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.
We own controlling interests in the following five joint ventures: Spartan Steel Coating,
LLC (Spartan) (52%), TWB Company, L.L.C. (TWB) (55%), Worthington Ar
1
taş Bas
1
nçl
1
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 nine months ended February 28, 2017 are not necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 2017 (fiscal 2017). 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, 2016 (fiscal 2016) of Worthington Industries, Inc. (the 2016 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 February 2015, amended accounting guidance was issued that revised consolidation requirements in order to provide financial
statement users with a more useful presentation of an entitys economic and operational results. The amended guidance revises the consolidation requirements for limited partnerships, the considerations surrounding the primary beneficiary
determination and the consolidation of certain investment funds. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or
results of operations.
In April 2015, amended accounting guidance was issued that requires debt issuance costs related to
a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability itself. The amended guidance does not apply to
line-of-credit
arrangements. Accordingly, issuance costs related to
line-of-credit
arrangements will continue to be presented as
an asset and amortized ratably over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs totaling $2,233,000 and $2,491,000 as of February 28, 2017
and May 31, 2016, respectively, have been presented as a component of the carrying amount of long-term debt reported in our consolidated balance sheets. Fiscal 2016 amounts were previously capitalized and reported within other assets.
In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction
with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than
retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of
operations.
5
In March 2016, amended accounting guidance was issued that simplifies the
accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in
the statement of cash flows. The Company early adopted this guidance during the fourth quarter of fiscal 2016. As required for early adoption in an interim period, all adjustments have been reflected as of the beginning of fiscal 2016. Accordingly,
income tax expense for the three and nine months ended February 29, 2016 has been restated to reflect excess tax benefits associated with share-based payments totaling $271,000 and $965,000, respectively, in income tax expense, rather than in
paid-in
capital.
Recently Issued Accounting Standards
In May 2014, amended accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP.
The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was issued on several areas including
guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and implementation of guidance related to
licensing. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of either the retrospective or cumulative
effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. While we have not yet identified any material changes in the
timing of revenue recognition, our evaluation is ongoing and not complete. We plan to adopt the amended guidance in the first quarter of fiscal 2019 and expect to make a determination as to the method of adoption by the end of fiscal 2017.
In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance requires
that inventory accounted for under the
first-in,
first-out
(FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable
value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the
last-in,
first-out
(LIFO) or retail inventory methods. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated
financial position or results of operations.
In February 2016, amended accounting guidance was issued that replaces most
existing lease accounting guidance under U.S. GAAP. Among other changes, the amended guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous
guidance. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective
approach as of the beginning of the earliest period presented. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect
of the amended guidance on our ongoing financial reporting.
In March 2016, amended accounting guidance was issued
regarding derivative instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided
that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change
may be applied either prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The
amended guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended guidance is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and we have not determined the effect of the amended
guidance on our ongoing financial reporting.
6
In August 2016, amended accounting guidance was issued to clarify the proper cash
flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is
permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial
reporting.
In October 2016, amended accounting guidance was issued that requires the income tax consequences of an
intra-entity transfer 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 January 2017, amended accounting guidance was issued to clarify the definition of a business to provide additional guidance
to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
In January 2017, amended accounting guidance was issued to simplify the goodwill impairment calculation, by removing Step 2 of
the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The amended guidance is effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of
operations, and have not determined the effect on our ongoing financial reporting.
