Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – Basis of Presentation
The consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). Investments in unconsolidated affiliates are accounted for using the equity method. Significant intercompany accounts and transactions are eliminated.
The Company owns controlling interests in the following three joint ventures: Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), and Worthington Specialty Processing (“WSP”) (51%). These joint ventures are consolidated with the equity owned by the other joint venture members shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings and other comprehensive income (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “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, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2019 (“fiscal 2019”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2018 (“fiscal 2018”) of Worthington Industries, Inc. (the “2018 Form 10-K”).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
On June 1, 2018, the Company adopted new accounting guidance that replaces most existing revenue recognition guidance under U.S. GAAP. See “NOTE B – Revenue Recognition” for further explanation related to this adoption, including newly required disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532; 34-83875, “Disclosure Update and Simplification,” adopting amendments to certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, GAAP or changes in the information environment. In addition, the amendments expanded the disclosure requirements relating to the analysis of shareholders’ equity for interim financial statements. Under the amendments, an analysis of the changes in each caption of shareholders’ equity and noncontrolling interests presented in the balance sheet must be provided in a note or separate statement. The analysis shall present a reconciliation of the beginning balance to the ending balance of each period for which a statement of earnings is required to be filed. The final rule was effective on November 5, 2018. The Company adopted the final rule effective for the second quarter of fiscal 2019. The adoption of the final rule did not have a significant impact on the Company’s consolidated financial position or results of operations. See “NOTE J – Changes in Equity” for the newly required disclosures related to this adoption.
Recently Issued Accounting Standards
In February 2016, new accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the new accounting guidance requires that leased assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous accounting guidance. The new accounting guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings. The scoping and diagnostic phases of the implementation of this new accounting guidance are in process, including gathering, documenting and analyzing lease agreements subject to the new accounting guidance.
5
While we are in the process of evaluating the effect this
new accounting
guidance will have on the presentation of our consolidated financial statements and related disclosures, the adoption is anticipated to ha
ve a material impact on the Company’s consolidated balance sheets with the addition of right-of-use assets, offset by the associated liabilities.
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended accounting 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 amended accounting guidance will have on our
consolidated
financial position and results of operations; however, we do not expect the amended accounting guidance to have a material impact on our ongoing financial reporting.
In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended accounting guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
It is to be applied using a modified retrospective transition approach for cash flow and net investment hedges existing at the date of adoption. The presentation and disclosure guidance is only required prospectively.
Early adoption is permitted. We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
NOTE B – Revenue Recognition
Through the fiscal year ended May 31, 2018, in accordance with our historical accounting policies for revenue recognition, we recognized revenue upon transfer of title and risk of loss, or in the case of toll processing revenue, upon delivery of the goods, provided persuasive evidence of an arrangement existed, pricing was fixed or determinable and collectability was reasonably assured. Through charges to net sales, provisions were made for returns & allowances, customer rebates and sales discounts based on past experience, specific agreements, and anticipated levels of customer activity.
On June 1, 2018, we adopted new accounting guidance that replaces most existing revenue recognition accounting guidance under U.S. GAAP, Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“Topic 606”). The new accounting guidance was adopted using the modified retrospective approach as applied to customer contracts that were not complete at the date of adoption, with the cumulative effect recognized in retained earnings. Comparative financial information for reporting periods beginning prior to June 1, 2018, has not been restated and continues to be reported under the previous accounting guidance. The cumulative effect adjustment resulted from a change in the pattern of recognition for our toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, which previously were accounted for as point in time and now will be accounted for over time.
The following table outlines the cumulative effect of adopting the new revenue recognition guidance:
(in thousands)
|
May 31, 2018
(As Reported)
|
|
|
Cumulative Effect of Topic 606 Adoption
|
|
|
June 1, 2018
(As Adjusted)
|
|
Consolidated Balance Sheet
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
$
|
572,689
|
|
|
$
|
4,706
|
|
|
$
|
577,395
|
|
Total inventories
|
|
454,027
|
|
|
|
(3,452
|
)
|
|
|
450,575
|
|
Prepaid expenses and other current assets
|
|
60,134
|
|
|
|
944
|
|
|
|
61,078
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
60,188
|
|
|
|
454
|
|
|
|
60,642
|
|
Retained earnings
|
|
637,757
|
|
|
|
1,174
|
|
|
|
638,931
|
|
Noncontrolling interests
|
|
117,606
|
|
|
|
570
|
|
|
|
118,176
|
|
Under the new accounting guidance, we recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive for those goods or services, including any variable consideration
Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both net sales and cost of goods sold at the time control is transferred to the customer. Due to the short-term nature of our contracts with customers, we have elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less. When we satisfy (or partially satisfy) a performance obligation, prior to being able to invoice the customer, we recognize an unbilled receivable when the right to consideration is unconditional and a contract asset when the right to consideration is conditional. Unbilled receivables and contract assets are included in receivables and prepaid and other current assets, respectively, on
6
the consolidated balance sheets.
Additionally, we do not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. Payments from customers are generally due within 30 to 60 days of invoicing, which generally occurs upon shipme
nt or delivery of
the
goods.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that we collect from a customer, are excluded from revenue.
Certain contracts with customers include warranties associated with the delivered goods or services. These warranties are not considered to be separate performance obligations, and accordingly, we record an estimated liability for potential warranty costs as the goods or services are transferred.
With the exception of the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, we recognize revenue at the point in time the performance obligation is satisfied and control of the product is transferred to the customer upon shipment or delivery. Generally, we receive and acknowledge purchase orders from our customers, which define the quantity, pricing, payment and other applicable terms and conditions. In some cases, we receive a blanket purchase order from our customers, which includes pricing, payment and other terms and conditions, with quantities defined at the time each customer subsequently issues periodic releases against the blanket purchase order.
