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Table of Contents

 

LOGO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended November 30, 2016

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES  ☒    NO  ☐

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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 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 30, 2016, the number of Common Shares, without par value, issued and outstanding was 63,673,654.


Table of Contents

TABLE OF CONTENTS

 

Safe Harbor Statement

     ii   

Part I. Financial Information

  

Item 1.

  Financial Statements (Unaudited)   
 

Consolidated Balance Sheets –
November 30, 2016 and May 31, 2016

     1   
 

Consolidated Statements of Earnings –
Three and Six Months Ended November 30, 2016 and 2015

     2   
 

Consolidated Statements of Comprehensive Income –
Three and Six Months Ended November 30, 2016 and 2015

     3   
 

Consolidated Statements of Cash Flows –
Three and Six Months Ended November 30, 2016 and 2015

     4   
 

Notes to Consolidated Financial Statements

     5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      39   

Item 4.

  Controls and Procedures      40   

Part II. Other Information

  

Item 1.

  Legal Proceedings      40   

Item 1A.

  Risk Factors      40   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

  Defaults Upon Senior Securities (Not applicable)      41   

Item 4.

  Mine Safety Disclosures (Not applicable)      41   

Item 5.

  Other Information (Not applicable)      41   

Item 6.

  Exhibits      42   

Signatures

     43   

Index to Exhibits

     44   

 

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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;

   

the ability to correct performance issues at operations;

   

future or expected growth, forward momentum, performance, 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 efforts;

   

anticipated 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, capacity and working capital needs;

   

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 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 increasing volatility or improving and sustaining earnings, earnings potential, margins or shareholder value;

   

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 global economy;

   

the effect of conditions in national and worldwide financial markets;

   

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;

   

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

 

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Table of Contents
   

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 in which we participate 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 or 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 exposure and the acceptance of our products in these 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 changes to healthcare laws in the United States, which may increase our healthcare and other costs and negatively impact our operations and financial results;

   

cyber security risks; and

   

other risks described from time to time in our filings 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, 2016.

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.

 

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PART I. FINANCIAL INFORMATION

Item 1. – Financial Statements

WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     November 30,
2016
     May 31,
2016
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 175,180       $ 84,188   

Receivables, less allowances of $3,499 and $4,579 at November 30, 2016 and May 31, 2016, respectively

     429,011         439,688   

Inventories:

     

Raw materials

     168,586         162,427   

Work in process

     85,933         86,892   

Finished products

     83,339         70,016   
  

 

 

    

 

 

 

Total inventories

     337,858         319,335   

Income taxes receivable

     7,997         10,535   

Assets held for sale

     10,050         10,079   

Prepaid expenses and other current assets

     47,385         51,290   
  

 

 

    

 

 

 

Total current assets

     1,007,481         915,115   

Investments in unconsolidated affiliates

     203,508         191,826   

Goodwill

     243,918         246,067   

Other intangible assets, net of accumulated amortization of $56,220 and $49,532 at November 30, 2016 and May 31, 2016, respectively

     88,588         96,164   

Other assets

     27,914         29,254   

Property, plant and equipment:

     

Land

     18,397         18,537   

Buildings and improvements

     257,950         256,973   

Machinery and equipment

     973,941         945,951   

Construction in progress

     34,732         48,156   
  

 

 

    

 

 

 

Total property, plant and equipment

     1,285,020         1,269,617   

Less: accumulated depreciation

     713,705         686,779   
  

 

 

    

 

 

 

Total property, plant and equipment, net

     571,315         582,838   
  

 

 

    

 

 

 

Total assets

   $ 2,142,724       $ 2,061,264   
  

 

 

    

 

 

 

Liabilities and equity

     

Current liabilities:

     

Accounts payable

   $ 278,192       $ 290,432   

Short-term borrowings

     497         2,651   

Accrued compensation, contributions to employee benefit plans and related taxes

     65,308         75,105   

Dividends payable

     14,182         13,471   

Other accrued items

     41,815         45,056   

Income taxes payable

     3,364         2,501   

Current maturities of long-term debt

     873         862   
  

 

 

    

 

 

 

Total current liabilities

     404,231         430,078   

Other liabilities

     63,910         63,487   

Distributions in excess of investment in unconsolidated affiliate

     67,516         52,983   

Long-term debt

     576,038         577,491   

Deferred income taxes, net

     20,267         17,379   
  

 

 

    

 

 

 

Total liabilities

     1,131,962         1,141,418   

Shareholders’ equity—controlling interest

     884,940         793,371   

Noncontrolling interests

     125,822         126,475   
  

 

 

    

 

 

 

Total equity

     1,010,762         919,846   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 2,142,724       $ 2,061,264   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2016     2015     2016     2015  

Net sales

   $ 727,780      $ 699,816      $ 1,465,329      $ 1,457,963   

Cost of goods sold

     604,977        590,637        1,195,244        1,235,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     122,803        109,179        270,085        222,195   

Selling, general and administrative expense

     76,487        72,722        157,543        148,673   

Impairment of long-lived assets

     —          22,962        —          25,962   

Restructuring and other expense

     3,272        1,523        4,600        4,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     43,044        11,972        107,942        42,968   

Other income (expense):

        

Miscellaneous income, net

     872        996        1,735        418   

Interest expense

     (7,658     (7,799     (15,528     (15,653

Equity in net income of unconsolidated affiliates

     27,124        29,247        61,668        55,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     63,382        34,416        155,817        83,561   

Income tax expense

     13,515        8,665        37,414        22,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     49,867        25,751        118,403        60,746   

Net earnings attributable to noncontrolling interests

     3,302        2,375        6,271        5,402   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to controlling interest

   $ 46,565      $ 23,376      $ 112,132      $ 55,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

        

Average common shares outstanding

     62,348        62,676        62,115        63,338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to controlling interest

   $ 0.75      $ 0.37      $ 1.81      $ 0.87   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Average common shares outstanding

     64,725        64,663        64,599        65,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to controlling interest

   $ 0.72      $ 0.36      $ 1.74      $ 0.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding at end of period

     62,562        62,101        62,562        62,101   

Cash dividends declared per share

   $ 0.20      $ 0.19      $ 0.40      $ 0.38   

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2016     2015     2016     2015  

Net earnings

   $ 49,867      $ 25,751      $ 118,403      $ 60,746   

Other comprehensive income (loss):

        

Foreign currency translation

     (7,517     (9,214     (8,182     (7,391

Pension liability adjustment, net of tax

     —          —          —          (8

Cash flow hedges, net of tax

     1,652        (2,523     2,277        (1,893
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (5,865     (11,737     (5,905     (9,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     44,002        14,014        112,498        51,454   

Comprehensive income attributable to noncontrolling interests

     3,155        1,760        6,128        4,731   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to controlling interest

   $ 40,847      $ 12,254      $ 106,370      $ 46,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2016     2015     2016     2015  

Operating activities:

        

Net earnings

   $ 49,867      $ 25,751      $ 118,403      $ 60,746   

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

        

Depreciation and amortization

     21,645        20,547        43,476        41,987   

Impairment of long-lived assets

     —          22,962        —          25,962   

Provision for (benefit from) deferred income taxes

     2,316        (9,851     2,336        (15,391

Bad debt (income) expense

     232        (2     151        8   

Equity in net income of unconsolidated affiliates, net of distributions

     (2,824     (10,389     1,074        (15,902

Net (gain) loss on sale of assets

     (2,912     (5,854     1,484        (4,248

Stock-based compensation

     3,824        3,880        6,960        7,657   

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

        

Receivables

     (7,156     23,474        9,798        66,103   

Inventories

     31,875        31,645        (18,523     23,821   

Prepaid expenses and other current assets

     (1,737     17,467        5,425        28,633   

Other assets

     1,165        (3,245     2,411        (2,803

Accounts payable and accrued expenses

     (65,946     (72,846     (22,885     (31,220

Other liabilities

     950        7,487        2,094        4,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     31,299        51,026        152,204        189,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Investment in property, plant and equipment

     (14,730     (21,995     (31,046     (60,492

Acquisitions, net of cash acquired

     —          (2,950     —          (2,950

Investments in unconsolidated affiliates

     —          (226     —          (1,913

Proceeds from sale of assets

     799        9,325        956        9,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (13,931     (15,846     (30,090     (55,899
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Net proceeds from (repayments of) short-term borrowings

     (1,037     27,499        (2,154     (41,012

Proceeds from long-term debt

     —          —          —          921   

Principal payments on long-term debt

     (218     (220     (437     (428

Proceeds from issuance of common shares, net of tax withholdings

     (2,849     3,666        2,972        3,064   

Payments to noncontrolling interests

     (6,781     (1,564     (6,781     (4,900

Repurchase of common shares

     —          (43,914     —          (71,496

Dividends paid

     (12,828     (12,065     (24,722     (23,616
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (23,713     (26,598     (31,122     (137,467
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (6,345     8,582        90,992        (3,713

Cash and cash equivalents at beginning of period

     181,525        18,772        84,188        31,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 175,180      $ 27,354      $ 175,180      $ 27,354   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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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.

We own controlling interests in the following six joint ventures: dHybrid Systems, LLC (“dHybrid”) (79.59%), Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), Worthington Ar1taş Bas1nçl1 Kaplar Sanayi (“Worthington Aritas”) (75%), Worthington Energy Innovations, LLC (“WEI”) (75%), and Worthington Specialty Processing (“WSP”) (51%). These joint ventures are consolidated with the equity owned by the other joint venture members shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings and other comprehensive loss (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included. Operating results for the three and six months ended November 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2017 (“fiscal 2017”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2016 (“fiscal 2016”) of Worthington Industries, Inc. (the “2016 Form 10-K”).

