
Note G Debt and Receivables Securitization
The
following table summarizes our long-term debt and short-term borrowings outstanding at May 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Short-term borrowings
|
|
$
|
123
|
|
|
$
|
2,651
|
|
4.55% senior notes due April 15, 2026
|
|
|
250,000
|
|
|
|
250,000
|
|
4.60% senior notes due August 10, 2024
|
|
|
150,000
|
|
|
|
150,000
|
|
6.50% senior notes due April 15, 2020
|
|
|
150,000
|
|
|
|
150,000
|
|
Term loans
|
|
|
30,400
|
|
|
|
31,020
|
|
Other
|
|
|
668
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
581,191
|
|
|
|
583,991
|
|
Unamortized discount and debt issuance costs
|
|
|
(2,581
|
)
|
|
|
(2,987
|
)
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
|
578,610
|
|
|
|
581,004
|
|
Less: current maturities and short-term borrowings
|
|
|
6,814
|
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
$
|
571,796
|
|
|
$
|
577,491
|
|
|
|
|
|
|
|
|
|
|
77
Maturities on long-term debt and short-term borrowings in the next five
fiscal years, and the remaining years thereafter, are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
2018
|
|
$
|
6,814
|
|
2019
|
|
|
6,636
|
|
2020
|
|
|
167,421
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
400,320
|
|
|
|
|
|
|
Total
|
|
$
|
581,191
|
|
|
|
|
|
|
Long-Term Debt
On September 26, 2014, our consolidated joint venture in Turkey, Worthington Aritas, executed a five-year term loan denominated in Euros. As of May 31, 2017, we had borrowed $28,687,000
against the facility. The facility bears interest at a variable rate based on EURIBOR. The applicable variable rate was 1.5% at May 31, 2017. On October 15, 2014, we entered into an interest rate swap to fix the interest rate on 60% of the
borrowings outstanding under this facility at 2.015% starting on December 26, 2014 through September 26, 2019. Borrowings against the facility were used for the construction of a cryogenics manufacturing facility in Turkey.
On April 15, 2014, we issued $250,000,000 aggregate principal amount of unsecured senior notes due on April 15,
2026 (the 2026 Notes). The 2026 Notes bear interest at a rate of 4.55%. The 2026 Notes were sold to the public at 99.789% of the principal amount thereof, to yield 4.573% to maturity. We used a portion of the net proceeds from the
offering to repay borrowings then outstanding under our revolving credit facilities. Approximately $3,081,000, $2,256,000 and $528,000 were allocated to the settlement of a derivative contract entered into in anticipation of the issuance of the 2026
Notes, debt issuance costs, and the debt discount, respectively. The debt issuance costs and debt discount were recorded on the consolidated balance sheets within long-term debt as a contra-liability, and the loss on the derivative contract recorded
within AOCI. Each will continue to be recognized, through interest expense, in our consolidated statements of earnings over the term of the 2026 Notes. The unamortized portion of the debt issuance costs and debt discount was $1,677,000 and $388,000,
respectively, at May 31, 2017.
On August 10, 2012, we issued $150,000,000 aggregate principal
amount of unsecured senior notes due August 10, 2024 (the 2024 Notes). The 2024 Notes bear interest at a rate of 4.60%. The net proceeds from this issuance were used to repay a portion of the then outstanding borrowings under our
revolving credit facilities. Approximately $80,000 of the aggregate proceeds were allocated to debt issuance costs. The unamortized portion of the debt issuance costs was $48,000 at May 31, 2017.
On April 27, 2012, we executed a $5,880,000 seven-year term loan that matures on May 1, 2019 and requires
monthly payments of $76,350. The loan bears interest at a rate of 2.49% and is secured by an aircraft that was purchased with its proceeds. Borrowings outstanding totaled $1,713,000 as of May 31, 2017.
On April 13, 2010, we issued $150,000,000 aggregate principal amount of unsecured senior notes due on April 15,
2020 (the 2020 Notes). The 2020 Notes bear interest at a rate of 6.50%. The 2020 Notes were sold to the public at 99.890% of the principal amount thereof, to yield 6.515% to maturity. We used the net proceeds from the offering to repay a
portion of the then outstanding borrowings under our revolving credit facilities. Approximately $165,000, $1,535,000 and $1,358,000 were allocated to the debt discount, debt issuance costs, and the settlement of a derivative contract entered into in
anticipation of the issuance of the 2020 Notes. The debt discount and debt issuance costs were recorded on the consolidated balance sheets within long-term debt as a contra-liability, and the loss on the derivative contract within AOCI. Each will
continue to be recognized, through interest expense, in our consolidated statements of earnings over the remaining term of the 2020 Notes. The unamortized portion of the debt issuance costs and debt discount was $421,000 and $47,000, respectively,
at May 31, 2017.
78
Other Financing Arrangements
We maintain a $100,000,000 revolving trade accounts receivable securitization facility (the AR Facility) that
matures in January 2018. 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 $100,000,000 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 May 31, 2017, no undivided ownership interests in
this pool of accounts receivable had been sold. Facility fees of $354,000, $540,000, and $723,000 were recognized within interest expense during fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
We also maintain a $500,000,000 multi-year revolving credit facility (the Credit Facility) with a group of
lenders that matures in April 2020. Borrowings under the Credit Facility typically have maturities of less than one year. However, we can extend the term of amounts borrowed by renewing these borrowings for the term of the Credit Facility. We have
the option to borrow at rates equal to an applicable margin over the LIBOR, Prime rate or Fed Funds rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at May 31, 2017.
As discussed in Note F Guarantees, we provided $15,294,000 in letters of credit for third-party beneficiaries as of May 31, 2017. While not drawn against at May 31, 2017, $13,600,000 of these letters of credit were
issued against availability under the Credit Facility, leaving $486,400,000 available at May 31, 2017.
Note H Comprehensive
Income (Loss)
Other Comprehensive Income (Loss):
The following table summarizes the tax effects of
each component of other comprehensive income (loss) for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
Before-
Tax
|
|
|
Tax
|
|
|
Net-of-
Tax
|
|
|
Before-
Tax
|
|
|
Tax
|
|
|
Net-of-
Tax
|
|
|
Before-
Tax
|
|
|
Tax
|
|
|
Net-of-
Tax
|
|
Foreign currency translation
|
|
$
|
1,342
|
|
|
$
|
-
|
|
|
$
|
1,342
|
|
|
$
|
4,716
|
|
|
$
|
-
|
|
|
$
|
4,716
|
|
|
$
|
(34,229
|
)
|
|
$
|
-
|
|
|
$
|
(34,229
|
)
|
Pension liability adjustment
|
|
|
3,400
|
|
|
|
(1,158
|
)
|
|
|
2,242
|
|
|
|
(3,233
|
)
|
|
|
1,175
|
|
|
|
(2,058
|
)
|
|
|
(5,652
|
)
|
|
|
1,914
|
|
|
|
(3,738
|
)
|
Cash flow hedges
|
|
|
(4,522
|
)
|
|
|
1,700
|
|
|
|
(2,822
|
)
|
|
|
35,524
|
|
|
|
(13,316
|
)
|
|
|
22,208
|
|
|
|
(18,605
|
)
|
|
|
6,952
|
|
|
|
(11,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
220
|
|
|
$
|
542
|
|
|
$
|
762
|
|
|
$
|
37,007
|
|
|
$
|
(12,141
|
)
|
|
$
|
24,866
|
|
|
$
|
(58,486
|
)
|
|
$
|
8,866
|
|
|
$
|
(49,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Accumulated Other Comprehensive Loss:
The
components of the changes in accumulated other comprehensive loss for the fiscal years ended May 31, 2017 and May 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
|
Pension
Liability
Adjustment
|
|
|
Cash Flow
Hedges
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2015
|
|
$
|
(20,717
|
)
|
|
$
|
(15,003
|
)
|
|
$
|
(14,984
|
)
|
|
$
|
(50,704
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
1,989
|
|
|
|
(3,667
|
)
|
|
|
7,283
|
|
|
|
5,605
|
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
434
|
|
|
|
28,241
|
|
|
|
28,675
|
|
Income taxes
|
|
|
-
|
|
|
|
1,175
|
|
|
|
(13,316
|
)
|
|
|
(12,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2016
|
|
$
|
(18,728
|
)
|
|
$
|
(17,061
|
)
|
|
$
|
7,224
|
|
|
$
|
(28,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
1,370
|
|
|
|
2,841
|
|
|
|
7,669
|
|
|
|
11,880
|
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
559
|
|
|
|
(12,191
|
)
|
|
|
(11,632
|
)
|
Income taxes
|
|
|
-
|
|
|
|
(1,158
|
)
|
|
|
1,700
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
$
|
(17,358
|
)
|
|
$
|
(14,819
|
)
|
|
$
|
4,402
|
|
|
$
|
(27,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed in Note P Derivative
Instruments and Hedging Activities.
|
The estimated net amount of the gains in AOCI at
May 31, 2017 expected to be reclassified into net earnings within the succeeding twelve months is $6,166,000 (net of tax of $3,770,000). This amount was computed using the fair value of the cash flow hedges at May 31, 2017, and will change
before actual reclassification from other comprehensive income to net earnings during fiscal 2018.
