NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A Basis of
Presentation
The consolidated financial statements include the accounts of Worthington Industries, Inc. and
consolidated subsidiaries (collectively, we, our, Worthington, or the Company). Investments in unconsolidated affiliates are accounted for using the equity method. Significant intercompany accounts and
transactions are eliminated.
The Company owns controlling interests in the following five joint ventures: Spartan Steel
Coating, LLC (Spartan) (52%), TWB Company, L.L.C. (TWB) (55%), Worthington Aritaş Basinçli 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 consolidated statements of
comprehensive income, respectively.
These unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X
of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of
management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on
Form 10-Q,
necessary for a fair presentation of the
consolidated financial statements for these interim periods, have been included. Operating results for the three and six months ended November 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 2018 (fiscal 2018). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form
10-K
for the fiscal year
ended May 31, 2017 (fiscal 2017) of Worthington Industries, Inc. (the 2017 Form
10-K).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
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 Company adopted this amended guidance on a prospective basis effective June 1, 2017. The adoption of this
guidance did not impact our consolidated financial position or results of operations.
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 Company early adopted this amended guidance on a prospective basis effective June 1, 2017. The adoption of this
guidance did not impact our consolidated statements of cash flows or ongoing financial reporting.
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 a business. The
Company early adopted this amended guidance on a prospective basis effective September 1, 2017. The adoption of this guidance did not impact our consolidated financial position or results of operations.
5
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
Company early adopted this amended guidance on a prospective basis effective September 1, 2017. The adoption of this guidance did not impact our consolidated financial position or results of operations.
Recently Issued Accounting Standards
In May 2014, new accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The
new 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 new
guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The 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. The scoping and diagnostic phases of the implementation are largely complete and reviews of the
Companys contracts are ongoing. While we have not yet identified any material changes in the timing of revenue recognition, our evaluation is ongoing and not complete. The Company will adopt this guidance on June 1, 2018 using the
cumulative effect transition method. The Company will continue to monitor any modifications, clarifications, and interpretations by the FASB that may impact its conclusions.
In February 2016, new accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP.
Among other changes, the new guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The new guidance is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented.
We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the new guidance on our ongoing financial reporting.
In June 2016, new accounting guidance was issued related to the measurement of credit losses on financial instruments. The new
guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The new guidance is effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, however, we do not expect the new guidance to have a
material impact on our ongoing financial reporting.
In October 2016, amended accounting guidance was issued that requires
the income tax consequences of an intra-entity transfer of 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
amended 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 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 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, however, we do not expect the new guidance to have a material impact on our ongoing financial reporting.
6
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.
In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible
for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify application of hedge accounting and increase transparency of information about an entitys risk
management activities. The amended guidance is effective for fiscal years beginning after December 15, 2018, 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.
NOTE B Investments in Unconsolidated Affiliates
Investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for
using the equity method. These include ArtiFlex Manufacturing, LLC (ArtiFlex) (50%), Clarkwestern Dietrich Building Systems LLC (ClarkDietrich) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de
C.V. (Serviacero) (50%), Worthington Armstrong Venture (WAVE) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We received distributions from unconsolidated affiliates totaling $38,948,000 during the six months ended November 30,
2017. 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 $61,085,000 at November 30, 2017. In accordance
with the applicable accounting guidance, we reclassified the negative balance to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if
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 received, less distributions
received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and
are classified as investing activities in our consolidated statements of cash flows.