For the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, we recognize revenue over time. Revenue is primarily measured using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Revenues are recorded proportionally as costs are incurred. We have elected to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Certain contracts contain variable consideration, which is not constrained, and primarily include estimated sales returns, customer rebates, and sales discounts which are recorded on an expected value basis. These estimates are based on historical returns, analysis of credit memo data and other known factors. We account for rebates by recording reductions to revenue for rebates in the same period the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer. We do not exercise significant judgments in determining the timing of satisfaction of performance obligations or the transaction price.
The following tables summarize net sales by product class and by timing of revenue recognition for the three month and six month periods ended November 30, 2018:
(in thousands)
|
Reportable Segments
|
|
Three months ended November 30, 2018
|
Steel Processing
|
|
|
Pressure Cylinders
|
|
|
Engineered Cabs
|
|
|
Other
|
|
|
Total
|
|
Product class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
$
|
602,010
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
602,010
|
|
Toll
|
|
33,033
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,033
|
|
Pressure Cylinders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial products
|
|
-
|
|
|
|
152,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,018
|
|
Consumer products
|
|
-
|
|
|
|
117,194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,194
|
|
Oil & gas equipment
|
|
-
|
|
|
|
25,235
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,235
|
|
Engineered Cabs
|
|
-
|
|
|
|
-
|
|
|
|
28,729
|
|
|
|
-
|
|
|
|
28,729
|
|
Other
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
7
|
|
Total
|
$
|
635,043
|
|
|
$
|
294,447
|
|
|
$
|
28,729
|
|
|
$
|
7
|
|
|
$
|
958,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
602,010
|
|
|
$
|
276,965
|
|
|
$
|
28,729
|
|
|
$
|
7
|
|
|
$
|
907,711
|
|
Goods and services transferred over time
|
|
33,033
|
|
|
|
17,482
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,515
|
|
Total
|
$
|
635,043
|
|
|
$
|
294,447
|
|
|
$
|
28,729
|
|
|
$
|
7
|
|
|
$
|
958,226
|
|
7
(in thousands)
|
Reportable Segments
|
|
Six months ended November 30, 2018
|
Steel Processing
|
|
|
Pressure Cylinders
|
|
|
Engineered Cabs
|
|
|
Other
|
|
|
Total
|
|
Product class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
$
|
1,228,872
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,228,872
|
|
Toll
|
|
66,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,658
|
|
Pressure Cylinders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial products
|
|
-
|
|
|
|
304,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
304,865
|
|
Consumer products
|
|
-
|
|
|
|
234,017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234,017
|
|
Oil & gas equipment
|
|
-
|
|
|
|
55,918
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,918
|
|
Engineered Cabs
|
|
-
|
|
|
|
-
|
|
|
|
55,981
|
|
|
|
-
|
|
|
|
55,981
|
|
Other
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
22
|
|
Total
|
$
|
1,295,530
|
|
|
$
|
594,800
|
|
|
$
|
55,981
|
|
|
$
|
22
|
|
|
$
|
1,946,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
1,228,872
|
|
|
$
|
565,999
|
|
|
$
|
55,981
|
|
|
$
|
22
|
|
|
$
|
1,850,874
|
|
Goods and services transferred over time
|
|
66,658
|
|
|
|
28,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,459
|
|
Total
|
$
|
1,295,530
|
|
|
$
|
594,800
|
|
|
$
|
55,981
|
|
|
$
|
22
|
|
|
$
|
1,946,333
|
|
The following tables show the adjustments that would be required to be made to our fiscal 2019 consolidated financial statements
to reflect the balances that would have been recorded if we continued to follow our accounting policies under the previous revenue recognition guidance.
8
|
November 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As Currently Reported
|
|
|
Topic 606 Adjustments
|
|
|
Balances Without Adoption of Topic 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
$
|
518,006
|
|
|
$
|
(4,750
|
)
|
|
$
|
513,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
488,742
|
|
|
|
6,376
|
|
|
|
495,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
62,367
|
|
|
|
(4,556
|
)
|
|
|
57,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable
|
|
1,276
|
|
|
|
(106
|
)
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
81,001
|
|
|
|
(454
|
)
|
|
|
80,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity - controlling interest
|
|
868,672
|
|
|
|
(1,753
|
)
|
|
|
866,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
117,583
|
|
|
|
(617
|
)
|
|
|
116,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended November 30, 2018
|
|
|
Six months ended November 30, 2018
|
|
(in thousands)
|
As Currently Reported
|
|
|
Topic 606 Adjustments
|
|
|
Balances Without Adoption of Topic 606
|
|
|
As Currently Reported
|
|
|
Topic 606 Adjustments
|
|
|
Balances Without Adoption of Topic 606
|
|
Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
958,226
|
|
|
$
|
(2,793
|
)
|
|
$
|
955,433
|
|
|
$
|
1,946,333
|
|
|
$
|
(3,656
|
)
|
|
$
|
1,942,677
|
|
Cost of goods sold
|
|
837,292
|
|
|
|
2,320
|
|
|
|
839,612
|
|
|
|
1,682,402
|
|
|
|
2,924
|
|
|
|
1,685,326
|
|
Income tax expense
|
|
11,119
|
|
|
|
110
|
|
|
|
11,229
|
|
|
|
25,617
|
|
|
|
106
|
|
|
|
25,723
|
|
Net earnings
|
|
37,792
|
|
|
|
(363
|
)
|
|
|
37,429
|
|
|
|
94,750
|
|
|
|
(626
|
)
|
|
|
94,124
|
|
Net earnings attributable to noncontrolling interests
|
|
3,790
|
|
|
|
(24
|
)
|
|
|
3,766
|
|
|
|
5,806
|
|
|
|
(48
|
)
|
|
|
5,758
|
|
Net earnings attributable to controlling interest
|
|
34,002
|
|
|
|
(339
|
)
|
|
|
33,663
|
|
|
|
88,944
|
|
|
|
(578
|
)
|
|
|
88,366
|
|
NOTE C – Investments in Unconsolidated Affiliates
Investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. These include ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero Worthington”) (50%), Worthington Armstrong Venture (“WAVE”) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We received distributions from unconsolidated affiliates totaling $110,459,000 during the six months ended November 30, 2018, including $60,000,000 of one-time special distributions from WAVE, comprised of $35,000,000 related to the pending sale of the international operations and $25,000,000 in connection with a financing transaction. 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 $122,806,000 at November 30, 2018. In accordance with the applicable accounting guidance, we reclassified the negative investment balance to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if the investment balance becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any negative investment balance classified as a liability as income immediately.
