UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
On March 31, 2020, the number of Common Shares, without par value, issued and outstanding was
TABLE OF CONTENTS
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Item 1. |
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Consolidated Balance Sheets –February 29, 2020 and May 31, 2019 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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i
Safe Harbor Statement
Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in “PART I – Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events. These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. These forward-looking statements include, without limitation, statements relating to:
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the impacts from COVID-19 and the actions taken by governmental authorities and others related thereto, including the ability of the Company to continue operating facilities in connection therewith, to cut variable costs, or to eventually recall furloughed workers; |
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future or expected cash positions, liquidity or ability to access financial markets and capital; |
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outlook, strategy or business plans; |
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future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, margins, balance sheet strengths, debt, financial condition or other financial measures; |
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pricing trends for raw materials and finished goods and the impact of pricing changes; |
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the ability to improve or maintain margins; |
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expected demand or demand trends for us or our markets; |
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additions to product lines and opportunities to participate in new markets; |
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expected benefits from Transformation and innovation efforts; |
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the ability to improve performance and competitive position at our operations; |
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anticipated working capital needs, capital expenditures and asset sales; |
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anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof; |
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projected profitability potential; |
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the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations; |
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projected capacity and the alignment of operations with demand; |
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the ability to operate profitably and generate cash in down markets; |
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the ability to capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets; |
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expectations for Company and customer inventories, jobs and orders; |
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expectations for the economy and markets or improvements therein; |
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expectations for generating improving and sustainable earnings, earnings potential, margins or shareholder value; |
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effects of judicial rulings; and |
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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:
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the risks, uncertainties and impacts related to COVID-19 or other actual or potential public health emergencies and actions taken by governmental authorities or others in connection therewith including risks, uncertainties and impacts related to the ability and costs to continue to operate facilities; |
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the effect of national, regional and global economic conditions generally and within major product markets, including significant economic disruptions from COVID-19 and the actions taken in connection therewith; |
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the effect of conditions in national and worldwide financial markets and with respect to the ability of financial institutions to provide capital; |
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the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships; |
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lower oil prices as a factor in demand for products; |
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product demand and pricing; |
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changes in product mix, product substitution and market acceptance of our products; |
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fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations; |
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the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters; |
ii
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effects of facility closures and the consolidation of operations; |
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the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction, oil and gas, and other industries in which we participate; |
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failure to maintain appropriate levels of inventories; |
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financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business; |
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the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts; |
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the ability to realize cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from Transformation initiatives, on a timely basis; |
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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; |
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capacity levels and efficiencies, within facilities, within major product markets and within the industries in which we participate as a whole; |
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the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, interruption in utility services, civil unrest, international conflicts, terrorist activities or other causes; |
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changes in customer demand, inventories, spending patterns, product choices, and supplier choices; |
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risks associated with doing business internationally, including economic, political and social instability, foreign currency exchange rate exposure and the acceptance of our products in global markets; |
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the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment; |
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deviation of actual results from estimates and/or assumptions used by the Company in the application of our significant accounting policies; |
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the level of imports and import prices in our markets; |
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the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States governmental agencies as contemplated by the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; |
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the effect of healthcare laws in the United States and potential changes for such laws which may increase our healthcare and other costs and negatively impact our operations and financial results; |
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cyber security risks; |
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the effects of privacy and information security laws and standards; and |
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other risks described from time to time in the filings of Worthington Industries, Inc. with the United States Securities and Exchange Commission, including those described in “PART I – Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 and in “PART II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q. |
We note these factors for investors as contemplated by the Act. It is impossible to predict or identify all potential risk factors. Consequently, you should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Any forward-looking statements in this Quarterly Report on Form 10-Q are based on current information as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.
iii
PART I. FINANCIAL INFORMATION
Item 1. – Financial Statements
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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February 29, |
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May 31, |
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2020 |
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2019 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Receivables, less allowances of $ |
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and May 31, 2019, respectively |
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Inventories: |
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Raw materials |
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Work in process |
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Finished products |
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Total inventories |
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Income taxes receivable |
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Assets held for sale |
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Prepaid expenses and other current assets |
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Total current assets |
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Investments in unconsolidated affiliates |
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Operating lease assets |
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Goodwill |
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Other intangible assets, net of accumulated amortization of $ |
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$ |
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Other assets |
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Property, plant and equipment: |
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Land |
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Buildings and improvements |
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Machinery and equipment |
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Construction in progress |
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Total property, plant and equipment |
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Less: accumulated depreciation |
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Total property, plant and equipment, net |
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Total assets |
$ |
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$ |
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Liabilities and equity |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued compensation, contributions to employee benefit plans and |
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related taxes |
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Dividends payable |
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Other accrued items |
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Current operating lease liabilities |
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Income taxes payable |
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Current maturities of long-term debt |
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Total current liabilities |
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Other liabilities |
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Distributions in excess of investment in unconsolidated affiliate |
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Long-term debt |
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Noncurrent operating lease liabilities |
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Deferred income taxes, net |
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Total liabilities |
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Shareholders' equity - controlling interest |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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See notes to consolidated financial statements.
1
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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February 29, 2020 |
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February 28, 2019 |
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February 29, 2020 |
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February 28, 2019 |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expense |
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Impairment of goodwill and long-lived assets |
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Restructuring and other expense (income), net |
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Operating income (loss) |
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Other income (expense): |
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Miscellaneous income, net |
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Interest expense |
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( |
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Loss on extinguishment of debt |
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( |
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Equity in net income of unconsolidated affiliates |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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Net earnings attributable to noncontrolling interests |
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Net earnings attributable to controlling interest |
$ |
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$ |
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$ |
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$ |
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Basic |
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Average common shares outstanding |
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Earnings per share attributable to controlling interest |
$ |
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$ |
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$ |
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$ |
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Diluted |
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Average common shares outstanding |
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Earnings per share attributable to controlling interest |
$ |
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$ |
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$ |
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$ |
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Common shares outstanding at end of period |
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Cash dividends declared per share |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
2
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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February 29, 2020 |
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February 28, 2019 |
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February 29, 2020 |
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February 28, 2019 |
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Net earnings |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation |
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( |
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( |
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Pension liability adjustment, net of tax |
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( |
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Cash flow hedges, net of tax |
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( |
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( |
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Other comprehensive income (loss) |
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( |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interests |
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Comprehensive income attributable to controlling interest |
$ |
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$ |
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$ |
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$ |
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See notes to consolidated financial statements.