7
Combined financial information for our unconsolidated affiliates is summarized in
the tables below:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
November 30,
2017
|
|
|
May 31,
2017
|
|
Cash
|
|
$
|
50,389
|
|
|
$
|
55,541
|
|
Other current assets
|
|
|
553,970
|
|
|
|
559,021
|
|
Noncurrent assets
|
|
|
371,328
|
|
|
|
361,106
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
975,687
|
|
|
$
|
975,668
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
139,168
|
|
|
$
|
156,947
|
|
Short-term borrowings
|
|
|
16,539
|
|
|
|
8,172
|
|
Current maturities of long-term debt
|
|
|
5,118
|
|
|
|
5,827
|
|
Long-term debt
|
|
|
266,036
|
|
|
|
268,711
|
|
Other noncurrent liabilities
|
|
|
21,637
|
|
|
|
21,380
|
|
Equity
|
|
|
527,189
|
|
|
|
514,631
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
975,687
|
|
|
$
|
975,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
|
Six Months Ended
November 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
412,617
|
|
|
$
|
387,192
|
|
|
$
|
855,241
|
|
|
$
|
804,307
|
|
Gross margin
|
|
|
71,122
|
|
|
|
96,541
|
|
|
|
157,357
|
|
|
|
220,738
|
|
Operating income
|
|
|
34,604
|
|
|
|
67,365
|
|
|
|
91,767
|
|
|
|
161,762
|
|
Depreciation and amortization
|
|
|
5,935
|
|
|
|
6,973
|
|
|
|
13,128
|
|
|
|
13,793
|
|
Interest expense
|
|
|
2,461
|
|
|
|
2,151
|
|
|
|
4,953
|
|
|
|
4,299
|
|
Income tax expense
|
|
|
1,816
|
|
|
|
3,545
|
|
|
|
3,164
|
|
|
|
11,063
|
|
Net earnings
|
|
|
30,190
|
|
|
|
63,444
|
|
|
|
82,664
|
|
|
|
149,511
|
|
On November 20, 2017, the Company announced that the WAVE joint venture agreed to sell
its business and operations in Europe, Middle East, Africa and Asia, to Knauf Group, a family-owned manufacturer of building materials headquartered in Germany. Worthington expects to receive proceeds of approximately $45,000,000 for its 50% share
of the WAVE operations being sold. The transaction is subject to regulatory approvals and other customary closing conditions and is anticipated to close in the middle of calendar 2018. The operations being sold generated a net loss of $1,703,000 and
$273,000 during the three and six months ended November 30, 2017, respectively. Results for the three and six months ended November 30, 2017 included allocated costs of $2,263,000 related to the period covering January 1 to August 31, 2017 as a
result of a new cost-sharing agreement between the joint venture and its partners. Net assets of the business being sold were approximately $31,500,000 as of November 30, 2017. These amounts have been included in the tables presented above.
NOTE C Impairment of Goodwill and Long-Lived Assets
During the second quarter of fiscal 2018, the Company determined that indicators of impairment were present with regard to the
goodwill and intangible assets of the WEI reporting unit. As a result, these assets were written down to their estimated fair value resulting in an impairment charge of $7,325,000. During the second quarter of fiscal 2018, the Company also
identified the presence of impairment indicators with regard to vacant land at the oil & gas equipment facility in Bremen, Ohio, resulting in an impairment charge of $964,000 to write the vacant land down to its estimated fair market value.
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.
8
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 the six months ended November 30, 2017 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Beginning
Balance
|
|
|
Expense
|
|
|
Payments
|
|
|
Adjustments
|
|
|
Ending
Balance
|
|
Early retirement and severance
|
|
$
|
253
|
|
|
$
|
2,560
|
|
|
$
|
(598
|
)
|
|
$
|
-
|
|
|
$
|
2,215
|
|
Facility exit and other costs
|
|
|
536
|
|
|
|
502
|
|
|
|
(1,038
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
789
|
|
|
|
3,062
|
|
|
$
|
(1,636
|
)
|
|
$
|
-
|
|
|
$
|
2,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of assets
|
|
|
|
|
|
|
(10,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other income, net
|
|
|
|
|
|
$
|
(7,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended November 30, 2017, the following actions were taken related
to the Companys restructuring activities:
|
|
|
In connection with the acquisition of Amtrol on June 2, 2017, the Company recognized severance expense of
$2,365,000 related to corporate management positions at Amtrol that were eliminated.
|
|
|
|
In connection with the closure of the Companys stainless steel business, Precision Specialty Metals,
Inc. (PSM), the Company recognized facility exit costs of $580,000 and a net gain on disposal of assets of $10,595,000 for the sale of the legacy real estate of this business. Net proceeds were $15,874,000.
|
|
|
|
In connection with other
non-significant
restructuring activities, the
Company recognized severance expense of $195,000 and a credit to facility exit costs of $78,000. The Company also recognized a net loss on disposal of assets of $143,000.
|
The total liability associated with our restructuring activities as of November 30, 2017 is expected to be paid in the
next twelve months.
NOTE E Contingent Liabilities and Commitments
We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly
determinable at the present time, would not have a material adverse effect on our consolidated financial position or future results of operations or cash flows. We believe that environmental issues will not have a material effect on our capital
expenditures, consolidated financial position or future results of operations or cash flows.
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 November 30, 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 $8,819,000 at November 30, 2017. Based on current facts and circumstances, we have
estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amount has been recognized in our consolidated financial statements.
