Note Q – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

Recurring Fair Value Measurements

At May 31, 2014, our financial assets and liabilities measured at fair value on a recurring basis were as follows:


(in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
Assets
Derivative contracts (1)	$	-	$	1,284	$	-	$	1,284

Total assets	$	-	$	1,284	$	-	$	1,284

Liabilities
Derivative contracts (1)	$	-	$	4,475	$	-	$	4,475
Contingent consideration obligation (2)		-		-		404		404

Total liabilities	$	-	$	4,475	$	404	$	4,879

At May 31, 2013, our financial assets and liabilities measured at fair value on a recurring basis were as follows:


(in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
Assets
Derivative contracts (1)	$	-	$	761	$	-	$	761

Total assets	$	-	$	761	$	-	$	761

Liabilities
Derivative contracts (1)	$	-	$	9,774	$	-	$	9,774

Total liabilities	$	-	$	9,774	$	-	$	9,774

(1)

The fair value of our derivative contracts is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “Note P – Derivative Instruments and Hedging Activities” for additional information regarding our use of derivative instruments.

(2)

The fair value of the contingent consideration obligation related to our acquisition of a 75% interest in Worthington Aritas is determined using a Monte Carlo simulation model based on management’s projections of future EBITDA levels. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. At each reporting date, we will revalue the contingent consideration obligation to estimated fair value and record changes in fair value as income or expense in our consolidated statement of earnings. Refer to “Note O – Acquisitions” for additional information.

Non-Recurring Fair Value Measurements

At May 31, 2014, our assets measured at fair value on a non-recurring basis were categorized as follows:


(in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
Assets
Long-lived assets held for sale (1)	$	-	$	25,040	$	-	$	25,040
Long-lived assets held and used (2)		-		7,034		-		7,034

Total assets	$	-	$	32,074	$	-	$	32,074

(1)

During the fourth quarter of fiscal 2014, management committed to a plan to sell the Company’s 60%-owned consolidated joint venture in India, Worthington Nitin Cylinders. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell. As the fair value of the asset group, or $5,925,000, was lower than its net book value, an impairment charge of $18,959,000 was recognized within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings. The portion of this impairment loss attributable to the noncontrolling interest, or $7,583,000, was recorded within net earnings attributable to noncontrolling interest in our fiscal 2014 consolidated statement of earnings.

During the fourth quarter of fiscal 2014, management committed to plans to sell the Company’s stainless steel business, Precision Specialty Metals, Inc. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell. As the fair value of the asset group, or $19,115,000, was lower than its net book value, an impairment charge of $7,141,000 was recognized within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings.

(2)

During the fourth quarter of fiscal 2014, we determined that indicators of impairment were present at the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, due to current and projected operating losses. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value of $7,034,000, resulting in an impairment charge of $1,412,000 within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings.

At May 31, 2013, our assets measured at fair value on a non-recurring basis were categorized as follows:


(in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
Assets
Long-lived assets held and used (1)	$	-	$	6,856	$	-	$	6,856

Total assets	$	-	$	6,856	$	-	$	6,856

(1)

During the fourth quarter of fiscal 2013, the long-lived assets of our 60%-owned consolidated joint venture in India, Worthington Nitin Cylinders, were written down to their estimated fair value of $6,856,000, resulting in an impairment charge of $4,968,000 within impairment of long-lived assets in our consolidated statement of earnings. The portion of this impairment loss attributable to the noncontrolling interest, or $1,987,000, was recorded within net earnings attributable to noncontrolling interest in our consolidated statement of earnings. Fair value was determined based on market prices for similar assets.

The non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, income taxes receivable, other assets, deferred income taxes, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued expenses, income taxes payable and other liabilities approximate fair value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $674,488,000 and $421,056,000 at May 31, 2014 and 2013, respectively. The carrying amount of long-term debt, including current maturities, was $655,963,000 and $407,328,000 at May 31, 2014 and 2013, respectively.

Observable prices in active markets for identical assets and liabilities.

Observable inputs other than quoted prices in active markets for identical assets and liabilities.

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.