NOTE B Investments in Unconsolidated Affiliates
Our investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted
for using the equity method. These include ArtiFlex Manufacturing, LLC (ArtiFlex) (50%), Clarkwestern Dietrich Building Systems LLC (ClarkDietrich) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L.
de C.V. (Serviacero) (50%), Worthington Armstrong Venture (WAVE) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We received distributions from unconsolidated affiliates totaling $84,183,000 during the nine months ended February 28,
2017. We have received cumulative distributions from WAVE in excess of our investment balance totaling $67,722,000 at February 28, 2017. In accordance with the applicable accounting guidance, these excess distributions are reclassified 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 obvious 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 as
follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
February 28,
2017
|
|
|
May 31,
2016
|
|
Cash
|
|
$
|
62,723
|
|
|
$
|
112,122
|
|
Other current assets
|
|
|
511,798
|
|
|
|
446,796
|
|
Noncurrent assets
|
|
|
365,343
|
|
|
|
352,370
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
939,864
|
|
|
$
|
911,288
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
141,266
|
|
|
$
|
112,491
|
|
Short-term borrowings
|
|
|
6,285
|
|
|
|
11,398
|
|
Current maturities of long-term debt
|
|
|
4,207
|
|
|
|
3,297
|
|
Long-term debt
|
|
|
268,032
|
|
|
|
266,942
|
|
Other noncurrent liabilities
|
|
|
20,558
|
|
|
|
21,034
|
|
Equity
|
|
|
499,516
|
|
|
|
496,126
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
939,864
|
|
|
$
|
911,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Net sales
|
|
$
|
384,261
|
|
|
$
|
376,448
|
|
|
$
|
1,188,568
|
|
|
$
|
1,170,096
|
|
Gross margin
|
|
|
84,645
|
|
|
|
83,251
|
|
|
|
305,383
|
|
|
|
257,036
|
|
Operating income
|
|
|
55,140
|
|
|
|
54,801
|
|
|
|
216,902
|
|
|
|
171,857
|
|
Depreciation and amortization
|
|
|
6,983
|
|
|
|
7,905
|
|
|
|
20,776
|
|
|
|
24,070
|
|
Interest expense
|
|
|
2,089
|
|
|
|
2,038
|
|
|
|
6,388
|
|
|
|
6,333
|
|
Income tax expense
|
|
|
5,065
|
|
|
|
2,625
|
|
|
|
16,128
|
|
|
|
7,348
|
|
Net earnings
|
|
|
49,098
|
|
|
|
51,994
|
|
|
|
198,609
|
|
|
|
186,063
|
|
The financial results of WSP have been included in the amounts presented in the tables above
through March 1, 2016. Effective March 1, 2016, the Company obtained effective control over the operations of WSP. As a result, WSPs results have been consolidated within the financial results of Steel Processing since that date with
the minority members portion of net earnings eliminated within net earnings attributable to noncontrolling interests.
NOTE C Impairment
of Long-Lived Assets
We review the carrying value of our long-lived assets, including intangible assets with definite
useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.
Impairment testing of long-lived assets with definite useful lives involves a comparison of the sum of the undiscounted future
cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future
cash flows, then a second step is performed to determine the amount of impairment, which would be recorded as an impairment charge in our consolidated statement of earnings.
No impairment charges were recognized during the nine months ended February 28, 2017.
8
Impairment charges during the nine months ended February 29, 2016, consisted
of $3,000,000 related to the then remaining long-lived assets of the Companys Engineered Cabs facility in Florence, South Carolina, which ceased operations on September 30, 2015, and $22,962,000 for the impairment of the long-lived assets
of two oil & gas equipment facilities triggered by a significant decrease in the long-term cash flow projections of that business. For further information, refer to the consolidated financial statements and notes thereto included in the
Companys 2016 Form
10-K.
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, moving manufacturing of a product to another location, and rationalizing headcount.
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 nine months ended February 28, 2017 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Beginning
Balance
|
|
|
Expense
|
|
|
Payments
|
|
|
Adjustments
|
|
|
Ending
Balance (1)
|
|
Early retirement and severance
|
|
$
|
1,831
|
|
|
$
|
1,795
|
|
|
$
|
(3,071
|
)
|
|
$
|
58
|
|
|
$
|
613
|
|
Facility exit and other costs
|
|
|
653
|
|
|
|
3,190
|
|
|
|
(3,369
|
)
|
|
|
45
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,484
|
|
|
|
4,985
|
|
|
$
|
(6,440
|
)
|
|
$
|
103
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sale of assets
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense
|
|
|
|
|
|
$
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
The total liability as of February 28, 2017 is expected to be paid in the next twelve months.
