10-Q 1 wor-10q_20180831.htm 10-Q wor-10q_20180831.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2018

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 001-08399

WORTHINGTON INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Ohio

 

31-1189815

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

200 Old Wilson Bridge Road, Columbus, Ohio

 

43085

(Address of principal executive offices)

 

(Zip Code)

 

(614) 438-3210

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer 

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes     No 

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  On September 30, 2018, the number of Common Shares, without par value, issued and outstanding was 59,165,664.

 

 

 


TABLE OF CONTENTS

 

Safe Harbor Statement

 

ii

 

 

 

Part I.  Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets – August 31, 2018 and May 31, 2018

 

1

 

 

 

 

 

 

 

Consolidated Statements of Earnings –Three Months Ended August 31, 2018 and 2017

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income –Three Months Ended August 31, 2018 and 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –Three Months Ended August 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

28

 

 

 

Part II.  Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

29

 

 

 

 

 

 

Item 1A.

Risk Factors

 

29

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities (Not applicable)

 

30

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures (Not applicable)

 

30

 

 

 

 

 

 

Item 5.

Other Information (Not applicable)

 

30

 

 

 

 

 

 

Item 6.

Exhibits

 

30

 

 

 

Signatures

 

32

 

 

 

i

 


Safe Harbor Statement

Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in “PART I – Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995 (the “Act”).  Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events.  These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases.  These forward-looking statements include, without limitation, statements relating to:

 

outlook, strategy or business plans;

 

future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, balance sheet strengths, debt, financial condition or other financial measures;

 

pricing trends for raw materials and finished goods and the impact of pricing changes;

 

demand trends for us or our markets;

 

additions to product lines and opportunities to participate in new markets;

 

expected benefits from Transformation and innovation efforts and the ability to improve performance and competitive position at our operations;

 

anticipated working capital needs, capital expenditures and asset sales;

 

anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof;

 

projected profitability potential;

 

the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, newly-created joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations;

 

the successful sale of the WAVE international business;

 

projected capacity and the alignment of operations with demand;

 

the ability to operate profitably and generate cash in down markets;

 

the ability to maintain margins and capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets;

 

expectations for Company and customer inventories, jobs and orders;

 

expectations for the economy and markets or improvements therein;

 

expectations for generating improving and sustainable earnings, earnings potential, margins or shareholder value;

 

the expected impact of the provisions of the Tax Cuts and Jobs Act (the “TCJA”) on the Company;

 

effects of judicial rulings; and

 

other non-historical matters.

Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected.  Any number of factors could affect actual results, including, without limitation, those that follow:

 

the effect of national, regional and global economic conditions generally and within major product markets, including a recurrent slowing economy;

 

the effect of conditions in national and worldwide financial markets;

 

the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, and other changes in trade regulations;

 

lower oil prices as a factor in demand for products;

 

product demand and pricing;

 

changes in product mix, product substitution and market acceptance of our products;

 

fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations;

 

effects of facility closures and the consolidation of operations;

 

the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction, oil and gas, and other industries in which we participate;

 

failure to maintain appropriate levels of inventories;

 

financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business;

 

the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts;

ii

 


 

the ability to realize cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from Transformation initiatives, on a timely basis;

 

the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom;

 

capacity levels and efficiencies, within facilities, within major product markets and within the industries as a whole;

 

the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, civil unrest, international conflicts, terrorist activities or other causes;

 

changes in customer demand, inventories, spending patterns, product choices, and supplier choices;

 

risks associated with doing business internationally, including economic, political and social instability, foreign currency exchange rate exposure and the acceptance of our products in global markets;

 

the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment;

 

the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters;

 

deviation of actual results from estimates and/or assumptions used by us in the application of our significant accounting policies;

 

level of imports and import prices in our markets;

 

the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States Securities and Exchange Commission and other governmental agencies as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

 

the effect of healthcare laws in the United States and potential changes for such laws which may increase our healthcare and other costs and negatively impact our operations and financial results;

 

the actual impact on our business of the TCJA differing materially from our estimates;

 

cyber security risks;

 

the effects of privacy and information security laws and standards; and

 

other risks described from time to time in the filings of Worthington Industries, Inc. with the United States Securities and Exchange Commission, including those described in “PART I – Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2018 and in “PART II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q.