We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be
9
returns of the investment and are classified as investing activitie
s in our consolidated statements of cash flows.
We received e
xcess distributions from
WAVE of
$55,201,000
during
the six months ended November 30, 2018
.
The following tables summarize combined financial information for our unconsolidated affiliates as of the dates, and for the periods presented:
|
November 30,
|
|
|
May 31,
|
|
(in thousands)
|
2018
|
|
|
2018
|
|
Cash
|
$
|
35,079
|
|
|
$
|
52,812
|
|
Other current assets
|
|
625,214
|
|
|
|
590,578
|
|
Current assets for discontinued operations
|
|
35,390
|
|
|
|
37,640
|
|
Noncurrent assets
|
|
364,305
|
|
|
|
358,927
|
|
Total assets
|
$
|
1,059,988
|
|
|
$
|
1,039,957
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
256,608
|
|
|
|
166,493
|
|
Current liabilities for discontinued operations
|
|
8,884
|
|
|
|
7,142
|
|
Short-term borrowings
|
|
38,366
|
|
|
|
26,599
|
|
Current maturities of long-term debt
|
|
8,173
|
|
|
|
23,243
|
|
Long-term debt
|
|
323,598
|
|
|
|
259,588
|
|
Other noncurrent liabilities
|
|
17,452
|
|
|
|
17,536
|
|
Equity
|
|
406,907
|
|
|
|
539,356
|
|
Total liabilities and equity
|
$
|
1,059,988
|
|
|
$
|
1,039,957
|
|
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
(in thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
$
|
480,716
|
|
|
$
|
412,617
|
|
|
$
|
979,261
|
|
|
$
|
855,241
|
|
Gross margin
|
|
75,515
|
|
|
|
71,122
|
|
|
|
179,327
|
|
|
|
157,357
|
|
Operating income
|
|
44,592
|
|
|
|
34,604
|
|
|
|
116,968
|
|
|
|
91,767
|
|
Depreciation and amortization
|
|
6,581
|
|
|
|
5,935
|
|
|
|
13,058
|
|
|
|
13,128
|
|
Interest expense
|
|
3,382
|
|
|
|
2,461
|
|
|
|
6,307
|
|
|
|
4,953
|
|
Income tax expense
|
|
3,568
|
|
|
|
1,816
|
|
|
|
8,093
|
|
|
|
3,164
|
|
Net earnings from continuing operations
|
|
36,523
|
|
|
|
31,893
|
|
|
|
101,417
|
|
|
|
82,937
|
|
Net earnings (loss) from discontinued operations
|
|
2,028
|
|
|
|
(1,703
|
)
|
|
|
3,712
|
|
|
|
(273
|
)
|
Net earnings
|
|
38,551
|
|
|
|
30,190
|
|
|
|
105,129
|
|
|
|
82,664
|
|
The amounts presented within the discontinued operations captions in the tables above reflect the international operations of our WAVE joint venture, which are being sold
as part of a broader transaction between the joint venture partner, Armstrong World Industries, Inc. (“AWI”), and Knauf Group, a family-owned manufacturer of building materials headquartered in Germany. WAVE’s portion of the total sales proceeds is expected to be approximately $90,000,000. The transaction is subject to regulatory approvals and other customary closing conditions. During the first quarter of fiscal 2019, the parties agreed to extend the date by which certain competition clearance conditions were to be satisfied per the original purchase agreement. In exchange, Knauf Group irrevocably agreed to fund the purchase price which was received by AWI in two distributions, the first on August 1, 2018, and the balance on September 15, 2018. In September 2018, we received a cash distribution of $35,000,000 from WAVE related to the pending sale of the international operations. Despite receiving the sales proceeds, there has been no change in control of the international operations, therefore, the gain or loss to be realized from this transaction has not been reflected in WAVE’s statement of earnings. We expect to receive total proceeds of approximately $45,000,000 in connection with the sale transaction.
NOTE D – Impairment of Goodwill and Long-Lived Assets
During the first quarter of fiscal 2019, changes in the facts and circumstances related to the planned sale of our
cryogenics business in Turkey, Worthington Aritas, resulted in our lowering the estimate of fair value less cost to sell to $7,000,000 which generated an impairment charge of $2,381,000. Fair value was determined using observable (Level 2) inputs.
During the second quarter of fiscal 2019, we began to explore strategic alternatives related to the cryoscience business within Pressure Cylinders, which was considered to be an impairment indicator. The required impairment test indicated that the current estimate of the undiscounted future cash flows exceeded the carrying amount of approximately $34,000,000. However, it is reasonably possible any change in the estimated future cash flows may result in an impairment.