|
During the nine months ended February 28, 2017, the following activities were taken related to the
Companys restructuring activities:
|
|
|
The Company announced certain organizational changes impacting its Pressure Cylinders operating segment,
including the consolidation of the Cryogenics business unit into the Industrial Products business unit. In connection with this matter, the Company recognized severance expense of $1,356,000 related to permanent headcount reductions.
|
|
|
|
In connection with the closure of the Companys stainless steel business, Precision Specialty Metals,
Inc. (PSM), the Company recognized $1,666,000 of facility exit costs and a credit to severance expense of $106,000.
|
|
|
|
In connection with the closure of the Engineered Cabs facility in Florence, South Carolina, the Company
recognized facility exit costs of $459,000. The Company also recognized a net loss of $101,000 related to the disposal of assets.
|
|
|
|
In connection with the consolidation of the Companys existing cryogenics facility in Istanbul, Turkey,
to its Greenfield facility in Bandirma, Turkey, the Company recognized facility exit costs of $1,113,000 and severance expense of $640,000. The consolidation is substantially complete.
|
|
|
|
The Company sold the remaining real estate of the legacy Advanced Component Technologies, Inc.
(ACT) business within Engineered Cabs for cash proceeds of $700,000, resulting in a loss of $822,000.
|
|
|
|
In connection with other
non-significant
restructuring activities, the
Company recognized a credit to severance expense of $95,000 and a credit to facility exit costs of $48,000. The Company also recognized a net loss on disposal of assets of $86,000.
|
9
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 significantly affect 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 February 28, 2017, we were party to an operating lease for an
aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $9,566,000 at February 28, 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 $15,893,000 of outstanding
stand-by
letters of credit issued to
third-party service providers at February 28, 2017. The fair value of these guarantee instruments, based on premiums paid, was not material and no amounts were drawn against them at February 28, 2017.
NOTE G Debt and Receivables Securitization
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 February 28, 2017. As
discussed in NOTE F Guarantees, we provided $15,893,000 in letters of credit for third-party beneficiaries as of February 28, 2017. While not drawn against at February 28, 2017, $13,600,000 of these letters of credit
were issued against availability under the Credit Facility, leaving $486,400,000 available under the Credit Facility at February 28, 2017.
We also maintain a $100,000,000 revolving trade accounts receivable securitization facility (the AR Facility)
which matures in January 2018. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (WRC), a wholly-owned,
consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $100,000,000 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 February 28, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
905
|
|
|
$
|
-
|
|
|
$
|
905
|
|
|
$
|
8,646
|
|
|
$
|
-
|
|
|
$
|
8,646
|
|
Pension liability adjustment
|
|
|
(117
|
)
|
|
|
82
|
|
|
|
(35
|
)
|
|
|
(90
|
)
|
|
|
-
|
|
|
|
(90
|
)
|
Cash flow hedges
|
|
|
(1,299
|
)
|
|
|
378
|
|
|
|
(921
|
)
|
|
|
8,505
|
|
|
|
(3,075
|
)
|
|
|
5,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(511
|
)
|
|
$
|
460
|
|
|
$
|
(51
|
)
|
|
$
|
17,061
|
|
|
$
|
(3,075
|
)
|
|
$
|
13,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following table summarizes the tax effects on each component of OCI for the
nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
(7,277
|
)
|
|
$
|
-
|
|
|
$
|
(7,277
|
)
|
|
$
|
1,255
|
|
|
$
|
-
|
|
|
$
|
1,255
|
|
Pension liability adjustment
|
|
|
(117
|
)
|
|
|
82
|
|
|
|
(35
|
)
|
|