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

Recently Adopted Accounting Standards

In February 2015, amended accounting guidance was issued that revised consolidation requirements in order to provide financial statement users with a more useful presentation of an entity’s economic and operational results. The amended guidance revises the consolidation requirements for limited partnerships, the considerations surrounding the primary beneficiary determination and the consolidation of certain investment funds. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.

In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs totaling $2,319,000 and $2,491,000 as of November 30, 2016 and May 31, 2016, respectively, have been presented as a component of the carrying amount of long-term debt reported in our consolidated balance sheets. These amounts were previously capitalized and reported within other assets.

In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.

 

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In March 2016, amended accounting guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in the statement of cash flows. The Company early adopted this guidance during the fourth quarter of fiscal 2016. As required for early adoption in an interim period, all adjustments have been reflected as of the beginning of fiscal 2016. Accordingly, income tax expense for the three and six months ended November 30, 2015 has been restated to reflect excess tax benefits associated with share-based payments totaling $136,000 and $694,000, respectively, in current income tax expense, rather than in paid-in capital.

Recently Issued Accounting Standards

In May 2014, amended accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and implementation of guidance related to licensing. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. Our evaluation is ongoing and not complete. However, we currently do not anticipate a material impact on our revenue recognition practices. We expect to make a determination as to the timing and method of adoption in the second half of fiscal 2017.

In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance requires that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.

In February 2016, amended accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amended guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.

In March 2016, amended accounting guidance was issued regarding derivative instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.

In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended guidance is effective for fiscal

 

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years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and we have not determined the effect of the amended guidance on our ongoing financial reporting.

In August 2016, amended accounting guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.

In October 2016, amended accounting guidance was issued that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and have not determined the effect of the amended guidance on our ongoing financial reporting.

NOTE B – Investments in Unconsolidated Affiliates

Our investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. These include ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero”) (50%), Worthington Armstrong Venture (“WAVE”) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).

We received distributions from unconsolidated affiliates totaling $62,742,000 during the six months ended November 30, 2016. We have received cumulative distributions from WAVE in excess of our investment balance totaling $67,516,000 at November 30, 2016. In accordance with the applicable accounting guidance, these excess distributions are reclassified to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if it becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any balance classified as a liability as income immediately.

We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows.

 

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Combined financial information for our unconsolidated affiliates is summarized as follows:

 

(in thousands)    November 30,
2016
     May 31,
2016
 

Cash

   $ 59,751       $ 112,122   

Other current assets

     523,625         446,796   

Noncurrent assets

     352,117         352,370   
  

 

 

    

 

 

 

Total assets

   $ 935,493       $ 911,288   
  

 

 

    

 

 

 

Current liabilities

   $ 141,808       $ 112,491   

Short-term borrowings

     9,210         11,398   

Current maturities of long-term debt

     2,807         3,297   

Long-term debt

     263,646         266,942   

Other noncurrent liabilities

     19,834         21,034   

Equity

     498,188         496,126   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 935,493       $ 911,288   
  

 

 

    

 

 

 

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
(in thousands)    2016      2015      2016      2015  

Net sales

   $ 387,192       $ 389,185       $ 804,307       $ 793,648   

Gross margin

     96,541         84,767         220,738         173,785   

Operating income

     67,365         55,810         161,762         117,057   

Depreciation and amortization

     6,973         8,068         13,793         16,165   

Interest expense

     2,151         2,136         4,299         4,295   

Income tax expense

     3,545         2,164         11,063         4,723   

Net earnings

     63,444         71,144         149,511         134,070   

The financial results of WSP have been included in the amounts presented in the tables above through March 1, 2016. Effective March 1, 2016, the Company obtained effective control over the operations of WSP. As a result, WSP’s results have been consolidated within the financial results of Steel Processing since that date with the minority member’s portion of earnings eliminated within earnings attributable to noncontrolling interests.

NOTE C – Impairment of Long-Lived Assets

We review the carrying value of our long-lived assets, including intangible assets with definite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.

Impairment testing of long-lived assets with definite useful lives involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, which would be recorded as an impairment charge in our consolidated statement of earnings.

No impairment charges were recognized during the six months ended November 30, 2016.

Impairment charges during the six months ended November 30, 2015, consisted of $3,000,000 related to the then remaining long-lived assets of the Company’s Engineered Cabs facility in Florence, South Carolina, which ceased operations on September 30, 2015, and $22,962,000 for the impairment of the long-lived assets of two oil & gas equipment facilities triggered by a significant decrease in the long-term cash flow projections of that business. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2016 Form 10-K.

 

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NOTE D – Restructuring and Other Expense

We consider restructuring activities to be programs whereby we fundamentally change our operations such as closing and consolidating manufacturing facilities, moving manufacturing of a product to another location, and rationalizing headcount.

A progression of the liabilities associated with our restructuring activities, combined with a reconciliation to the restructuring and other expense financial statement caption in our consolidated statement of earnings for the six months ended November 30, 2016 is summarized as follows:

 

(in thousands)    Beginning
Balance
     Expense      Payments     Adjustments      Ending
Balance
 

Early retirement and severance

   $ 1,831       $ 1,572       $ (2,707   $ 39       $ 735   

Facility exit and other costs

     653         2,019         (1,295     -         1,377   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 2,484         3,591       $ (4,002   $ 39       $ 2,112   
  

 

 

       

 

 

   

 

 

    

 

 

 

Net loss on sale of assets

        1,009           
     

 

 

         

Restructuring and other expense

      $ 4,600           
     

 

 

         

During the six months ended November 30, 2016, the following activities were taken related to the Company’s restructuring activities:

 

   

The Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the consolidation of the Cryogenics business unit into the Industrial Products business unit. In connection with this matter, the Company recognized severance expense of $1,356,000 related to permanent headcount reductions.

 

   

In connection with the closure of the Company’s stainless steel business, Precision Specialty Metals, Inc. (“PSM”), the Company recognized $1,264,000 of facility exit costs.

 

   

In connection with the closure of the Engineered Cabs facility in Florence, South Carolina, the Company recognized facility exit costs of $307,000. The Company also recognized a net loss of $101,000 related to the disposal of assets.

 

   

In connection with the consolidation of the Company’s existing cryogenics facility in Istanbul, Turkey, to its Greenfield facility in Bandirma, Turkey, the Company recognized facility exit costs of $421,000 and severance expense of $309,000. The consolidation is expected to be complete in the second half of fiscal 2017.

 

   

The Company sold the remaining real estate of the legacy Advanced Component Technologies, Inc. (“ACT”) business within Engineered Cabs for cash proceeds of $700,000, resulting in a loss of $822,000.

 

   

In connection with other non-significant restructuring activities, the Company recognized a credit to severance expense of $93,000 and facility exit costs totaling $27,000. The Company also recognized a net loss on disposal of assets of $86,000.

The total liability as of November 30, 2016 is expected to be paid in the next twelve months.

NOTE E – Contingent Liabilities and Commitments

We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, would not significantly affect our consolidated financial position or future results of operations or cash flows. We believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations or cash flows.

 

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NOTE F – Guarantees

We do not have guarantees that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of November 30, 2016, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $9,883,000 at November 30, 2016. 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.

NOTE G – Debt and Receivables Securitization

We maintain a $500,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders that matures in April 2020. Borrowings under the Credit Facility typically have maturities of less than one year. However, we can extend the term of amounts borrowed by renewing these borrowings for the term of the Credit Facility. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime rate or Fed Funds rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at November 30, 2016.

We had letters of credit totaling $15,266,000 outstanding as of November 30, 2016. These letters of credit have been issued to third parties and had no amounts drawn against them at November 30, 2016. While not drawn against at November 30, 2016, $13,600,000 of these letters of credit were issued against availability under the Credit Facility, leaving $486,400,000 available at November 30, 2016.

We also maintain a $100,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”) which expires in January 2018. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $100,000,000 of undivided ownership interests in this pool of accounts receivable to a third-party bank. We retain an undivided interest in this pool and are subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables more than 90 days past due, receivables offset by an allowance for doubtful accounts due to bankruptcy or other cause, concentrations over certain limits with specific customers and certain reserve amounts, we believe additional risk of loss is minimal. As of November 30, 2016, no undivided ownership interests in this pool of accounts receivable had been sold.

 

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NOTE H – Other Comprehensive Income

The following table summarizes the tax effects on each component of OCI for the three months ended November 30:

 

     2016     2015  
     Before-Tax     Tax     Net-of-Tax     Before-Tax     Tax      Net-of-Tax  
(in thousands)                                      

Foreign currency translation

   $ (7,517   $ -      $ (7,517   $ (9,214   $ -       $ (9,214

Pension liability adjustment

     -        -        -        -        -         -   

Cash flow hedges

     2,047        (395     1,652        (3,805     1,282         (2,523
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive loss

   $ (5,470   $ (395   $ (5,865   $ (13,019   $ 1,282       $ (11,737
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table summarizes the tax effects on each component of OCI for the six months ended November 30:

 

     2016     2015  
     Before-Tax     Tax     Net-of-Tax     Before-Tax     Tax      Net-of-Tax  
(in thousands)                                      

Foreign currency translation

   $ (8,182   $ -      $ (8,182   $ (7,391   $ -       $ (7,391

Pension liability adjustment

     -        -        -        (8     -         (8

Cash flow hedges

     3,135        (858     2,277        (2,567     674         (1,893
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive loss

   $ (5,047   $ (858   $ (5,905   $ (9,966   $ 674       $ (9,292
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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NOTE I – Changes in Equity

The following table provides a summary of the changes in total equity, shareholders’ equity attributable to controlling interest, and equity attributable to noncontrolling interests for the six months ended November 30, 2016:

 

