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EX-32.2 - EX-32.2 - WORTHINGTON INDUSTRIES INCwor-ex322_8.htm
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EX-31.2 - EX-31.2 - WORTHINGTON INDUSTRIES INCwor-ex312_9.htm
EX-31.1 - EX-31.1 - WORTHINGTON INDUSTRIES INCwor-ex311_6.htm
EX-10.4 - EX-10.4 - WORTHINGTON INDUSTRIES INCwor-ex104_233.htm
EX-10.3 - EX-10.3 - WORTHINGTON INDUSTRIES INCwor-ex103_324.htm
EX-10.2 - EX-10.2 - WORTHINGTON INDUSTRIES INCwor-ex102_232.htm
EX-10.1 - EX-10.1 - WORTHINGTON INDUSTRIES INCwor-ex101_231.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 November 30, 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 December 31, 2018, the number of Common Shares, without par value, issued and outstanding was 57,736,995.

 

 

 


TABLE OF CONTENTS

 

Safe Harbor Statement

 

ii

 

 

 

Part I.  Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets –November 30, 2018 and May 31, 2018

 

1

 

 

 

 

 

 

 

Consolidated Statements of Earnings –Three and Six Months Ended November 30, 2018 and 2017

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income –Three and Six Months Ended November 30, 2018 and 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –Three and Six Months Ended November 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

Item 2.

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

 

24

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

37

 

 

 

Part II.  Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

 

 

 

 

 

Item 1A.

Risk Factors

 

37

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities (Not applicable)

 

38

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures (Not applicable)

 

38

 

 

 

 

 

 

Item 5.

Other Information (Not applicable)

 

38

 

 

 

 

 

 

Item 6.

Exhibits

 

39

 

 

 

Signatures

 

40

 

 

 

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 demand or 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)

 

 

November 30,

 

 

May 31,

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

93,027

 

 

$

121,967

 

Receivables, less allowances of $650 and $632 at November 30, 2018

 

 

 

 

 

 

 

and May 31, 2018, respectively

 

518,006

 

 

 

572,689

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

267,871

 

 

 

237,471

 

Work in process

 

111,158

 

 

 

122,977

 

Finished products

 

109,713

 

 

 

93,579

 

Total inventories

 

488,742

 

 

 

454,027

 

Income taxes receivable

 

18,079

 

 

 

1,650

 

Assets held for sale

 

7,395

 

 

 

30,655

 

Prepaid expenses and other current assets

 

62,367

 

 

 

60,134

 

Total current assets

 

1,187,616

 

 

 

1,241,122

 

Investments in unconsolidated affiliates

 

221,701

 

 

 

216,010

 

Goodwill

 

342,126

 

 

 

345,183

 

Other intangible assets, net of accumulated amortization of $82,659 and

 

 

 

 

 

 

 

$74,922 at November 30, 2018 and May 31, 2018, respectively

 

205,142

 

 

 

214,026

 

Other assets

 

21,570

 

 

 

20,476

 

Property, plant and equipment:

 

 

 

 

 

 

 

Land

 

24,066

 

 

 

24,229

 

Buildings and improvements

 

308,549

 

 

 

300,542

 

Machinery and equipment

 

1,045,864

 

 

 

1,030,720

 

Construction in progress

 

45,077

 

 

 

32,282

 

Total property, plant and equipment

 

1,423,556

 

 

 

1,387,773

 

Less: accumulated depreciation

 

839,274

 

 

 

802,803

 

Total property, plant and equipment, net

 

584,282

 

 

 

584,970

 

Total assets

$

2,562,437

 

 

$

2,621,787

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

406,444

 

 

$

473,485

 

Accrued compensation, contributions to employee benefit plans and

 

 

 

 

 

 

 

related taxes

 

69,611

 

 

 

96,487

 

Dividends payable

 

14,348

 

 

 

13,731

 

Other accrued items

 

57,864

 

 

 

57,125

 

Income taxes payable

 

1,276

 

 

 

4,593

 

Current maturities of long-term debt

 

1,387

 

 

 

1,474

 