We also had in place $15,877,000 of outstanding
stand-by
letters of credit issued to third-party
service providers at November 30, 2017. The fair value of these guarantee instruments, based on premiums paid, was not material and no amounts were drawn against them at November 30, 2017.
NOTE G Debt and Receivables Securitization
On July 28, 2017, we issued $200,000,000 aggregate principal amount of senior unsecured notes due August 1, 2032
(the 2032 Notes). The 2032 Notes bear interest at a rate of 4.300%. The 2032 Notes were sold to the public at 99.901% of the principal amount thereof, to yield 4.309% to maturity. We used a portion of the net proceeds from the offering
to repay amounts then outstanding under our multi-year revolving credit facility and amounts then outstanding under our revolving trade accounts receivable securitization facility, both of which are described in more detail below. We entered into an
interest rate swap in June 2017, in anticipation of the issuance of the 2032 Notes. The interest rate swap had a notional amount of $150,000,000 to hedge the risk of changes in the semi-annual interest rate payments attributable to changes in the
benchmark interest rate during the several days leading up to the issuance of the 2032 Notes. Upon pricing of the 2032 Notes, the derivative instrument was settled resulting in a gain of approximately $3,098,000, which was reflected in accumulated
other comprehensive income (AOCI). Approximately $2,116,000 and $198,000 were allocated to debt issuance costs and the debt discount. The debt issuance costs and the debt discount were recorded on the consolidated balance sheet within
long-term debt as a contra-liability. The unamortized portion of the debt issuance costs and debt discount was $2,069,000 and $194,000, respectively, at November 30, 2017.
9
We 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 November 30, 2017. As discussed in NOTE F Guarantees, we provided $15,877,000 in
stand-by
letters of credit for third-party beneficiaries as of November 30, 2017. While
not drawn against at November 30, 2017, $14,495,000 of these
stand-by
letters of credit were issued against availability under the Credit Facility, leaving $485,505,000 available under the Credit Facility
at November 30, 2017.
We also maintain a $100,000,000 revolving trade accounts receivable securitization facility
(the AR Facility). The AR Facility has been available throughout fiscal 2018 to date and was available throughout fiscal 2017. The AR Facility expires in January 2018; however, we are currently in the process of renewing this agreement
and expect to renew this facility prior to its expiration. 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 November 30,
2017, no undivided ownership interests in this pool of accounts receivable had been sold.
NOTE H Other Comprehensive Income
The following table summarizes the tax effects on each component of OCI for the three months ended November 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
1,511
|
|
|
$
|
-
|
|
|
$
|
1,511
|
|
|
$
|
(7,517
|
)
|
|
$
|
-
|
|
|
$
|
(7,517
|
)
|
Pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash flow hedges
|
|
|
(3,495
|
)
|
|
|
1,285
|
|
|
|
(2,210
|
)
|
|
|
2,047
|
|
|
|
(395
|
)
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(1,984
|
)
|
|
$
|
1,285
|
|
|
$
|
(699
|
)
|
|
$
|
(5,470
|
)
|
|
$
|
(395
|
)
|
|
$
|
(5,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the tax effects on each component of OCI for the six months
ended November 30:
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
17,383
|
|
|
$
|
-
|
|
|
$
|
17,383
|
|
|
$
|
(8,182
|
)
|
|
$
|
-
|
|
|
$
|
(8,182
|
)
|
Pension liability adjustment
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash flow hedges
|
|
|
(502
|
)
|
|
|
179
|
|
|
|
(323
|
)
|
|
|
3,135
|
|
|
|
(858
|
)
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
16,881
|
|
|
$
|
173
|
|
|
$
|
17,054
|
|
|
$
|
(5,047
|
)
|
|
$
|
(858
|
)
|
|
$
|
(5,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTE I Changes in Equity
The following table summarizes the changes in equity by component and in total for the six months ended November 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Interest
|
|
|
|
|
|
|
|
(in thousands)
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss, Net of
Tax
|
|
|
Retained
Earnings
|
|
|
Total
|
|
|
Non
controlling
Interests
|
|
|
Total
|
|
Balance at May 31, 2017
|
|
$
|
303,391
|
|
|
$
|
(27,775
|
)
|
|
$
|
676,019
|
|
|
$
|
951,635
|
|
|
$
|
122,294
|
|
|
$
|
1,073,929
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
84,937
|
|
|
|
84,937
|
|
|
|
4,759
|
|
|
|
89,696
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
16,695
|
|
|
|
-
|
|
|
|
16,695
|
|
|
|
359
|
|
|
|
17,054
|
|
Common shares issued, net of withholding tax