10
NOTE
E
–
Restructuring and Other Expense
(Income),
N
et
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 income, net financial statement caption, in our consolidated statement of earnings is summarized below for the period presented:
|
|
Balance, as of
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Balance, as of
|
|
(in thousands)
|
|
May 31, 2018
|
|
|
(income)
|
|
|
Payments
|
|
|
Adjustments
|
|
|
November 30, 2018
|
|
Early retirement and severance
|
|
$
|
1,116
|
|
|
$
|
1,155
|
|
|
$
|
(1,257
|
)
|
|
$
|
(61
|
)
|
|
$
|
953
|
|
Facility exit and other costs
|
|
|
-
|
|
|
|
273
|
|
|
|
(231
|
)
|
|
|
8
|
|
|
|
50
|
|
|
|
$
|
1,116
|
|
|
|
1,428
|
|
|
$
|
(1,488
|
)
|
|
$
|
(53
|
)
|
|
$
|
1,003
|
|
Net gain on sale of assets
|
|
|
|
|
|
|
(1,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other income, net
|
|
|
|
|
|
$
|
(534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and facility exit costs in the table above resulted primarily from activities related to the ongoing consolidation of the Company’s industrial gas operations in Portugal following the acquisition of AMTROL in fiscal 2018. During the six months ended November 30, 2018, the Company also completed the sale of two oil & gas manufacturing facilities resulting in a net gain of $1,962,000. The total liability associated with our restructuring activities as of November 30, 2018 is expected to be paid in the next twelve months.
NOTE F – Contingent Liabilities and Commitments
We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, would not significantly affect our consolidated financial position or future results of operations. We also believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.
NOTE G – Guarantees
We do not have guarantees that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of November 30, 2018, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $7,881,000 at November 30, 2018. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amount has been recognized in our consolidated financial statements.
We also had in place $13,145,000 of outstanding stand-by letters of credit issued to third-party service providers at November 30, 2018. No amounts were drawn against them at November 30, 2018.
NOTE H – Debt and Receivables Securitization
We
maintain a $500,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders which matures in February 2023. Borrowings under the Credit Facility have maturities of up to one year. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime Rate or Overnight Bank Funding Rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at November 30, 2018. As discussed in “
NOTE G – Guarantees,”
we provided $13,145,000 in letters of credit for third-party beneficiaries as of November 30, 2018. While not drawn against at November 30, 2018, $450,000 of these letters of credit were issued against availability under the Credit Facility, leaving $499,550,000 available at November 30, 2018.
We also maintain a $50,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”) which matures in January 2019. We are in the process of renewing the AR Facility for a term of one year, with an anticipated closing date of January 15, 2019. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $50,000,000 of undivided ownership interests in this pool of accounts receivable to a third-party bank. We retain an undivided interest in this pool and are subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables more than 90
11
days past due, receivables offset by an allowa
nce 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, 2018
, no undivided ownership interests in
this pool of accounts receivable had been sold.
NOTE I – Other Comprehensive Income
The following table summarizes the tax effects on each component of OCI for the three months ended November 30:
|
Three months ended November 30,
|
|
|
2018
|
|
|
2017
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(6,638
|
)
|
|
$
|
-
|
|
|
$
|
(6,638
|
)
|
|
$
|
1,511
|
|
|
$
|
-
|
|
|
$
|
1,511
|
|
Pension liability adjustment
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash flow hedges
|
|
(6,066
|
)
|
|
|
1,404
|
|
|
|
(4,662
|
)
|
|
|
(3,495
|
)
|
|
|
1,285
|
|
|
|
(2,210
|
)
|
Other comprehensive loss
|
$
|
(12,704
|
)
|
|
$
|
1,404
|
|
|
$
|
(11,300
|
)
|
|
$
|
(1,984
|
)
|
|
$
|
1,285
|
|
|
$
|
(699
|
)
|
The following table summarizes the tax effects on each component of OCI for the six months ended November 30:
|
Six months ended November 30,
|
|
|
2018
|
|
|
2017
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(10,333
|
)
|
|
$
|
-
|
|
|
$
|
(10,333
|
)
|
|
$
|
17,383
|
|
|
$
|
-
|
|
|
$
|
17,383
|
|
Pension liability adjustment
|
|
-
|
|
|
|
(97
|
)
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Cash flow hedges
|
|
(8,593
|
)
|
|
|
1,961
|
|
|
|
(6,632
|
)
|
|
|
(502
|
)
|
|
|
179
|
|
|
|
(323
|
)
|
Other comprehensive income (loss)
|
$
|
(18,926
|
)
|
|
$
|
1,864
|
|
|
$
|
(17,062
|
)
|
|
$
|
16,881
|
|
|
$
|
173
|
|
|
$
|
17,054
|
|
12
NOTE
J
– Changes in Equity
The following tables summarize the changes in equity by component and in total for the periods presented:
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Loss,
|
|
|
Retained
|
|
|
|
|
|
|
controlling
|
|
|
|
|
|