We note these factors for investors as contemplated by the Act.  It is impossible to predict or identify all potential risk factors.  Consequently, you should not consider the foregoing list to be a complete set of all potential risks and uncertainties.  Any forward-looking statements in this Quarterly Report on Form 10-Q are based on current information as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.

 

 

iii

 


PART I.  FINANCIAL INFORMATION

Item 1. – Financial Statements

WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

August 31,

 

 

May 31,

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

96,843

 

 

$

121,967

 

Receivables, less allowances of $622 and $632 at August 31, 2018

 

 

 

 

 

 

 

and May 31, 2018, respectively

 

564,612

 

 

 

572,689

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

270,126

 

 

 

237,471

 

Work in process

 

120,722

 

 

 

122,977

 

Finished products

 

103,268

 

 

 

93,579

 

Total inventories

 

494,116

 

 

 

454,027

 

Income taxes receivable

 

6,349

 

 

 

1,650

 

Assets held for sale

 

7,655

 

 

 

30,655

 

Prepaid expenses and other current assets

 

60,846

 

 

 

60,134

 

Total current assets

 

1,230,421

 

 

 

1,241,122

 

Investments in unconsolidated affiliates

 

221,144

 

 

 

216,010

 

Goodwill

 

344,467

 

 

 

345,183

 

Other intangible assets, net of accumulated amortization of $79,077 and

 

 

 

 

 

 

 

$74,922 at August 31, 2018 and May 31, 2018, respectively

 

209,602

 

 

 

214,026

 

Other assets

 

20,478

 

 

 

20,476

 

Property, plant and equipment:

 

 

 

 

 

 

 

Land

 

24,193

 

 

 

24,229

 

Buildings and improvements

 

302,153

 

 

 

300,542

 

Machinery and equipment

 

1,040,410

 

 

 

1,030,720

 

Construction in progress

 

39,463

 

 

 

32,282

 

Total property, plant and equipment

 

1,406,219

 

 

 

1,387,773

 

Less: accumulated depreciation

 

822,156

 

 

 

802,803

 

Total property, plant and equipment, net

 

584,063

 

 

 

584,970

 

Total assets

$

2,610,175

 

 

$

2,621,787

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

478,205

 

 

$

473,485

 

Accrued compensation, contributions to employee benefit plans and

 

 

 

 

 

 

 

related taxes

 

66,055

 

 

 

96,487

 

Dividends payable

 

14,584

 

 

 

13,731

 

Other accrued items

 

59,383

 

 

 

57,125

 

Income taxes payable

 

2,042

 

 

 

4,593

 

Current maturities of long-term debt

 

1,327

 

 

 

1,474

 

Total current liabilities

 

621,596

 

 

 

646,895

 

Other liabilities

 

71,225

 

 

 

74,237

 

Distributions in excess of investment in unconsolidated affiliate

 

52,133

 

 

 

55,198

 

Long-term debt

 

748,731

 

 

 

748,894

 

Deferred income taxes, net

 

79,116

 

 

 

60,188

 

Total liabilities

 

1,572,801

 

 

 

1,585,412

 

Shareholders' equity - controlling interest

 

919,519

 

 

 

918,769

 

Noncontrolling interests

 

117,855

 

 

 

117,606

 

Total equity

 

1,037,374

 

 

 

1,036,375

 

Total liabilities and equity

$

2,610,175

 

 

$

2,621,787

 

 

See notes to consolidated financial statements.