Total current liabilities

 

550,930

 

 

 

646,895

 

Other liabilities

 

73,053

 

 

 

74,237

 

Distributions in excess of investment in unconsolidated affiliate

 

122,806

 

 

 

55,198

 

Long-term debt

 

748,392

 

 

 

748,894

 

Deferred income taxes, net

 

81,001

 

 

 

60,188

 

Total liabilities

 

1,576,182

 

 

 

1,585,412

 

Shareholders' equity - controlling interest

 

868,672

 

 

 

918,769

 

Noncontrolling interests

 

117,583

 

 

 

117,606

 

Total equity

 

986,255

 

 

 

1,036,375

 

Total liabilities and equity

$

2,562,437

 

 

$

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 November 30,

 

 

Six Months Ended November 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

958,226

 

 

$

871,266

 

 

$

1,946,333

 

 

$

1,719,503

 

Cost of goods sold

 

837,292

 

 

 

731,187

 

 

 

1,682,402

 

 

 

1,446,646

 

Gross margin

 

120,934

 

 

 

140,079

 

 

 

263,931

 

 

 

272,857

 

Selling, general and administrative expense

 

84,668

 

 

 

89,425

 

 

 

175,309

 

 

 

177,674

 

Impairment of goodwill and long-lived assets

 

-

 

 

 

8,289

 

 

 

2,381

 

 

 

8,289

 

Restructuring and other expense (income), net

 

402

 

 

 

(9,694

)

 

 

(534

)

 

 

(7,390

)

Operating income

 

35,864

 

 

 

52,059

 

 

 

86,775

 

 

 

94,284

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous income, net

 

1,432

 

 

 

1,321

 

 

 

1,697

 

 

 

1,669

 

Interest expense

 

(9,472

)

 

 

(10,038

)

 

 

(19,200

)

 

 

(18,845

)

Equity in net income of unconsolidated affiliates

 

21,087

 

 

 

16,445

 

 

 

51,095

 

 

 

43,751

 

Earnings before income taxes

 

48,911

 

 

 

59,787

 

 

 

120,367

 

 

 

120,859

 

Income tax expense

 

11,119

 

 

 

18,165

 

 

 

25,617

 

 

 

31,163

 

Net earnings

 

37,792

 

 

 

41,622

 

 

 

94,750

 

 

 

89,696

 

Net earnings attributable to noncontrolling interests

 

3,790

 

 

 

2,219

 

 

 

5,806

 

 

 

4,759

 

Net earnings attributable to controlling interest

$

34,002

 

 

$

39,403

 

 

$

88,944

 

 

$

84,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

57,716

 

 

 

61,503

 

 

 

58,226

 

 

 

61,976

 

Earnings per share attributable to controlling interest

$

0.59

 

 

$

0.64

 

 

$

1.53

 

 

$

1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

59,338

 

 

 

63,468

 

 

 

60,013

 

 

 

64,044

 

Earnings per share attributable to controlling interest

$

0.57

 

 

$

0.62

 

 

$

1.48

 

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding at end of period

 

56,957

 

 

 

60,755

 

 

 

56,957

 

 

 

60,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.23

 

 

$

0.21

 

 

$

0.46

 

 

$

0.42

 

 

See notes to consolidated financial statements.

 

 

2

 


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

Three Months Ended November 30,

 

 

Six Months Ended November 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

$

37,792

 

 

$

41,622

 

 

$

94,750

 

 

$

89,696

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(6,638

)

 

 

1,511

 

 

 

(10,333

)

 

 

17,383

 

Pension liability adjustment, net of tax

 

-

 

 

 

-

 

 

 

(97

)

 

 

(6

)

Cash flow hedges, net of tax

 

(4,662

)

 

 

(2,210

)

 

 

(6,632

)

 

 

(323

)

Other comprehensive income (loss)

 

(11,300

)

 

 

(699

)

 

 

(17,062

)

 

 

17,054

 

Comprehensive income

 

26,492

 

 

 

40,923

 

 

 

77,688

 

 

 

106,750

 

Comprehensive income attributable to noncontrolling interests

 

3,735

 

 

 

2,139

 

 

 

5,734

 

 

 

5,118

 

Comprehensive income attributable to controlling interest

$

22,757

 

 

$

38,784

 

 

$

71,954

 

 

$

101,632

 

 

See notes to consolidated financial statements.