3
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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February 29, 2020 |
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February 28, 2019 |
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February 29, 2020 |
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February 28, 2019 |
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Operating activities: |
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Net earnings |
$ |
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$ |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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Impairment of goodwill and long-lived assets |
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Provision for (benefit from) deferred income taxes |
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( |
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( |
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( |
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Bad debt expense |
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Equity in net income of unconsolidated affiliates, net of distributions |
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( |
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( |
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( |
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Net gain on sale of assets |
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( |
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( |
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( |
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( |
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Stock-based compensation |
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Loss on extinguishment of debt |
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Changes in assets and liabilities, net of impact of acquisitions: |
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Receivables |
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Inventories |
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( |
) |
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( |
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Accounts payable |
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( |
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( |
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Accrued compensation and employee benefits |
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( |
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( |
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( |
) |
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( |
) |
Other operating items, net |
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( |
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( |
) |
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( |
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Net cash provided by operating activities |
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Investing activities: |
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Investment in property, plant and equipment |
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( |
) |
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( |
) |
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( |
) |
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( |
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Acquisitions |
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( |
) |
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( |
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Distributions from unconsolidated affiliate |
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Proceeds from sale of assets |
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Net cash provided (used) by investing activities |
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( |
) |
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( |
) |
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Financing activities: |
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Proceeds from long-term debt, net of issuance costs |
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Principal payments on long-term obligations and debt redemption costs |
|
( |
) |
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( |
) |
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( |
) |
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( |
) |
Proceeds from issuance of common shares, net of tax withholdings |
|
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( |
) |
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( |
) |
Payments to noncontrolling interests |
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( |
) |
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( |
) |
Repurchase of common shares |
|
( |
) |
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( |
) |
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( |
) |
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( |
) |
Dividends paid |
|
( |
) |
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( |
) |
|
|
( |
) |
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( |
) |
Net cash used by financing activities |
|
( |
) |
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( |
) |
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( |
) |
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( |
) |
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Increase (decrease) in cash and cash equivalents |
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( |
) |
Cash and cash equivalents at beginning of period |
|
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Cash and cash equivalents at end of period |
$ |
|
|
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$ |
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$ |
|
|
|
$ |
|
|
See notes to consolidated financial statements.
4
WORTHINGTON INDUSTRIES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – Basis of Presentation
The unaudited consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). They have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
At February 29, 2020, the Company owned controlling interests in the following
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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 and significant intercompany accounts and transactions have been eliminated.
Operating results for the three and nine months ended February 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2020 (“fiscal 2020”), particularly in light of the novel coronavirus (“COVID-19”) and its effects on the domestic and global economies. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and a reduction in demand for many products from direct or ultimate customers. Accordingly, businesses have adjusted, reduced or suspended operating activities. This has negatively impacted several of the markets we serve, including the North American automotive market, which shut down production in mid-March 2020. While a number of our plants are operating as essential businesses, some of our plants have suspended or cut back on operating levels and shifts, and additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop. 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, 2019 (“fiscal 2019”) of Worthington Industries, Inc. (the “2019 Form 10-K”) and “Part II – Item 1A – Risk Factors” of this 10-Q.
Deconsolidation of Engineered Cabs: On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of the Company’s Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse Holdings, LLC (the “Cabs joint venture”), in which the Company retained a
The Company’s contribution to the Cabs joint venture consisted of the net assets of its two primary manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota. In anticipation of the transaction for substantially all the net assets of the Engineered Cabs business, an impairment charge of $
5
Upon closing of the transaction, the contributed net assets were deconsolidated, resulting in a one-time net gain of $
(in thousands) |
|
|
|
Retained investment (at fair value) |
$ |
|
|
Contributed net assets (at carrying value) |
|
|
|
Gain on deconsolidation |
|
|
|
Less: deal costs |
|
( |
) |
Net gain on deconsolidation |
$ |
|
|
In accordance with the applicable accounting guidance, our minority ownership interest in the Cabs joint venture was recorded at fair value as of the closing date. The Company’s estimate of fair value was based on a preliminary valuation of the net assets of the Cabs joint venture. For additional information regarding the fair value of our minority ownership interest in the Cabs joint venture, refer to “NOTE R – Fair Value”.
Recently Adopted Accounting Standards
On June 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (“Topic 842”), which replaces most existing lease accounting guidance under U.S. GAAP. See “NOTE D – Leases” for additional information regarding the Company’s adoption of Topic 842, including newly-required disclosures.
On June 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“Topic 815”), which amended the existing hedge accounting guidance under U.S. GAAP. The ASU is intended to simplify and clarify the accounting and disclosure requirements for hedging activities by more closely aligning the results of cash flow and fair value hedge accounting with the underlying risk management activities. The adoption of the standard had no current or historical impact on our consolidated financial position or results of operations. See “NOTE Q – Derivative Instruments and Hedging Activities” for additional information.
Recently Issued Accounting Standards
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended accounting guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations; however, we do not expect the amended accounting guidance to have a material impact on our ongoing financial reporting.
Reclassification
Certain prior period amounts have been reclassified within the operating section of the consolidated statements of cash flows for consistency with the current period presentation.
6
NOTE B – Revenue Recognition
The following tables summarize net sales by product class for the periods presented:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
Reportable segments by product class: |
|
|
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|
|
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|
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|
|
|
|
|
|
Steel Processing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Toll |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure Cylinders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial products |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Consumer products |
|
|
|
|
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|
|
|
Oil & gas equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Cabs |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
We recognize revenue at a point in time, with the exception of the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, which are recognized over time.
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
Steel Processing - toll |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pressure Cylinders - certain oil & gas contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total over time revenue |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes the unbilled receivables and contract assets for the periods indicated:
(in thousands) |
Balance Sheet Classification |
|
February 29, 2020 |
|
|
May 31, 2019 |
|
||
Unbilled receivables |
Receivables |
|
$ |
|
|
|
$ |
|
|
Contract assets |
Prepaid and other current assets |
|
$ |
|
|
|
$ |
|
|
7
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. At February 29, 2020, the Company held investments in the following affiliated companies: ArtiFlex Manufacturing, LLC (“ArtiFlex”) (
During the first quarter of fiscal 2020, the Company began the process of exploring the potential exit of its interest in the Nisshin joint venture in China. As a result, the Company evaluated its investment for potential impairment. The Company concluded the remaining book value of the investment was fully impaired, resulting in an impairment charge of $
During the second quarter of fiscal 2020, the Company’s exploration of strategic alternatives relating to its investment in ArtiFlex resulted in the need to evaluate this investment for potential impairment. Based on the analysis performed, the Company concluded its investment was not impaired, as then current and projected cash flows were deemed sufficient to recover the remaining book value of $
On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of our Engineered Cabs business to a newly-formed joint venture, in which we retained a
On December 31, 2019, the Company contributed the recently acquired operating net assets related to Heidtman Steel Products, Inc.’s Cleveland facility (“Heidtman”) to the Samuel joint venture in exchange for an incremental
We received distributions from unconsolidated affiliates totaling $
We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows.
8
The following tables summarize combined financial information for our unconsolidated affiliates as of the dates, and for the periods presented:
|
February 29, |
|
|
May 31, |
|
||
(in thousands) |
2020 |
|
|
2019 |
|
||
Cash |
$ |
|
|
|
$ |
|
|
Other current assets |
|
|
|
|
|
|
|
Current assets for discontinued operations |
|
- |
|
|
|
|
|
Noncurrent assets |
|
|
|
|
|
|
|
Total assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
$ |
|
|
|
$ |
|
|
Current liabilities for discontinued operations |
|
- |
|
|
|
|
|
Short-term borrowings |
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
Total liabilities and equity |
$ |
|
|
|
$ |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operations |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts presented within the discontinued operations captions in the tables above reflect the international operations of our WAVE joint venture prior to their sale on September 30, 2019. Upon closing of the transaction, the related net assets were deconsolidated resulting in a pre-tax gain within net earnings from discontinued operations of $
Worthington has invested and continues to invest in other companies which are generally pursuing innovative products. The amount invested by Worthington in these companies is generally smaller and accounted for using the cost method. One of these investments is in Nikola Corporation, a designer and manufacturer of electric and hydrogen trucks and powertrains, in which the Company owns approximately a
NOTE D – Leases
On June 1, 2019, the Company adopted the new lease accounting standard under U.S. GAAP, Topic 842, which among other things, requires right-of-use (“ROU”) assets and liabilities be recognized upon lease commencement for operating leases based on the present value of lease payments over the lease term. Topic 842 was adopted using the modified retrospective approach as of the effective date of the new standard. As such, comparative financial information for reporting periods beginning prior to June 1, 2019,
9
has not been restated and continues to be reported under the previous accounting standard. As allowed, we elected to carry forward the historical lease classification and to apply the short-term lease measurement and recognition exemption whereby ROU assets and lease liabilities are not recognized for short-term leases. Adoption of the new standard resulted in the recognition of $
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets include any initial direct costs and prepayments less lease incentives. Lease terms include options to renew or terminate the lease when it is reasonably certain the Company will exercise such options. As most of our leases do not include an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date, in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of goods sold or selling, general and administrative expense depending on the underlying nature of the leased assets.