(in thousands)
|
|
Capital
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Total
|
|
|
Interests
|
|
|
Total
|
|
Balance at May 31, 2018
|
|
$
|
295,592
|
|
|
$
|
(14,580
|
)
|
|
$
|
637,757
|
|
|
$
|
918,769
|
|
|
$
|
117,606
|
|
|
$
|
1,036,375
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
54,942
|
|
|
|
54,942
|
|
|
|
2,016
|
|
|
|
56,958
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
(5,745
|
)
|
|
|
-
|
|
|
|
(5,745
|
)
|
|
|
(17
|
)
|
|
|
(5,762
|
)
|
Common shares issued, net of withholding tax
|
|
|
(4,091
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,091
|
)
|
|
|
-
|
|
|
|
(4,091
|
)
|
Common shares in NQ plans
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
152
|
|
Stock-based compensation
|
|
|
4,838
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,838
|
|
|
|
-
|
|
|
|
4,838
|
|
ASC 606 transition adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,174
|
|
|
|
1,174
|
|
|
|
570
|
|
|
|
1,744
|
|
Purchases and retirement of common shares
|
|
|
(4,003
|
)
|
|
|
-
|
|
|
|
(32,849
|
)
|
|
|
(36,852
|
)
|
|
|
-
|
|
|
|
(36,852
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,668
|
)
|
|
|
(13,668
|
)
|
|
|
-
|
|
|
|
(13,668
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,320
|
)
|
|
|
(2,320
|
)
|
Balance at August 31, 2018
|
|
$
|
292,488
|
|
|
$
|
(20,325
|
)
|
|
$
|
647,356
|
|
|
$
|
919,519
|
|
|
$
|
117,855
|
|
|
$
|
1,037,374
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
34,002
|
|
|
|
34,002
|
|
|
|
3,790
|
|
|
|
37,792
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
(11,245
|
)
|
|
|
-
|
|
|
|
(11,245
|
)
|
|
|
(55
|
)
|
|
|
(11,300
|
)
|
Common shares issued, net of withholding tax
|
|
|
(658
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(658
|
)
|
|
|
-
|
|
|
|
(658
|
)
|
Common shares in NQ plans
|
|
|
306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306
|
|
|
|
-
|
|
|
|
306
|
|
Stock-based compensation
|
|
|
3,730
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,730
|
|
|
|
-
|
|
|
|
3,730
|
|
Purchases and retirement of common shares
|
|
|
(7,540
|
)
|
|
|
-
|
|
|
|
(56,041
|
)
|
|
|
(63,581
|
)
|
|
|
-
|
|
|
|
(63,581
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,401
|
)
|
|
|
(13,401
|
)
|
|
|
-
|
|
|
|
(13,401
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,007
|
)
|
|
|
(4,007
|
)
|
Balance at November 30, 2018
|
|
$
|
288,326
|
|
|
$
|
(31,570
|
)
|
|
$
|
611,916
|
|
|
$
|
868,672
|
|
|
$
|
117,583
|
|
|
$
|
986,255
|
|
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Loss,
|
|
|
Retained
|
|
|
|
|
|
|
controlling
|
|
|
|
|
|
(in thousands)
|
|
Capital
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Total
|
|
|
Interests
|
|
|
Total
|
|
Balance at May 31, 2017
|
|
$
|
303,391
|
|
|
$
|
(27,775
|
)
|
|
$
|
676,019
|
|
|
$
|
951,635
|
|
|
$
|
122,294
|
|
|
$
|
1,073,929
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
45,534
|
|
|
|
45,534
|
|
|
|
2,540
|
|
|
|
48,074
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
17,314
|
|
|
|
-
|
|
|
|
17,314
|
|
|
|
439
|
|
|
|
17,753
|
|
Common shares issued, net of withholding tax
|
|
|
(3,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,274
|
)
|
|
|
-
|
|
|
|
(3,274
|
)
|
Common shares in NQ plans
|
|
|
536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
|
|
-
|
|
|
|
536
|
|
Stock-based compensation
|
|
|
4,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,822
|
|
|
|
-
|
|
|
|
4,822
|
|
Purchases and retirement of common shares
|
|
|
(4,235
|
)
|
|
|
-
|
|
|
|
(40,841
|
)
|
|
|
(45,076
|
)
|
|
|
-
|
|
|
|
(45,076
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,317
|
)
|
|
|
(13,317
|
)
|
|
|
-
|
|
|
|
(13,317
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(720
|
)
|
|
|
(720
|
)
|
Balance at August 31, 2017
|
|
$
|
301,240
|
|
|
$
|
(10,461
|
)
|
|
$
|
667,395
|
|
|
$
|
958,174
|
|
|
$
|
124,553
|
|
|
$
|
1,082,727
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
39,403
|
|
|
|
39,403
|
|
|
|
2,219
|
|
|
|
41,622
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
(619
|
)
|
|
|
-
|
|
|
|
(619
|
)
|
|
|
(80
|
)
|
|
|
(699
|
)
|
Common shares issued, net of withholding tax
|
|
|
(722
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(722
|
)
|
|
|
-
|
|
|
|
(722
|
)
|
Common shares in NQ plans
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
350
|
|
|
|
-
|
|
|
|
350
|
|
Stock-based compensation
|
|
|
3,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,169
|
|
|
|
-
|
|
|
|
3,169
|
|
Purchases and retirement of common shares
|
|
|
(7,245
|
)
|
|
|
-
|
|
|
|
(60,203
|
)
|
|
|
(67,448
|
)
|
|
|
-
|
|
|
|
(67,448
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,020
|
)
|
|
|
(13,020
|
)
|
|
|
-
|
|
|
|
(13,020
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,196
|
)
|
|
|
(3,196
|
)
|
Balance at November 30, 2017
|
|
$
|
296,792
|
|
|
$
|
(11,080
|
)
|
|
$
|
633,575
|
|
|
$
|
919,287
|
|
|
$
|
123,496
|
|
|
$
|
1,042,783
|
|
13
Of the 6,828,855 common shares of Worthington Industries, Inc. authorized for repurchase by our Board of Directors on September 27, 2017, 4,200,000 remained available for repurchase at November 30, 2018. During the first six months of fiscal 2019, we repurchased 2,300,000 common shares for $100,433,000.