 

 

3

 


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended November 30,

 

 

Six Months Ended November 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

37,792

 

 

$

41,622

 

 

$

94,750

 

 

$

89,696

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

23,525

 

 

 

26,283

 

 

 

48,018

 

 

 

51,648

 

Impairment of goodwill and long-lived assets

 

-

 

 

 

8,289

 

 

 

2,381

 

 

 

8,289

 

Provision for (benefit from) deferred income taxes

 

3,289

 

 

 

(583

)

 

 

22,223

 

 

 

7,351

 

Bad debt (income) expense

 

32

 

 

 

41

 

 

 

253

 

 

 

(21

)

Equity in net income of unconsolidated affiliates, net of distributions

 

14,182

 

 

 

2,952

 

 

 

4,163

 

 

 

(4,803

)

Net (gain) loss on assets

 

(312

)

 

 

(10,680

)

 

 

2,403

 

 

 

(9,255

)

Stock-based compensation

 

3,456

 

 

 

3,787

 

 

 

6,612

 

 

 

7,194

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

40,838

 

 

 

(46,097

)

 

 

54,247

 

 

 

16,581

 

Inventories

 

5,866

 

 

 

9,871

 

 

 

(37,471

)

 

 

(24,825

)

Prepaid expenses and other current assets

 

(13,249

)

 

 

3,622

 

 

 

(21,668

)

 

 

4,765

 

Other assets

 

(1,194

)

 

 

(626

)

 

 

(1,260

)

 

 

(976

)

Accounts payable and accrued expenses

 

(71,711

)

 

 

(21,577

)

 

 

(100,496

)

 

 

(48,368

)

Other liabilities

 

2,190

 

 

 

2,478

 

 

 

994

 

 

 

5,461

 

Net cash provided by operating activities

 

44,704

 

 

 

19,382

 

 

 

75,149

 

 

 

102,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in property, plant and equipment

 

(21,741

)

 

 

(23,678

)

 

 

(41,175

)

 

 

(41,691

)

Acquisitions, net of cash acquired

 

-

 

 

 

(523

)

 

 

-

 

 

 

(285,028

)

Distributions from unconsolidated affiliates

 

55,201

 

 

 

-

 

 

 

55,201

 

 

 

-

 

Proceeds from sale of assets

 

170

 

 

 

16,312

 

 

 

20,447

 

 

 

16,739

 

Net cash provided (used) by investing activities

 

33,630

 

 

 

(7,889

)

 

 

34,473

 

 

 

(309,980

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

-

 

 

 

302

 

 

 

-

 

 

 

600

 

Proceeds from long-term debt, net of issuance costs

 

-

 

 

 

(594

)

 

 

-

 

 

 

197,685

 

Principal payments on long-term debt

 

(371

)

 

 

(220

)

 

 

(801

)

 

 

(439

)

Payments for issuance of common shares, net of tax withholdings

 

(658

)

 

 

(722

)

 

 

(4,749

)

 

 

(3,996

)

Payments to noncontrolling interests

 

(4,007

)

 

 

(3,196

)

 

 

(6,327

)

 

 

(3,916

)

Repurchase of common shares

 

(63,581

)

 

 

(67,448

)

 

 

(100,433

)

 

 

(112,524

)

Dividends paid

 

(13,533

)

 

 

(13,256

)

 

 

(26,252

)

 

 

(26,034

)

Net cash provided (used) by financing activities

 

(82,150

)

 

 

(85,134

)

 

 

(138,562

)

 

 

51,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(3,816

)

 

 

(73,641

)

 

 

(28,940

)

 

 

(155,867

)

Cash and cash equivalents at beginning of period

 

96,843

 

 

 

195,855

 

 

 

121,967

 

 

 

278,081

 

Cash and cash equivalents at end of period

$

93,027

 

 

$

122,214

 

 

$

93,027

 

 

$

122,214

 

 

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 (the “SEC”).  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included.  Operating results for the three and six months ended November 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2019 (“fiscal 2019”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2018 (“fiscal 2018”) of Worthington Industries, Inc. (the “2018 Form 10-K”).