 

 

1

 


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2018

 

 

2017

 

Net sales

$

988,107

 

 

$

848,237

 

Cost of goods sold

 

845,110

 

 

 

715,459

 

Gross margin

 

142,997

 

 

 

132,778

 

Selling, general and administrative expense

 

90,641

 

 

 

88,249

 

Impairment of long-lived assets

 

2,381

 

 

 

-

 

Restructuring and other expense (income), net

 

(936

)

 

 

2,304

 

Operating income

 

50,911

 

 

 

42,225

 

Other income (expense):

 

 

 

 

 

 

 

Miscellaneous income, net

 

265

 

 

 

348

 

Interest expense

 

(9,728

)

 

 

(8,807

)

Equity in net income of unconsolidated affiliates

 

30,008

 

 

 

27,306

 

Earnings before income taxes

 

71,456

 

 

 

61,072

 

Income tax expense

 

14,498

 

 

 

12,998

 

Net earnings

 

56,958

 

 

 

48,074

 

Net earnings attributable to noncontrolling interests

 

2,016

 

 

 

2,540

 

Net earnings attributable to controlling interest

$

54,942

 

 

$

45,534

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

Average common shares outstanding

 

58,731

 

 

 

62,444

 

Earnings per share attributable to controlling interest

$

0.94

 

 

$

0.73

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

Average common shares outstanding

 

60,621

 

 

 

64,590

 

Earnings per share attributable to controlling interest

$

0.91

 

 

$

0.70

 

 

 

 

 

 

 

 

 

Common shares outstanding at end of period

 

58,389

 

 

 

62,144

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.23

 

 

$

0.21

 

 

See notes to consolidated financial statements.

 

 

2

 


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2018

 

 

2017

 

Net earnings

$

56,958

 

 

$

48,074

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation

 

(3,695

)

 

 

15,872

 

Pension liability adjustment, net of tax

 

(97

)

 

 

(6

)

Cash flow hedges, net of tax

 

(1,970

)

 

 

1,887

 

Other comprehensive income (loss)

 

(5,762

)

 

 

17,753

 

Comprehensive income

 

51,196

 

 

 

65,827

 

Comprehensive income attributable to noncontrolling interests

 

1,999

 

 

 

2,979

 

Comprehensive income attributable to controlling interest

$

49,197

 

 

$

62,848

 

 

See notes to consolidated financial statements.

 

 

3

 


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

Net earnings

$

56,958

 

 

$

48,074

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

24,493

 

 

 

25,365

 

Impairment of long-lived assets

 

2,381

 

 

 

-

 

Provision for deferred income taxes

 

18,934

 

 

 

7,934

 

Bad debt (income) expense

 

221

 

 

 

(62

)

Equity in net income of unconsolidated affiliates, net of distributions

 

(10,019

)

 

 

(7,755

)

Net loss on assets

 

2,715

 

 

 

1,425

 

Stock-based compensation

 

3,156

 

 

 

3,407

 

Changes in assets and liabilities, net of impact of acquisitions:

 

 

 

 

 

 

 

Receivables

 

13,409

 

 

 

62,678

 

Inventories

 

(43,337

)

 

 

(34,696

)

Prepaid expenses and other current assets

 

(8,419

)

 

 

1,143

 

Other assets

 

(66

)

 

 

(350

)

Accounts payable and accrued expenses

 

(28,785

)

 

 

(26,791

)

Other liabilities

 

(1,196

)

 

 

2,983

 

Net cash provided by operating activities

 

30,445

 

 

 

83,355

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Investment in property, plant and equipment

 

(19,434

)

 

 

(18,013

)

Acquisitions, net of cash acquired

 

-

 

 

 

(284,505

)

Proceeds from sale of assets

 

20,277

 

 

 

427

 

Net cash provided (used) by investing activities

 

843

 

 

 

(302,091

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Net proceeds from short-term borrowings, net of issuance costs

 

-

 

 

 

298

 

Proceeds from long-term debt, net of issuance costs

 