     Controlling Interest              
(in thousands)    Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Loss, Net of
Tax
    Retained
Earnings
    Total     Non-
controlling
Interests
    Total  

Balance at May 31, 2016

   $ 298,984       $ (28,565   $ 522,952      $ 793,371      $ 126,475      $ 919,846   

Net earnings

     -         -        112,132        112,132        6,271        118,403   

Other comprehensive loss

     -         (5,762     -        (5,762     (143     (5,905

Common shares issued, net of withholding tax

     2,972         -        -        2,972        -        2,972   

Common shares in NQ plans

     948         -        -        948        -        948   

Stock-based compensation

     7,040         -        -        7,040        -        7,040   

Cash dividends declared

     -         -        (25,761     (25,761     -        (25,761

Dividends to noncontrolling interest

     -         -        -        -        (6,781     (6,781
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 30, 2016

   $ 309,944       $ (34,327   $ 609,323      $ 884,940      $ 125,822      $ 1,010,762   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The components of the changes in accumulated other comprehensive loss were as follows:

 

(in thousands)    Foreign
Currency
Translation
    Pension
Liability
Adjustment
    Cash
Flow
Hedges
    Accumulated
Other
Comprehensive
Loss
 

Balance as of May 31, 2016

   $ (18,728   $ (17,061   $ 7,224      $ (28,565

Other comprehensive income (loss) before reclassifications

     (8,039     -        8,050        11   

Reclassification adjustments to income (a)

     -        -        (4,915     (4,915

Income taxes

     -        -        (858     (858
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of November 30, 2016

   $ (26,767   $ (17,061   $ 9,501      $ (34,327
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed in “NOTE N – Derivative Instruments and Hedging Activities.”

NOTE J – Stock-Based Compensation

Non-Qualified Stock Options

During the six months ended November 30, 2016, we granted non-qualified stock options covering a total of 111,000 common shares under our stock-based compensation plans. The option price of $42.30 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $11.60 per share. The calculated pre-tax stock-based compensation expense for these stock options, after an estimate for forfeitures, is $1,146,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:

 

Dividend yield

     2.59

Expected volatility

     36.86

Risk-free interest rate

     1.15

Expected term (years)

     6.0   

 

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Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the United States Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.

Service-Based Restricted Common Shares

During the six months ended November 30, 2016, we granted an aggregate of 513,300 service-based restricted common shares under our stock-based compensation plans. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the date of grant, or $42.13 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $19,347,000 and will be recognized on a straight-line basis over the three-year service-based vesting period.

Performance Share Awards

We have awarded performance shares to certain key employees under our stock-based compensation plans. These performance shares are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the three-year periods ending May 31, 2017, 2018 and 2019. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period. The fair values of our performance shares are determined by the closing market prices of the underlying common shares at their respective grant dates and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the six months ended November 30, 2016, we granted performance share awards covering an aggregate of 67,000 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $3,009,000 and will be recognized over the three-year performance period.

NOTE K – Income Taxes

Income tax expense for the six months ended November 30, 2016 and November 30, 2015 reflected estimated annual effective income tax rates of 28.5% and 30.9%, respectively. The annual effective income tax rates exclude any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of Worthington Aritas (a foreign corporation), and TWB’s wholly-owned foreign corporations, is reported in our consolidated tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2017 could be materially different from the forecasted rate as of November 30, 2016.

 

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NOTE L – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the three and six months ended November 30, 2016 and 2015:

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
(in thousands, except per share amounts)    2016      2015      2016      2015  

Numerator (basic & diluted):

           

Net earnings attributable to controlling interest-income available to common shareholders

   $ 46,565       $ 23,376       $ 112,132       $ 55,344   

Denominator:

           

Denominator for basic earnings per share attributable to controlling interest—weighted average common shares

     62,348         62,676         62,115         63,338   

Effect of dilutive securities

     2,377         1,987         2,484         2,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share attributable to controlling interest—adjusted weighted average common shares

     64,725         64,663         64,599         65,350   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to controlling interest

   $ 0.75       $ 0.37       $ 1.81       $ 0.87   

Diluted earnings per share attributable to controlling interest

   $ 0.72       $ 0.36       $ 1.74       $ 0.85   

Stock options and restricted common shares covering 110,354 and 367,094 common shares for the three months ended November 30, 2016 and 2015, respectively, and 92,923 and 346,557 common shares for the six months ended November 30, 2016 and 2015, respectively, have been excluded from the computation of diluted earnings per share because the effect of their inclusion would have been “anti-dilutive.”

 

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NOTE M – Segment Operations

Summarized financial information for our reportable segments is shown in the following table:

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
(in thousands)    2016      2015      2016      2015  

Net sales

           

Steel Processing

   $ 508,806       $ 467,812       $ 1,014,480       $ 958,612   

Pressure Cylinders

     194,661         201,173         399,870         425,567   

Engineered Cabs

     22,463         28,699         48,044         67,316   

Other

     1,850         2,132         2,935         6,468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 727,780       $ 699,816       $ 1,465,329       $ 1,457,963   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

           

Steel Processing

   $ 35,448       $ 26,642       $ 90,230       $ 50,280   

Pressure Cylinders

     11,304         (10,309      25,409         6,510   

Engineered Cabs

     (3,381      (4,290      (5,224      (13,581

Other

     (327      (71      (2,473      (241
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 43,044       $ 11,972       $ 107,942       $ 42,968   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impairment of long-lived assets

           

Steel Processing

   $ -       $ -       $ -       $ -   

Pressure Cylinders

     -         22,962         -         22,962   

Engineered Cabs

     -         -         -         3,000   

Other

     -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impairment of long-lived assets

   $ -       $ 22,962       $ -       $ 25,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring and other expense (income)

           

Steel Processing

   $ 318       $ 2,258       $ 1,284       $ 2,720   

Pressure Cylinders

     1,963         (16      2,109         715   

Engineered Cabs

     1,004         765         1,210         2,643   

Other

     (13      (1,484      (3      (1,486
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and other expense

   $ 3,272       $ 1,523       $ 4,600       $ 4,592   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(in thousands)    November 30,
2016
     May 31,
2016
 

Total assets

     

Steel Processing

   $ 836,265       $ 819,853   

Pressure Cylinders

     763,716         787,786   

Engineered Cabs

     65,273         75,124   

Other

     477,470         378,501   
  

 

 

    

 

 

 

Total assets

   $ 2,142,724       $ 2,061,264   
  

 

 

    

 

 

 

 

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Table of Contents

NOTE N – Derivative Instruments and Hedging Activities

We utilize derivative instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.

Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Foreign Currency Rate Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating foreign currency exchange rates; however, derivative instruments are not used to manage this risk.

Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative contracts to manage the associated price risk.

We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. At November 30, 2016, we had posted total cash collateral of $154,000 to our margin accounts. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty, and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “NOTE O – Fair Value” for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.

 

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The following table summarizes the fair value of our derivative instruments and the respective financial statement caption in which they were recorded in our consolidated balance sheet at November 30, 2016:

 

     Asset Derivatives      Liability Derivatives  
(in thousands)    Balance
Sheet
Location
   Fair
Value
     Balance
Sheet
Location
   Fair
Value
 

Derivatives designated as hedging instruments:

           

Commodity contracts

   Receivables    $ 15,807       Accounts payable    $ 489   
   Other assets      101       Other liabilities      -   
     

 

 

       

 

 

 
        15,908            489   
     

 

 

       

 

 

 

Interest rate contracts

   Receivables      -       Accounts payable      141   
   Other assets      -       Other liabilities      195   
     

 

 

       

 

 

 
        -            336   
     

 

 

       

 

 

 

Totals

      $ 15,908          $ 825   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity contracts

   Receivables    $ 4,149       Accounts payable    $ 131   
   Other assets      41       Other liabilities      -   
     

 

 

       

 

 

 
        4,190            131   
     

 

 

       

 

 

 

Foreign currency contracts

   Receivables      514       Accounts payable      -   
     

 

 

       

 

 

 

Totals

      $ 4,704          $ 131   
     

 

 

       

 

 

 

Total derivative instruments

      $ 20,612          $ 956   
     

 

 

       

 

 

 

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $100,000 increase in receivables with a corresponding increase in accounts payable.

 

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The following table summarizes the fair value of our derivative instruments and the financial statement caption in which they were recorded in the consolidated balance sheet at May 31, 2016:

 

     Asset Derivatives      Liability Derivatives  
(in thousands)    Balance
Sheet
Location
     Fair
Value
     Balance
Sheet
Location
   Fair
Value
 

Derivatives designated as hedging instruments:

           

Commodity contracts

    

Receivables

      $ 13,224      

Accounts payable

   $ 696   
     Other assets         3,589      

Other liabilities

     80   
     

 

 

       

 

 

 
        16,813            776   
     

 

 

       

 

 

 

Interest rate contracts

    

Receivables

        -      

Accounts payable

     155   
     Other assets         -      

Other liabilities

     306   
     

 

 

       

 

 

 
        -            461   
     

 

 

       

 

 

 

Totals

      $ 16,813          $ 1,237   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity contracts

    

Receivables

      $ 4,660      

Accounts payable

   $ 761   
     Other assets         317      

Other liabilities

     -   
     

 

 

       

 

 

 
        4,977            761   
     

 

 

       

 

 

 

Foreign currency contracts

    

Receivables

        -      

Accounts payable

     15   
     

 

 

       

 

 

 
        -            15   
     

 

 

       

 

 

 

Totals

      $ 4,977          $ 776   
     

 

 

       

 

 

 

Total derivative instruments

      $ 21,790          $ 2,013   
     

 

 

       

 

 

 

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $300,000 decrease in receivables with a corresponding decrease in accounts payable.

Cash Flow Hedges

We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rates and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same financial statement caption associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.