|
|
|
(3,996
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,996
|
)
|
|
|
-
|
|
|
|
(3,996
|
)
|
Common shares in NQ plans
|
|
|
886
|
|
|
|
-
|
|
|
|
-
|
|
|
|
886
|
|
|
|
-
|
|
|
|
886
|
|
Stock-based compensation
|
|
|
7,991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,991
|
|
|
|
-
|
|
|
|
7,991
|
|
Purchases and retirement of common shares
|
|
|
(11,480
|
)
|
|
|
-
|
|
|
|
(101,044
|
)
|
|
|
(112,524
|
)
|
|
|
-
|
|
|
|
(112,524
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,337
|
)
|
|
|
(26,337
|
)
|
|
|
-
|
|
|
|
(26,337
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,916
|
)
|
|
|
(3,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2017
|
|
$
|
296,792
|
|
|
$
|
(11,080
|
)
|
|
$
|
633,575
|
|
|
$
|
919,287
|
|
|
$
|
123,496
|
|
|
$
|
1,042,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in accumulated other comprehensive loss for the six
months ended November 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
|
Pension
Liability
Adjustment
|
|
|
Cash
Flow
Hedges
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance as of May 31, 2017
|
|
$
|
(17,358
|
)
|
|
$
|
(14,819
|
)
|
|
$
|
4,402
|
|
|
$
|
(27,775
|
)
|
Other comprehensive income before reclassifications
|
|
|
17,024
|
|
|
|
-
|
|
|
|
8,912
|
|
|
|
25,936
|
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,414
|
)
|
|
|
(9,414
|
)
|
Income taxes
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
179
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 30, 2017
|
|
$
|
(334
|
)
|
|
$
|
(14,825
|
)
|
|
$
|
4,079
|
|
|
$
|
(11,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed
in NOTE O Derivative Instruments and Hedging Activities.
|
11
NOTE J Stock-Based Compensation
Non-Qualified
Stock Options
During the six months ended November 30, 2017, we granted
non-qualified
stock
options covering a total of 90,200 common shares under our stock-based compensation plans. The option price of $47.76 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options,
based on the Black-Scholes option-pricing model, calculated at the grant date, was $14.99 per share. The calculated
pre-tax
stock-based compensation expense for these stock options, after an estimate for
forfeitures, is $1,203,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:
|
|
|
|
|
Dividend yield
|
|
|
1.81
|
%
|
Expected volatility
|
|
|
36.65
|
%
|
Risk-free interest rate
|
|
|
1.98
|
%
|
Expected term (years)
|
|
|
6.0
|
|
Expected volatility is based on the historical volatility of our common shares and the
risk-free interest rate is based on the United States Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.
Service-Based Restricted Common Shares
During the six months ended November 30, 2017, we granted an aggregate of 159,700 service-based restricted common shares
under our stock-based compensation plans. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the respective dates of grant, or $48.15 per share. The calculated
pre-tax
stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $6,964,000 and will be recognized on a straight-line basis over the three-year service-based vesting
period.
Performance Share Awards
We have awarded performance shares to certain key employees under our stock-based compensation plans. These performance shares
are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the
three-year periods ending May 31, 2018, 2019 and 2020. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period.
The fair values of our performance shares are determined by the closing market prices of the underlying common shares at the respective grant dates of the performance shares and the
pre-tax
stock-based
compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the six months ended November 30, 2017, we granted
performance share awards covering an aggregate of 54,700 common shares (at target levels). The calculated
pre-tax
stock-based compensation expense for these performance shares is $2,768,000 and will be
recognized over the three-year performance period.
NOTE K Income Taxes
Income tax expense for the six months ended November 30, 2017 and 2016 reflected estimated annual effective income tax
rates of 30.0% and 28.5%, respectively. The annual effective income tax rates exclude any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. Net earnings attributable to
noncontrolling interests are primarily a result of our WSP, Spartan, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and 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. Management is required to estimate the annual effective income tax rate based upon its forecast of annual
pre-tax
income for domestic and
foreign operations. Our actual effective income tax rate for fiscal 2018 could be materially different from the forecasted rate as of November 30, 2017.