-

 

 

 

198,279

 

Principal payments on long-term debt

 

(430

)

 

 

(219

)

Payments for issuance of common shares, net of tax withholdings

 

(4,091

)

 

 

(3,274

)

Payments to noncontrolling interests

 

(2,320

)

 

 

(720

)

Repurchase of common shares

 

(36,852

)

 

 

(45,076

)

Dividends paid

 

(12,719

)

 

 

(12,778

)

Net cash provided (used) by financing activities

 

(56,412

)

 

 

136,510

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(25,124

)

 

 

(82,226

)

Cash and cash equivalents at beginning of period

 

121,967

 

 

 

278,081

 

Cash and cash equivalents at end of period

$

96,843

 

 

$

195,855

 

 

See notes to consolidated financial statements.

 

 

4

 


WORTHINGTON INDUSTRIES, INC.

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 (“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 months ended August 31, 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. 

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 guidance requires that leased assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance.  The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented.  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.  We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the new guidance on our ongoing financial reporting.

In June 2016, 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; however, we do not expect the new 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

5

 


activities.  The amended 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 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 the Company’s historical accounting policies for revenue recognition, the Company 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.  We provided, through charges to net sales, for returns and allowances based on experience and current customer activities.  We also provided, through charges to net sales, for customer rebates and sales discounts based on specific agreements and recent and anticipated levels of customer activity.

On June 1, 2018, the Company adopted new accounting guidance that replaces most existing revenue recognition guidance under U.S. GAAP, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”).  The new 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 the Company’s toll processing and oil & gas equipment revenue streams, 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 guidance:

 

(in thousands)

May 31, 2018

(As Reported)

 

 

Cumulative Effect of Topic 606 Adoption

 

 

June 1, 2018

(As Adjusted)

 

Consolidated Balance Sheet caption

 

 

 

 

 

 

 

 

 

 

 

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

 

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 guidance, the Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services, including any variable consideration.  Under the new revenue guidance, the Company applies the following five step approach:  (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when a performance obligation is satisfied.

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 the Company satisfies (or partially satisfies) 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 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 shipment 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 are collected by the Company from a customer, are excluded from revenue.

The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations.  The Company provides its customers with a manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs.

With the exception of the toll processing and oil & gas equipment revenue streams, the Company recognizes 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.  

6

 


Generally, the Company receives and acknowledges purchase orders from its customers, which define the quantity, pricing, payment and other applicable terms and conditions.  In some cases, the Company receives a blanket purchase order from its 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 and oil & gas equipment revenue streams, the Company recognizes revenue over time.  Revenue is primarily measured using the cost-to-cost method, which the Company believes 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. Under Topic 606, the Company has 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.  The Company accounts 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.  The Company does not exercise significant judgments in determining the timing of satisfaction of performance obligations or the transaction price.  

The following table summarizes net sales disaggregated by product class and timing of revenue recognition for the period presented:

 

(in thousands)

Reportable Segments

 

Three months ended August 31, 2018

Steel Processing

 

 

Pressure Cylinders

 

 

Engineered Cabs

 

 

Other

 

 

Total

 

Product class:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel Processing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

$

626,862

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

626,862

 

Toll

 

33,625

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33,625

 

Pressure Cylinders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial products

 

-

 

 

 

152,847

 

 

 

-

 

 

 

-

 

 

 

152,847

 

Consumer products

 

-

 

 

 

116,823

 

 

 

-

 

 

 

-

 

 

 

116,823

 

Oil & gas equipment

 

-

 

 

 

30,683

 

 

 

-

 

 

 

-

 

 

 

30,683

 

Engineered Cabs

 

-

 

 

 

-

 

 

 

27,252

 

 

 

-

 

 

 

27,252

 

Other

 

-

 

 

 

-

 

 

 

-

 

 

 

15

 

 

 

15

 

Total

$

660,487

 

 

$

300,353

 