The following table summarizes our cash flow hedges outstanding at November 30, 2016:

 

(in thousands)    Notional
Amount
     Maturity Date

Commodity contracts

   $ 49,224       December 2016 - December 2018

Interest rate contracts

     16,201       September 2019

 

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The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the three months ended November 30, 2016 and 2015:

 

           Location of          Location of       
           Gain (Loss)    Gain (Loss)     Gain    Gain  
           Reclassified    Reclassified     (Ineffective    (Ineffective  
     Gain (Loss)     from    from     Portion)    Portion)  
     Recognized     Accumulated    Accumulated     and Excluded    and Excluded  
     in OCI     OCI    OCI     from    from  
     (Effective     (Effective    (Effective     Effectiveness    Effectiveness  
(in thousands)    Portion)    

Portion)

   Portion)    

Testing

   Testing  

For the three months ended November 30, 2016:

            

Commodity contracts

   $ 7,157      Cost of goods sold    $ 5,737      Cost of goods sold    $ -   

Interest rate contracts

     160      Interest expense      (467   Interest expense      -   
  

 

 

      

 

 

      

 

 

 

Totals

   $ 7,317         $ 5,270         $ -   
  

 

 

      

 

 

      

 

 

 

For the three months ended November 30, 2015:

            

Commodity contracts

   $ (10,210   Cost of goods sold    $ (6,460   Cost of goods sold    $ -   

Interest rate contracts

     (201   Interest expense      (146   Interest expense      -   
  

 

 

      

 

 

      

 

 

 

Totals

     (10,411        (6,606        -   
  

 

 

      

 

 

      

 

 

 

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the six months ended November 30, 2016 and 2015:

 

           Location of          Location of       
           Gain (Loss)    Gain (Loss)     Gain    Gain  
           Reclassified    Reclassified     (Ineffective    (Ineffective  
     Gain (Loss)     from    from     Portion)    Portion)  
     Recognized     Accumulated    Accumulated     and Excluded    and Excluded  
     in OCI     OCI    OCI     from    from  
     (Effective     (Effective    (Effective     Effectiveness    Effectiveness  
(in thousands)    Portion)    

Portion)

   Portion)    

Testing

   Testing  

For the six months ended November 30, 2016:

            

Interest rate contracts

   $ 7,926      Interest expense    $ 5,485      Interest expense    $ -   

Commodity contracts

     124      Cost of goods sold      (570   Cost of goods sold      -   
  

 

 

      

 

 

      

 

 

 

Totals

   $ 8,050         $ 4,915         $ -   
  

 

 

      

 

 

      

 

 

 

For the six months ended November 30, 2015:

            

Interest rate contracts

   $ (167   Interest expense    $ (285   Interest expense    $ -   

Commodity contracts

     (18,336   Cost of goods sold      (15,647   Cost of goods sold      -   

Foreign currency contracts

     -      Miscellaneous income, net      (4   Miscellaneous income, net      -   
  

 

 

      

 

 

      

 

 

 

Totals

   $ (18,503      $ (15,936      $ -   
  

 

 

      

 

 

      

 

 

 

 

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The estimated net amount of the losses recognized in accumulated OCI at November 30, 2016 expected to be reclassified into net earnings within the succeeding twelve months is $11,131,000 (net of tax of $6,147,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2016, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2017 and 2018.

Economic (Non-designated) Hedges

We enter into foreign currency contracts to manage our foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.

The following table summarizes our economic (non-designated) derivative instruments outstanding at November 30, 2016:

 

(in thousands)    Notional
Amount
     Maturity Date(s)

Commodity contracts

   $ 22,389       December 2016 - August 2018

Foreign currency contracts

     14,149       December 2016 - August 2017

 

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The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended November 30, 2016 and 2015:

 

            Gain (Loss) Recognized  
            in Earnings for the  
     Location of Gain (Loss)      Three Months Ended
November 30,
 
(in thousands)    Recognized in Earnings      2016     2015  

Commodity contracts

     Cost of goods sold       $ 2,003      $ (5,390

Foreign currency contracts

     Miscellaneous income, net         (599     70   
     

 

 

   

 

 

 

Total

      $ 1,404      $ (5,320
     

 

 

   

 

 

 

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the six months ended November 30, 2016 and 2015:

 

            Gain (Loss) Recognized  
            in Earnings for the  
     Location of Gain (Loss)      Six Months Ended
November 30,
 
(in thousands)    Recognized in Earnings      2016     2015  

Commodity contracts

     Cost of goods sold       $ 4,911      $ (8,145

Foreign currency contracts

     Miscellaneous income, net         (665     70   
     

 

 

   

 

 

 

Total

      $ 4,246      $ (8,075
     

 

 

   

 

 

 

The gain (loss) on the foreign currency derivatives significantly offsets the gain (loss) on the hedged item.

NOTE O – Fair Value

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

 

Level 1

      Observable prices in active markets for identical assets and liabilities.

Level 2

      Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.

Level 3

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

 

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Recurring Fair Value Measurements

At November 30, 2016, our assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Totals  

Assets

           

Derivative instruments (1)

   $ -       $ 20,612       $ -       $ 20,612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 20,612       $ -       $ 20,612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative instruments (1)

   $ -       $ 956       $ -       $ 956   

Contingent consideration obligation (2)

     -         -         4,549         4,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ -       $ 956       $ 4,549       $ 5,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

At May 31, 2016, our assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Totals  

Assets

           

Derivative instruments (1)

   $ -       $ 21,790       $ -       $ 21,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 21,790       $ -       $ 21,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative instruments (1)

   $ -       $ 2,013       $ -       $ 2,013   

Contingent consideration obligations (2)

     -         -         4,519         4,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ -       $ 2,013       $ 4,519       $ 6,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

 

(2)

The fair value of the contingent consideration obligations is determined using a probability weighted cash flow approach based on management’s projections of future cash flows of the acquired businesses. The fair value measurement was based on Level 3 inputs not observable in the market.

The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $593,821,000 and $609,245,000 at November 30, 2016 and May 31, 2016, respectively. The carrying amount of long-term debt, including current maturities, was $576,911,000 and $578,353,000 at November 30, 2016 and May 31, 2016, respectively.

 

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Table of Contents

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected statements contained in this “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. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Quarterly Report on Form 10-Q and “Part I—Item 1A.—Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

Introduction

The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position of Worthington Industries, Inc., together with its subsidiaries (collectively, “we,” “our,” “Worthington,” or our “Company”), should be read in conjunction with our consolidated financial statements and notes thereto included in “Item 1. – Financial Statements” of this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 (“fiscal 2016”) includes additional information about Worthington, our operations and our consolidated financial position and should be read in conjunction with this Quarterly Report on Form 10-Q.

As of November 30, 2016, excluding our joint ventures, we operated 29 manufacturing facilities worldwide, principally in three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs. Our remaining operating segment consists of Worthington Energy Innovations (“WEI”), which does not meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, and therefore is combined and reported in the “Other” category.

We also held equity positions in 12 active joint ventures, which operated 50 manufacturing facilities worldwide, as of November 30, 2016. Six of these joint ventures are consolidated with the equity owned by the other joint venture member(s) shown as noncontrolling interests in our consolidated balance sheets, and their portion of net earnings and other comprehensive loss shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. The remaining six of these joint ventures are accounted for using the equity method.

Overview

The Company’s performance during the second quarter of fiscal 2017 was highlighted by near record earnings at Steel Processing and steady contributions from joint ventures. The Company delivered overall sales growth of 4% driven primarily by higher average direct selling prices in Steel Processing due to recent increases in flat-rolled steel pricing and contributions from the consolidation of the WSP joint venture effective March 1, 2016. Margins also improved during the quarter on a favorable pricing spread in Steel Processing, primarily related to coated products, and strength in the consumer products business and improvement in the alternative fuels business within Pressure Cylinders. Weakness in the oil & gas equipment business within Pressure Cylinders business continues to weigh on our results. We have reduced costs in an attempt to match demand in this market while maintaining capacity to respond to an eventual market upturn.

Equity in net income of unconsolidated affiliates (“equity income”) decreased $2.1 million from the prior year quarter on lower contributions from ClarkDietrich. However, ClarkDietrich’s contribution to equity income actually improved after adjusting for $4.0 million of litigation gains recognized in the prior year. The contribution from Serviacero was also up on higher steel pricing. Strong automotive and construction markets in the U.S. are benefiting these businesses. We received distributions from unconsolidated joint ventures of $24.3 million during the second quarter of fiscal 2017.

 

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Table of Contents

Recent Business Developments

 

   

The Company completed the exit of the businesses within its former Construction Services operating segment during the first quarter of fiscal 2017.

 

   

The Company’s laser blanking joint venture, TWB Company, L.L.C. (“TWB”), commissioned two new production lines in Mexico during the second quarter of fiscal 2017.

 

   

During the second quarter of fiscal 2017, the Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the consolidation of the Cryogenics business unit into the Industrial Products business unit.

 

   

On December 20, 2016, the Board of Directors of Worthington Industries, Inc. (the “Board”) declared a quarterly dividend of $0.20 per share payable on March 29, 2017, to shareholders of record on March 15, 2017.

Market & Industry Overview

We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for the second quarter of each of fiscal 2017 and fiscal 2016 is illustrated in the following chart:

 

LOGO

The automotive industry is one of the largest consumers of flat-rolled steel, and thus the largest end market for our Steel Processing operating segment. Approximately 64% of the net sales of our Steel Processing operating segment are to the automotive market. North American vehicle production, primarily by Ford, General Motors and FCA US (the “Detroit Three automakers”), has a considerable impact on the activity within this operating segment. The majority of the net sales of three of our unconsolidated joint ventures are also to the automotive end market.