We lease certain property and equipment from third parties under non-cancellable operating lease agreements. Certain lease agreements provide for payment of property taxes, maintenance and insurance by the Company. Under Topic 842, we elected the practical expedient to account for lease and non-lease components as a single component for all asset classes. Certain leases include variable lease payments based on usage or an index or rate.
During the second quarter of fiscal 2020, we entered into a non-cancellable financing lease agreement for land and a building which was paid as part of the cash consideration in connection with the acquisition of certain operating assets of Heidtman. Refer to “NOTE P – Acquisitions” for additional information. In the consolidated balance sheets, the financing lease ROU assets are recorded in other assets and the current and long-term portion of the financing lease ROU liabilities are recorded in other accrued items and other liabilities, respectively.
The components of lease expense were as follows:
(in thousands) |
|
Three Months Ended February 29, 2020 |
|
|
Nine Months Ended February 29, 2020 |
|
||
Operating lease expense |
|
$ |
|
|
|
$ |
|
|
Financing lease expense: |
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
Total financing lease expense |
|
|
|
|
|
|
|
|
Short-term lease expense |
|
|
|
|
|
|
|
|
Variable lease expense |
|
|
|
|
|
|
|
|
Total lease expense |
|
$ |
|
|
|
$ |
|
|
During the first quarter of fiscal 2020, ROU assets within the Engineered Cabs operating segment with a book value of $
Other information related to the Company’s leases, as of and for the nine-month period ended February 29, 2020, is provided below:
(dollars in thousands) |
|
Operating Leases |
|
|
Financing Leases |
|
||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
Operating cash flows |
|
$ |
|
|
|
$ |
|
|
Financing cash flows |
|
$ |
- |
|
|
$ |
|
|
ROU assets obtained in exchange for lease liabilities |
|
$ |
|
|
|
$ |
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
% |
|
|
|
% |
10
Future minimum lease payments for non-cancelable leases having an initial or remaining term in excess of one year at February 29, 2020, were as follows:
(in thousands) |
Operating Leases |
|
|
Financing Leases |
|
||
Year 1 |
$ |
|
|
|
$ |
|
|
Year 2 |
|
|
|
|
|
|
|
Year 3 |
|
|
|
|
|
|
|
Year 4 |
|
|
|
|
|
- |
|
Year 5 |
|
|
|
|
|
- |
|
Thereafter |
|
|
|
|
|
- |
|
Total |
|
|
|
|
|
|
|
Less: imputed interest |
|
( |
) |
|
|
( |
) |
Present value of lease liabilities |
$ |
|
|
|
$ |
|
|
As previously disclosed in our 2019 Form 10-K, under the prior accounting guidance, future minimum lease payments for non-cancelable operating leases having an initial or remaining term in excess of one year at May 31, 2019, were as follows:
(in thousands) |
|
|
|
Year 1 |
$ |
|
|
Year 2 |
|
|
|
Year 3 |
|
|
|
Year 4 |
|
|
|
Year 5 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
NOTE E – Impairment of Goodwill and Long-Lived Assets
Fiscal 2020:
On February 12, 2020, the Company announced a plan to consolidate its oil & gas equipment manufacturing operations in Wooster, Ohio, into its existing manufacturing facility in Bremen, Ohio. The closure is expected to be complete by the end of fiscal 2020. As a result, the Company tested the long-lived assets of the combined asset group, consisting of fixed assets and customer list intangible assets with net book values of $
As a result of the impairment charges noted above, the Company also performed an interim goodwill impairment test of its oil & gas equipment reporting unit. The results of the analysis indicated that the fair value of the reporting unit no longer supported the book value of the corresponding goodwill, resulting in an impairment charge of $
During the third quarter of fiscal 2020, the Company’s consolidated joint venture, WSP committed to a plan to sell the Canton, Michigan facility and some of the production equipment at that facility. The land and building related to the facility were determined to not be impaired and the book value of $
During the first quarter of fiscal 2020, the Company committed to plans to sell substantially all of the net assets of its Engineered Cabs business with the exception of the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana. As of August 31, 2019, the disposal group met the criteria for classification as assets held for sale and the net assets were
11
recorded at the lower of net book value or fair value, less costs to sell, and presented separately as assets held for sale in our consolidated balance sheet. The book value of the disposal group exceeded its estimated fair market value of $
NOTE F – Restructuring and Other Expense (Income), Net
We consider restructuring activities to be programs whereby we fundamentally change our operations, such as closing and consolidating manufacturing facilities or moving manufacturing of a product to another location. Restructuring activities may also involve substantial realignment of the management structure of a business unit in response to changing market conditions.
A progression of the liabilities associated with our restructuring activities, combined with a reconciliation to the restructuring and other expense (income), net financial statement caption, in our consolidated statement of earnings is summarized below for the period presented:
|
|
Balance, as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, as of |
|
||
(in thousands) |
|
May 31, 2019 |
|
|
Expense |
|
|
Payments |
|
|
Adjustments |
|
|
February 29, 2020 |
|
|||||
Early retirement and severance |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Facility exit and other costs |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Net loss on sale of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense, net |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended February 29, 2020, the following actions were taken related to the Company’s restructuring activities:
|
• |
In July 2019, the Company completed the sale of its cryogenics business in Turkey, the net assets of which had been previously classified as assets held for sale. In connection with the sale, the Company realized net cash proceeds of $ |
|
• |
In November 2019, the Company contributed substantially all of the net assets of the Engineered Cabs business to the newly-formed Cabs joint venture. In connection with the transaction, the Company recognized a net gain of $ |
|
• |
In February 2020, the Company announced the closure of the Hermosillo, Mexico facility and an office in Sonata, Mexico, both operated by the Company’s consolidated joint venture, TWB. In connection with the closures, and a reduction in personnel at Puebla, Mexico, the Company recognized severance expense of $ |
|
• |
In February 2020, the Company’s WSP joint venture committed to plans to close and sell the assets of its Canton, Michigan facility. In connection with the sale, the Company recognized severance expense of $ |
|
• |
In the third quarter of fiscal 2020, the Company announced a plan to consolidate its oil & gas equipment manufacturing operations in Wooster, Ohio into its existing facility in Bremen, Ohio. In connection with the consolidation, the Company recognized $ |
12
|
• |
In connection with other non-significant restructuring activities, the Company recognized severance expense of $ |
The total liability associated with our restructuring activities as of February 29, 2020 is expected to be paid in the next twelve months.
NOTE G – Contingent Liabilities and Commitments
Legal Proceedings
We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, would not significantly affect our consolidated financial position or future results of operations. We also believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.