12
NOTE L Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
November 30,
|
|
|
Six Months Ended
November 30,
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest -income available to common
shareholders
|
|
$
|
39,403
|
|
|
$
|
46,565
|
|
|
$
|
84,937
|
|
|
$
|
112,132
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to controlling interestweighted
average common shares
|
|
|
61,503
|
|
|
|
62,348
|
|
|
|
61,976
|
|
|
|
62,115
|
|
Effect of dilutive securities
|
|
|
1,965
|
|
|
|
2,377
|
|
|
|
2,068
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share attributable to controlling interestadjusted
weighted average common shares
|
|
|
63,468
|
|
|
|
64,725
|
|
|
|
64,044
|
|
|
|
64,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest
|
|
$
|
0.64
|
|
|
$
|
0.75
|
|
|
$
|
1.37
|
|
|
$
|
1.81
|
|
Diluted earnings per share attributable to controlling interest
|
|
$
|
0.62
|
|
|
$
|
0.72
|
|
|
$
|
1.33
|
|
|
$
|
1.74
|
|
Stock options covering 195,774 and 110,354 common shares for the three months ended
November 30, 2017 and 2016, respectively, and 76,605 and 92,923 common shares for the six months ended November 30, 2017 and 2016, 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.
13
NOTE M Segment Operations
The following table presents summarized financial information for our reportable segments as of, and for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended November 30,
|
|
|
Six Months Ended
November 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
538,390
|
|
|
$
|
508,806
|
|
|
$
|
1,081,881
|
|
|
$
|
1,014,480
|
|
Pressure Cylinders
|
|
|
300,862
|
|
|
|
194,661
|
|
|
|
570,673
|
|
|
|
399,870
|
|
Engineered Cabs
|
|
|
30,404
|
|
|
|
22,463
|
|
|
|
62,350
|
|
|
|
48,044
|
|
Other
|
|
|
1,610
|
|
|
|
1,850
|
|
|
|
4,599
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
871,266
|
|
|
$
|
727,780
|
|
|
$
|
1,719,503
|
|
|
$
|
1,465,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
41,130
|
|
|
$
|
35,448
|
|
|
$
|
74,002
|
|
|
$
|
90,230
|
|
Pressure Cylinders
|
|
|
24,675
|
|
|
|
11,304
|
|
|
|
35,133
|
|
|
|
25,409
|
|
Engineered Cabs
|
|
|
(1,587
|
)
|
|
|
(3,381
|
)
|
|
|
(1,948
|
)
|
|
|
(5,224
|
)
|
Other
|
|
|
(12,159
|
)
|
|
|
(327
|
)
|
|
|
(12,903
|
)
|
|
|
(2,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
52,059
|
|
|
$
|
43,044
|
|
|
$
|
94,284
|
|
|
$
|
107,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Pressure Cylinders
|
|
|
964
|
|
|
|
-
|
|
|
|
964
|
|
|
|
-
|
|
Engineered Cabs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
7,325
|
|
|
|
-
|
|
|
|
7,325
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of goodwill and long-lived assets
|
|
$
|
8,289
|
|
|
$
|
-
|
|
|
$
|
8,289
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
(10,335
|
)
|
|
$
|
318
|
|
|
$
|
(10,056
|
)
|
|
$
|
1,284
|
|
Pressure Cylinders
|
|
|
488
|
|
|
|
1,963
|
|
|
|
2,365
|
|
|
|
2,109
|
|
Engineered Cabs
|
|
|
(82
|
)
|
|
|
1,004
|
|
|
|
(78
|
)
|
|
|
1,210
|
|
Other
|
|
|
235
|
|
|
|
(13
|
)
|
|
|
379
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other expense (income), net
|
|
$
|
(9,694
|
)
|
|
$
|
3,272
|
|
|
$
|
(7,390
|
)
|
|
$
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
November 30,
2017
|
|
|
May 31,
2017
|
|
Total assets
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
882,710
|
|
|
$
|
882,863
|
|
Pressure Cylinders
|
|
|
1,200,361
|
|
|
|
766,611
|
|
Engineered Cabs
|
|
|
66,957
|
|
|
|
62,141
|
|
Other
|
|
|
421,685
|
|
|
|
613,729
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,571,713
|
|
|
$
|
2,325,344
|
|
|
|
|
|
|
|
|
|
|
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 Packaging Solutions from the Steel Processing operating segment to the
Engineered Cabs operating segment. Previously reported results have not been restated and are immaterial for all periods presented.
14
NOTE N Acquisitions
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 $291,921,000 after adjusting for excess working capital and was funded primarily with cash on hand. The net assets became part of the Pressure Cylinders operating segment at closing,
with the well water and expansion tank operations aligning under the consumer products business and the refrigerant, liquid propane and industrial and specialty gas operations aligning under the industrial products business. Total
acquisition-related expenses were $3,568,000, of which $1,568,000 were incurred during fiscal 2018.