 

$

27,252

 

 

$

15

 

 

$

988,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods transferred at a point in time

$

626,862

 

 

$

289,034

 

 

$

27,252

 

 

$

15

 

 

$

943,163

 

Goods and services transferred over time

 

33,625

 

 

 

11,319

 

 

 

-

 

 

 

-

 

 

 

44,944

 

Total

$

660,487

 

 

$

300,353

 

 

$

27,252

 

 

$

15

 

 

$

988,107

 

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements as of and for the period ended August 31, 2018 as if the Company continued to follow its accounting policies under the previous revenue recognition guidance.

 

7

 


 

August 31, 2018

 

(in thousands)

As Currently Reported

 

 

Topic 606 Adjustments

 

 

Balances Without Adoption of Topic 606

 

Consolidated Balance Sheet

Assets

 

 

 

 

 

 

 

 

 

 

 

Receivables

$

564,612

 

 

$

(4,690

)

 

$

559,922

 

Total inventories

 

494,116

 

 

 

4,056

 

 

 

498,172

 

Prepaid expenses and other current assets

 

60,846

 

 

 

(1,823

)

 

 

59,023

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes, net

 

79,116

 

 

 

(450

)

 

 

78,666

 

Shareholders' equity - controlling interest

 

919,519

 

 

 

(1,413

)

 

 

918,106

 

Noncontrolling interests

 

117,855

 

 

 

(594

)

 

 

117,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended August 31, 2018

 

(in thousands)

As Currently Reported

 

 

Topic 606 Adjustments

 

 

Balances Without Adoption of Topic 606

 

Consolidated Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

988,107

 

 

$

(863

)

 

$

987,244

 

Cost of goods sold

 

845,110

 

 

 

604

 

 

 

845,714

 

Income tax expense

 

14,498

 

 

 

(4

)

 

 

14,494

 

Net earnings

 

56,958

 

 

 

(263

)

 

 

56,695

 

Net earnings attributable to noncontrolling interests

 

2,016

 

 

 

(24

)

 

 

1,992

 

Net earnings attributable to controlling interest

 

54,942

 

 

 

(239

)

 

 

54,703

 

 

 

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 $19,989,000 during the three months ended August 31, 2018.  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 $52,133,000 at August 31, 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 returns of the investment and are classified as investing activities in our consolidated statements of cash flows.

8

 


The following tables summarize combined financial information for our unconsolidated affiliates as of, and for the periods presented:  

 

August 31,

 

 

May 31,

 

(in thousands)

2018

 

 

2018

 

Cash

$

43,004

 

 

$

52,812

 

Other current assets

 

717,270

 

 

 

590,578

 

Current assets for discontinued operations

 

37,474

 

 

 

37,640

 

Noncurrent assets

 

365,396

 

 

 

358,927

 

Total assets

$

1,163,144

 

 

$

1,039,957

 

 

 

 

 

 

 

 

 

Current liabilities

 

244,831

 

 

 

166,493

 

Current liabilities for discontinued operations

 

8,243

 

 

 

7,142

 

Short-term borrowings

 

36,215

 

 

 

26,599

 

Current maturities of long-term debt

 

43,131

 

 

 

23,243

 

Long-term debt

 

261,348

 

 

 

259,588

 

Other noncurrent liabilities

 

17,541

 

 

 

17,536

 

Equity

 

551,835

 

 

 

539,356

 

Total liabilities and equity

$

1,163,144

 

 

$

1,039,957

 

 

 

Three Months Ended August 31,

 

(in thousands)

2018

 

 

2017

 

Net sales

$

498,545

 

 

$

442,624

 

Gross margin

 

103,812

 

 

 

86,235

 

Operating income

 

72,376

 

 

 

57,163

 

Depreciation and amortization

 

6,477

 

 

 

7,193

 

Interest expense

 

2,925

 

 

 

2,492

 

Income tax expense

 

4,525

 