Voluntary Tank Replacement Program
In February 2019, our Structural Composites Industries, LLC subsidiary (“SCI”) agreed to participate in a tank replacement program for specific design sizes of its composite hydrogen fuel tanks, which are integrated into a customer’s hydrogen fuel cells used to fuel material handling equipment, primarily rider pallet jacks in warehouses. During the third quarter of fiscal 2020, a favorable adjustment was recorded related to lower than expected freight.
A progression of the liabilities recorded in connection with this matter during fiscal 2020 is summarized in the following table:
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
||
(in thousands) |
Balance |
|
|
Expense |
|
|
Payments |
|
|
Adjustments |
|
|
Balance |
|
|||||
Tank replacement costs |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
|
( |
) |
|
$ |
|
|
We believe these liabilities are sufficient to absorb our remaining direct costs related to the replacement program, which are expected to be paid in the next twelve months. The actual costs incurred by the Company related to this matter may vary from the initial estimate.
NOTE H – 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 February 29, 2020, 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 $
We also had in place $
NOTE I – Debt and Receivables Securitization
On August 23, 2019,
The Senior Notes were issued in a private placement and the proceeds thereof were used to redeem $
13
We maintain a $
We also maintain a revolving trade accounts receivable securitization facility (the “AR Facility”). On January 13, 2020, the Company extended the maturity of the AR Facility by one year to
NOTE J – Other Comprehensive Income (Loss)
The following table summarizes the tax effects on each component of OCI for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||||||
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||||||||||||||||
|
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
|
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Pension liability adjustment |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Cash flow hedges |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Other comprehensive income |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Nine Months Ended |
|
|||||||||||||||||||||
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||||||||||||||||
|
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
|
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
Pension liability adjustment |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Cash flow hedges |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Other comprehensive income (loss) |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
14
NOTE K – Changes in Equity
The following tables summarize the changes in equity by component and in total for the periods presented:
|
|
Controlling Interest |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||
|
|
Paid-in |
|
|
Loss, |
|
|
Retained |
|
|
|
|
|
|
controlling |
|
|
|
|
|
||||
(in thousands) |
|
Capital |
|
|
Net of Tax |
|
|
Earnings |
|
|
Total |
|
|
Interests |
|
|
Total |
|
||||||
Balance at May 31, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued, net of withholding tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and retirement of common shares |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Balance at August 31, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued, net of withholding tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Dividends to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Balance at November 30, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of Samuel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued, net of withholding tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and retirement of common shares |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Balance at February 29, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
15
|
|
Controlling Interest |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||
|
|
Paid-in |
|
|
Loss, |
|
|
Retained |
|
|
|
|
|
|
controlling |
|
|
|
|
|
||||
(in thousands) |
|
Capital |
|
|
Net of Tax |
|
|
Earnings |
|
|
Total |
|
|
Interests |
|
|
Total |
|
||||||
Balance at May 31, 2018 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Common shares issued, net of withholding tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 606 transition adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and retirement of common shares |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Dividends to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Balance at August 31, 2018 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Common shares issued, net of withholding tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and retirement of common shares |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Dividends to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Balance at November 30, 2018 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued, net of withholding tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares in NQ plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and retirement of common shares |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Balance at February 28. 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following tables summarize the changes in accumulated other comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Foreign |
|
|
Pension |
|
|
|
|
|
|
Other |
|
|||
|
|
Currency |
|
|
Liability |
|
|
Cash Flow |
|
|
Comprehensive |
|
||||
(in thousands) |
|
Translation |
|
|
Adjustment |
|
|
Hedges |
|
|
Loss |
|
||||
Balance as of May 31, 2019 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Reclassification adjustments to income (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of February 29, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Foreign |
|
|
Pension |
|
|
|
|
|
|
Other |
|
|||
|
|
Currency |
|
|
Liability |
|
|
Cash Flow |
|
|
Comprehensive |
|
||||
(in thousands) |
|
Translation |
|
|
Adjustment |
|
|
Hedges |
|
|
Loss |
|
||||
Balance as of May 31, 2018 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Reclassification adjustments to income (a) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Income tax effect |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Balance as of February 28, 2019 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
(a) |
The statement of earnings classifications of amounts reclassified to income include: |
|
(1) |
Foreign currency translation – result of $ |
|
(2) |
Pension liability adjustment – result of the settlement of certain participant balances within the pension plan maintained by WAVE. |
|
(3) |
Cash flow hedges – disclosed in “NOTE Q – Derivative Instruments and Hedging Activities”. |
NOTE L – Stock-Based Compensation
Non-Qualified Stock Options
During the nine months ended February 29, 2020, we granted non-qualified stock options covering a total of
Dividend yield |
|
|
|
% |
Expected volatility |
|
|
|
% |
Risk-free interest rate |
|
|
|
% |
Expected term (years) |
|
|
|
|
Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the U.S. 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 nine months ended February 29, 2020, we granted an aggregate of
Market-Based Restricted Common Shares
On September 25, 2019, we granted
Dividend yield |
|
|
|
% |
Expected volatility |
|
|
|
% |
Risk-free interest rate |
|
|
|
% |
The calculated pre-tax stock-based compensation expense for these restricted common shares is $
17
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, 2020, 2021 and 2022. These performance share awards will be paid, to the extent earned, in common shares of Worthington Industries, Inc. 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 the respective grant dates of the performance shares 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 nine months ended February 29, 2020, we granted performance share awards covering an aggregate of
NOTE M – Income Taxes
Income tax expense for the nine months ended February 29, 2020 and February 28, 2019 reflected estimated annual effective income tax rates of
NOTE N – Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the periods presented:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands, except per share amounts) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
Numerator (basic & diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to controlling interest - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income available to common shareholders |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - weighted average common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - adjusted weighted average common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to controlling interest |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Diluted earnings per share attributable to controlling interest |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Stock options covering
NOTE O – Segment Operations
Effective November 1, 2019, the Company deconsolidated substantially all of the net assets of the Engineered Cabs business, which has historically been treated as a separate reporting segment. The deconsolidated net assets included its two primary manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota. The remaining non-core assets of the
18
Engineered Cabs business, including the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana, were retained. The retained Engineered Cabs assets no longer qualify as a separate operating or reportable segment. Accordingly, the activity related to our former Engineered Cabs operating segment has been reported in the “Other” category. Segment information reported in previous periods has been restated to conform to this new presentation.
The following table presents summarized financial information for our reportable segments as of the dates, and for the periods presented:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pressure Cylinders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pressure Cylinders |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total operating income (loss) |
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Pressure Cylinders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment of goodwill and long-lived assets |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
Pressure Cylinders |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Other |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other expense (income), net |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
February 29, |
|
|
May 31, |
|
||
(in thousands) |
2020 |
|
|
2019 |
|
||
Total assets |
|
|
|
|
|
|
|
Steel Processing |
$ |
|
|
|
$ |
|
|
Pressure Cylinders |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
Total assets |
$ |
|
|
|
$ |
|
|
19
NOTE P – Acquisitions
Worthington Samuel Coil Processing LLC
On December 31, 2019, the Company contributed the recently acquired operating net assets of Heidtman’s Cleveland facility to the Samuel joint venture, in exchange for an incremental
The assets acquired and liabilities assumed were recognized at their acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired.