|
(98
|
)
|
|
|
-
|
|
|
|
(98
|
)
|
Cash flow hedges
|
|
|
1,836
|
|
|
|
(480
|
)
|
|
|
1,356
|
|
|
|
5,938
|
|
|
|
(2,401
|
)
|
|
|
3,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(5,558
|
)
|
|
$
|
(398
|
)
|
|
$
|
(5,956
|
)
|
|
$
|
7,095
|
|
|
$
|
(2,401
|
)
|
|
$
|
4,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE I Changes in Equity
The following table provides a summary of the changes in total equity, shareholders equity attributable to controlling
interest, and equity attributable to noncontrolling interests for the nine months ended February 28, 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, 2016
|
|
$
|
298,984
|
|
|
$
|
(28,565
|
)
|
|
$
|
522,952
|
|
|
$
|
793,371
|
|
|
$
|
126,475
|
|
|
$
|
919,846
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
148,021
|
|
|
|
148,021
|
|
|
|
9,333
|
|
|
|
157,354
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
(5,821
|
)
|
|
|
-
|
|
|
|
(5,821
|
)
|
|
|
(135
|
)
|
|
|
(5,956
|
)
|
Common shares issued, net of withholding tax
|
|
|
(9,225
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,225
|
)
|
|
|
-
|
|
|
|
(9,225
|
)
|
Common shares in NQ plans
|
|
|
1,058
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,058
|
|
|
|
-
|
|
|
|
1,058
|
|
Stock-based compensation
|
|
|
10,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,599
|
|
|
|
-
|
|
|
|
10,599
|
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,600
|
)
|
|
|
(38,600
|
)
|
|
|
-
|
|
|
|
(38,600
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,141
|
)
|
|
|
(10,141
|
)
|
Purchase of noncontrolling interest in dHybrid (1)
|
|
|
(935
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(935
|
)
|
|
|
(1,953
|
)
|
|
|
(2,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2017
|
|
$
|
300,481
|
|
|
$
|
(34,386
|
)
|
|
$
|
632,373
|
|
|
$
|
898,468
|
|
|
$
|
123,579
|
|
|
$
|
1,022,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
On January 1, 2017, the Company acquired the minority membership interests in dHybrid Systems, LLC
(dHybrid) from the noncontrolling member in a
non-cash
transaction.
|
The components of the changes in accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
|
|
|
Pension
Liability
Adjustment
|
|
|
Cash
Flow
Hedges
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance as of May 31, 2016
|
|
$
|
(18,728
|
)
|
|
$
|
(17,061
|
)
|
|
$
|
7,224
|
|
|
$
|
(28,565
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(7,142
|
)
|
|
|
(117
|
)
|
|
|
10,112
|
|
|
|
2,853
|
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,276
|
)
|
|
|
(8,276
|
)
|
Income taxes
|
|
|
-
|
|
|
|
82
|
|
|
|
(480
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of February 28, 2017
|
|
$
|
(25,870
|
)
|
|
$
|
(17,096
|
)
|
|
$
|
8,580
|
|
|
$
|
(34,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed
in NOTE N Derivative Instruments and Hedging Activities.
|
11
NOTE J Stock-Based Compensation
Non-Qualified
Stock Options
During the nine months ended February 28, 2017, we granted
non-qualified
stock
options covering a total of 111,000 common shares under our stock-based compensation plans. The option price of $42.30 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 $11.60 per share. The calculated
pre-tax
stock-based compensation expense for these stock options, after an estimate for
forfeitures, is $1,146,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:
|
|
|
|
|
Dividend yield
|
|
|
2.59
|
%
|
Expected volatility
|
|
|
36.86
|
%
|
Risk-free interest rate
|
|
|
1.15
|
%
|
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 nine months ended February 28, 2017, we granted an aggregate of 520,850 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 date of grant, or $42.27 per share. The calculated
pre-tax
stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $19,695,000 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, 2017, 2018 and 2019. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period.