Note I Equity
Preferred Shares:
The Worthington Industries, Inc. Amended Articles of Incorporation
authorize two classes of preferred shares and their relative voting rights. The Board of Directors of Worthington Industries, Inc. is empowered to determine the issue prices, dividend rates, amounts payable upon liquidation and other terms of the
preferred shares when issued. No preferred shares are issued or outstanding.
Common
Shares
: On June 25, 2014, the Board of Directors of Worthington Industries, Inc. authorized the repurchase of up to 10,000,000 of our outstanding common shares. An aggregate of 5,953,855 common shares have been
repurchased under this authorization, leaving 4,046,145 common shares available for repurchase at May 31, 2017.
No common shares were repurchased under this authorization during fiscal 2017. During fiscal 2016, we repurchased 3,500,000 common shares having an aggregate cost of $99,847,000 under this
authorization. During fiscal 2015, we repurchased 4,176,187 common shares having an aggregate cost of $127,360,000, including 2,453,855 common shares under this authorization.
Common shares available for repurchase under this authorization may be purchased from time to time, with consideration
given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately
negotiated transactions.
On October 1, 2014, the Company amended its non-qualified deferred compensation
plans for employees to require that any portion of a participants current account credited to the theoretical common share option, which reflects the fair value of the Companys common shares with dividends reinvested, and any new
contributions credited to the theoretical common share option remain credited to the theoretical common share option until distributed. For amounts credited to the theoretical common share option, payouts are required to be made in the form of whole
common shares of the Company and cash in lieu of fractional common shares. As a result, we account for the deferred compensation obligation credited to the theoretical common share option within equity. The amounts credited to equity totaled
$1,259,000 and $960,000 during fiscal 2017 and fiscal 2016, respectively. Prior to October 1, 2014, participant accounts credited to the theoretical common share option were settled in cash and classified as a liability in the Companys
consolidated balance sheets.
Note J Stock-Based Compensation
Under our employee and non-employee director stock-based compensation plans (the Plans), we may grant
incentive or non-qualified stock options, restricted common shares and performance shares to employees and non-qualified stock options and restricted common shares to non-employee directors. We classify share-based compensation expense within
SG&A expense to correspond with the same financial statement caption as the majority of the cash compensation paid to employees. A total of 3,797,139 of our common shares were authorized and available for issuance in connection with the
stock-based compensation plans in place at May 31, 2017.
80
We recognized pre-tax stock-based compensation expense of $14,349,000
($9,112,000 after-tax), $15,836,000 ($10,056,000 after-tax), and $17,916,000 ($11,500,000 after-tax) under the Plans during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. At May 31, 2017, the total unrecognized compensation cost
related to non-vested awards was $18,012,000, which will be expensed over the next three fiscal years.
Non-Qualified Stock Options
Stock options may be granted to purchase common shares at not less than 100% of the fair market value of
the underlying common shares on the date of the grant. All outstanding stock options are non-qualified stock options. The exercise price of all stock options granted has been set at 100% of the fair market value of the underlying common shares on
the date of grant. Generally, stock options granted to employees vest and become exercisable at the rate of (i) 20% per year for options issued before June 30, 2011, and (ii) 33% per year for options issued on or after
June 30, 2011, in each case beginning one year from the date of grant, and expire ten years after the date of grant. Non-qualified stock options granted to non-employee directors vest and become exercisable on the earlier of (a) the first
anniversary of the date of grant or (b) the date on which the next annual meeting of shareholders is held following the date of grant for any stock option granted as of the date of an annual meeting of shareholders of Worthington. Stock options
can be exercised through net-settlement, at the election of the option holder.
U.S. GAAP requires that all
share-based awards be recorded as expense in the statement of earnings based on their grant-date fair value. We calculate the fair value of our non-qualified stock options using the Black-Scholes option pricing model and certain assumptions. The
computation of fair values for all stock options incorporates the following assumptions: expected volatility (based on the historical volatility of our common shares); risk-free interest rate (based on the United States Treasury strip rate for the
expected term of the stock options); expected term (based on historical exercise experience); and dividend yield (based on annualized current dividends and an average quoted price of our common shares over the preceding annual period).
The table below sets forth the non-qualified stock options granted during each of the last three fiscal years. For each
grant, the exercise price was equal to the closing market price of the underlying common shares at each respective grant date. The fair values of these stock options were based on the Black-Scholes option pricing model, calculated at the respective
grant dates. The calculated pre-tax stock-based compensation expense for these stock options, which is after an estimate of forfeitures, will be recognized on a straight-line basis over the respective vesting periods of the stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
111
|
|
|
|
154
|
|
|
|
97
|
|
Weighted average exercise price, per share
|
|
$
|
42.30
|
|
|
$
|
30.92
|
|
|
$
|
42.95
|
|
Weighted average grant date fair value, per share
|
|
$
|
11.60
|
|
|
$
|
9.55
|
|
|
$
|
17.96
|
|
Pre-tax stock-based compensation, net of forfeitures
|
|
$
|
1,146
|
|
|
$
|
1,305
|
|
|
$
|
1,553
|
|
The weighted average fair value of stock options granted in fiscal 2017, fiscal 2016 and
fiscal 2015 was based on the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Assumptions used:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
2.59
|
%
|
|
|
2.33
|
%
|
|
|
1.88
|
%
|
Expected volatility
|
|
|
36.86
|
%
|
|
|
38.40
|
%
|
|
|
50.92
|
%
|
Risk-free interest rate
|
|
|
1.15
|
%
|
|
|
1.98
|
%
|
|
|
1.88
|
%
|
Expected life (years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
81
The following tables summarize our stock option activity for the years ended
May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands, except per share amounts)
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, beginning of year
|
|
|
3,306
|
|
|
$
|
19.01
|
|
|
|
4,044
|
|
|
$
|
18.25
|
|
|
|
4,752
|
|
|
$
|
17.58
|
|
Granted
|
|
|
111
|
|
|
|
42.30
|
|
|
|
154
|
|
|
|
30.92
|
|
|
|
97
|
|
|
|
42.95
|
|
Exercised
|
|
|
(1,076
|
)
|
|
|
16.90
|
|
|
|
(874
|
)
|
|
|
17.22
|
|
|
|
(758
|
)
|
|
|
17.24
|
|
Forfeited
|
|
|
(34
|
)
|
|
|
29.95
|
|
|
|
(18
|
)
|
|
|
32.25
|
|
|
|
(47
|
)
|
|
|
17.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
2,307
|
|
|
|
20.99
|
|
|
|
3,306
|
|
|
|
19.01
|
|
|
|
4,044
|
|
|
|
18.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
2,067
|
|
|
|
19.17
|
|
|
|
3,059
|
|
|
|
17.85
|
|
|
|
3,276
|
|
|
|
17.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Options
(in thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
2,307
|
|
|
|
3.95
|
|
|
$
|
48,509
|
|
Exercisable
|
|
|
2,067
|
|
|
|
3.47
|
|
|
$
|
47,488
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
3,306
|
|
|
|
4.33
|
|
|
$
|
61,178
|
|
Exercisable
|
|
|
3,059
|
|
|
|
4.01
|
|
|
$
|
60,082
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
4,044
|
|
|
|
4.82
|
|
|
$
|
38,277
|
|
Exercisable
|
|
|
3,276
|
|
|
|
4.42
|
|
|
$
|
31,625
|
|
The total intrinsic value of stock options exercised during fiscal 2017 was $18,989,000.