Approximately 12% of the net sales of our Steel Processing operating segment and 48% of the net sales of our Engineered Cabs operating segment are to the construction market. The construction market is also the predominant end market for two of our unconsolidated joint ventures: WAVE and ClarkDietrich. While the market price of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including U.S. gross domestic product (“GDP”), the Dodge Index of construction contracts and, in the case of ClarkDietrich, trends in the relative price of framing lumber and steel.

Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 24% and 52% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, industrial, lawn and garden, agriculture, oil & gas equipment, heavy truck, mining, forestry and appliance. Given the many different products that make up these net sales and the wide variety of end markets, it is very difficult to detail the key market indicators that drive these portions of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing these operating segments.

 

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We use the following information to monitor our costs and demand in our major end markets:

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2016     2015     Inc / (Dec)     2016     2015     Inc / (Dec)  

U.S. GDP (% growth year-over-year) 1

     1.7     1.0     0.7     1.6     1.2     0.4

Hot-Rolled Steel ($ per ton) 2

   $ 544      $ 419      $ 125      $ 581      $ 440      $ 141   

Detroit Three Auto Build (000’s vehicles) 3

     2,388        2,495        (107     4,768        4,814        (46

No. America Auto Build (000’s vehicles) 3

     4,619        4,619        -        9,182        9,012        170   

Zinc ($ per pound) 4

   $ 0.83      $ 0.75      $ 0.08      $ 0.83      $ 0.82      $ 0.01   

Natural Gas ($ per mcf) 5

   $ 1.90      $ 2.59      $ (0.69   $ 1.90      $ 2.69      $ (0.79

On-Highway Diesel Fuel Prices ($ per gallon) 6

   $ 2.78      $ 2.50      $ 0.28      $ 2.59      $ 2.63      $ (0.04

Crude Oil—WTI ($ per barrel) 6

   $ 53.00      $ 44.71      $ 8.29      $ 49.52      $ 47.96      $ 1.56   

 

1 

2015 figures based on revised actuals 2 CRU Hot-Rolled Index; period average 3 IHS Global 4 LME Zinc; period average 5 NYMEX Henry Hub Natural Gas; period average 6 Energy Information Administration; period average

U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasing U.S. GDP growth rates generally indicate a weaker economy. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative (“SG&A”) expense.

The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs.

The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2017 (first and second quarters), fiscal 2016 and fiscal 2015:

 

(Dollars per ton 1 )                     
     Fiscal Year  
     2017      2016      2015  

1st Quarter

   $ 617       $ 461       $ 673   

2nd Quarter

   $ 544       $ 419       $ 651   

3rd Quarter

     N/A       $ 383       $ 578   

4th Quarter

     N/A       $ 507       $ 464   

Annual Avg.

   $ 581       $ 443       $ 592   

 

1

CRU Hot-Rolled Index, period average

No single customer contributed more than 10% of our consolidated net sales during the second quarter of fiscal 2017. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During the second quarter of fiscal 2017, overall vehicle production for the Detroit Three automakers was down 4% while North American vehicle production as a whole was flat.

Certain other commodities, such as zinc, natural gas and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plant operations and indirectly through transportation and freight expense.

 

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Table of Contents

Results of Operations

Second Quarter – Fiscal 2017 Compared to Fiscal 2016

Consolidated Operations

The following table presents consolidated operating results for the periods indicated:

 

    Three Months Ended November 30,  
          % of           % of     Increase/  
(In millions)   2016     Net sales     2015     Net sales     (Decrease)  

Net sales

  $ 727.8        100.0   $ 699.9        100.0   $ 27.9   

Cost of goods sold

    605.0        83.1     590.7        84.4     14.3   
 

 

 

     

 

 

     

 

 

 

Gross margin

    122.8        16.9     109.2        15.6     13.6   

Selling, general and administrative expense

    76.5        10.5     72.7        10.4     3.8   

Impairment of long-lived assets

    —          0.0     23.0        3.3     (23.0

Restructuring and other expense

    3.3        0.5     1.5        0.2     1.8   
 

 

 

     

 

 

     

 

 

 

Operating income

    43.0        5.9     12.0        1.7     31.0   

Miscellaneous income, net

    0.9        0.1     1.0        0.1     (0.1

Interest expense

    (7.6     -1.0     (7.8     -1.1     (0.2

Equity in net income of unconsolidated affiliates (1)

    27.1        3.7     29.2        4.2     (2.1

Income tax expense

    (13.5     -1.9     (8.6     -1.2     4.9   
 

 

 

     

 

 

     

 

 

 

Net earnings

    49.9        6.9     25.8        3.7     24.1   

Net earnings attributable to noncontrolling interests

    3.3        0.5     2.4        0.3     0.9   
 

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest

  $ 46.6        6.4   $ 23.4        3.3   $ 23.2   
 

 

 

     

 

 

     

 

 

 

(1) Equity income by unconsolidated affiliate

         

WAVE

  $ 18.7        $ 19.1        $ (0.4

ClarkDietrich

    4.3          6.4          (2.1

Serviacero

    2.0          0.4          1.6   

ArtiFlex

    2.1          2.6          (0.5

WSP

    —            0.7          (0.7

Other

    —            —            —     
 

 

 

     

 

 

     

 

 

 

Total

  $ 27.1        $ 29.2        $ (2.1
 

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest for the three months ended November 30, 2016 increased $23.2 million from the comparable period in the prior year. Net sales and operating highlights were as follows:

 

   

Net sales increased $27.9 million from the comparable period in the prior year. The increase was driven primarily by higher average direct selling prices in Steel Processing, partially offset by lower volumes in Engineered Cabs and certain Pressure Cylinders businesses. The net impact of these factors increased consolidated net sales by $17.0 million. The remaining increase was primarily due to higher tolling volumes in Steel Processing, driven by the consolidation of the WSP joint venture effective March 1, 2016.

 

   

Gross margin increased $13.6 million from the comparable period in the prior year. The improvement was driven primarily by a favorable pricing spread in Steel Processing, which increased gross margin by $21.1 million, partially offset by higher manufacturing expenses, which negatively impacted gross margin by $5.8 million due in part to production/start-up costs associated with new production lines at our TWB joint venture.

 

   

SG&A expense increased $3.8 million over the comparable prior year period driven primarily by the consolidation of WSP and the impact of prior year acquisitions in Pressure Cylinders. Overall, SG&A expense is trending in line with the prior year quarter at 10.5% of consolidated net sales.

 

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Impairment charges of $23.0 million in the prior year period related to the impairment of certain long-lived assets in our oil & gas equipment business. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

   

Restructuring and other expense of $3.3 million in the current period related primarily to severance associated with the organizational changes within Pressure Cylinders described above under Recent Business Developments and a $0.8 million loss related to the disposal of legacy real estate in Engineered Cabs. For additional financial information regarding the Company’s restructuring activities, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE D – Restructuring and Other Expense” of this Quarterly Report on Form 10-Q.

 

   

Interest expense decreased $0.2 million from the comparable period in the prior year due to lower short-term borrowings.

 

   

Equity income decreased $2.1 million from the comparable period in the prior year on lower contributions from ClarkDietrich. However, ClarkDietrich’s contribution to equity income actually improved after adjusting for $4.0 million of litigation gains recognized in the prior year. The contribution from Serviacero was also up on higher steel pricing. We received distributions of $24.3 million from our unconsolidated affiliates during the quarter. For additional financial regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.

 

   

Income tax expense increased $4.9 million from the comparable period in the prior year due to higher earnings. The increase in tax expense was partially offset by a $6.3 million tax benefit associated with share-based payment awards. The current quarter expense was calculated using an estimated annual effective income tax rate of 28.5% versus 30.9% in the prior year quarter. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE K – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.

 

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Segment Operations

Steel Processing

The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:

 

     Three Months Ended November 30,  
            % of            % of     Increase/  
(Dollars in millions)    2016      Net sales     2015      Net sales     (Decrease)  

Net sales

   $ 508.8         100.0   $ 467.8         100.0   $ 41.0   

Cost of goods sold

     437.2         85.9     406.0         86.8     31.2   
  

 

 

      

 

 

      

 

 

 

Gross margin

     71.6         14.1     61.8         13.2     9.8   

Selling, general and administrative expense

     35.8         7.0     32.9         7.0     2.9   

Restructuring and other expense

     0.3         0.1     2.3         0.5     (2.0
  

 

 

      

 

 

      

 

 

 

Operating income

   $ 35.5         7.0   $ 26.6         5.7   $ 8.9   
  

 

 

      

 

 

      

 

 

 

Material cost

   $ 339.0         $ 322.5         $ 16.5   

Tons shipped (in thousands)

     1,021           828           193   

Net sales and operating highlights were as follows:

 

   

Net sales increased $41.0 million from the comparable period in the prior year driven primarily by higher average direct selling prices, which increased net sales by $30.9 million. The remaining increase was due to higher tolling volume driven by the consolidation of the WSP joint venture effective March 1, 2016. The mix of direct versus toll tons processed was 49% to 51% compared to 62% to 38% in the prior year quarter. The change in mix was primarily the result of the consolidation of the WSP joint venture.

 

   

Operating income increased $8.9 million from the comparable period in the prior year on a favorable pricing spread, which increased gross margin by $12.9 million, partially offset by higher manufacturing expenses, which negatively impacted gross margin by $4.4 million due in part to production/start-up costs associated with new production lines at our TWB joint venture. SG&A expense increased $2.9 million driven by the consolidation of WSP and an increase in corporate allocated costs. Restructuring and other expense in the current quarter consisted primarily of costs related to the closure of Precision Specialty Metals, Inc. (“PSM”).