 

 

1,348

 

Net earnings from continuing operations

 

64,894

 

 

 

51,061

 

Net earnings from discontinued operations

 

1,684

 

 

 

1,413

 

Net earnings

 

66,578

 

 

 

52,474

 

 

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 current quarter, 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.  Despite the realization of the sales proceeds, there has been no change in the parent-subsidiary relationship and therefore, no change in control.  As a result, WAVE’s balance sheet at August 31, 2018, includes a $70,000,000 receivable within current assets for its portion of the proceeds received by AWI prior to quarter end, with an offsetting current liability for deferred proceeds.  This $70,000,000 was received by WAVE in September 2018 and subsequently distributed to the joint venture partners in equal amounts.     

 

NOTE D – Impairment of Long-Lived Assets

As a result of changes in the facts and circumstances related to the planned sale of the Company’s cryogenics business in Turkey, Worthington Aritas, the Company lowered its estimate of fair value less cost to sell to $7,000,000 resulting in an impairment charge of $2,381,000 during the three months ended August 31, 2018.  Fair value was determined using observable (Level 2) inputs.

 

NOTE E – Restructuring and Other Expense (Income), net

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.

9

 


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

 

 

August 31, 2018

 

Early retirement and severance

 

$

1,116

 

 

$

904

 

 

$

(658

)

 

$

2

 

 

$

1,364

 

Facility exit and other costs

 

 

-

 

 

 

122

 

 

 

-

 

 

 

10

 

 

 

132

 

 

 

$

1,116

 

 

 

1,026

 

 

$

(658

)

 

$

12

 

 

$

1,496

 

Net gain on sale of assets

 

 

 

 

 

 

(1,962

)

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and other income, net

 

 

 

 

 

$

(936

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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 the prior year.  During the three months ended August 31, 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 August 31, 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 August 31, 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 $8,118,000 at August 31, 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 $13,912,000 of outstanding stand-by letters of credit issued to third-party service providers at August 31, 2018.  No amounts were drawn against them at August 31, 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.  On February 16, 2018, the Company amended the terms of the Credit Facility, extending the maturity by three years to February 2023.  Debt issuance costs of $805,000 were incurred as a result of the renewal.  These costs have been deferred and will be amortized over the life of the Credit Facility to interest expense.  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 August 31, 2018.  As discussed in “NOTE G – Guarantees,” we provided $13,912,000 in letters of credit for third-party beneficiaries as of August 31, 2018.  While not drawn against at August 31, 2018, $12,800,000 of these letters of credit were issued against availability under the Credit Facility, leaving $487,200,000 available at August 31, 2018.

We also maintain a $50,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”) which matures in January 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 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 August 31, 2018, no undivided ownership interests in this pool of accounts receivable had been sold.

10

 


NOTE I – Other Comprehensive Income

The following table summarizes the tax effects on each component of OCI for the three months ended August 31:

 

 

Three months ended August 31,

 

 

2018

 

 

2017

 

 

Before-Tax

 

 

Tax

 

 

Net-of-Tax

 

 

Before-Tax

 

 

Tax

 

 

Net-of-Tax

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

$

(3,695

)

 

$

-

 

 

$

(3,695

)

 

$

15,872

 

 

$

-

 

 

$

15,872

 

Pension liability adjustment

 

-

 

 

 

(97

)

 

 

(97

)

 

 

-

 

 

 

(6

)

 

 

(6

)

Cash flow hedges

 

(2,527

)

 

 

557

 

 

 

(1,970

)

 

 

2,993

 

 

 

(1,106

)

 

 

1,887

 

Other comprehensive income (loss)

$

(6,222

)

 

$

460

 

 

$

(5,762

)

 

$

18,865

 

 

$

(1,112

)

 

$

17,753

 

 

 

 

NOTE J – Changes in Equity

The following table summarizes the changes in equity by component and in total for the period presented:

 

 

 

Controlling Interest