The following table summarizes the changes in accumulated other comprehensive loss for the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Pension
|
|
|
|
|
|
|
Other
|
|
|
|
Currency
|
|
|
Liability
|
|
|
Cash Flow
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Loss
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
(4,987
|
)
|
|
$
|
(16,071
|
)
|
|
$
|
6,478
|
|
|
$
|
(14,580
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(10,261
|
)
|
|
|
-
|
|
|
|
(4,530
|
)
|
|
|
(14,791
|
)
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,063
|
)
|
|
|
(4,063
|
)
|
Income taxes
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
1,961
|
|
|
|
1,864
|
|
Balance as of November 30, 2018
|
|
$
|
(15,248
|
)
|
|
$
|
(16,168
|
)
|
|
$
|
(154
|
)
|
|
$
|
(31,570
|
)
|
|
(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.”
|
NOTE K – Stock-Based Compensation
Non-Qualified Stock Options
During the six months ended November 30, 2018, we granted non-qualified stock options covering a total of 95,600 common shares under our stock-based compensation plans. The weighted average option price of $42.86 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $12.55 per share. The calculated pre-tax stock-based compensation expense for these stock options is $1,200,000 and will be recognized on a straight-line basis over the three-year vesting period, net of any forfeitures. The following assumptions were used to value these stock options:
Dividend yield
|
|
2.01% - 2.16%
|
|
Expected volatility
|
|
33.04% - 33.60%
|
|
Risk-free interest rate
|
|
2.77% - 2.96%
|
|
Expected term (years)
|
|
|
6.0
|
|
Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.
Service-Based Restricted Common Shares
During the
six months ended November 30, 2018
, we granted an aggregate of 323,925 service-based restricted common shares under our stock-based compensation plans. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the respective dates of grant, or $43.59 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares is $14,119,000 and will be recognized on a straight-line basis over the three-year service-based vesting period, net of any forfeitures.
Market-Based Restricted Common Shares
On September 28, 2018, we granted an aggregate of 225,000 restricted common shares to two key employees under our stock-based compensation plans. Vesting of these restricted common share awards is contingent upon the price of our common shares reaching $65.00 per share and remaining at or above that price for 90 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 $23.38 per share. The following assumptions were used to determine the grant-date fair value and the derived service period for these restricted common shares:
14
Divid
end yield
|
|
|
2.16
|
%
|
Expected volatility
|
|
|
33.60
|
%
|
Risk-free interest rate
|
|
|
2.96
|
%
|
The calculated pre-tax stock-based compensation expense for these restricted common shares is $5,261,000 and will be recognized on a straight-line basis over the five-year service vesting period, net of any forfeitures.
Performance Share Awards
We have awarded performance shares to certain key employees under our stock-based compensation plans. These performance shares are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the three-year periods ending May 31, 2019, 2020 and 2021. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period. The fair values of our performance shares are determined by the closing market prices of the underlying common shares at the respective grant dates of the performance shares and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the
six months ended November 30, 2018
, we granted performance share awards covering an aggregate of 58,200 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $2,494,000 and will be recognized over the three-year performance period as the performance condition is probable.
NOTE L – Income Taxes
Income tax expense for the
six
months ended November 30, 2018 and 2017 reflected estimated annual effective income tax rates of 23.4% and 30.0%, 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, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of TWB’s wholly-owned foreign corporations is reported in our consolidated tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2019 could be materially different from the forecasted rate as of November 30, 2018.
On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “TCJA”), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The TCJA lowered the U.S. corporate income tax rate from 35% to 21% in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time “deemed repatriation” of accumulated foreign earnings. We recognized a provisional income tax benefit of $38,200,000 related to the re-measurement of deferred tax assets and liabilities and a provisional income tax expense of $6,900,000 for the one-time mandatory deemed repatriation tax during fiscal 2018. During the second quarter of fiscal 2019, we finalized the accounting for the TCJA and for the six months ended November 30, 2018, we made no material adjustments to these provisional amounts.
15
NOTE
M
– Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the periods presented:
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
(in thousands, except per share amounts)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income available to common shareholders
|
$
|
34,002
|
|
|
$
|
39,403
|
|
|
$
|
88,944
|
|
|
$
|
84,937
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - weighted average common shares
|
|
57,716
|
|
|
|
61,503
|
|
|
|
58,226
|
|
|
|
61,976
|
|
Effect of dilutive securities
|
|
1,622
|
|
|
|
1,965
|
|
|
|
1,787
|
|
|
|
2,068
|
|
Denominator for diluted earnings per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - adjusted weighted average common shares
|
|
59,338
|
|
|
|
63,468
|
|
|
|
60,013
|
|
|
|
64,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest
|
$
|
0.59
|
|
|
$
|
0.64
|
|
|
$
|
1.53
|
|
|
$
|
1.37
|
|
Diluted earnings per share attributable to controlling interest
|
$
|
0.57
|
|
|
$
|
0.62
|
|
|
$
|
1.48
|
|
|
$
|
1.33
|
|
Stock options covering 223,372 and 195,774 common shares for the three months ended November 30, 2018 and 2017, respectively, and 152,256 and 76,605 common shares for the six months ended November 30, 2018 and 2017, 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.