The information
included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed. The purchase price allocation is subject to further
adjustment until all pertinent information regarding the assets acquired and liabilities assumed are fully evaluated by the Company, including but not limited to, the fair value accounting, legal and tax matters, obligations, and deferred taxes.
The assets acquired and liabilities assumed were recognized at their preliminary 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
(Years)
|
|
Category
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
90,800
|
|
|
|
14-17
|
|
Trade names
|
|
|
62,200
|
|
|
|
Indefinite
|
|
Technology
|
|
|
13,000
|
|
|
|
15-16
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 not expected to be deductible for income tax purposes.
15
The following table summarizes the consideration transferred for the assets of
Amtrol and the preliminary fair value assigned to the assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Preliminary
|
|
|
Measurement
Period
Adjustments
|
|
|
Revised
Valuation
|
|
Cash
|
|
$
|
6,893
|
|
|
$
|
-
|
|
|
$
|
6,893
|
|
Accounts receivable
|
|
|
40,212
|
|
|
|
-
|
|
|
|
40,212
|
|
Inventories
|
|
|
37,249
|
|
|
|
-
|
|
|
|
37,249
|
|
Prepaid expenses
|
|
|
981
|
|
|
|
-
|
|
|
|
981
|
|
Other assets
|
|
|
2,550
|
|
|
|
-
|
|
|
|
2,550
|
|
Intangible assets
|
|
|
166,000
|
|
|
|
-
|
|
|
|
166,000
|
|
Property, plant and equipment
|
|
|
52,870
|
|
|
|
-
|
|
|
|
52,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
306,755
|
|
|
|
-
|
|
|
|
306,755
|
|
Accounts payable
|
|
|
25,945
|
|
|
|
-
|
|
|
|
25,945
|
|
Accrued liabilities
|
|
|
21,016
|
|
|
|
-
|
|
|
|
21,016
|
|
Long-term debt including current maturities
|
|
|
2,287
|
|
|
|
-
|
|
|
|
2,287
|
|
Other accrued items
|
|
|
3,993
|
|
|
|
-
|
|
|
|
3,993
|
|
Deferred income taxes, net
|
|
|
64,495
|
|
|
|
(413
|
)
|
|
|
64,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable assets
|
|
|
189,019
|
|
|
|
413
|
|
|
|
189,432
|
|
Goodwill
|
|
|
102,902
|
|
|
|
(413
|
)
|
|
|
102,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
291,921
|
|
|
$
|
-
|
|
|
$
|
291,921
|
|
Less: excess working capital
|
|
|
(523
|
)
|
|
|
-
|
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid at closing
|
|
$
|
291,398
|
|
|
$
|
-
|
|
|
$
|
291,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating results of Amtrol have been included in the Companys consolidated statements
of earnings since the date of the acquisition. During the three and six months ended November 30, 2017, Amtrol contributed net sales of $67,935,000 and $125,281,000, and operating income of $6,441,000 and $3,830,000, respectively.
The following unaudited pro forma information presents consolidated financial information as if Amtrol had been acquired at
the beginning of fiscal 2017. Depreciation and amortization expense included in the pro forma results reflect the preliminary acquisition-date fair values assigned to the definite-lived intangible assets and fixed assets of Amtrol assuming a
June 1, 2016 acquisition date. Adjustment has also been made for acquisition-related costs incurred in each period presented. Pro forma results for the three and six months ended November 30, 2017, have also been adjusted to remove the
impact of the acquisition-date fair value adjustments to inventories and accrued severance costs related to headcount reductions at Amtrol initiated during fiscal 2018, as discussed in NOTE D Restructuring and Other Expense. The
pro forma adjustments noted above have been adjusted for the applicable income tax impact. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the
acquisition had taken as of June 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
November 30,
|
|
|
Six months ended
November 30,
|
|
(in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
871,266
|
|
|
$
|
791,652
|
|
|
$
|
1,719,503
|
|
|
$
|
1,587,196
|
|
Net earnings attributable to controlling interest
|
|
$
|
39,711
|
|
|
$
|
47,469
|
|
|
$
|
89,182
|
|
|
$
|
117,826
|
|
Diluted earnings per share attributable to controlling interest
|
|
$
|
0.63
|
|
|
$
|
0.73
|
|
|
$
|
1.39
|
|
|
$
|
1.82
|
|
NOTE O Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary
risks managed through the use of derivative instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into
derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of
each period.