The total amount of cash received from the exercise of stock options during fiscal 2017 was $11,676,000, and the related excess tax benefit realized from share-based payment awards was $16,243,000.
The following table summarizes information about non-vested stock option awards for the year ended May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Options
(in thousands)
|
|
|
Weighted
Average
Grant
Date Fair
Value per
Share
|
|
Non-vested, beginning of year
|
|
|
247
|
|
|
$
|
10.91
|
|
Granted
|
|
|
111
|
|
|
|
10.32
|
|
Vested
|
|
|
(84
|
)
|
|
|
11.57
|
|
Forfeited
|
|
|
(34
|
)
|
|
|
13.84
|
|
|
|
|
|
|
|
|
|
|
Non-vested, end of year
|
|
|
240
|
|
|
$
|
9.99
|
|
|
|
|
|
|
|
|
|
|
82
Service-Based Restricted Common Shares
We have awarded restricted common shares to certain employees and non-employee directors that contain service-based
vesting conditions. Service-based restricted common shares granted to employees cliff vest three years from the date of grant. Service-based restricted common shares granted to non-employee directors vest under the same parameters as the
non-employee stock options discussed above. All service-based restricted common shares are valued at the closing market price of our common shares on the date of the grant.
The table below sets forth the service-based restricted common shares we granted during each of fiscal 2017, fiscal 2016
and fiscal 2015. The calculated pre-tax stock-based compensation expense for these restricted common shares will be recognized on a straight-line basis over their respective vesting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Granted
|
|
|
525
|
|
|
|
217
|
|
|
|
240
|
|
Weighted average grant date fair value, per share
|
|
$
|
42.28
|
|
|
$
|
29.49
|
|
|
$
|
40.05
|
|
Pre-tax stock-based compensation, net of forfeitures
|
|
$
|
19,841
|
|
|
$
|
5,800
|
|
|
$
|
8,660
|
|
The following tables summarize the activity for our service-based restricted common
shares for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands, except per share amounts)
|
|
Restricted
Common
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Restricted
Common
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Restricted
Common
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding, beginning of year
|
|
|
698
|
|
|
$
|
33.69
|
|
|
|
635
|
|
|
$
|
33.65
|
|
|
|
573
|
|
|
$
|
28.36
|
|
Granted
|
|
|
525
|
|
|
|
42.28
|
|
|
|
217
|
|
|
|
29.49
|
|
|
|
240
|
|
|
|
40.05
|
|
Vested
|
|
|
(310
|
)
|
|
|
31.81
|
|
|
|
(120
|
)
|
|
|
24.14
|
|
|
|
(142
|
)
|
|
|
23.32
|
|
Forfeited
|
|
|
(48
|
)
|
|
|
38.82
|
|
|
|
(34
|
)
|
|
|
34.53
|
|
|
|
(36
|
)
|
|
|
32.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
865
|
|
|
|
39.49
|
|
|
|
698
|
|
|
|
33.69
|
|
|
|
635
|
|
|
|
33.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life of outstanding restricted common shares (in years)
|
|
|
1.57
|
|
|
|
|
|
|
|
1.04
|
|
|
|
|
|
|
|
1.41
|
|
|
|
|
|
Aggregate intrinsic value of outstanding restricted common shares
|
|
$
|
36,298
|
|
|
|
|
|
|
$
|
26,059
|
|
|
|
|
|
|
$
|
17,269
|
|
|
|
|
|
Aggregate intrinsic value of restricted common shares vested during the year
|
|
$
|
12,840
|
|
|
|
|
|
|
$
|
3,527
|
|
|
|
|
|
|
$
|
5,400
|
|
|
|
|
|
83
Market-Based Restricted Common Shares
During fiscal 2015, we granted an aggregate of 50,000 market-based restricted common shares to two key employees under one
of our stock-based compensation plans. Vesting of these restricted common share awards is contingent upon the price of our common shares reaching $60.00 per share and remaining at or above that price for 30 consecutive days during the five-year
period following the date of grant and the completion of a five-year service vesting period. The grant-date fair value of these restricted common shares, as determined by a Monte Carlo simulation model, was $32.06 per share. The following
assumptions were used to determine the grant-date fair value and the derived service period for these market-based restricted common shares:
|
|
|
|
|
Dividend yield
|
|
|
1.60
|
%
|
Expected volatility
|
|
|
44.00
|
%
|
Risk-free interest rate
|
|
|
1.70
|
%
|
The calculated pre-tax stock-based compensation expense was determined to be $1,603,000
and will continue to be recognized on a straight-line basis over the remaining vesting period. At May 31, 2017, 25,000 of these market-based restricted common shares were outstanding.
Performance Shares
We have awarded performance shares to certain key employees that are contingent (i.e., vest) upon achieving 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 ended or ending May 31, 2017, 2018 and 2019. 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 value of our performance shares is determined by the closing market prices of the underlying common shares at their respective grant dates 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.
The table below sets forth the performance shares we granted (at target levels) during fiscal 2017, fiscal 2016 and
fiscal 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Granted
|
|
|
67
|
|
|
|
87
|
|
|
|
61
|
|
Weighted average grant date fair value, per share
|
|
$
|
44.91
|
|
|
$
|
30.12
|
|
|
$
|
42.71
|
|
Pre-tax stock-based compensation
|
|
$
|
2,995
|
|
|
$
|
2,623
|
|
|
$
|
2,611
|
|
Note K Employee Pension Plans
We provide retirement benefits to employees mainly through defined contribution retirement plans. Eligible participants
make pre-tax contributions based on elected percentages of eligible compensation, subject to annual addition and other limitations imposed by the Internal Revenue Code and the various plans provisions. Company contributions consist of company
matching contributions, annual or monthly employer contributions and discretionary contributions, based on individual plan provisions.
We also have one defined benefit plan, The Gerstenslager Company Bargaining Unit Employees Pension Plan (the Gerstenslager Plan or defined benefit plan). The Gerstenslager
Plan is a
non-contributory
pension plan, which covers certain employees based on age and length of service. Our contributions have complied with ERISAs minimum funding requirements. Effective May 9,
2011, in connection with the formation of the ArtiFlex joint venture, the Gerstenslager Plan was frozen, which qualified as a curtailment under the applicable accounting guidance. We did not recognize a gain or loss in connection with the
curtailment of the Gerstenslager Plan.
84
The following table summarizes the components of net periodic pension cost
for the defined benefit plan and the defined contribution plans for the years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Defined benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
1,527
|
|
|
$
|
1,621
|
|
|
$
|
1,541
|
|
Actuarial (return) loss on plan assets
|
|
|
(2,224
|
)
|
|
|
1,154
|
|
|
|
(1,846
|
)
|
Net amortization and deferral
|
|
|
1,025
|
|
|
|
(2,664
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit) on defined benefit plan
|
|
|
328
|
|
|
|
111
|
|
|
|
(254
|
)
|
Defined contribution plans
|
|
|
14,542
|
|
|
|
13,300
|
|
|
|
13,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retirement plan cost
|
|
$
|
14,870
|
|
|
$
|
13,411
|
|
|
$
|
13,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following actuarial assumptions were used for our defined benefit plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
To determine benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.94
|
%
|
|
|
3.75
|
%
|
|
|
4.07
|
%
|
To determine net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.75
|
%
|
|
|
4.07
|
%
|
|
|
4.38
|
%
|
Expected long-term rate of return
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
To calculate the discount rate we used the expected cash flows of the benefit payments
and the Citigroup Pension Index. The Gerstenslager Plans expected long-term rate of return in fiscal 2017, fiscal 2016 and fiscal 2015 was based on the actual historical returns adjusted for a change in the frequency of lump-sum settlements
upon retirement. In determining our benefit obligation, we use the actuarial present value of the vested benefits to which each eligible employee is currently entitled, based on the employees expected date of separation or retirement.