16
NOTE
N
– Segment Operations
The following table presents summarized financial information for our reportable segments as of the dates, and for the periods presented:
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
(in thousands)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
635,043
|
|
|
$
|
538,390
|
|
|
$
|
1,295,530
|
|
|
$
|
1,081,881
|
|
Pressure Cylinders
|
|
294,447
|
|
|
|
300,862
|
|
|
|
594,800
|
|
|
|
570,673
|
|
Engineered Cabs
|
|
28,729
|
|
|
|
30,404
|
|
|
|
55,981
|
|
|
|
62,350
|
|
Other
|
|
7
|
|
|
|
1,610
|
|
|
|
22
|
|
|
|
4,599
|
|
Total net sales
|
$
|
958,226
|
|
|
$
|
871,266
|
|
|
$
|
1,946,333
|
|
|
$
|
1,719,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
25,016
|
|
|
$
|
41,130
|
|
|
$
|
64,676
|
|
|
$
|
74,002
|
|
Pressure Cylinders
|
|
14,758
|
|
|
|
24,675
|
|
|
|
29,491
|
|
|
|
35,133
|
|
Engineered Cabs
|
|
(3,371
|
)
|
|
|
(1,587
|
)
|
|
|
(7,682
|
)
|
|
|
(1,948
|
)
|
Other
|
|
(539
|
)
|
|
|
(12,159
|
)
|
|
|
290
|
|
|
|
(12,903
|
)
|
Total operating income
|
$
|
35,864
|
|
|
$
|
52,059
|
|
|
$
|
86,775
|
|
|
$
|
94,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Pressure Cylinders
|
|
-
|
|
|
|
964
|
|
|
|
2,381
|
|
|
|
964
|
|
Engineered Cabs
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
-
|
|
|
|
7,325
|
|
|
|
-
|
|
|
|
7,325
|
|
Total impairment of goodwill and long-lived assets
|
$
|
-
|
|
|
$
|
8,289
|
|
|
$
|
2,381
|
|
|
$
|
8,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
-
|
|
|
$
|
(10,335
|
)
|
|
$
|
(9
|
)
|
|
$
|
(10,056
|
)
|
Pressure Cylinders
|
|
402
|
|
|
|
488
|
|
|
|
(525
|
)
|
|
|
2,365
|
|
Engineered Cabs
|
|
-
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
Other
|
|
-
|
|
|
|
235
|
|
|
|
-
|
|
|
|
379
|
|
Total restructuring and other expense (income), net
|
$
|
402
|
|
|
$
|
(9,694
|
)
|
|
$
|
(534
|
)
|
|
$
|
(7,390
|
)
|
|
November 30,
|
|
|
May 31,
|
|
(in thousands)
|
2018
|
|
|
2018
|
|
Total assets
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
963,717
|
|
|
$
|
999,238
|
|
Pressure Cylinders
|
|
1,128,656
|
|
|
|
1,147,268
|
|
Engineered Cabs
|
|
66,590
|
|
|
|
66,456
|
|
Other
|
|
403,474
|
|
|
|
408,825
|
|
Total assets
|
$
|
2,562,437
|
|
|
$
|
2,621,787
|
|
NOTE O – Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.
Interest Rate Risk Management
– We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-
17
rate and variable-rate d
ebt 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.
Foreign Currency Exchange Rate 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 U.S. 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 lines in which they were recorded in the consolidated balance sheet at November 30, 2018:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
-
|
|
|
Accounts payable
|
|
$
|
1,560
|
|
|
|
Other assets
|
|
|
-
|
|
|
Other liabilities
|
|
|
85
|
|
Totals
|
|
|
|
$
|
-
|
|
|
|
|
$
|
1,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
890
|
|
|
Accounts payable
|
|
$
|
1,167
|
|
|
|
Other assets
|
|
|
92
|
|
|
Other liabilities
|
|
|
150
|
|
|
|
|
|
|
982
|
|
|
|
|
|
1,317
|
|
Foreign currency exchange contracts
|
|
Receivables
|
|
|
-
|
|
|
Accounts payable
|
|
|
36
|
|
Totals
|
|
|
|
$
|
982
|
|
|
|
|
$
|
1,353
|
|
Total derivative instruments
|
|
|
|
$
|
982
|
|
|
|
|
$
|
2,998
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $961,000 increase in receivables with a corresponding increase in accounts payable.
18
The following table summarizes the fair value of our derivative instruments and the respective line
s
in which they were recorded in the consolidated balance sheet at
May 31, 2018
:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
6,385
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
|
Other assets
|
|
|
68
|
|
|
Other liabilities
|
|
|
-
|
|
Totals
|
|
|
|
$
|
6,453
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
4,749
|
|
|
Accounts payable
|
|
$
|
613
|
|
|
|
Other assets
|
|
|
221
|
|
|
Other liabilities
|
|
|
158
|
|
|
|
|
|
|
4,970
|
|
|
|
|
|
771
|
|
Foreign currency exchange contracts
|
|
Receivables
|
|
|
-
|
|
|
Accounts payable
|
|
|
75
|
|
Totals
|
|
|
|
$
|
4,970
|
|
|
|
|
$
|
846
|
|
Total derivative instruments
|
|
|
|
$
|
11,423
|
|
|
|
|
$
|
846
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $351,000 increase in receivables with a corresponding increase in accounts payable.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.