 

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Pressure Cylinders

The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods indicated:

 

    Three Months Ended November 30,  
           % of            % of     Increase/  
(Dollars in millions)   2016      Net sales     2015      Net sales     (Decrease)  

Net sales

  $ 194.7         100.0   $ 201.2         100.0   $ (6.5

Cost of goods sold

    145.9         74.9     154.6         76.8     (8.7
 

 

 

      

 

 

      

 

 

 

Gross margin

    48.8         25.1     46.6         23.2     2.2   

Selling, general and administrative expense

    35.5         18.2     33.9         16.8     1.6   

Impairment of long-lived assets

    —           0.0     23.0         11.4     (23.0

Restructuring and other expense

    2.0         1.0     —           0.0     2.0   
 

 

 

      

 

 

      

 

 

 

Operating income (loss)

  $ 11.3         5.8   $ (10.3      -5.1   $ 21.6   
 

 

 

      

 

 

      

 

 

 

Material cost

  $ 76.3         $ 85.5         $ (9.2

Net sales by principal class of products:

           

Consumer products

  $ 55.4         $ 49.5         $ 5.9   

Industrial products

    98.9           102.7           (3.8

Alternative fuels

    29.2           24.0           5.2   

Oil & gas equipment

    11.2           25.0           (13.8
 

 

 

      

 

 

      

 

 

 

Total Pressure Cylinders

  $ 194.7         $ 201.2         $ (6.5
 

 

 

      

 

 

      

 

 

 

Units shipped by principal class of products:

           

Consumer products

    10,383,747           10,523,692           (139,945

Industrial products

    5,790,436           5,990,875           (200,439

Alternative fuels

    134,190           107,121           27,069   

Oil & gas equipment

    434           1,044           (610
 

 

 

      

 

 

      

 

 

 

Total Pressure Cylinders

    16,308,807           16,622,732           (313,925
 

 

 

      

 

 

      

 

 

 

Net sales and operating highlights were as follows:

 

   

Net sales decreased $6.5 million from the comparable period in the prior year. The decrease was driven by lower volumes in the oil & gas equipment and industrial products businesses, partially offset by improvements in consumer products and alternative fuels. The most significant decline was in oil & gas equipment, where net sales decreased 55%, or $13.8 million, on weak demand. Net sales in the industrial products business were down $3.8 million on lower volume due to weak demand across our refillable propane cylinder products, as well as softness for high pressure industrial cylinders in Europe. An improved product mix in the consumer products business led to higher net sales despite an overall decline in units shipped. Net sales were also up in the alternative fuels business on higher volume.

 

   

Operating income increased $21.6 million from the comparable period in the prior year on lower impairment and restructuring charges, which declined a combined $21.0 million. Improvements in the consumer products and alternative fuels businesses were largely offset by continued declines in the oil & gas equipment business.

 

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Engineered Cabs

The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods indicated:

 

     Three Months Ended November 30,  
(In millions)    2016      % of
Net sales
    2015      % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 22.5         100.0   $ 28.7         100.0   $ (6.2

Cost of goods sold

     21.2         94.2     27.4         95.5     (6.2
  

 

 

      

 

 

      

 

 

 

Gross margin

     1.3         5.8     1.3         4.5     -   

Selling, general and administrative expense

     3.7         16.4     4.9         17.1     (1.2

Restructuring and other expense

     1.0         4.4     0.7         2.4     0.3   
  

 

 

      

 

 

      

 

 

 

Operating loss

   $ (3.4      -15.1   $ (4.3      -15.0   $ 0.9   
  

 

 

      

 

 

      

 

 

 

Material cost

   $ 10.2         $ 13.4         $ (3.2

Net sales and operating highlights were as follows:

 

   

Net sales decreased $6.2 million from the comparable period in the prior year on lower volume due to declines in market demand.

 

   

Operating loss improved $0.9 million to $3.4 million. The improvement resulted from successful cost reduction efforts, which led to a higher gross margin as a percentage of net sales and a 24% decline in SG&A expense.

Other

The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in the Other category, including costs associated with our captive insurance company. The following table presents a summary of operating results for the Other category for the periods indicated:

 

     Three Months Ended November 30,  
(In millions)    2016      % of
Net sales
    2015      % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 1.9         100.0   $ 2.2         100.0   $ (0.3

Cost of goods sold

     0.7         36.8     2.7         122.7     (2.0
  

 

 

      

 

 

      

 

 

 

Gross margin

     1.2         63.2     (0.5      -22.7     1.7   

Selling, general and administrative expense

     1.5         78.9     1.1         50.0     0.4   

Restructuring and other income

     -         0.0     (1.5      -68.2     1.5   
  

 

 

      

 

 

      

 

 

 

Operating loss

   $ (0.3      -15.8   $ (0.1      -4.5   $ (0.2
  

 

 

      

 

 

      

 

 

 

Net sales and operating highlights were as follows:

 

   

Net sales decreased $0.3 million from the comparable period in the prior year due to declines at WEI.

 

   

Operating loss of $0.3 million in the current period was driven primarily by losses at WEI.

 

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Six Months Year-to-Date – Fiscal 2017 Compared to Fiscal 2016

Consolidated Operations

The following table presents consolidated operating results for the periods indicated:

 

    Six Months Ended November 30,  
           % of            % of     Increase/  
(In millions)   2016      Net sales     2015      Net sales     (Decrease)  

Net sales

  $ 1,465.3         100.0   $ 1,458.0         100.0   $ 7.3   

Cost of goods sold

    1,195.2         81.6     1,235.8         84.8     (40.6
 

 

 

      

 

 

      

 

 

 

Gross margin

    270.1         18.4     222.2         15.2     47.9   

Selling, general and administrative expense

    157.6         10.8     148.6         10.2     9.0   

Impairment of long-lived assets

    —           0.0     26.0         1.8     (26.0

Restructuring and other expense

    4.6         0.3     4.6         0.3     —     
 

 

 

      

 

 

      

 

 

 

Operating income

    107.9         7.4     43.0         2.9     64.9   

Miscellaneous income, net

    1.7         0.1     0.5         0.0     1.2   

Interest expense

    (15.5      -1.1     (15.7      -1.1     (0.2

Equity in net income of unconsolidated affiliates (1)

    61.7         4.2     55.8         3.8     5.9   

Income tax expense

    (37.4      -2.6     (22.8      -1.6     14.6   
 

 

 

      

 

 

      

 

 

 

Net earnings

    118.4         8.1     60.8         4.2     57.6   

Net earnings attributable to noncontrolling interests

    6.3         0.4     5.4         0.4     0.9   
 

 

 

      

 

 

      

 

 

 

Net earnings attributable to controlling interest

  $ 112.1         7.7   $ 55.4         3.8   $ 56.7   
 

 

 

      

 

 

      

 

 

 

(1) Equity income by unconsolidated affiliate

           

WAVE

  $ 39.5         $ 41.2         $ (1.7

ClarkDietrich

    12.9           9.0           3.9   

Serviacero

    4.0           1.2           2.8   

ArtiFlex

    5.0           4.2           0.8   

WSP

    —             1.5           (1.5

Other

    0.3           (1.3        1.6   
 

 

 

      

 

 

      

 

 

 

Total

  $ 61.7         $ 55.8         $ 5.9   
 

 

 

      

 

 

      

 

 

 

Net earnings attributable to controlling interest for the six months ended November 30, 2016 increased $56.7 million from the comparable period in the prior year. Net sales and operating highlights were as follows:

 

   

Net sales increased $7.3 million from the comparable period in the prior year. The increase was the result of higher average direct selling prices in Steel Processing, which favorably impacted net sales by $37.4 million, partially offset by lower volume in Engineered Cabs and certain Pressure Cylinders businesses. Higher tolling volumes in Steel Processing, driven by the consolidation of WSP, also contributed to the overall increase in net sales.

 

   

Gross margin increased $47.9 million from the comparable period in the prior year. A favorable pricing spread, primarily in Steel Processing and to a lesser extent in Pressure Cylinders, increased gross margin by $76.4 million. The favorable impact of higher spreads was partially offset by lower volume in certain Pressure Cylinders businesses and higher overall manufacturing expenses, which reduced gross margin by a combined $27.6 million.

 

   

SG&A expense increased $9.0 million over the comparable prior year period. The increase was primarily driven by the consolidation of WSP and the impact of prior year acquisitions in Pressure Cylinders, which increased SG&A expense by a combined $6.0 million. Higher profit sharing and bonus expense and a $1.5 million increase in accrued legal expense also contributed to the overall increase.

 

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Restructuring and other expense of $4.6 million in the current period related primarily to severance associated with the organizational changes within Pressure Cylinders described above under Recent Business Developments and facility exist costs related to the ongoing closures of PSM in Steel Processing and the Florence, South Carolina, facility in Engineered Cabs. For additional financial information regarding the Company’s restructuring activities, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE D – Restructuring and Other Expense” of this Quarterly Report on Form 10-Q.

 

   

Interest expense decreased $0.2 million from the comparable period in the prior year on lower short-term borrowings.

 

   

Equity income increased $5.9 million from the comparable period in the prior year on higher contributions from ClarkDietrich and Serviacero. Equity income at ClarkDietrich was $3.9 million higher than the prior year period despite a $4.0 million favorable impact related to legal settlements in the prior year. The contribution from Serviacero was also up on higher steel pricing. Strong automotive and construction markets in the U.S. are benefiting these businesses. We received distributions of $62.7 million from our unconsolidated affiliates during the six months ended November 30, 2016. For additional financial regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.

 

   

Income tax expense increased $14.6 million from the comparable period in the prior year due to higher earnings. The increase in tax expense was partially offset by the following items recorded in the current year: (i) a $10.9 million tax benefit associated with share-based payment awards, and (ii) a $1.2 million tax benefit related to foreign tax credits. Tax expense of $37.4 million for the six months was calculated using an estimated annual effective rate of 28.5% versus 30.9% in the prior year comparable period. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE K – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.