The following tables provide a reconciliation of the changes in the projected benefit obligation and fair
value of plan assets and the funded status of the Gerstenslager Plan as of, and for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
41,168
|
|
|
$
|
40,227
|
|
Interest cost
|
|
|
1,527
|
|
|
|
1,621
|
|
Actuarial (gain) loss
|
|
|
(2,459
|
)
|
|
|
759
|
|
Benefits paid
|
|
|
(1,062
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
39,174
|
|
|
$
|
41,168
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value, beginning of year
|
|
$
|
25,566
|
|
|
$
|
28,159
|
|
Actual return (loss) on plan assets
|
|
|
2,224
|
|
|
|
(1,154
|
)
|
Company contributions
|
|
|
294
|
|
|
|
-
|
|
Benefits paid
|
|
|
(1,062
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
Fair value, end of year
|
|
$
|
27,022
|
|
|
$
|
25,566
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(12,152
|
)
|
|
$
|
(15,602
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
(12,152
|
)
|
|
$
|
(15,602
|
)
|
Accumulated other comprehensive loss
|
|
|
17,839
|
|
|
|
21,324
|
|
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
17,839
|
|
|
|
21,324
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,839
|
|
|
$
|
21,324
|
|
|
|
|
|
|
|
|
|
|
85
The following table shows other changes in plan assets and benefit
obligations recognized in OCI during the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Net actuarial gain (loss)
|
|
$
|
2,926
|
|
|
$
|
(3,858
|
)
|
Amortization of net loss
|
|
|
559
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
3,485
|
|
|
$
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income (loss)
|
|
$
|
3,157
|
|
|
$
|
(3,535
|
)
|
|
|
|
|
|
|
|
|
|
The estimated net loss for the defined benefit plan that will be amortized from AOCI into
net periodic pension cost during fiscal 2018 is $473,000.
Pension plan assets are required to be disclosed at
fair value in the consolidated financial statements. Fair value is defined in Note Q Fair Value Measurements. The pension plan assets fair value measurement level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table sets forth, by level within the fair value hierarchy, a summary of the defined benefit plans
assets measured at fair value on a recurring basis at May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
294
|
|
|
$
|
294
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bond Funds
|
|
|
14,613
|
|
|
|
14,613
|
|
|
|
-
|
|
|
|
-
|
|
Equity Funds
|
|
|
12,115
|
|
|
|
12,115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
27,022
|
|
|
$
|
27,022
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The following table sets forth, by level within the fair value hierarchy, a
summary of the defined benefit plans assets measured at fair value on a recurring basis at May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
340
|
|
|
$
|
340
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bond Funds
|
|
|
12,435
|
|
|
|
12,435
|
|
|
|
-
|
|
|
|
-
|
|
Equity Funds
|
|
|
12,791
|
|
|
|
12,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
25,566
|
|
|
$
|
25,566
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values of the money market, bond and equity funds held by the defined benefit plan
were determined by quoted market prices.
Plan assets for the defined benefit plan consisted principally of
the following as of the respective measurement dates:
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
|
May 31,
2016
|
|
Asset category:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
45
|
%
|
|
|
50
|
%
|
Debt securities
|
|
|
54
|
%
|
|
|
49
|
%
|
Other
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Equity securities include no employer stock. The investment policy and strategy for the
defined benefit plan is: (i) long-term in nature with liquidity requirements that are anticipated to be minimal due to the projected normal retirement date of the average employee and the current average age of participants; (ii) to earn
nominal returns, net of investment fees, equal to or in excess of the actuarial assumptions of the plan; and (iii) to include a strategic asset allocation of 60%-80% equities, including international, and 20%-40% fixed income investments. No
employer contributions are expected to be made to the defined benefit plan during fiscal 2018.
The following
estimated future benefits, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years noted:
|
|
|
|
|
(in thousands)
|
|
|
|
2018
|
|
$
|
1,076
|
|
2019
|
|
$
|
1,145
|
|
2020
|
|
$
|
1,187
|
|
2021
|
|
$
|
1,268
|
|
2022
|
|
$
|
1,398
|
|
2023-2027
|
|
$
|
8,751
|
|
Commercial law requires us to pay severance and service benefits to employees at our
Austrian Pressure Cylinders location. Severance benefits must be paid to all employees hired before December 31, 2002. Employees hired after that date are covered under a governmental plan that requires us to pay benefits as a percentage of
compensation (included in payroll tax withholdings). Service benefits are based on a percentage of compensation and years of service. The accrued liability for these unfunded plans was $6,149,000 and $5,939,000 at May 31, 2017 and 2016,
respectively, and was included in other liabilities on the consolidated balance sheets. Net periodic pension cost for these plans was $554,000, $617,000, and $718,000, for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The assumed salary
rate increase was 2.75%, 2.75%, and 3.0% for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The discount rate at May 31, 2017, 2016 and 2015 was 1.60%, 1.75%, and 1.60%, respectively. Each discount rate was based on a published
corporate bond rate with a term approximating the estimated benefit payment cash flows and is consistent with European and Austrian regulations.
87
Note L Income Taxes
Earnings before income taxes for the fiscal years ended May 31 include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States based operations
|
|
$
|
266,222
|
|
|
$
|
180,467
|
|
|
$
|
104,732
|
|
Non United States based operations
|
|
|
30,905
|
|
|
|
36,148
|
|
|
|
8,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
297,127
|
|
|
|
216,615
|
|
|
|
113,028
|
|
Less: Net earnings attributable to noncontrolling interests*
|
|
|
13,422
|
|
|
|
13,913
|
|
|
|
10,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes attributable to controlling interest
|
|
$
|
283,705
|
|
|
$
|
202,702
|
|
|
$
|
102,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Net earnings attributable to noncontrolling interests are not taxable to Worthington.
|
Significant components of income tax expense (benefit) for the fiscal years ended May 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
50,200
|
|
|
$
|
42,837
|
|
|
$
|
57,511
|
|
State and local
|
|
|
2,954
|
|
|
|
2,157
|
|
|
|
2,731
|
|
Foreign
|
|
|
7,593
|
|
|
|
6,639
|
|
|
|
5,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,747
|
|
|
|
51,633
|
|
|
|
65,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
18,177
|
|
|
|
7,584
|
|
|
|
(37,839
|
)
|
State and local
|
|
|
476
|
|
|
|
934
|
|
|
|
(754
|
)
|
Foreign
|
|
|
(210
|
)
|
|
|
(1,164
|
)
|
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,443
|
|
|
|
7,354
|
|
|
|
(39,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,190
|
|
|
$
|
58,987
|
|
|
$
|
25,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the adoption of amended accounting guidance related to the accounting for
share-based payments in fiscal 2016, as described in Note A Summary of Significant Accounting Policies Recently Adopted Accounting Standards, no tax benefits related to stock-based compensation were credited to additional
paid-in capital in fiscal 2017 or fiscal 2016. The tax benefit related to stock-based compensation that was credited to additional paid-in capital was $6,179,000 for fiscal 2015. The tax benefit related to the purchase of noncontrolling interest in
dHybrid credited to additional paid-in capital was $539,000 for fiscal 2017. Tax benefits (expense) related to defined benefit pension liability that were credited to (deducted from) OCI were $(1,158,000), $1,175,000, and $1,914,000 for fiscal 2017,
fiscal 2016 and fiscal 2015, respectively. Tax benefits (expenses) related to cash flow hedges that were credited to (deducted from) OCI were $1,700,000, $(13,316,000), and $6,952,000 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
88
A reconciliation of the 35% federal statutory tax rate to total tax
provision follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net of federal tax benefit
|
|
|
1.8
|
|
|
|
2.6
|
|
|
|
3.0
|
|
Change in state and local valuation allowances
|
|
|
(0.3
|
)
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
Non-U.S. income taxes at other than 35%
|
|
|
(2.1
|
)
|
|
|
(3.5
|
)
|
|
|
(0.7
|
)
|
Change in Non-U.S. valuation allowances
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
1.2
|
|
Qualified production activities deduction
|
|
|
(1.9
|
)
|
|
|
(2.2
|
)
|
|
|
(5.9
|
)
|
Research & development credits
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Benefit related to foreign tax credits
|
|
|
(0.5
|
)
|
|
|
-
|
|
|
|
(5.3
|
)
|
Excess benefit related to share-based payment awards
|
|
|
(5.7
|
)
|
|
|
(1.6
|
)
|
|
|
-
|
|
Other
|
|
|
1.0
|
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate attributable to controlling interest
|
|
|
27.9
|
%
|
|
|
29.1
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above effective tax rate attributable to controlling interest excludes any impact
from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. The effective tax rates upon inclusion of net earnings attributable to noncontrolling interests were 26.7%, 27.2% and 22.8% for
fiscal 2017, fiscal 2016 and fiscal 2015, respectively. 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 TWBs U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWBs U.S. operations are taxed directly based on the earnings attributable to them. The
tax expense of Worthington Aritas (a foreign corporation), and TWBs wholly-owned foreign corporations, is reported in our consolidated tax expense.