The following table summarizes our cash flow hedges outstanding at November 30, 2018:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date
|
Commodity contracts
|
|
$
|
22,067
|
|
|
December 2018 - December 2019
|
19
The following table summarizes the
gain
(loss)
recognized in OCI and the gain (loss)
reclassified from AOCI into earnings for derivative instruments designated as cash flow hedges for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain (Loss)
|
|
|
Reclassified
|
|
Reclassified
|
|
|
Portion)
|
|
Portion)
|
|
|
|
Recognized
|
|
|
from
|
|
from
|
|
|
and Excluded
|
|
and Excluded
|
|
|
|
in OCI
|
|
|
AOCI
|
|
AOCI
|
|
|
from
|
|
from
|
|
|
|
(Effective
|
|
|
(Effective
|
|
(Effective
|
|
|
Effectiveness
|
|
Effectiveness
|
|
(in thousands)
|
|
Portion)
|
|
|
Portion)
|
|
Portion)
|
|
|
Testing
|
|
Testing
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended November 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
(4,499
|
)
|
|
Cost of goods sold
|
|
$
|
1,565
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
-
|
|
|
Interest expense
|
|
|
(34
|
)
|
|
Interest expense
|
|
|
-
|
|
Foreign currency exchange contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
36
|
|
|
Miscellaneous income, net
|
|
|
-
|
|
Totals
|
|
$
|
(4,499
|
)
|
|
|
|
$
|
1,567
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended November 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
(4,530
|
)
|
|
Cost of goods sold
|
|
$
|
4,108
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
-
|
|
|
Interest expense
|
|
|
(81
|
)
|
|
Interest expense
|
|
|
-
|
|
Foreign currency exchange contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
36
|
|
|
Miscellaneous income, net
|
|
|
-
|
|
Totals
|
|
$
|
(4,530
|
)
|
|
|
|
$
|
4,063
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
$
|
-
|
|
The estimated net amount of the losses recognized in AOCI at November 30, 2018 expected to be reclassified into net earnings within the succeeding twelve months is $765,000 (net of tax of $229,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2018, and will change before actual reclassification from OCI to net earnings during the fiscal years ending
May 31, 2019
and May 31, 2020.
Economic (Non-designated) Hedges
We enter into foreign currency exchange contracts to manage our foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.
20
The following table summarizes our econom
ic (non-designated) derivative instruments outstanding at
November 30, 2018
:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date(s)
|
Commodity contracts
|
|
$
|
10,513
|
|
|
December 2018 - April 2020
|
Foreign currency exchange contracts
|
|
|
5,030
|
|
|
December 2018 - May 2019
|
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
In Earnings for the
|
|
|
|
Location of Gain (Loss)
|
|
Three Months Ended November 30,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
2018
|
|
|
2017
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(737
|
)
|
|
$
|
(86
|
)
|
Foreign currency exchange contracts
|
|
Miscellaneous income, net
|
|
|
(1,183
|
)
|
|
|
19
|
|
Total
|
|
|
|
$
|
(1,920
|
)
|
|
$
|
(67
|
)
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
in Earnings for the
|
|
|
|
Location of Gain (Loss)
|
|
Six Months Ended November 30,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
2018
|
|
|
2017
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(2,934
|
)
|
|
$
|
2,248
|
|
Foreign currency exchange contracts
|
|
Miscellaneous income, net
|
|
|
(2,689
|
)
|
|
|
(189
|
)
|
Total
|
|
|
|
$
|
(5,623
|
)
|
|
$
|
2,059
|
|
The gain (loss) on the foreign currency exchange contract derivatives significantly offsets the gain (loss) on the hedged item.
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.
21
Recurring Fair Value
Measurements
At November 30, 2018, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
982
|
|
|
$
|
-
|
|
|
$
|
982
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
982
|
|
|
$
|
-
|
|
|
$
|
982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
2,998
|
|
|
$
|
-
|
|
|
$
|
2,998
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
2,998
|
|
|
$
|
-
|
|
|
$
|
2,998
|
|
At May 31, 2018, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
$
|
-
|
|
|
$
|
11,423
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
$
|
-
|
|
|
$
|
11,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
846
|
|
|
$
|
-
|
|
|
$
|
846
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
846
|
|
|
$
|
-
|
|
|
$
|
846
|
|
|
(1)
|
The fair value of our derivative instruments is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “
NOTE O – Derivative Instruments and Hedging Activities
” for additional information regarding our use of derivative instruments.
|
Non-Recurring Fair Value Measurements
At November 30, 2018, there were no assets or liabilities measured at fair value on a non-recurring basis on our consolidated balance sheet.
At May 31, 2018, our assets measured at fair value on a non-recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held for sale (1)
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
$
|
30,000
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
$
|
30,000
|
|
22
|
1)
|
During the fourth quarter of fiscal 2018, management committed to a plan to sell the Company’s cryogenics business in Turkey, Worthington Aritas, and certain underperforming oil & gas equipment assets within Pressure Cylinders. In accordance with the applicable accounting guidance, the net assets in each asset group were recorded at the lower of net book value or fair value less costs to sell. The book value of Worthington Aritas exceeded its fair market value of $9,000,000, resulting in an impairment charge of $42,422,000. The book value of the oil & gas equipment asset group also exceeded its estimated fair market value of $21,000,000, resulting in an impairment charge of $10,497,000.
|
During the first quarter of fiscal 2019, the Company completed the sale of the oil & gas equipment assets described above. In addition, the Company lowered its estimate of the fair value of Worthington Aritas to $7,000,000, resulting in an impairment charge of $2,381,000.
The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $737,341,000 and $757,069,000 at November 30, 2018 and May 31, 2018, respectively. The carrying amount of long-term debt, including current maturities, was $749,779,000 and $750,368,000 at November 30, 2018 and May 31, 2018, respectively.
NOTE Q – Subsequent Events
On December 31, 2018, the Pressure Cylinders segment sold the operating assets and real property related to its solder business to an affiliate of Lincoln Electric Holdings, Inc. (“Lincoln”), for approximately $26,500,000. In addition, the parties have entered into a purchase agreement pursuant to which Lincoln will acquire certain brazing assets from the Company, with a net book value of approximately $1,900,000. The anticipated closing of the sale of the brazing assets is February 1, 2019. The Company expects to recognize a net gain in connection with these sales transactions.
23