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

Recently Adopted Accounting Standards

On June 1, 2018, the Company adopted new accounting guidance that replaces most existing revenue recognition guidance under U.S. GAAP.  See “NOTE B – Revenue Recognition” for further explanation related to this adoption, including newly required disclosures. 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532; 34-83875, “Disclosure Update and Simplification,” adopting amendments to certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, GAAP or changes in the information environment.  In addition, the amendments expanded the disclosure requirements relating to the analysis of shareholders’ equity for interim financial statements.  Under the amendments, an analysis of the changes in each caption of shareholders’ equity and noncontrolling interests presented in the balance sheet must be provided in a note or separate statement.  The analysis shall present a reconciliation of the beginning balance to the ending balance of each period for which a statement of earnings is required to be filed.  The final rule was effective on November 5, 2018.  The Company adopted the final rule effective for the second quarter of fiscal 2019.  The adoption of the final rule did not have a significant impact on the Company’s consolidated financial position or results of operations.  See “NOTE J – Changes in Equity” for the newly required disclosures related to this adoption.

Recently Issued Accounting Standards

In February 2016, new accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP.  Among other changes, the new accounting guidance requires that leased assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous accounting guidance.  The new accounting guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented.  In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings.  The scoping and diagnostic phases of the implementation of this new accounting guidance are in process, including gathering, documenting and analyzing lease agreements subject to the new accounting guidance.  

5

 


While we are in the process of evaluating the effect this new accounting guidance will have on the presentation of our consolidated financial statements and related disclosures, the adoption is anticipated to have a material impact on the Company’s consolidated balance sheets with the addition of right-of-use assets, offset by the associated liabilities.

In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held.  The amended accounting guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations; however, we do not expect the amended accounting guidance to have a material impact on our ongoing financial reporting.

In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness.  The intent is to simplify application of hedge accounting and increase transparency of information about an entity’s risk management activities.  The amended accounting guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  It is to be applied using a modified retrospective transition approach for cash flow and net investment hedges existing at the date of adoption.  The presentation and disclosure guidance is only required prospectively.  Early adoption is permitted.  We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.

NOTE B – Revenue Recognition

Through the fiscal year ended May 31, 2018, in accordance with our historical accounting policies for revenue recognition, we recognized revenue upon transfer of title and risk of loss, or in the case of toll processing revenue, upon delivery of the goods, provided persuasive evidence of an arrangement existed, pricing was fixed or determinable and collectability was reasonably assured.  Through charges to net sales, provisions were made for returns & allowances, customer rebates and sales discounts based on past experience, specific agreements, and anticipated levels of customer activity.

On June 1, 2018, we adopted new accounting guidance that replaces most existing revenue recognition accounting guidance under U.S. GAAP, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”).  The new accounting guidance was adopted using the modified retrospective approach as applied to customer contracts that were not complete at the date of adoption, with the cumulative effect recognized in retained earnings.  Comparative financial information for reporting periods beginning prior to June 1, 2018, has not been restated and continues to be reported under the previous accounting guidance.   The cumulative effect adjustment resulted from a change in the pattern of recognition for our toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, which previously were accounted for as point in time and now will be accounted for over time.  