Under applicable accounting guidance, a tax benefit may be recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Any tax benefits recognized in our financial statements from such a position were measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The total amount
of unrecognized tax benefits were $2,975,000, $2,827,000, and $3,530,000 as of May 31, 2017, 2016 and 2015, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate attributable to
controlling interest was $2,225,000 as of May 31, 2017. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. Accrued amounts of
interest and penalties related to unrecognized tax benefits are recognized as part of income tax expense within our consolidated statements of earnings. As of May 31, 2017, 2016 and 2015, we had accrued liabilities of $307,000, $538,000 and
$947,000, respectively, for interest and penalties related to unrecognized tax benefits.
A tabular
reconciliation of unrecognized tax benefits follows:
|
|
|
|
|
(In thousands)
|
|
|
|
Balance at May 31, 2016
|
|
$
|
2,827
|
|
Decreases tax positions taken in prior years
|
|
|
(206
|
)
|
Increases current tax positions
|
|
|
617
|
|
Settlements
|
|
|
(227
|
)
|
Lapse of statutes of limitations
|
|
|
(36
|
)
|
|
|
|
|
|
Balance at May 31, 2017
|
|
$
|
2,975
|
|
89
Approximately $673,000 of the liability for unrecognized tax benefits is
expected to be settled in the next twelve months due to the expiration of statutes of limitations in various tax jurisdictions and as a result of expected settlements with various tax jurisdictions. While it is expected that the amount of
unrecognized tax benefits will change in the next twelve months, any change is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
The following is a summary of the tax years open to examination by major tax jurisdiction:
U.S. Federal 2014 and forward
U.S. State and Local 2013 and forward
Austria 2013 and forward
Canada 2013 and forward
Mexico 2011 and
forward
Earnings before income taxes attributable to foreign sources for fiscal 2017, fiscal 2016 and fiscal
2015 were as noted above. As of May 31, 2017, and based on the tax laws in effect at that time, it remains our intention to continue to indefinitely reinvest our undistributed foreign earnings, except for the foreign earnings of our TWB joint
venture. Accordingly, no deferred tax liability has been recorded for our foreign earnings, except those that pertain to TWB. Excluding TWB, the undistributed earnings of our foreign subsidiaries at May 31, 2017 were approximately $241,000,000.
If such earnings were not permanently reinvested, a deferred tax liability of approximately $12,000,000 would have been required.
90
The components of our deferred tax assets and liabilities as of May 31
were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
2,157
|
|
|
$
|
2,786
|
|
Inventories
|
|
|
6,624
|
|
|
|
6,418
|
|
Accrued expenses
|
|
|
30,065
|
|
|
|
34,035
|
|
Net operating loss carry forwards
|
|
|
13,256
|
|
|
|
12,756
|
|
Tax credit carry forwards
|
|
|
3,206
|
|
|
|
3,127
|
|
Stock-based compensation
|
|
|
17,668
|
|
|
|
22,452
|
|
Other
|
|
|
205
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
73,181
|
|
|
|
81,784
|
|
Valuation allowance for deferred tax assets
|
|
|
(12,987
|
)
|
|
|
(11,796
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
60,194
|
|
|
|
69,988
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(42,599
|
)
|
|
|
(35,521
|
)
|
Investment in affiliated companies, principally due to undistributed earnings
|
|
|
(46,001
|
)
|
|
|
(42,967
|
)
|
Derivative contracts
|
|
|
(1,745
|
)
|
|
|
(6,395
|
)
|
Other
|
|
|
(4,149
|
)
|
|
|
(2,484
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(94,494
|
)
|
|
|
(87,367
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(34,300
|
)
|
|
$
|
(17,379
|
)
|
|
|
|
|
|
|
|
|
|
During fiscal 2016, the Company adopted amended accounting guidance that requires all
deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The above net deferred tax liability amounts are classified in the consolidated balance sheets as noncurrent liabilities as of May 31, 2017 and
May 31, 2016. At May 31, 2017, we had tax benefits for state net operating loss carry forwards of $8,470,000 that expire from fiscal 2018 to the fiscal year ending May 31, 2037, tax benefits for foreign net operating loss carry
forwards of $4,786,000 that expire from fiscal 2018 to the fiscal year ending May 31, 2036, and a tax benefit for foreign income tax credit carry forwards of $3,206,000, that expires in the fiscal year ending May 31, 2025.
The valuation allowance for deferred tax assets of $12,987,000 at May 31, 2017 is associated primarily with the net
operating loss carry forwards. The valuation allowance includes $8,548,000 for state and $4,439,000 for foreign deferred tax assets. The majority of the state valuation allowance relates to our facility in Decatur, Alabama. The foreign valuation
allowance relates to the Companys operations in Turkey. Based on our history of profitability, the scheduled reversal of deferred tax liabilities, and taxable income projections, we have determined that it is more likely than not that the
remaining deferred tax assets are otherwise realizable.
91
Note M Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the fiscal years ended
May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest income available to common shareholders
|
|
$
|
204,515
|
|
|
$
|
143,715
|
|
|
$
|
76,785
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to controlling interest weighted average common
shares
|
|
|
62,443
|
|
|
|
62,469
|
|
|
|
66,309
|
|
Effect of dilutive securities
|
|
|
2,431
|
|
|
|
2,286
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share attributable to controlling interest adjusted weighted average common
shares
|
|
|
64,874
|
|
|
|
64,755
|
|
|
|
68,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest
|
|
$
|
3.28
|
|
|
$
|
2.30
|
|
|
$
|
1.16
|
|
Diluted earnings per share attributable to controlling interest
|
|
|
3.15
|
|
|
|
2.22
|
|
|
|
1.12
|
|
Stock options covering 100,048, 326,585, and 97,798 common shares for fiscal 2017, fiscal
2016 and fiscal 2015, respectively, have been excluded from the computation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive for those periods.
Note N Segment Data
Our operations are managed principally on a products and services basis and include three reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs, each of which is comprised
of a similar group of products and services. Factors used to identify reportable business segments include the nature of the products and services provided by each business, the management reporting structure, similarity of economic characteristics
and certain quantitative measures, as prescribed by authoritative guidance. A discussion of each of our reportable business segments is outlined below.
Steel Processing
: The Steel Processing reportable segment consists of the Worthington Steel business unit and Worthington Steelpac Systems, LLC (Packaging
Solutions), which designs and manufactures reusable custom steel platforms, racks and pallets for supporting, protecting and handling products throughout the shipping process. Worthington Steel also includes three consolidated joint ventures:
Spartan, TWB and WSP. Spartan operates a cold-rolled, hot-dipped galvanizing line and TWB operates a laser welded blanking business. WSP serves primarily as a toll processor for U.S. Steel and others. Its services include slitting, blanking,
cutting-to-length, laser blanking, laser welding, tension leveling and warehousing. Worthington Steel is an intermediate processor of flat-rolled steel. This operating segments processing capabilities include cold reducing, configured
blanking, coil fed laser blanking, cutting-to-length, dry-lube, hot-dipped galvanizing, hydrogen annealing, laser welding, pickling, slitting, oscillate slitting, temper rolling, tension leveling, and non-metallic coating, including acrylic and
paint coating. Worthington Steel sells to customers principally in the aerospace, agricultural, appliance, automotive, construction, container, hardware, HVAC, lawn and garden, leisure and recreation, office furniture and office equipment markets.