The fair values of our performance shares are determined by the closing market prices of the underlying common shares at their respective grant dates and the
pre-tax
stock-based compensation expense is based
on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the nine months ended February 28, 2017, we granted performance share awards
covering an aggregate of 66,200 common shares (at target levels). The calculated
pre-tax
stock-based compensation expense for these performance shares is $2,973,000 and will be recognized over the three-year
performance period.
NOTE K Income Taxes
Income tax expense for the nine months ended February 28, 2017 and February 29, 2016 reflected estimated annual
effective income tax rates of 27.2% and 29.6%, 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 2017 could be materially different from the forecasted rate as of February 28, 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 three and nine months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands, except per share amounts)
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest-income available to common shareholders
|
|
$
|
35,889
|
|
|
$
|
29,847
|
|
|
$
|
148,021
|
|
|
$
|
85,191
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to controlling interestweighted
average common shares
|
|
|
62,750
|
|
|
|
61,747
|
|
|
|
62,325
|
|
|
|
62,810
|
|
Effect of dilutive securities
|
|
|
2,227
|
|
|
|
2,124
|
|
|
|
2,433
|
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share attributable to controlling interestadjusted
weighted average common shares
|
|
|
64,977
|
|
|
|
63,871
|
|
|
|
64,758
|
|
|
|
64,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest
|
|
$
|
0.57
|
|
|
$
|
0.48
|
|
|
$
|
2.37
|
|
|
$
|
1.36
|
|
Diluted earnings per share attributable to controlling interest
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
|
$
|
2.29
|
|
|
$
|
1.31
|
|
Stock options covering 107,224 and 352,830 common shares for the three months ended
February 28, 2017 and February 29, 2016, respectively, and 97,638 and 343,454 common shares for the nine months ended February 28, 2017 and February 29, 2016, respectively, have been excluded from the computation of diluted
earnings per share because the effect of their inclusion would have been anti-dilutive.
13
NOTE M Segment Operations
Summarized financial information for our reportable segments is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
478,174
|
|
|
$
|
419,026
|
|
|
$
|
1,492,654
|
|
|
$
|
1,377,638
|
|
Pressure Cylinders
|
|
|
198,433
|
|
|
|
200,721
|
|
|
|
598,303
|
|
|
|
626,288
|
|
Engineered Cabs
|
|
|
23,547
|
|
|
|
25,553
|
|
|
|
71,591
|
|
|
|
92,869
|
|
Other
|
|
|
3,282
|
|
|
|
1,780
|
|
|
|
6,217
|
|
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
703,436
|
|
|
$
|
647,080
|
|
|
$
|
2,168,765
|
|
|
$
|
2,105,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
26,026
|
|
|
$
|
21,294
|
|
|
$
|
116,256
|
|
|
$
|
71,574
|
|
Pressure Cylinders
|
|
|
10,071
|
|
|
|
8,969
|
|
|
|
35,480
|
|
|
|
15,479
|
|
Engineered Cabs
|
|
|
(2,001
|
)
|
|
|
(4,053
|
)
|
|
|
(7,225
|
)
|
|
|
(17,634
|
)
|
Other
|
|
|
224
|
|
|
|
(1,138
|
)
|
|
|
(2,249
|
)
|
|
|
(1,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
34,320
|
|
|
$
|
25,072
|
|
|
$
|
142,262
|
|
|
$
|
68,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Pressure Cylinders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,962
|
|
Engineered Cabs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of long-lived assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
212
|
|
|
$
|
1,068
|
|
|
$
|
1,496
|
|
|
$
|
3,788
|
|
Pressure Cylinders
|
|
|
1,056
|
|
|
|
(1,031
|
)
|
|
|
3,165
|
|
|
|
(316
|
)
|
Engineered Cabs
|
|
|
169
|
|
|
|
416
|
|
|
|
1,379
|
|
|
|
3,059
|
|
Other
|
|
|
(43
|
)
|
|
|
249
|
|
|
|
(46
|
)
|
|
|
(1,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other expense
|
|
$
|
1,394
|
|
|
$
|
702
|
|
|
$
|
5,994
|
|
|
$
|
5,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
February 28,
2017
|
|
|
May 31,
2016
|
|
Total assets
|
|
|
|
|
|
|
|
|
Steel Processing
|
|
$
|
885,244
|
|
|
$
|
819,853
|
|
Pressure Cylinders
|
|
|
751,131
|
|
|
|
787,786
|
|
Engineered Cabs
|
|
|
65,633
|
|
|
|
75,124
|
|
Other
|
|
|
545,167
|
|
|
|
378,501
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,247,175
|
|
|
$
|
2,061,264
|
|
|
|
|
|
|
|
|
|
|
14
NOTE N Derivative Instruments and Hedging Activities
We utilize derivative 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 to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
Foreign Currency 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 fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating foreign 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 O Fair Value for additional information regarding the accounting treatment for our derivative
instruments, as well as how fair value is determined.