 

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Table of Contents

Segment Operations

Steel Processing

The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:

 

     Six Months Ended November 30,  
            % of            % of     Increase/  
(Dollars in millions)    2016      Net sales     2015      Net sales     (Decrease)  

Net sales

   $ 1,014.5         100.0   $ 958.6         100.0   $ 55.9   

Cost of goods sold

     850.3         83.8     839.8         87.6     10.5   
  

 

 

      

 

 

      

 

 

 

Gross margin

     164.2         16.2     118.8         12.4     45.4   

Selling, general and administrative expense

     72.7         7.2     65.8         6.9     6.9   

Restructuring and other expense

     1.3         0.1     2.7         0.3     (1.4
  

 

 

      

 

 

      

 

 

 

Operating income

   $ 90.2         8.9   $ 50.3         5.2   $ 39.9   
  

 

 

      

 

 

      

 

 

 

Material cost

   $ 651.7         $ 670.8         $ (19.1

Tons shipped (in thousands)

     2,051           1,695           356   

Net sales and operating highlights were as follows:

 

   

Net sales increased $55.9 million from the comparable period in the prior year driven primarily by higher average direct selling prices, which increased net sales by $37.4 million. The remaining increase was due to higher tolling volume driven by the consolidation of the WSP joint venture effective March 1, 2016. The mix of direct versus toll tons processed was 51% to 49% compared to 61% to 39% in the comparable period of fiscal 2016. The change in mix was primarily the result of the consolidation of the WSP joint venture.

 

   

Operating income increased $39.9 million from the comparable period in the prior year on higher gross margin, partially offset by higher SG&A expense. Higher spreads between average selling prices and material costs increased gross margin by $56.5 million. The favorable impact of higher spreads was partially offset by higher manufacturing expenses, which negatively impacted gross margin by $12.2 million due to higher profit sharing and bonus expense and production/start-up costs associated with new production lines at our TWB joint venture. SG&A expense increased $6.9 million driven by an increase in corporate allocated costs, the consolidation of WSP and higher profit sharing and bonus expense. Restructuring and other expense in the current period consisted primarily of costs related to the closure of PSM.

 

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Table of Contents

Pressure Cylinders

The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods indicated:

 

    Six Months Ended November 30,  
          % of           % of     Increase/  
(Dollars in millions)   2016     Net sales     2015     Net sales     (Decrease)  

Net sales

  $ 399.9        100.0   $ 425.6        100.0   $ (25.7

Cost of goods sold

    299.9        75.0     324.6        76.3     24.7   
 

 

 

     

 

 

     

 

 

 

Gross margin

    100.0        25.0     101.0        23.7     (1.0

Selling, general and administrative expense

    72.5        18.1     70.8        16.6     1.7   

Impairment of long-lived assets

    —          0.0     23.0        5.4     (23.0

Restructuring and other expense

    2.1        0.5     0.7        0.2     1.4   
 

 

 

     

 

 

     

 

 

 

Operating income

  $ 25.4        6.4   $ 6.5        1.5   $ 18.9   
 

 

 

     

 

 

     

 

 

 

Material cost

  $ 159.2        $ 184.6        $ (25.4

Net sales by principal class of products:

         

Consumer products

  $ 116.1        $ 104.5        $ 11.6   

Industrial products

    199.2          214.4          (15.2

Alternative fuels

    58.9          48.8          10.1   

Oil & gas equipment

    25.7          57.9          (32.2
 

 

 

     

 

 

     

 

 

 

Total Pressure Cylinders

  $ 399.9        $ 425.6        $ (25.7
 

 

 

     

 

 

     

 

 

 

Units shipped by principal class of products:

         

Consumer products

    22,472,659          22,501,637          (28,978

Industrial products

    12,480,584          13,227,314          (746,730

Alternative fuels

    270,252          199,077          71,175   

Oil & gas equipment

    1,190          2,364          (1,174
 

 

 

     

 

 

     

 

 

 

Total Pressure Cylinders

    35,224,685          35,930,392          (705,707
 

 

 

     

 

 

     

 

 

 

Net sales and operating highlights were as follows:

 

   

Net sales decreased $25.7 million from the comparable period in the prior year. The decrease was driven by lower volumes in the oil & gas equipment and industrial products businesses, partially offset by improvements in consumer products and alternative fuels. The most significant decline was in oil & gas equipment, where net sales decreased 56%, or $32.2 million, on weak demand. Net sales in the industrial products business were down $15.2 million on lower volume due to weak demand across our refillable propane cylinder products, as well as softness for high pressure industrial cylinders in Europe. An improved product mix in the consumer products business led to higher net sales despite an overall decline in units shipped. Net sales were also up in the alternative fuels business on higher volume.

 

   

Operating income increased $18.9 million from the comparable period in the prior year primarily on lower impairment and restructuring charges, which declined a combined $21.6 million. Improvements in the consumer products and alternative fuels businesses were largely offset by continued declines in the oil & gas equipment business.

 

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Table of Contents

Engineered Cabs

The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods indicated:

 

     Six Months Ended November 30,  
            % of            % of     Increase/  
(In millions)    2016      Net sales     2015      Net sales     (Decrease)  

Net sales

   $ 48.0         100.0   $ 67.3         100.0   $ (19.3

Cost of goods sold

     44.4         92.5     65.0         96.6     (20.6
  

 

 

      

 

 

      

 

 

 

Gross margin

     3.6         7.5     2.3         3.4     1.3   

Selling, general and administrative expense

     7.6         15.8     10.3         15.3     (2.7

Impairment of long-lived assets

     -         0.0     3.0         4.5     (3.0

Restructuring and other expense

     1.2         2.5     2.6         3.9     (1.4
  

 

 

      

 

 

      

 

 

 

Operating loss

   $ (5.2      -10.8   $ (13.6      -20.2   $ 8.4   
  

 

 

      

 

 

      

 

 

 

Material cost

   $ 21.4         $ 31.4         $ (10.0

Net sales and operating highlights were as follows:

 

   

Net sales decreased $19.3 million from the comparable period in the prior year due to declines in market demand.

 

   

Operating loss improved $8.4 million to $5.2 million on lower impairment and restructuring charges and the impact of cost reduction efforts, which led to margin improvements and a 26% decline in SG&A expense.

Other

The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in the Other category, including costs associated with our captive insurance company. The following table presents a summary of operating results for the Other category for the periods indicated:

 

     Six Months Ended November 30,  
            % of            % of     Increase/  
(In millions)    2016      Net sales     2015      Net sales     (Decrease)  

Net sales

   $ 2.9         100.0   $ 6.5         100.0   $ (3.6

Cost of goods sold

     0.7         24.1     6.4         98.5     (5.7
  

 

 

      

 

 

      

 

 

 

Gross margin

     2.2         75.9     0.1         1.5     2.1   

Selling, general and administrative expense

     4.7         162.1     1.8         27.7     2.9   

Restructuring and other income

     -         0.0     (1.5      -23.1     1.5   
  

 

 

      

 

 

      

 

 

 

Operating loss

   $ (2.5      -86.2   $ (0.2      -3.1   $ (2.3
  

 

 

      

 

 

      

 

 

 

Net sales and operating highlights were as follows:

 

   

Net sales decreased $3.6 million from the comparable period in the prior year as the former Construction Services operating segment ceased operations during the first quarter of fiscal 2017.

 

   

Operating loss of $2.5 million in the current period was driven primarily by a $1.5 million increase in legal expenses.

 

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Liquidity and Capital Resources

During the six months ended November 30, 2016, we generated $152.2 million of cash from operating activities, invested $31.0 million in property, plant and equipment and paid dividends of $24.7 million on our common shares. The following table summarizes our consolidated cash flows for the six months ended November 30, 2016 and 2015:

 

     Six Months Ended
November 30,
 
(in millions)    2016      2015  

Net cash provided by operating activities

   $ 152.2       $ 189.7   

Net cash used by investing activities

     (30.1      (55.9

Net cash used by financing activities

     (31.1      (137.5
  

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     91.0         (3.7

Cash and cash equivalents at beginning of period

     84.2         31.1   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 175.2       $ 27.4   
  

 

 

    

 

 

 

We believe we have access to adequate resources to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, and working capital. These resources include cash and cash equivalents, cash provided by operating activities and unused lines of credit. We also believe that we have adequate access to the financial markets to allow us to be in a position to sell long-term debt or equity securities. However, uncertainty and volatility in the financial markets may impact our ability to access capital and the terms under which we can do so.

Operating Activities

Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices due to higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.

Net cash provided by operating activities was $152.2 million during the six months ended November 30, 2016 compared to $189.7 million in the comparable period of fiscal 2016. The decrease was driven primarily by an increase in working capital levels as a result of higher average steel prices partially offset by higher net earnings.

Investing Activities

Net cash used by investing activities was $30.1 million during the six months ended November 30, 2016 compared to $55.9 million in the prior year period. The decrease from the prior year period was driven primarily by lower capital expenditures.

Investment activities are largely discretionary, and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms when required.

Financing Activities

Net cash used by financing activities was $31.1 million during the six months ended November 30, 2016 compared to $137.5 million in the comparable prior year period. The decrease from the prior year period was driven primarily by the absence of share repurchases and lower repayments of short-term borrowings.

 

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As of November 30, 2016, we were in compliance with our short-term and long-term financial debt covenants. These debt agreements do not include credit rating triggers or material adverse change provisions. Our credit ratings at November 30, 2016 were unchanged from those reported as of May 31, 2016.