Worthington Steel also toll processes steel for steel mills, large end-users, service centers and other processors. Toll processing is different from typical steel processing in that the mill, end-user or other party retains title to the steel and
has the responsibility for selling the end product. The percentage of our consolidated net sales generated by Steel Processing was approximately 69%, 65% and 63%, in fiscal 2017, fiscal 2016 and fiscal 2015, respectively
Pressure Cylinders
: The Pressure Cylinders reportable segment consists of the Worthington
Cylinders business unit and the Companys consolidated joint venture in Turkey, Worthington Aritas. Worthington Aritas is a manufacturer of cryogenic pressure vessels for LNG and other gas storage applications. The percentage of our
consolidated net sales generated by Pressure Cylinders was approximately 28%, 30% and 30% in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
92
Pressure Cylinders manufactures and sells filled and unfilled pressure
cylinders, tanks, hand torches, and oil and gas equipment along with various accessories and related products for diversified end-use market applications. The following is a description of these markets:
|
|
|
Industrial Products: This market sector includes high pressure and acetylene cylinders for industrial gases, refrigerant and
certain propane gas cylinders, hand torch cylinders and joining products such as solder and brazing rods, cryogenic equipment, and systems and services for handling liquid gasses, and other specialty products. Cylinders in this market sector are
generally sold to gas producers, cylinder exchangers and industrial distributors. Industrial cylinders hold fuel for uses such as cutting, brazing and soldering, semiconductor production, and beverage delivery. Refrigerant gas cylinders are used to
hold refrigerant gases for commercial, residential and automotive air conditioning and refrigeration systems. LPG cylinders hold fuel for barbeque grills, recreational vehicle equipment, residential and light commercial heating systems,
industrial forklifts and commercial/residential cooking (the latter, generally outside North America). Cryogenic equipment and systems include LNG systems for marine and mining applications, liquid nitrogen storage freezers and shipping containers
for organic specimens in healthcare markets, and tanks, trailers, and regasification plants for liquefied nitrogen, oxygen, argon, hydrogen, and natural gas. Specialty products include a variety of fire suppression and chemical tanks.
|
|
|
|
Consumer Products: This market sector includes propane-filled cylinders for torches, camping stoves and other applications,
hand held torches and accessories, and Balloon Time
®
helium-filled balloon kits. These products are sold
primarily to mass merchandisers and distributors.
|
|
|
|
Alternative Fuels: This market sector includes composite and steel cylinders used to hold CNG and hydrogen for automobiles,
buses, and light-duty trucks, and to hold propane/autogas for automobiles and light- and medium-duty trucks, as well as CNG fuel systems for heavy duty, refuse and other trucks.
|
|
|
|
Oil & Gas Equipment: This market sector includes steel and fiberglass storage tanks, separation equipment, controls
and other products primarily used in the energy markets, including oil and gas and nuclear. This market sector also includes hoists and other marine products which are used principally in shipyard lift systems. This market sector also leverages its
manufacturing competencies to produce pressure vessels, atmospheric tanks, controls and various custom machined components for other industrial and agricultural end markets.
|
Engineered Cabs:
The Engineered Cabs reportable segment consists of the Worthington
Industries Engineered Cabs business unit, a non-captive designer and manufacturer of high-quality, custom-engineered open and enclosed cabs and operator stations and custom fabrications for heavy mobile equipment used primarily in the agricultural,
construction, forestry, military and mining industries. Engineered Cabs product design, engineering support and broad manufacturing capabilities enable it to produce cabs and structures used in products ranging from small utility
equipment to large earthmovers.
Other:
The Other category includes the
Worthington Energy Innovations operating segment, as it does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in Other, including costs
associated with our captive insurance company. The Other category also includes the results of our former Construction Services operating segment, on a historical basis, through May 31, 2016.
Worthington Energy Innovations:
WEI is a 75%-owned consolidated joint venture with Tom E.
Kiser (20%) and Stonehenge Structured Finance Partners, LLC (5%) (together referred to as WEI Partners), with offices in Fremont and Columbus, Ohio. WEI is an Energy Services Company that develops cost-effective energy
solutions for entities in North America and Asia. Once these solutions are implemented, WEI monitors, verifies and guarantees these energy saving solutions.
93
The accounting policies of the reportable business segments and other
operating segments are described in Note A Summary of Significant Accounting Policies. We evaluate operating segment performance based on operating income (loss). Inter-segment sales are not material.
The following table presents summarized financial information for our reportable business segments as of, and for the
fiscal years ended, May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
2,074,869
|
|
|
$
|
1,843,661
|
|
|
$
|
2,145,744
|
|
Pressure Cylinders
|
|
|
829,846
|
|
|
|
844,898
|
|
|
|
1,001,402
|
|
Engineered Cabs
|
|
|
101,388
|
|
|
|
121,946
|
|
|
|
192,953
|
|
Other
|
|
|
8,005
|
|
|
|
9,209
|
|
|
|
44,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
3,014,108
|
|
|
$
|
2,819,714
|
|
|
$
|
3,384,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
170,481
|
|
|
$
|
112,001
|
|
|
$
|
108,707
|
|
Pressure Cylinders
|
|
|
54,098
|
|
|
|
28,375
|
|
|
|
58,113
|
|
Engineered Cabs
|
|
|
(7,685
|
)
|
|
|
(19,331
|
)
|
|
|
(97,260
|
)
|
Other
|
|
|
(3,773
|
)
|
|
|
1,007
|
|
|
|
(9,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
213,121
|
|
|
$
|
122,052
|
|
|
$
|
60,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
42,861
|
|
|
$
|
38,523
|
|
|
$
|
34,526
|
|
Pressure Cylinders
|
|
|
31,052
|
|
|
|
32,403
|
|
|
|
34,953
|
|
Engineered Cabs
|
|
|
5,197
|
|
|
|
6,205
|
|
|
|
10,184
|
|
Other
|
|
|
7,683
|
|
|
|
7,568
|
|
|
|
5,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
86,793
|
|
|
$
|
84,699
|
|
|
$
|
85,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,050
|
|
Pressure Cylinders
|
|
|
-
|
|
|
|
22,962
|
|
|
|
11,911
|
|
Engineered Cabs
|
|
|
-
|
|
|
|
3,000
|
|
|
|
83,989
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of goodwill and long-lived assets
|
|
$
|
-
|
|
|
$
|
25,962
|
|
|
$
|
100,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
1,828
|
|
|
$
|
4,110
|
|
|
$
|
72
|
|
Pressure Cylinders
|
|
|
3,411
|
|
|
|
392
|
|
|
|
6,408
|
|
Engineered Cabs
|
|
|
1,219
|
|
|
|
3,570
|
|
|
|
(332
|
)
|
Other
|
|
|
(47
|
)
|
|
|
(895
|
)
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other expense
|
|
$
|
6,411
|
|
|
$
|
7,177
|
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
882,863
|
|
|
$
|
819,853
|
|
|
$
|
829,116
|
|
Pressure Cylinders
|
|
|
766,611
|
|
|
|
787,786
|
|
|
|
804,799
|
|
Engineered Cabs
|
|
|
62,141
|
|
|
|
75,124
|
|
|
|
94,506
|
|
Other
|
|
|
613,729
|
|
|
|
378,501
|
|
|
|
353,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,325,344
|
|
|
$
|
2,061,264
|
|
|
$
|
2,082,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
40,775
|
|
|
$
|
42,063
|
|
|
$
|
34,546
|
|
Pressure Cylinders
|
|
|
24,798
|
|
|
|
29,916
|
|
|
|
35,872
|
|
Engineered Cabs
|
|
|
755
|
|
|
|
6,945
|
|
|
|
8,951
|
|
Other
|
|
|
2,058
|
|
|
|
18,112
|
|
|
|
16,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
68,386
|
|
|
$
|
97,036
|
|
|
$
|
96,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
The following table presents net sales by geographic region for the fiscal
years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
2,805,182
|
|
|
$
|
2,662,196
|
|
|
$
|
3,239,123
|
|
International
|
|
|
208,926
|
|
|
|
157,518
|
|
|
|
145,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,014,108
|
|
|
$
|
2,819,714
|
|
|
$
|
3,384,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents property, plant and equipment, net, by geographic region as of May 31:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
North America
|
|
$
|
501,776
|
|
|
$
|
515,263
|
|
International
|
|
|
68,713
|
|
|
|
67,575
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
570,489
|
|
|
$
|
582,838
|
|
|
|
|
|
|
|
|
|
|
Note O Acquisitions
Worthington Specialty Processing
Effective March 1,
2016, the Company reached an agreement with U.S. Steel, its partner in the WSP joint venture, whereby the Company appoints a majority of the WSP Board of Directors, giving the Company effective control over the operations of WSP. The ownership
percentages in WSP remained unchanged at 51% Worthington and 49% U.S. Steel. This transaction was accounted for as a step acquisition, which required that the Company re-measure its previously held 51% ownership interest in WSP to fair value and
record the difference between fair value and carrying value as a gain in our consolidated statement of earnings. The re-measurement to fair value resulted in a non-cash, pre-tax gain of $6,877,000, which is included in miscellaneous income, net in
our consolidated statement of earnings for fiscal 2016. The fair value of the Companys previously held interest in WSP was estimated to be $32,375,000 and was derived using an income approach. The acquired assets became part of our Steel
Processing operating segment upon closing.