15
The following table summarizes the fair value of our derivative instruments and
the respective financial statement caption in which they were recorded in our consolidated balance sheet at February 28, 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
|
|
|
$
|
14,053
|
|
|
|
Accounts payable
|
|
|
$
|
-
|
|
|
|
|
Other assets
|
|
|
|
176
|
|
|
|
Other liabilities
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,229
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
83
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
14,229
|
|
|
|
|
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
2,964
|
|
|
|
Accounts payable
|
|
|
$
|
233
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,964
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
|
Receivables
|
|
|
|
511
|
|
|
|
Accounts payable
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
3,475
|
|
|
|
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
17,704
|
|
|
|
|
|
|
$
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in the table above reflect the fair value of the Companys derivative
instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $91,000 increase in receivables with a corresponding increase in accounts payable.
16
The following table summarizes the fair value of our derivative instruments and
the financial statement caption in which they were recorded in the consolidated balance sheet at May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
(in thousands)
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
13,224
|
|
|
|
Accounts payable
|
|
|
$
|
696
|
|
|
|
|
Other assets
|
|
|
|
3,589
|
|
|
|
Other liabilities
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,813
|
|
|
|
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
155
|
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Other liabilities
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
16,813
|
|
|
|
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
Receivables
|
|
|
$
|
4,660
|
|
|
|
Accounts payable
|
|
|
$
|
761
|
|
|
|
|
Other assets
|
|
|
|
317
|
|
|
|
Other liabilities
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,977
|
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
|
Receivables
|
|
|
|
-
|
|
|
|
Accounts payable
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
21,790
|
|
|
|
|
|
|
$
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in the table above reflect the fair value of the Companys derivative
instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $300,000 decrease in receivables with a corresponding decrease in accounts payable.
Cash Flow Hedges
We
enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rates and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify
as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same financial statement caption 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 February 28, 2017:
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity Date
|
Commodity contracts
|
|
$
|
40,570
|
|
|
March 2017 - December 2018
|
Interest rate contracts
|
|
|
16,183
|
|
|
September 2019
|
17
The following table summarizes the gain (loss) recognized in OCI and the gain
(loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the three months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
Reclassified
|
|
Reclassified
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain (Loss)
|
|
|
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 February 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
2,037
|
|
|
Cost of goods sold
|
|
$
|
3,397
|
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
25
|
|
|
Interest expense
|
|
|
(36
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,062
|
|
|
|
|
$
|
3,361
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
707
|
|
|
Cost of goods sold
|
|
$
|
(7,775
|
)
|
|
Cost of goods sold
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
(107
|
)
|
|
Interest expense
|
|
|
(130
|
)
|
|
Interest expense
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
600
|
|
|
|
|
|
(7,905
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gain (loss) recognized in OCI and the gain (loss)
reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the nine months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
|
Gain
|
|
Gain
|
|
|
|
|
|
|
Reclassified
|
|
Reclassified
|
|
|
(Ineffective
|
|
(Ineffective
|
|
|
|
Gain (Loss)
|
|
|
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 nine months ended February 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
9,963
|
|
|
Cost of goods sold
|
|
$
|
8,882
|
|
|
Interest expense
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
149
|
|
|
Interest expense
|
|
|
(606
|
)
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
10,112
|
|
|
|
|
$
|
8,276
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
(17,629
|
)
|
|
Cost of goods sold
|
|
$
|
(23,422
|
)
|
|
Interest expense
|
|
$
|
-
|
|
Interest rate contracts
|
|
|
(274
|
)
|
|
Interest expense
|
|
|
(415
|
)
|
|
Cost of goods sold
|
|
|
-
|
|
Foreign currency contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
(4
|
)
|
|
Miscellaneous income, net
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(17,903
|
)
|
|
|
|
$
|
(23,841
|
)
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
The estimated net amount of the losses recognized in accumulated OCI at
February 28, 2017 expected to be reclassified into net earnings within the succeeding twelve months is $10,088,000 (net of tax of $5,725,000). This amount was computed using the fair value of the cash flow hedges at February 28, 2017, and
will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2017 and 2018.