(in thousands) |
|
|
|
|||
Category |
|
Amount |
|
|
Useful Life (Years) |
|
Customer relationships |
|
$ |
|
|
|
|
Trade name |
|
|
|
|
|
Indefinite |
Total acquired identifiable intangible assets |
|
$ |
|
|
|
|
The acquisition price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The acquisition price also includes strategic and synergistic benefits (investment value) specific to us, which resulted in an acquisition price in excess of the fair value of the identifiable net assets. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
The following table summarizes the consideration transferred for our 63% controlling interest in Samuel and the fair value assigned to the assets acquired and liabilities assumed at the acquisition date:
(in thousands) |
|
|||
Consideration Transferred: |
|
|
|
|
Assets contributed ( |
|
$ |
|
|
Capital contribution |
|
|
|
|
Fair value of previously held equity interest in Samuel |
|
|
|
|
Total consideration |
|
$ |
|
|
|
|
|
|
|
Estimated Fair Value of Assets Acquired and Liabilities Assumed: |
|
|
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventories |
|
|
|
|
Prepaid expenses |
|
|
|
|
Intangible assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Total identifiable assets |
|
|
|
|
Accounts payable |
|
|
( |
) |
Accrued liabilities |
|
|
( |
) |
Net identifiable assets |
|
|
|
|
Goodwill |
|
|
|
|
Net assets |
|
|
|
|
Noncontrolling interest |
|
|
( |
) |
Total consideration |
|
$ |
|
|
20
The fair value of each of our previously held equity interest and the noncontrolling interest were derived using a market approach. The minority discount to reflect management’s estimate of a control premium was immaterial.
Operating results of the Samuel joint venture have been included in our consolidated statements of earnings from the acquisition date forward. For periods prior to the acquisition date, our portion of equity in net income of Samuel was included within equity in net income of unconsolidated affiliates in our consolidated statements of earnings. Proforma results, including the acquired business since the beginning of fiscal 2019, would not be materially different than the reported results.
Heidtman Cleveland
On October 7, 2019, we acquired the operating net assets related to Heidtman’s Cleveland facility, excluding working capital, for cash consideration of $
The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets acquired is fully evaluated by the Company, including but not limited to, the fair value accounting.
The assets acquired and liabilities assumed were recognized at their estimated acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired. In connection with the acquisition, a customer list intangible asset was identified and valued and will be amortized over the estimated useful life of
The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes strategic and synergistic benefits (investment value) specific to us, which resulted in a purchase price in excess of the fair value of the identifiable net assets. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid and the final fair value assigned to the assets acquired and liabilities assumed at the acquisition date:
|
|
Preliminary |
|
|
Measurement |
|
|
Final |
|
|||
|
|
Valuation |
|
|
Period |
|
|
Valuation |
|
|||
(in thousands) |
|
November 30, 2019 |
|
|
Adjustments |
|
|
February 29, 2020 |
|
|||
Customer list |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Property, plant and equipment |
|
|
|
|
|
|
( |
) |
|
|
|
|
Finance lease assets |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
- |
|
|
|
|
|
Net identifiable assets |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
( |
) |
|
|
|
|
Purchase price |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
NOTE Q – Derivative Instruments and Hedging Activities
We utilize derivative financial 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 (loss) 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 and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
21
Foreign Currency Exchange 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 foreign currency exchange rate fluctuations. The translation of foreign currencies into U.S. 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. 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 R – Fair Value" for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.
The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at February 29, 2020:
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
||||||
|
|
Balance |
|
|
|
|
|
Balance |
|
|
|
|
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
||
(in thousands) |
|
Location |
|
Value |
|
|
Location |
|
Value |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Receivables |
|
$ |
- |
|
|
Accounts payable |
|
$ |
|
|
|
|
Other assets |
|
|
- |
|
|
Other liabilities |
|
|
|
|
Totals |
|
|
|
$ |
- |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Receivables |
|
$ |
|
|
|
Accounts payable |
|
$ |
|
|
|
|
Other assets |
|
|
- |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts |
|
Receivables |
|
|
- |
|
|
Accounts payable |
|
|
|
|
Totals |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
Total derivative instruments |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis at February 29, 2020. Had these amounts been recognized on a gross basis, the impact would have been a $
22
The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at May 31, 2019:
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
||||||
|
|
Balance |
|
|
|
|
|
Balance |
|
|
|
|
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
||
(in thousands) |
|
Location |
|
Value |
|
|
Location |
|
Value |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Receivables |
|
$ |
|
|
|
Accounts payable |
|
$ |
|
|
|
|
Other assets |
|
|
- |
|
|
Other liabilities |
|
|
|
|
Totals |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Receivables |
|
$ |
|
|
|
Accounts payable |
|
$ |
|
|
|
|
Other assets |
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts |
|
Receivables |
|
|
- |
|
|
Accounts payable |
|
|
|
|
Totals |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
Total derivative instruments |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis at May 31, 2019. Had these amounts been recognized on a gross basis, the impact would have been a $
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. The earnings effects of these derivative instruments are presented in the same statement of earnings line items as the earnings effects of the hedged items. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative instrument.
The following table summarizes our cash flow hedges outstanding at February 29, 2020:
|
|
Notional |
|
|
|
|
(in thousands) |
|
Amount |
|
|
Maturity Date |
|
Commodity contracts |
|
$ |
|
|
|
|
23
The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from AOCI into net earnings for derivative instruments designated as cash flow hedges for the periods presented:
|
|
Gain (Loss) |
|
|
Location of Gain (Loss) |
|
Gain (Loss) Reclassified |
|
||
(in thousands) |
|
Recognized in OCI |
|
|
Reclassified from AOCI into Net Earnings |
|
from AOCI into Net Earnings |
|
||
For the three months ended February 29, 2020: |
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
( |
) |
|
Cost of goods sold |
|
$ |
( |
) |
Interest rate contracts |
|
|
- |
|
|
Interest expense |
|
|
|
|
Foreign currency exchange contracts |
|
|
- |
|
|
Miscellaneous income, net |
|
|
- |
|
Totals |
|
$ |
( |
) |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended February 28, 2019: |
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
|
|
|
Cost of goods sold |
|
$ |
|
|
Interest rate contracts |
|
|
- |
|
|
Interest expense |
|
|
( |
) |
Foreign currency exchange contracts |
|
|
- |
|
|
Miscellaneous income, net |
|
|
( |
) |
Totals |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended February 29, 2020: |
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
( |
) |
|
Cost of goods sold |
|
$ |
( |
) |
Interest rate contracts |
|
|
( |
) |
|
Interest expense |
|
|
|
|
Foreign currency exchange contracts |
|
|
- |
|
|
Miscellaneous income, net |
|
|
( |
) |
Totals |
|
$ |
( |
) |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended February 28, 2019: |
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
( |
) |
|
Cost of goods sold |
|
$ |
|
|
Interest rate contracts |
|
|
- |
|
|
Interest expense |
|
|
( |
) |
Foreign currency exchange contracts |
|
|
- |
|
|
Miscellaneous income, net |
|
|
|
|
Totals |
|
$ |
( |
) |
|
|
|
$ |
|
|
The estimated net amount of the losses recognized in AOCI at February 29, 2020 expected to be reclassified into net earnings within the succeeding twelve months is $
Economic (Non-designated) Hedges
We enter into foreign currency exchange 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 net earnings.