The following table outlines the cumulative effect of adopting the new revenue recognition guidance:

 

(in thousands)

May 31, 2018

(As Reported)

 

 

Cumulative Effect of Topic 606 Adoption

 

 

June 1, 2018

(As Adjusted)

 

Consolidated Balance Sheet

Assets

 

 

 

 

 

 

 

 

 

 

 

Receivables

$

572,689

 

 

$

4,706

 

 

$

577,395

 

Total inventories

 

454,027

 

 

 

(3,452

)

 

 

450,575

 

Prepaid expenses and other current assets

 

60,134

 

 

 

944

 

 

 

61,078

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes, net

 

60,188

 

 

 

454

 

 

 

60,642

 

Retained earnings

 

637,757

 

 

 

1,174

 

 

 

638,931

 

Noncontrolling interests

 

117,606

 

 

 

570

 

 

 

118,176

 

Under the new accounting guidance, we recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive for those goods or services, including any variable consideration

Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both net sales and cost of goods sold at the time control is transferred to the customer.  Due to the short-term nature of our contracts with customers, we have elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less.  When we satisfy (or partially satisfy) a performance obligation, prior to being able to invoice the customer, we recognize an unbilled receivable when the right to consideration is unconditional and a contract asset when the right to consideration is conditional.  Unbilled receivables and contract assets are included in receivables and prepaid and other current assets, respectively, on

6

 


the consolidated balance sheets.  Additionally, we do not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product.  Payments from customers are generally due within 30 to 60 days of invoicing, which generally occurs upon 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 we collect from a customer, are excluded from revenue.

Certain contracts with customers include warranties associated with the delivered goods or services.  These warranties are not considered to be separate performance obligations, and accordingly, we record an estimated liability for potential warranty costs as the goods or services are transferred.

With the exception of the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, we recognize revenue at the point in time the performance obligation is satisfied and control of the product is transferred to the customer upon shipment or delivery.  Generally, we receive and acknowledge purchase orders from our customers, which define the quantity, pricing, payment and other applicable terms and conditions.  In some cases, we receive a blanket purchase order from our customers, which includes pricing, payment and other terms and conditions, with quantities defined at the time each customer subsequently issues periodic releases against the blanket purchase order.

For the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, we recognize revenue over time.  Revenue is primarily measured using the cost-to-cost method, which we believe best depicts the transfer of control to the customer.  Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Revenues are recorded proportionally as costs are incurred. We have elected to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

Certain contracts contain variable consideration, which is not constrained, and primarily include estimated sales returns, customer rebates, and sales discounts which are recorded on an expected value basis.  These estimates are based on historical returns, analysis of credit memo data and other known factors.  We account for rebates by recording reductions to revenue for rebates in the same period the related revenue is recorded.  The amount of these reductions is based upon the terms agreed to with the customer.  We do not exercise significant judgments in determining the timing of satisfaction of performance obligations or the transaction price.  

The following tables summarize net sales by product class and by timing of revenue recognition for the three month and six month periods ended November 30, 2018:

(in thousands)

Reportable Segments

 

Three months ended November 30, 2018

Steel Processing

 

 

Pressure Cylinders

 

 

Engineered Cabs

 

 

Other

 

 

Total

 

Product class:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel Processing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

$

602,010

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

602,010

 

Toll

 

33,033

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33,033

 

Pressure Cylinders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial products

 

-

 

 

 

152,018

 

 

 

-

 

 

 

-

 

 

 

152,018

 

Consumer products

 

-

 

 

 

117,194

 

 

 

-

 

 

 

-

 

 

 

117,194

 

Oil & gas equipment

 

-

 

 

 

25,235

 

 

 

-

 

 

 

-

 

 

 

25,235

 

Engineered Cabs

 

-

 

 

 

-

 

 

 

28,729

 

 

 

-

 

 

 

28,729

 

Other

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

7

 

Total

$

635,043

 

 

$

294,447

 

 

$

28,729

 

 

$

7

 

 

$

958,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods transferred at a point in time

$

602,010

 

 

$

276,965

 

 

$

28,729

 

 

$

7

 

 

$

907,711

 

Goods and services transferred over time

 

33,033

 

 

 

17,482

 

 

 

-

 

 

 

-

 

 

 

50,515

 

Total

$

635,043

 

 

$

294,447

 

 

$

28,729

 

 

$

7

 

 

$

958,226

 

 

7

 


(in thousands)

Reportable Segments

 

Six months ended November 30, 2018

Steel Processing

 

 

Pressure Cylinders

 

 

Engineered Cabs

 

 

Other

 

 

Total