Note Q – Fair Value Measurements

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


Level 1	–	Observable prices in active markets for identical assets and liabilities.

Level 2	–	Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.

Level 3	–	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

Recurring Fair Value Measurements

At May 31, 2018, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

			Significant
	Quoted Prices		Other		Significant
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Totals
Assets
Derivative contracts (1)	$	-	$	11,423	$	-	$	11,423
Total Assets	$	-	$	11,423	$	-	$	11,423

Liabilities
Derivative contracts (1)	$	-	$	846	$	-	$	846
Total liabilities	$	-	$	846	$	-	$	846

At May 31, 2017, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

			Significant
	Quoted Prices		Other		Significant
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Totals
Assets
Derivative contracts (1)	$	-	$	8,326	$	-	$	8,326
Total assets	$	-	$	8,326	$	-	$	8,326

Liabilities
Derivative contracts (1)	$	-	$	1,142	$	-	$	1,142
Contingent consideration obligation (2)		-		-		585		585
Total liabilities	$	-	$	1,142	$	585	$	1,727

(1)

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

(2)

The fair value of the contingent consideration obligation was determined using a probability weighted cash flow approach based on management’s projections of future cash flows of the acquired business. The fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements.

Non-Recurring Fair Value Measurements

At May 31, 2018, our assets measured at fair value on a non-recurring basis were categorized as follows:

			Significant
	Quoted Prices		Other		Significant
	in Active		Observable		Unobservable
	Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Totals
Assets
Long-lived assets held for sale (1)	$	-	$	30,000	$	-	$	30,000
Total assets	$	-	$	30,000	$	-	$	30,000

(1)

During the fourth quarter of fiscal 2018, management committed to a plan to sell the Company’s cryogenics business in Turkey, Worthington Aritas, and certain underperforming oil & gas equipment assets within Pressure Cylinders. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell. The book value of Worthington Aritas exceeded its estimated fair market value of $9,000,000, resulting in an impairment charge of $42,422,000. The book value of the oil & gas equipment asset group also exceeded its estimated fair market value of $21,000,000, resulting in an impairment charge of $10,497,000.

At May 31, 2017, there were no assets or liabilities measured at fair value on a non-recurring basis on the Company’s consolidated balance sheet.

The non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, income taxes receivable, other assets, deferred income taxes, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued expenses, income taxes payable and other liabilities approximate fair value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing primarily market observable (Level 2) inputs and credit risk, was $757,069,000 and $618,059,000 at May 31, 2018 and 2017, respectively. The carrying amount of long-term debt, including current maturities, was $750,368,000 and $578,487,000 at May 31, 2018 and 2017, respectively.