The following table summarizes our economic (non-designated) derivative instruments outstanding at February 29, 2020:
|
|
Notional |
|
|
|
|
(in thousands) |
|
Amount |
|
|
Maturity Date(s) |
|
Commodity contracts |
|
$ |
|
|
|
March 2020 - September 2021 |
Foreign currency exchange contracts |
|
|
|
|
|
|
The following tables summarize the gain (loss) recognized in net earnings for economic (non-designated) derivative financial instruments for the periods presented:
|
|
|
|
Gain (Loss) Recognized |
|
|||||
|
|
|
|
In Net Earnings for the |
|
|||||
|
|
Location of Gain (Loss) |
|
Three Months Ended |
|
|||||
(in thousands) |
|
Recognized in Net Earnings |
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||
Commodity contracts |
|
Cost of goods sold |
|
$ |
( |
) |
|
$ |
|
|
Foreign currency exchange contracts |
|
Miscellaneous income, net |
|
|
|
|
|
|
( |
) |
Total |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
24
|
|
|
|
Loss Recognized |
|
|||||
|
|
|
|
in Net Earnings for the |
|
|||||
|
|
Location of Loss |
|
Nine Months Ended |
|
|||||
(in thousands) |
|
Recognized in Net Earnings |
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||
Commodity contracts |
|
Cost of goods sold |
|
$ |
( |
) |
|
$ |
( |
) |
Foreign currency exchange contracts |
|
Miscellaneous income, net |
|
|
( |
) |
|
|
( |
) |
Total |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
NOTE R – 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.
Recurring Fair Value Measurements
At February 29, 2020, our 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 instruments (1) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Total assets |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Total liabilities |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
At May 31, 2019, our 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 instruments (1) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Total assets |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Total liabilities |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
(1) |
|
25
|
|
Non-Recurring Fair Value Measurements
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|||
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|||
(in thousands) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Totals |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate (1) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
Long-lived assets held for sale (2) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Long-lived assets held and used (3) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Total assets |
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
1) |
|
|
2) |
|
|
|
|
|
3) |
|
During the third quarter of fiscal 2020, the Company identified an impairment indicator for our oil & gas equipment business and performed an interim impairment test of the reporting unit. In accordance with the applicable accounting guidance, the book value of the corresponding goodwill was written off, resulting in an impairment charge of $
At May 31, 2019, our assets measured at fair value on a non-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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate (1) |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Long-lived assets held for sale (2) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Long-lived assets held and used (3) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Total assets |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
26
|
1) |
|
|
2) |
|
|
3) |
|
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, 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 $
27
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, “Part I – Item 1A. – Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 and “PART II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q.
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 the “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, 2019 (“fiscal 2019”) 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 February 29, 2020, excluding our joint ventures, we operated 27 manufacturing facilities worldwide, principally in two operating segments, which correspond with our reportable business segments: Steel Processing and Pressure Cylinders.
As of February 29, 2020, we held equity positions in nine joint ventures, which operated 49 manufacturing facilities worldwide, including 30 facilities which were operated by joint ventures in which we held a 50% or greater ownership interest. Four 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 portions of net earnings (loss) and other comprehensive income (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 five of these joint ventures are accounted for using the equity method.
Overview
Operating loss for the current quarter was $1.3 million, compared to operating income of $26.0 million for the comparable prior year quarter, a decrease of $27.3 million. The current quarter was negatively impacted by $36.0 million of impairment and restructuring charges primarily associated with the oil & gas equipment business within Pressure Cylinders, compared to a net restructuring gain of $11.2 million in the prior year quarter. Excluding the impact of impairment and restructuring activity, operating income was up $19.9 million due to an improvement in gross margin which was driven by higher direct spreads and higher toll volume in Steel Processing combined with higher contributions from Pressure Cylinders, which was partially offset by higher SG&A expense.
Equity in net income of unconsolidated affiliates (“equity income”) for the current year third quarter increased $4.7 million over the comparable prior year quarter, primarily on higher contributions from ClarkDietrich, ArtiFlex and WAVE. We received cash distributions from unconsolidated joint ventures of $21.0 million during the third quarter of fiscal 2020.
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and a reduction in demand for many products from direct or ultimate customers. Accordingly, businesses have adjusted, reduced or suspended operating activities. This has negatively impacted several of the markets we serve, including the North American automotive market, which shut down production in mid-March 2020. While a number of our plants are operating as essential businesses, some of our plants have suspended or cut back on operating levels and shifts, and additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop.
As a result of curtailed operations, we have taken action in some locations to reduce the work force mostly through furloughs, although reductions in some positions are expected to be permanent. We will continue to review if and when additional such actions may be appropriate throughout the Company. The hope is to begin calling back furloughed workers when and if the country and businesses begin to return to some semblance of normal and demand increases to more normal levels.
While we expect the effects of the pandemic and the related responses to negatively impact our results of operations, cash flows and financial position, the uncertainty over the duration and severity of the economic and operational impacts of COVID-19 means we cannot reasonably estimate the related financial impact at this time.
28
Recent Business Developments
|
• |
On July 26, 2019, the Company completed the sale of Worthington Aritas Basınçlı Kaplar Sanayi (“Worthington Aritas”), its Turkish manufacturer of cryogenic pressure vessels. The Company received cash proceeds, net of transaction costs, of $8.3 million resulting in a pre-tax restructuring loss of $481,000. |
|
• |
On August 23, 2019, two of the Company’s European subsidiaries issued a €36.7 million principal amount unsecured 1.56% Series A Senior Note due August 23, 2031 (the “2031 Note”) and €55.0 million aggregate principal amount of unsecured 1.90% Series B Senior Notes due August 23, 2034 (the “2034 Notes”), (collectively, the “Senior Notes”). The Senior Notes were issued in a private placement and the proceeds thereof were used in the redemption of $150.0 million of aggregate principal amount of 6.50% senior notes. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE I – Debt and Receivables Securitization” for more information on these transactions. |
|
|
• |
On September 30, 2019, Worthington Armstrong Venture (“WAVE”) completed the sale of its international operations to Knauf Ceilings and Holding GmbH (“Knauf”), as part of the broader transaction between Knauf and Armstrong World Industries, Inc. (“AWI”), the other partner in the WAVE joint venture. Our portion of the net gain, subject to post-closing adjustments, was $23.1 million and has been recognized in equity income. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Investments in Unconsolidated Affiliates” for more information on this transaction. |
|
• |
On October 7, 2019, we acquired the operating net assets, excluding working capital, related to Heidtman Steel Products, Inc.’s Cleveland facility (“Heidtman”), for cash consideration of $29.6 million, which expanded the Company’s pickling and slitting capabilities. The acquired business was managed as part of our Steel Processing operating segment until its contribution to the Worthington Samuel Coil Processing LLC (the “Samuel joint venture”) on December 31, 2019. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE P – Acquisitions” for more information on this transaction. |
|
• |
On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of our Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse Holdings, LLC (the “Cabs joint venture”), in which the Company retained a 20% noncontrolling interest. Certain non-core assets of the Engineered Cabs business, including the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana, were retained. The retained Engineered Cabs assets no longer qualify as a separate operating or reportable segment. For additional information refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE O – Segment Operations”. |
|
• |
On December 19, 2019, the Company finalized an agreement to transfer the risks and rewards related to its 10% minority ownership interest in the Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (“Nisshin”) joint venture in China to the other joint venture partners. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Investments in Unconsolidated Affiliates” for more information on this transaction. |
|
• |
On December 31, 2019, the Company contributed the recently acquired operating net assets related to Heidtman’s Cleveland facility to the Samuel joint venture in exchange for an incremental 31.75% ownership interest in the Samuel joint venture, bringing our total ownership interest to 63%. As a result, the Samuel joint venture’s results have been consolidated within Steel Processing since that date, with the minority member’s portion of earnings eliminated within earnings attributable to noncontrolling interest. This transaction was accounted for as a step acquisition, which required we re-measure our previously held 31.25% ownership interest to fair value resulting in a re-measurement gain of $6.1 million, which is included in miscellaneous income, net in our consolidated statement of earnings for the three and nine months ended February 29, 2020. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE P – Acquisitions” for more information on this transaction. |
|
• |
On February 12, 2020, the Company announced a plan to consolidate its oil & gas equipment manufacturing operations in Wooster, Oho, into its existing facility in Bremen, Ohio, resulting in pre-tax impairment and restructuring charges of $33.9 million. For additional information refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE F – Restructuring and Other Expense (Income), Net”. |
29
|
• |
On March 18, 2020, the Company’s Worthington Specialty Processing (“WSP”) joint venture announced a plan to consolidate its manufacturing operations in Canton, Michigan into its existing facilities in Jackson and Taylor, Michigan, resulting in pre-tax impairment and restructuring charges of $1.6 million. For additional information refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Lon-Lived Assets” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE F – Restructuring and Other Expense (Income), Net”. |
|
• |
On March 25, 2020, the Worthington Industries, Inc. Board of Directors (the “Worthington Industries Board”) declared a quarterly dividend of $0.24 per share payable on June 29, 2020 to shareholders of record on June 15, 2020. |
|
• |
During the first nine months of fiscal 2020, the Company repurchased a total of 1,300,000 common shares for $50.9 million at an average price of $39.19 per share. |
Market & Industry Overview
Due to COVID-19 and the actions taken by governmental authorities and others related thereto, some of the information provided in this “Market & Industry Overview” section could be substantially different in the fourth quarter of fiscal 2020.