Economic
(Non-designated)
Hedges
We enter into foreign currency contracts to manage our
foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting
treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.
The following table summarizes our economic
(non-designated)
derivative instruments
outstanding at February 28, 2017:
|
|
|
|
|
|
|
(in thousands)
|
|
Notional
Amount
|
|
|
Maturity Date(s)
|
Commodity contracts
|
|
$
|
22,971
|
|
|
March 2017 - December 2018
|
Foreign currency contracts
|
|
|
15,450
|
|
|
March 2017 - August 2017
|
The following table summarizes the gain recognized in earnings for economic
(non-designated)
derivative financial instruments during the three months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
|
in Earnings for the
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
|
Location of Gain (Loss)
Recognized in Earnings
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Commodity contracts
|
|
|
Cost of goods sold
|
|
|
$
|
258
|
|
|
$
|
173
|
|
Foreign currency contracts
|
|
|
Miscellaneous income, net
|
|
|
|
(172
|
)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
86
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gain (loss) recognized in earnings for economic
(non-designated)
derivative financial instruments during the nine months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
|
in Earnings for the
|
|
|
|
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
Location of Gain (Loss)
Recognized in Earnings
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Commodity contracts
|
|
|
Cost of goods sold
|
|
|
$
|
5,169
|
|
|
$
|
(7,972
|
)
|
Foreign currency contracts
|
|
|
Miscellaneous income, net
|
|
|
|
(837
|
)
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
4,332
|
|
|
$
|
(7,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain (loss) on the foreign currency derivatives significantly offsets the gain (loss) on
the hedged item.
19
NOTE O 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 February 28, 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 instruments (1)
|
|
$
|
-
|
|
|
$
|
17,704
|
|
|
$
|
-
|
|
|
$
|
17,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
17,704
|
|
|
$
|
-
|
|
|
$
|
17,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
580
|
|
|
$
|
-
|
|
|
$
|
580
|
|
Contingent consideration obligations (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,557
|
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
580
|
|
|
$
|
4,557
|
|
|
$
|
5,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
At May 31, 2016, 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 instruments (1)
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
$
|
-
|
|
|
$
|
21,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
2,013
|
|
|
$
|
-
|
|
|
$
|
2,013
|
|
Contingent consideration obligations (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,519
|
|
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
2,013
|
|
|
$
|
4,519
|
|
|
$
|
6,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fair value of our derivative 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 N Derivative Instruments and Hedging Activities for additional information regarding our use of derivative instruments.
|
(2)
|
The fair value of the contingent consideration obligations is determined using a probability weighted cash
flow approach based on managements projections of future cash flows of the acquired businesses. The fair value measurement was based on Level 3 inputs not observable in the market.
|
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 $602,907,000 and $609,245,000 at February 28, 2017 and May 31, 2016, respectively. The carrying amount of long-term debt, including current maturities, was $576,880,000 and $578,353,000 at February 28, 2017 and May 31,
2016, respectively.
21