The assets acquired and liabilities assumed were recognized at
their acquisition-date fair values. In connection with the acquisition of WSP, we identified and valued the following identifiable intangible assets:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Useful Life
(Years)
|
|
Category
|
|
|
Customer relationships
|
|
$
|
3,300
|
|
|
|
6
|
|
Trade name
|
|
|
1,900
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of the business includes the fair values of other assets that were
not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The fair value of the business also includes a going-concern element that represents our ability to earn a higher rate of return
on this group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
95
The following table summarizes the fair value assigned to the assets
acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
(in thousands)
|
|
|
|
Cash
|
|
$
|
6,902
|
|
Accounts receivable
|
|
|
10,233
|
|
Inventories
|
|
|
3,349
|
|
Prepaid expense and other
|
|
|
809
|
|
Intangible assets
|
|
|
5,200
|
|
Other assets
|
|
|
2,608
|
|
Property, plant and equipment
|
|
|
38,657
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
67,758
|
|
Accounts payable
|
|
|
(6,963
|
)
|
Accrued liabilities
|
|
|
(1,728
|
)
|
|
|
|
|
|
Net identifiable assets
|
|
|
59,067
|
|
Goodwill
|
|
|
1,312
|
|
|
|
|
|
|
Net assets
|
|
|
60,379
|
|
Noncontrolling interest
|
|
|
(28,004
|
)
|
|
|
|
|
|
Total basis allocated
|
|
$
|
32,375
|
|
|
|
|
|
|
NetBraze
On January 15, 2016, the Company acquired the net assets of NetBraze, LLC, a manufacturer of brazing alloys, silver brazing filler metals, solders and fluxes. The total purchase price was $3,390,000,
including contingent consideration with an estimated fair value of $540,000. This basis was allocated among the net assets acquired at their acquisition-date fair values, with $1,565,000 to working capital and $1,825,000 to fixed assets. The
acquired assets became part of our Pressure Cylinders operating segment upon closing.
The CryoScience business of Taylor
Wharton
On December 7, 2015, the Company acquired the net assets of the CryoScience business of
Taylor Wharton (Taylor Wharton CryoScience), including a manufacturing facility in Theodore, Alabama. The Company also purchased certain intellectual property and manufacturing assets of Taylor Wharton focused on the cryogenic industrial
and LNG markets. The total purchase price was $30,584,000 after adjusting for an estimated working capital deficit of $772,000. The acquired assets became part of our Pressure Cylinders operating segment upon closing.
The assets acquired and liabilities assumed were recognized at their acquisition-date fair values, with goodwill
representing the excess of the purchase price over the fair value of the net identifiable assets acquired. In connection with the acquisition, we identified and valued the following identifiable intangible assets:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Useful
Life
(Years)
|
|
Category
|
|
|
Technology
|
|
$
|
2,800
|
|
|
|
20
|
|
Customer relationships
|
|
|
2,200
|
|
|
|
15
|
|
Other
|
|
|
260
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
5,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price includes the fair values of other assets that were not identifiable,
not separately recognizable under accounting rules (e.g., assembled workforce), or of immaterial value. The purchase price also includes a going-concern element that represents our ability to earn a higher rate of return on this group of assets than
would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
96
The following table summarizes the consideration transferred and the fair
value assigned to the assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
(in thousands)
|
|
|
|
Accounts receivable
|
|
$
|
2,367
|
|
Inventories
|
|
|
5,762
|
|
Prepaid expenses
|
|
|
208
|
|
Intangible assets
|
|
|
5,260
|
|
Property, plant and equipment
|
|
|
13,400
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
26,997
|
|
Accounts payable
|
|
|
(2,808
|
)
|
Other accrued items
|
|
|
(318
|
)
|
|
|
|
|
|
Net assets
|
|
|
23,871
|
|
Goodwill
|
|
|
6,713
|
|
|
|
|
|
|
Purchase price
|
|
|
30,584
|
|
Plus: estimated working capital deficit
|
|
|
772
|
|
|
|
|
|
|
Cash paid at closing
|
|
$
|
31,356
|
|
|
|
|
|
|
Operating results of these acquired businesses have been included in our consolidated
statements of earnings from the respective acquisition date, forward. Proforma operating results and operating results for the acquired businesses since the respective acquisition dates have not been separately disclosed because the effects were not
material, individually or in the aggregate.
Note P 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 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 to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
Foreign Currency Exchange Risk Management
We conduct business 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 exposure. Such contracts limit exposure to both
favorable and unfavorable currency exchange rate fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating currency exchange rates; however, derivative 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.
97
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 Q Fair Value Measurements 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 line in which they were recorded in the consolidated balance sheet at May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
(in thousands)
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
|
Balance Sheet
Location
|
|
|
Fair
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
7,148
|
|
|
|
Accounts payable
|
|
|
$
|
111
|
|
|
|
|
Other assets
|
|
|
|
6
|
|
|
|
Other liabilities
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,154
|
|
|
|
|
|
|
|
270
|
|
Interest rate contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
141
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
7,154
|
|
|
|
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
1,110
|
|
|
|
Accounts payable
|
|
|
$
|
570
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
571
|
|
Foreign exchange contracts
|
|
|
Receivables
|
|
|
|
62
|
|
|
|
Accounts payable
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
1,172
|
|
|
|
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Instruments
|
|
|
|
|
|
$
|
8,326
|
|
|
|
|
|
|
$
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in the table above reflect the fair value of the Companys derivative
contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $100,000 increase in receivables with a corresponding increase in accounts payable.
98
The following table summarizes the fair value of our derivative instruments
and the respective line in which they were recorded in the consolidated balance sheet at May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
(in thousands)
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
|
Balance Sheet
Location
|
|
|
Fair
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
13,224
|
|
|
|
Accounts payable
|
|
|
$
|
696
|
|
|
|
|
Other assets
|
|
|
|
3,589
|
|
|
|
Other liabilities
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,813
|
|
|
|
|
|
|
|
776
|
|
Interest rate contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
155
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
16,813
|
|
|
|
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
4,660
|
|
|
|
Accounts payable
|
|
|
$
|
761
|
|
|
|
|
Other assets
|
|
|
|
317
|
|
|
|
Other liabilities
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,977
|
|
|
|
|
|
|
|
761
|
|
Foreign exchange contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Instruments
|
|
|
|
|
|
$
|
21,790
|
|
|
|
|
|
|
$
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in the table above reflect the fair value of the Companys derivative
contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $300,000 decrease in receivables with a corresponding decrease 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 OCI 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 May 31, 2017:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity
Date
|
|
Commodity contracts
|
|
$
|
35,529
|
|
|
|
June 2017 June 2019
|
|
Interest rate contracts
|
|
|
17,203
|
|
|
|
September 2019
|
|
99
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 during fiscal 2017 and fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gain
(Loss)
Recognized
in
OCI
(Effective
Portion)
|
|
|
Location of
Gain
(Loss)
Reclassified from
Accumulated OCI
(Effective
Portion)
|
|
Gain
(Loss)
Reclassified
from
Accumulated
OCI
(Effective
Portion)
|
|
|
Location of
Gain
(Ineffective
Portion)
Excluded from
Effectiveness
Testing
|
|
|
Gain
(Ineffective
Portion)
Excluded
from
Effectiveness
Testing
|
|
For the fiscal year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
26
|
|
|
Interest expense
|
|
$
|
(211
|
)
|
|
|
Interest expense
|
|
|
$
|
-
|
|
Commodity contracts
|
|
|
7,643
|
|
|
Cost of goods sold
|
|
|
12,402
|
|
|
|
Cost of goods sold
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,669
|
|
|
|
|
$
|
12,191
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(266
|
)
|
|
Interest expense
|
|
$
|
(510
|
)
|
|
|
Interest expense
|
|
|
$
|
-
|
|
Commodity contracts
|
|
|
7,549
|
|
|
Cost of goods sold
|
|
|
(27,727
|
)
|
|
|
Cost of goods sold
|
|
|
|
-
|
|
Foreign currency contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
(4
|
)
|
|
|
Miscellaneous income, net
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,283
|
|
|
|
|
$
|
(28,241
|
)
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net amount of the gains in AOCI at May 31, 2017 expected to be
reclassified into net earnings within the succeeding twelve months is $6,166,000 (net of tax of $3,770,000). This amount was computed using the fair value of the cash flow hedges at May 31, 2017, and will change before actual reclassification
from other comprehensive income to net earnings during fiscal 2018.