We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of net sales by end market for the third quarter of each of fiscal 2020 and fiscal 2019 is illustrated in the following chart:
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 56% of Steel Processing’s net sales 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 market.
Approximately 17% of the net sales of our Steel Processing 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 27% of the net sales of our Steel Processing operating segment are to other markets such as consumer products, industrial products, 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 businesses.
30
We use the following information to monitor costs and assess demand in our major end markets:
|
|
Three Months Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
||||||||||
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
|
Inc / (Dec) |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
|
Inc / (Dec) |
|
||||||
U.S. GDP (% growth year-over-year) 1 |
|
|
2.2 |
% |
|
|
3.2 |
% |
|
|
-1.0 |
% |
|
|
2.3 |
% |
|
|
2.9 |
% |
|
|
-0.6 |
% |
Hot-Rolled Steel ($ per ton) 2 |
|
$ |
571 |
|
|
$ |
725 |
|
|
$ |
(154 |
) |
|
$ |
554 |
|
|
$ |
820 |
|
|
$ |
(266 |
) |
Detroit Three Auto Build (000's vehicles) 3 |
|
|
1,921 |
|
|
|
1,931 |
|
|
|
(10 |
) |
|
|
5,849 |
|
|
|
6,218 |
|
|
|
(369 |
) |
No. America Auto Build (000's vehicles) 3 |
|
|
3,870 |
|
|
|
3,891 |
|
|
|
(21 |
) |
|
|
12,043 |
|
|
|
12,436 |
|
|
|
(393 |
) |
Zinc ($ per pound) 4 |
|
$ |
1.05 |
|
|
$ |
1.16 |
|
|
$ |
(0.11 |
) |
|
$ |
1.09 |
|
|
$ |
1.20 |
|
|
$ |
(0.11 |
) |
Natural Gas ($ per mcf) 5 |
|
$ |
2.07 |
|
|
$ |
3.27 |
|
|
$ |
(1.20 |
) |
|
$ |
2.28 |
|
|
$ |
3.17 |
|
|
$ |
(0.89 |
) |
On-Highway Diesel Fuel Prices ($ per gallon) 6 |
|
$ |
3.01 |
|
|
$ |
3.03 |
|
|
$ |
(0.02 |
) |
|
$ |
3.03 |
|
|
$ |
3.19 |
|
|
$ |
(0.16 |
) |
Crude Oil - WTI ($ per barrel) 6 |
|
$ |
56.01 |
|
|
$ |
51.96 |
|
|
$ |
4.05 |
|
|
$ |
55.70 |
|
|
$ |
62.32 |
|
|
$ |
(6.62 |
) |
1 |
2019 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 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 2020 (first, second and third quarters), fiscal 2019 and fiscal 2018:
|
|
Fiscal Year |
|
|||||||||
(dollars per ton 1 ) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
1st Quarter |
|
$ |
564 |
|
|
$ |
900 |
|
|
$ |
604 |
|
2nd Quarter |
|
$ |
526 |
|
|
$ |
836 |
|
|
$ |
608 |
|
3rd Quarter |
|
$ |
571 |
|
|
$ |
725 |
|
|
$ |
674 |
|
4th Quarter |
|
N/A |
|
|
$ |
672 |
|
|
$ |
860 |
|
|
Annual Avg. |
|
$ |
554 |
|
|
$ |
783 |
|
|
$ |
687 |
|
|
1 |
CRU Hot-Rolled Index, period average |
Sales to one Steel Processing customer in the automotive industry represented 10.2% and 14.1% of consolidated net sales during the third quarter of fiscal 2020 and fiscal 2019, respectively. 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 third quarter of fiscal 2020, vehicle production for the Detroit Three automakers and North American vehicle production were essentially flat relative to the comparable period in the prior year.
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 manufacturing operations and indirectly through transportation and freight expense.