Common shares—The Board of Directors of Worthington Industries, Inc. (the “Board”) declared a quarterly dividend of $0.20 per common share for the first and second quarters of fiscal 2017 compared to $0.19 per common share for the first and second quarters of fiscal 2016. Dividends paid on our common shares totaled $24.7 million and $23.6 million during the six months ended November 30, 2016 and 2015, respectively. On December 20, 2016, the Board declared a quarterly dividend of $0.20 per share payable on March 29, 2017, to shareholders of record on March 15, 2017.

On June 25, 2014, the Board authorized the repurchase of up to 10,000,000 of our outstanding common shares. A total of 5,953,855 common shares have been repurchased under this authorization, leaving 4,046,145 common shares available for repurchase. No common shares were repurchased under this authorization during the first and second quarters of fiscal 2017.

The common shares available for repurchase under this authorization may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately negotiated transactions.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments will continue in the future.

Contractual Cash Obligations and Other Commercial Commitments

Our contractual cash obligations and other commercial commitments have not changed significantly from those disclosed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Cash Obligations and Other Commercial Commitments” of our 2016 Form 10-K, other than the changes in borrowings, as described in “Part I – Item 1. – Financial Statements – NOTE G – Debt and Receivables Securitization” of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of November 30, 2016, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $9.9 million at November 30, 2016. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amounts have been recognized in our consolidated financial statements.

Recently Adopted Accounting Standards

In February 2015, amended accounting guidance was issued that revised consolidation requirements in order to provide financial statement users with a more useful presentation of an entity’s economic and operational results. The amended guidance revises the consolidation requirements for limited partnerships, the considerations surrounding the primary beneficiary determination and the consolidation of certain investment funds. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.

 

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In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs totaling $2.3 million and $2.5 million as of November 30, 2016 and May 31, 2016, respectively, have been presented as a component of the carrying amount of long-term debt reported in our consolidated balance sheets. These amounts were previously capitalized and reported within other assets.

In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.

In March 2016, amended accounting guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in the statement of cash flows. The Company early adopted this guidance during the fourth quarter of fiscal 2016. As required for early adoption in an interim period, all adjustments have been reflected as of the beginning of fiscal 2016. Accordingly, income tax expense for the three and six months ended November 30, 2015 has been restated to reflect excess tax benefits associated with share-based payments totaling $136,000 and $694,000, respectively, in current income tax expense, rather than in paid-in capital.

Recently Issued Accounting Standards

In May 2014, amended accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and implementation of guidance related to licensing. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. Our evaluation is ongoing and not complete. However, we currently do not anticipate a material impact on our revenue recognition practices. We expect to make a determination as to the timing and method of adoption in the second half of fiscal 2017.

In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance requires that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.

In February 2016, amended accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amended guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.

 

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In March 2016, amended accounting guidance was issued regarding derivative instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.

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

In August 2016, amended accounting guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.

In October 2016, amended accounting guidance was issued that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and have not determined the effect of the amended guidance on our ongoing financial reporting.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, intangible assets, accrued liabilities, income and other tax accruals, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily obtained from other sources. Critical accounting policies are defined as those that require our significant judgments and involve uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such policies. Our critical accounting policies have not significantly changed from those discussed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of our 2016 Form 10-K.

Item 3. – Quantitative and Qualitative Disclosures About Market Risk

Market risks have not changed significantly from those disclosed in “Part II—Item 7A. – Quantitative and Qualitative Disclosures About Market Risk” of our 2016 Form 10-K.

 

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Table of Contents

Item 4. – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures [as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)] that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our principal executive officer and our principal financial officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q (the fiscal quarter ended November 30, 2016). Based on that evaluation, our principal executive officer and our principal financial officer have concluded that such disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes that occurred during the period covered by this Quarterly Report on Form 10-Q (the fiscal quarter ended November 30, 2016) in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. – Legal Proceedings

Various legal actions, which generally have arisen in the ordinary course of business, are pending against the Company. None of this pending litigation, individually or collectively, is expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A. – Risk Factors

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “PART I – Item 1A. – Risk Factors” of the Annual Report on Form 10-K of Worthington Industries, Inc. for the fiscal year ended May 31, 2016 (the “2016 Form 10-K”), as filed with the Securities and Exchange Commission on August 1, 2016, and available at www.sec.gov or at www.worthingtonindustries.com, we included a detailed discussion of our risk factors. Our risk factors have not changed significantly from those disclosed in our 2016 Form 10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in our 2016 Form 10-K could materially affect our business, consolidated financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in our 2016 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition and/or future results.

 

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Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases made by, or on behalf of, Worthington Industries, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a) (3) under the Securities Exchange Act of 1934, as amended) of common shares of Worthington Industries, Inc. during each month of the fiscal quarter ended November 30, 2016:

 

                   Total Number of         
                   Common Shares         
                   Purchased as      Maximum Number of  
     Total Number      Average Price      Part of Publicly      Common Shares that  
     of Common      Paid per      Announced      May Yet Be  
     Shares      Common      Plans or      Purchased Under the  

Period

   Purchased      Share      Programs      Plans or Programs (1)  

September 1-30, 2016 (2)

     14,321       $ 46.92         -         4,046,145   

October 1-31, 2016 (2)

     10,762       $ 48.21         -         4,046,145   

November 1-30, 2016 (2)

     87,297       $ 57.24         -         4,046,145   
  

 

 

    

 

 

    

 

 

    

Total

     112,380       $ 55.06         -      
  

 

 

    

 

 

    

 

 

    

 

(1)

The number shown represents, as of the end of each period, the maximum number of common shares that could be purchased under the publicly announced repurchase authorization then in effect. On June 26, 2014, Worthington Industries, Inc. announced that on June 25, 2014, the Board of Directors had authorized the repurchase of up to 10,000,000 of Worthington Industries’ outstanding common shares. A total of 4,046,145 common shares were available under this repurchase authorization at November 30, 2016.

The common shares available for repurchase under this authorization may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other appropriate factors. Repurchases may be made on the open market or through privately negotiated transactions.

 

(2)

Includes an aggregate of 112,380 common shares surrendered by employees in September—November 2016 to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted common shares. These common shares were not counted against the share repurchase authorization in effect throughout the second quarter of fiscal 2017 and discussed in footnote (1) above.

Item 3. – Defaults Upon Senior Securities

Not applicable

Item 4. – Mine Safety Disclosures

Not applicable

Item 5. – Other Information

Not applicable

 

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Item 6. – Exhibits

 

  10.1    Worthington Industries, Inc. Amended and Restated 2006 Equity Incentive Plan for Non-Employee Directors, reflecting the First Amendment and the Second Amendment thereto (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Worthington Industries, Inc. dated October 3, 2016 and filed with the SEC on the same day (SEC File No. 1-8399))
  31.1    Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Executive Officer) *
  31.2    Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Financial Officer) *
  32.1    Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
  32.2    Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
  101.INS    XBRL Instance Document #
  101.SCH    XBRL Taxonomy Extension Schema Document #
  101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document #
  101.LAB    XBRL Taxonomy Extension Label Linkbase Document #
  101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document #
  101.DEF    XBRL Taxonomy Extension Definition Linkbase Document #

 

*

Filed herewith.

 

**

Furnished herewith.

 

#

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q of Worthington Industries, Inc. are the following documents formatted in XBRL (Extensible Business Reporting Language):

  (i)

Consolidated Balance Sheets at November 30, 2016 and May 31, 2016;

  (ii)

Consolidated Statements of Earnings for the three and six months ended November 30, 2016 and 2015;

  (iii)

Consolidated Statements of Comprehensive Income for the three and six months ended November 30, 2016 and 2015;

  (iv)

Consolidated Statements of Cash Flows for the three and six months ended November 30, 2016 and 2015; and

  (v)

Notes to Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

WORTHINGTON INDUSTRIES, INC.

Date: January 6, 2017

   

By:

 

/s/ B. Andrew Rose

     

B. Andrew Rose,

     

Executive Vice President and Chief Financial Officer

     

(On behalf of the Registrant and as Principal

     

Financial Officer)

 

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INDEX TO EXHIBITS

 

Exhibit No.

  

Description

  

Location

10.1   

Worthington Industries, Inc. Amended and Restated 2006 Equity Incentive Plan for Non-Employee Directors, reflecting the First Amendment and the Second Amendment thereto

  

Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Worthington Industries, Inc. dated October 3, 2016 and filed with the SEC on the same day (SEC File No. 1-8399)

31.1   

Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Executive Officer)

  

Filed herewith

31.2   

Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Financial Officer)

  

Filed herewith

32.1   

Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Furnished herewith

32.2   

Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Furnished herewith

101.INS   

XBRL Instance Document

  

Submitted electronically herewith #

101.SCH   

XBRL Taxonomy Extension Schema Document

  

Submitted electronically herewith #

101.PRE   

XBRL Taxonomy Extension Presentation Linkbase Document

  

Submitted electronically herewith #

101.LAB   

XBRL Taxonomy Extension Label Linkbase Document

  

Submitted electronically herewith #

101.CAL   

XBRL Taxonomy Extension Calculation Linkbase Document

  

Submitted electronically herewith #

101.DEF   

XBRL Taxonomy Extension Definition Linkbase Document

  

Submitted electronically herewith #

 

#

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q of Worthington Industries, Inc. are the following documents formatted in XBRL (Extensible Business Reporting Language):

 

  (i)

Consolidated Balance Sheets at November 30, 2016 and May 31, 2016;

 

  (ii)

Consolidated Statements of Earnings for the three and six months ended November 30, 2016 and 2015;

 

  (iii)

Consolidated Statements of Comprehensive Income for the three and six months ended November 30, 2016 and 2015;

 

  (iv)

Consolidated Statements of Cash Flows for the three and six months ended November 30, 2016 and 2015; and

 

  (v)

Notes to Consolidated Financial Statements.

 

44