Economic (Non-designated) Hedges
We enter into foreign currency contracts to manage our foreign exchange 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 May 31, 2017:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity Date(s)
|
|
Commodity contracts
|
|
$
|
25,331
|
|
|
|
June 2017 December 2018
|
|
Foreign currency contracts
|
|
|
4,676
|
|
|
|
June 2017
|
|
100
The following table summarizes the gain (loss) recognized in earnings for
economic (non-designated) derivative financial instruments during fiscal 2017 and fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized
in Earnings
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Location of Gain (Loss)
Recognized in Earnings
|
|
|
May 31,
|
|
(in thousands)
|
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
|
Cost of goods sold
|
|
|
$
|
3,749
|
|
|
$
|
(1,351
|
)
|
Foreign exchange contracts
|
|
|
Miscellaneous income, net
|
|
|
|
(553
|
)
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3,196
|
|
|
$
|
(1,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Q Fair Value Measurements
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 May 31, 2017, our financial assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Quoted
Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts (1)
|
|
$
|
-
|
|
|
$
|
8,326
|
|
|
$
|
-
|
|
|
$
|
8,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
8,326
|
|
|
$
|
-
|
|
|
$
|
8,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts (1)
|
|
$
|
-
|
|
|
$
|
1,142
|
|
|
$
|
-
|
|
|
$
|
1,142
|
|
Contingent consideration obligation (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
585
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,142
|
|
|
$
|
585
|
|
|
$
|
1,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
At May 31, 2016, our financial assets and liabilities measured at fair
value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Quoted
Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts (1)
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts (1)
|
|
$
|
-
|
|
|
$
|
2,013
|
|
|
$
|
-
|
|
|
$
|
2,013
|
|
Contingent consideration obligations (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,519
|
|
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
2,013
|
|
|
$
|
4,519
|
|
|
$
|
6,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fair value of our derivative contracts 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 P Derivative
Instruments and Hedging Activities for additional information regarding our use of derivative instruments.
|
(2)
|
The fair value of the contingent consideration obligations is determined using a probability weighted cash flow approach based on managements
projections of future cash flows of the acquired businesses. The fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements.
|
The non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables,
income taxes receivable, other assets, deferred income taxes, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued expenses, income taxes payable and other
liabilities approximate fair value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing primarily market observable (Level 2) inputs and credit risk, was $618,059,000 and
$609,245,000 at May 31, 2017 and 2016, respectively. The carrying amount of long-term debt, including current maturities, was $578,487,000 and $578,353,000 at May 31, 2017 and 2016, respectively.
102
Note R Operating Leases
We lease certain property and equipment from third parties under non-cancelable operating lease agreements. Rent expense
under operating leases was $13,519,000, $14,683,000 and $17,219,000 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Future minimum lease payments for non-cancelable operating leases having an initial or remaining term in excess of one
year at May 31, 2017, were as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
2018
|
|
$
|
9,951
|
|
2019
|
|
|
9,259
|
|
2020
|
|
|
6,605
|
|
2021
|
|
|
4,820
|
|
2022
|
|
|
3,041
|
|
Thereafter
|
|
|
6,784
|
|
|
|
|
|
|
Total
|
|
$
|
40,460
|
|
|
|
|
|
|
Note S Related Party Transactions
We purchase from, and sell to, affiliated companies certain raw materials and services at prevailing market prices. Net
sales to affiliated companies for fiscal 2017, fiscal 2016 and fiscal 2015 totaled $56,588,000, $32,496,000, and $32,277,000, respectively. Purchases from affiliated companies for fiscal 2017, fiscal 2016 and fiscal 2015 totaled $7,145,000,
$15,737,000, and $8,021,000, respectively. Accounts receivable from affiliated companies were $4,616,000 and $5,152,000 at May 31, 2017 and 2016, respectively. Accounts payable to affiliated companies were $76,000 and $107,000 at May 31,
2017 and 2016, respectively.
Note T Quarterly Results of Operations (Unaudited)
The following table summarizes the unaudited quarterly consolidated results of operations for fiscal 2017 and fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share)
|
|
Three Months Ended
|
|
Fiscal 2017
|
|
August 31
|
|
|
November 30
|
|
|
February 28
|
|
|
May 31
|
|
Net sales
|
|
$
|
737,549
|
|
|
$
|
727,780
|
|
|
$
|
703,436
|
|
|
$
|
845,343
|
|
Gross margin
|
|
|
147,282
|
|
|
|
122,803
|
|
|
|
110,990
|
|
|
|
154,830
|
|
Net earnings
|
|
|
68,536
|
|
|
|
49,867
|
|
|
|
38,951
|
|
|
|
60,583
|
|
Net earnings attributable to controlling interest
|
|
|
65,567
|
|
|
|
46,565
|
|
|
|
35,889
|
|
|
|
56,494
|
|
Earnings per share basic
|
|
$
|
1.06
|
|
|
$
|
0.75
|
|
|
$
|
0.57
|
|
|
$
|
0.90
|
|
Earnings per share diluted
|
|
$
|
1.02
|
|
|
$
|
0.72
|
|
|
$
|
0.55
|
|
|
$
|
0.87
|
|
|
|
|
|
|
Fiscal 2016
|
|
August 31
|
|
|
November 30
|
|
|
February 29
|
|
|
May 31
|
|
Net sales
|
|
$
|
758,147
|
|
|
$
|
699,816
|
|
|
$
|
647,080
|
|
|
$
|
714,671
|
|
Gross margin
|
|
|
113,016
|
|
|
|
109,179
|
|
|
|
95,923
|
|
|
|
134,475
|
|
Impairment of long-lived assets (1)
|
|
|
3,000
|
|
|
|
22,962
|
|
|
|
-
|
|
|
|
-
|
|
Net earnings (2)
|
|
|
34,995
|
|
|
|
25,752
|
|
|
|
34,143
|
|
|
|
62,738
|
|
Net earnings attributable to controlling interest (2)
|
|
|
31,968
|
|
|
|
23,376
|
|
|
|
29,847
|
|
|
|
58,523
|
|
Earnings per share basic (2)
|
|
$
|
0.50
|
|
|
$
|
0.37
|
|
|
$
|
0.48
|
|
|
$
|
0.95
|
|
Earnings per share diluted (2)
|
|
$
|
0.48
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
|
$
|
0.92
|
|
(1)
|
For additional information regarding the Companys impairment activity, refer to Note C Goodwill and Other Long-Lived
Assets
.
|
(2)
|
Amounts are presented on a revised basis due to the adoption of amended accounting guidance related to the accounting for share-based payments in
the fourth quarter of fiscal 2016. As a result of the adoption of this amended accounting guidance, net earnings and net earnings attributable to controlling interest for the three month periods ended August 31, 2015, November 30,
2015 and February 29, 2016 increased $558,000, $136,000 and $271,000, respectively, from the previously reported results.
|
103
The sum of the quarterly earnings per share data presented in the table may
not equal the annual results due to rounding and the impact of dilutive securities on the annual versus the quarterly earnings per share calculations.
Note U Subsequent Events
Effective June 1,
2017, we made certain organizational changes impacting the internal reporting and management structure of Packaging Solutions. As a result of these organizational changes, management responsibilities and internal reporting were realigned, moving
from the Steel Processing operating segment to the Engineered Cabs operating segment, where we expect to achieve synergies in design engineering and manufacturing development.
On June 2, 2017, the Company acquired AMTROL, a leading manufacturer of pressure cylinders and water system tanks
with operations in the U.S. and Europe. The total purchase price was $283,000,000 and is subject to adjustment based on closing working capital. A portion of the purchase price was used to settle certain indebtedness and other liabilities assumed by
the Company in the transaction. The acquisition was funded primarily with cash on hand.
104