Interest Rate Risk Management
We are exposed to the impact of interest rate changes. Our
objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition,
we enter into interest rate swaps and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
16
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.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain
strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a
predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have
significant exposure to any one counterparty, and management believes the risk of loss is remote and, in any event, would not be material.
Refer to NOTE P Fair Value for additional information regarding the accounting treatment for our derivative
instruments, as well as how fair value is determined.
The following table summarizes the fair value of our derivative
instruments and the respective line in which they were recorded in the consolidated balance sheet at November 30, 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
|
|
|
$
|
3,721
|
|
|
|
Accounts payable
|
|
|
$
|
-
|
|
|
|
|
Other assets
|
|
|
|
649
|
|
|
|
Other liabilities
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,370
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
240
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
4,370
|
|
|
|
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
1,692
|
|
|
|
Accounts payable
|
|
|
$
|
320
|
|
|
|
|
Other assets
|
|
|
|
18
|
|
|
|
Other liabilities
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
1,710
|
|
|
|
|
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
6,080
|
|
|
|
|
|
|
$
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $292,000 increase in receivables with a corresponding increase in accounts payable.
17
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.
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 accumulated 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 November 30, 2017:
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity Date
|
Commodity contracts
|
|
$
|
22,011
|
|
|
December 2017 - June 2019
|
Interest rate contracts
|
|
|
18,212
|
|
|
September 2019
|
18
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 the three months ended November 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
Reclassified
|
|
Reclassified
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain
|
|
|
from
|
|
from
|
|
|
Portion)
|
|
Portion)
|
|
|
|
Recognized
|
|
|
Accumulated
|
|
Accumulated
|
|
|
and Excluded
|
|
and Excluded
|
|
|
|
in OCI
|
|
|
OCI
|
|
OCI
|
|
|
from
|
|
from
|
|
|
|
(Effective
|
|
|
(Effective
|
|
(Effective
|
|
|
Effectiveness
|
|
Effectiveness
|
|
(in thousands)
|
|
Portion)
|
|
|
Portion)
|
|
Portion)
|
|
|
Testing
|
|
Testing
|
|
For the three months ended November 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
2,080
|
|
|
Cost of goods sold
|
|
$
|
5,637
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
34
|
|
|
Interest expense
|
|
|
(28
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,114
|
|
|
|
|
$
|
5,609
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
7,157
|
|
|
Cost of goods sold
|
|
$
|
5,737
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
160
|
|
|
Interest expense
|
|
|
(467
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,317
|
|
|
|
|
$
|
5,270
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gain recognized in OCI and the gain reclassified from
accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the six months ended November 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
Reclassified
|
|
Reclassified
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain
|
|
|
from
|
|
from
|
|
|
Portion)
|
|
Portion)
|
|
|
|
Recognized
|
|
|
Accumulated
|
|
Accumulated
|
|
|
and Excluded
|
|
and Excluded
|
|
|
|
in OCI
|
|
|
OCI
|
|
OCI
|
|
|
from
|
|
from
|
|
|
|
(Effective
|
|
|
(Effective
|
|
(Effective
|
|
|
Effectiveness
|
|
Effectiveness
|
|
(in thousands)
|
|
Portion)
|
|
|
Portion)
|
|
Portion)
|
|
|
Testing
|
|
Testing
|
|
For the six months ended November 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
5,814
|
|
|
Cost of goods sold
|
|
$
|
9,805
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
3,098
|
|
|
Interest expense
|
|
|
(391
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
8,912
|
|
|
|
|
$
|
9,414
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
7,926
|
|
|
Cost of goods sold
|
|
$
|
5,485
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
124
|
|
|
Interest expense
|
|
|
(570
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
8,050
|
|
|
|
|
$
|
4,915
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net amount of the losses recognized in AOCI at November 30, 2017 expected
to be reclassified into net earnings within the succeeding twelve months is $3,201,000 (net of tax of $1,970,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2017, and will change before actual
reclassification from other comprehensive income to net earnings during the fiscal years ending May 31, 2018 and May 31, 2019.
