NOTE C – Investments in Unconsolidated Affiliates

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

We received distributions from unconsolidated affiliates totaling $19,989,000 during the three months ended August 31, 2018. We have received cumulative distributions from WAVE in excess of our investment balance, which resulted in an amount recorded within other liabilities on our consolidated balance sheets of $52,133,000 at August 31, 2018. In accordance with the applicable accounting guidance, we reclassified the negative investment balance to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if the investment balance becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any negative investment balance classified as a liability as income immediately.

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

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

	August 31,		May 31,
(in thousands)	2018		2018
Cash	$	43,004	$	52,812
Other current assets		717,270		590,578
Current assets for discontinued operations		37,474		37,640
Noncurrent assets		365,396		358,927
Total assets	$	1,163,144	$	1,039,957

Current liabilities		244,831		166,493
Current liabilities for discontinued operations		8,243		7,142
Short-term borrowings		36,215		26,599
Current maturities of long-term debt		43,131		23,243
Long-term debt		261,348		259,588
Other noncurrent liabilities		17,541		17,536
Equity		551,835		539,356
Total liabilities and equity	$	1,163,144	$	1,039,957

	Three Months Ended August 31,
(in thousands)	2018		2017
Net sales	$	498,545	$	442,624
Gross margin		103,812		86,235
Operating income		72,376		57,163
Depreciation and amortization		6,477		7,193
Interest expense		2,925		2,492
Income tax expense		4,525		1,348
Net earnings from continuing operations		64,894		51,061
Net earnings from discontinued operations		1,684		1,413
Net earnings		66,578		52,474

The amounts presented within the discontinued operations captions in the tables above reflect the international operations of our WAVE joint venture, which are being sold as part of a broader transaction between the joint venture partner, Armstrong World Industries, Inc. (“AWI”), and Knauf Group, a family-owned manufacturer of building materials headquartered in Germany. WAVE’s portion of the total sales proceeds is expected to be approximately $90,000,000. The transaction is subject to regulatory approvals and other customary closing conditions. During the current quarter, the parties agreed to extend the date by which certain competition clearance conditions were to be satisfied per the original purchase agreement. In exchange, Knauf Group irrevocably agreed to fund the purchase price which was received by AWI in two distributions, the first on August 1, 2018, and the balance on September 15, 2018. Despite the realization of the sales proceeds, there has been no change in the parent-subsidiary relationship and therefore, no change in control. As a result, WAVE’s balance sheet at August 31, 2018, includes a $70,000,000 receivable within current assets for its portion of the proceeds received by AWI prior to quarter end, with an offsetting current liability for deferred proceeds. This $70,000,000 was received by WAVE in September 2018 and subsequently distributed to the joint venture partners in equal amounts.