19
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 November 30, 2017:
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity Date(s)
|
Commodity contracts
|
|
$
|
25,427
|
|
|
December 2017 - May 2019
|
Foreign exchange contracts
|
|
|
5,469
|
|
|
December 2017 - June 2018
|
The following table summarizes the gain (loss) recognized in earnings for economic
(non-designated)
derivative financial instruments during the three months ended November 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
|
In Earnings for the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Location of Gain (Loss)
|
|
|
November 30,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
|
Cost of goods sold
|
|
|
$
|
(86
|
)
|
|
$
|
2,003
|
|
Foreign exchange contracts
|
|
|
Miscellaneous income, net
|
|
|
|
19
|
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
(67
|
)
|
|
$
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gain recognized in earnings for economic
(non-designated)
derivative financial instruments during the six months ended November 30, 2017 and 2016:
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
|
in Earnings for the
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Location of Gain (Loss)
|
|
|
November 30,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
|
2017
|
|
|
2016
|
|
Commodity contracts
|
|
|
Cost of goods sold
|
|
|
$
|
2,248
|
|
|
$
|
4,911
|
|
Foreign exchange contracts
|
|
|
Miscellaneous income, net
|
|
|
|
(189
|
)
|
|
|
(665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
2,059
|
|
|
$
|
4,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain (loss) on the foreign currency exchange contracts derivatives significantly offsets
the gain (loss) on the hedged item.
20
NOTE P Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would
use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
|
|
|
|
|
Level 1
|
|
|
|
Observable prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2
|
|
|
|
Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.
|
|
|
|
Level 3
|
|
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
|
Recurring Fair Value Measurements
At November 30, 2017, our 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)
|
|
$
|
-
|
|
|
$
|
6,080
|
|
|
$
|
-
|
|
|
$
|
6,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
6,080
|
|
|
$
|
-
|
|
|
$
|
6,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts (1)
|
|
$
|
-
|
|
|
$
|
631
|
|
|
$
|
-
|
|
|
$
|
631
|
|
Contingent consideration obligation (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
601
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
631
|
|
|
$
|
601
|
|
|
$
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
At May 31, 2017, our 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fair value of our derivative instruments is based on the present value of the expected future cash flows
considering the risks involved, including
non-performance
risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present
value of the expected future cash flows. Refer to NOTE O Derivative Instruments and Hedging Activities for additional information regarding our use of derivative instruments.
|
(2)
|
The fair value of the contingent consideration obligation is determined using a probability weighted cash flow
approach based on managements projections of future cash flows of the acquired business. The fair value measurement was based on Level 3 inputs not observable in the market.
|
Non-Recurring
Fair Value Measurements
At November 30, 2017, our assets measured at fair value on a
non-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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used (1)
|
|
$
|
-
|
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the second quarter of fiscal 2018, the Company determined that indicators of impairment were present
with regard to the goodwill and intangible assets of the WEI reporting unit. As a result, these assets were written down to their estimated fair value of $0 resulting in an impairment charge of $7,325,000. The key assumptions that drove the fair
value calculation were projected cash flows and the discount rate.
|
During the second quarter of fiscal
2018, the Company also identified impairment indicators to be present with regard to vacant land at the oil & gas equipment facility in Bremen, Ohio, resulting in an impairment charge of $964,000 to write the land down to its estimated fair
market value of $100,000. Fair value was determined based on market prices for similar assets.
22
At May 31, 2017, there were no assets or liabilities measured at fair value
on a
non-recurring
basis on the Companys consolidated balance sheet.
The
fair value of
non-derivative
financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable,
short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of
long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $821,808,000 and $618,059,000 at November 30, 2017 and May 31, 2017, respectively. The carrying amount of
long-term debt, including current maturities, was $779,930,000 and $578,487,000 at November 30, 2017 and May 31, 2017, respectively.
NOTE Q
Subsequent Events
On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA) was enacted into
federal law. The TCJA includes significant changes to the U.S. corporate federal income tax system. Among other things, the TCJA lowers the corporate income tax rate to 21% from the current 35%, creates a territorial tax system (with a
one-time
mandatory tax on previously deferred foreign earnings), broadens the tax base and allows for immediate capital expensing of certain qualified property. While we are in the process of assessing the impact of
the TCJA on future earnings, our best estimate of the Companys ongoing effective income tax rate as a result of the TCJA is 24% beginning in fiscal 2019. Results for the full fiscal year ending May 31, 2018 will reflect only five months
of the lower federal income tax rate. In addition, the Company expects to record a
non-cash
tax benefit in the third quarter of fiscal 2018 to reflect the impact of the remeasurement of the Companys net
deferred tax liability at the lower tax rate, currently estimated to be in the range of $30,000,000 to $40,000,000. The
one-time
mandatory tax on the Companys previously deferred foreign earnings is
expected to be immaterial.
23