31
Results of Operations
Third Quarter – Fiscal 2020 Compared to Fiscal 2019
Consolidated Operations
The following table presents consolidated operating results for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
764.0 |
|
|
|
100.0 |
% |
|
$ |
874.4 |
|
|
|
100.0 |
% |
|
$ |
(110.4 |
) |
Cost of goods sold |
|
648.4 |
|
|
|
84.9 |
% |
|
|
784.4 |
|
|
|
89.7 |
% |
|
|
(136.0 |
) |
Gross margin |
|
115.6 |
|
|
|
15.1 |
% |
|
|
90.0 |
|
|
|
10.3 |
% |
|
|
25.6 |
|
Selling, general and administrative expense |
|
80.9 |
|
|
|
10.6 |
% |
|
|
75.2 |
|
|
|
8.6 |
% |
|
|
5.7 |
|
Impairment of goodwill and long-lived assets |
|
34.6 |
|
|
|
4.5 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
34.6 |
|
Restructuring and other expense (income), net |
|
1.4 |
|
|
|
0.2 |
% |
|
|
(11.2 |
) |
|
|
-1.3 |
% |
|
|
(12.6 |
) |
Operating income (loss) |
|
(1.3 |
) |
|
|
-0.2 |
% |
|
|
26.0 |
|
|
|
3.0 |
% |
|
|
(27.3 |
) |
Miscellaneous income, net |
|
6.9 |
|
|
|
0.9 |
% |
|
|
0.5 |
|
|
|
0.1 |
% |
|
|
6.4 |
|
Interest expense |
|
(7.4 |
) |
|
|
-1.0 |
% |
|
|
(9.3 |
) |
|
|
-1.1 |
% |
|
|
(1.9 |
) |
Equity in net income of unconsolidated affiliates (1) |
|
25.5 |
|
|
|
3.3 |
% |
|
|
20.8 |
|
|
|
2.4 |
% |
|
|
4.7 |
|
Income tax expense |
|
(4.8 |
) |
|
|
-0.6 |
% |
|
|
(8.4 |
) |
|
|
-1.0 |
% |
|
|
(3.6 |
) |
Net earnings |
|
18.9 |
|
|
|
2.5 |
% |
|
|
29.6 |
|
|
|
3.4 |
% |
|
|
(10.7 |
) |
Net earnings attributable to noncontrolling interests |
|
3.5 |
|
|
|
0.5 |
% |
|
|
2.8 |
|
|
|
0.3 |
% |
|
|
0.7 |
|
Net earnings attributable to controlling interest |
$ |
15.4 |
|
|
|
2.0 |
% |
|
$ |
26.8 |
|
|
|
3.1 |
% |
|
$ |
(11.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Equity in net income by unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE |
$ |
20.1 |
|
|
|
|
|
|
$ |
18.8 |
|
|
|
|
|
|
$ |
1.3 |
|
ClarkDietrich |
|
4.9 |
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
3.1 |
|
Serviacero Worthington |
|
0.8 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
0.3 |
|
ArtiFlex |
|
1.7 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
1.8 |
|
Other |
|
(2.0 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(1.8 |
) |
Total |
$ |
25.5 |
|
|
|
|
|
|
$ |
20.8 |
|
|
|
|
|
|
$ |
4.7 |
|
Net earnings attributable to controlling interest for the three months ended February 29, 2020 decreased $11.4 million from the comparable period in the prior year. Net sales and operating highlights for the third quarter of fiscal 2020 were as follows:
|
• |
Net sales decreased $110.4 million from the comparable quarter in the prior year. The decrease was driven primarily by lower average selling prices in Steel Processing, the impact of divestiture of the Engineered Cabs business in the current year, and lower volumes in the industrial and consumer products businesses within Pressure Cylinders, partially offset by higher volumes in Steel Processing. |
|
• |
Gross margin increased $25.6 million over the comparable quarter in the prior year. The increase was driven primarily by higher direct spreads and higher toll volume in Steel Processing combined with a higher contribution from Pressure Cylinders in the current quarter, compared to the prior year quarter that had included the $13.0 million unfavorable impact of the tank replacement program. |
|
• |
SG&A expense increased $5.7 million over the comparable quarter in the prior year. The increase was driven primarily by higher wages and profit sharing and bonus accruals. Overall, SG&A expense was 10.6% of consolidated net sales compared to 8.6% in the comparable quarter of the prior year. |
|
• |
Impairment and restructuring activity combined to reduce operating income by $22.0 million driven primarily by $33.4 million related to the current quarter write-down of certain oil & gas equipment assets within Pressure Cylinders, compared to an $11.2 million net restructuring gain in the comparable prior year period primarily related to the sale of the Company’s solder business and certain brazing assets. For additional information regarding the current period impairment charges, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”. |
32
|
• |
Interest expense decreased $1.9 million from the comparable quarter in the prior year. The decrease was due primarily to lower average debt levels and lower average interest rates resulting from the debt refinancing transactions completed in the first quarter of fiscal 2020. |
|
• |
Equity income increased $4.7 million over the comparable quarter in the prior year, due primarily to a $3.1 million increase in equity income from ClarkDietrich, driven by improved margins, combined with higher contributions from ArtiFlex and WAVE. Equity income in the current quarter was negatively impacted by a $2.1 million loss related to our retained interest in the Cabs joint venture, which consisted primarily of transaction-related expenses incurred at the new company formed in the second quarter of fiscal 2020. We received cash distributions of $21.0 million from our unconsolidated affiliates during the current quarter. For additional information regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Investments in Unconsolidated Affiliates”. |
|
• |
Income tax expense was $4.8 million in the current quarter compared to $8.4 million in the prior year quarter. The decrease was due primarily to the oil & gas impairment charge recognized in the current quarter, partially offset by higher core earnings. Tax expense in the current quarter reflects an estimated annual effective income tax rate of 24.6% versus 23.3% in the prior year quarter. For additional information regarding the Company’s income taxes refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE M – Income Taxes”. |
Segment Operations
Steel Processing
The following table presents a summary of operating results for our Steel Processing operating segment for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(dollars in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
491.1 |
|
|
|
100.0 |
% |
|
$ |
555.9 |
|
|
|
100.0 |
% |
|
$ |
(64.8 |
) |
Cost of goods sold |
|
434.1 |
|
|
|
88.4 |
% |
|
|
516.1 |
|
|
|
92.8 |
% |
|
|
(82.0 |
) |
Gross margin |
|
57.0 |
|
|
|
11.6 |
% |
|
|
39.8 |
|
|
|
7.2 |
% |
|
|
17.2 |
|
Selling, general and administrative expense |
|
36.0 |
|
|
|
7.3 |
% |
|
|
29.6 |
|
|
|
5.3 |
% |
|
|
6.4 |
|
Impairment of long-lived assets |
|
1.3 |
|
|
|
0.3 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
1.3 |
|
Restructuring and other expense |
|
0.7 |
|
|
|
0.1 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
0.7 |
|
Operating income |
$ |
19.0 |
|
|
|
3.9 |
% |
|
$ |
10.2 |
|
|
|
1.8 |
% |
|
$ |
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost |
$ |
342.6 |
|
|
|
|
|
|
$ |
430.8 |
|
|
|
|
|
|
$ |
(88.2 |
) |
Tons shipped (in thousands) |
|
1,140 |
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
300 |
|
Net sales and operating highlights for the third quarter of fiscal 2020 were as follows:
|
• |
Net sales decreased $64.8 million from the comparable quarter in the prior year, driven by lower average selling prices due to the overall decline in steel prices, which decreased net sales by $90.6 million from the prior year quarter, partially offset by higher volumes, which increased net sales by $25.8 million. The mix of direct versus toll tons processed was 43% to 57% compared to 57% to 43% in the prior year quarter. The change in mix in the current period quarter was driven primarily by the consolidation of the Samuel joint venture. |
|
• |
Operating income increased $8.8 million over the comparable quarter in the prior year on higher direct spreads and the impact of higher toll volume. Direct spreads in the current quarter reflected lower estimated inventory holding losses of $6.0 million compared to $10.8 million in the comparable quarter in the prior year. |
33
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(dollars in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
271.0 |
|
|
|
100.0 |
% |
|
$ |
290.7 |
|
|
|
100.0 |
% |
|
$ |
(19.7 |
) |
Cost of goods sold |
|
211.4 |
|
|
|
78.0 |
% |
|
|
240.4 |
|
|
|
82.7 |
% |
|
|
(29.0 |
) |
Gross margin |
|
59.6 |
|
|
|
22.0 |
% |
|
|
50.3 |
|
|
|
17.3 |
% |
|
|
9.3 |
|
Selling, general and administrative expense |
|
45.4 |
|
|
|
16.8 |
% |
|
|
42.5 |
|
|
|
14.6 |
% |
|
|
2.9 |
|
Impairment of goodwill and long-lived assets |
|
33.4 |
|
|
|
12.3 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
33.4 |
|
Restructuring and other (income) expense, net |
|
0.7 |
|
|
|
0.3 |
% |
|
|
(11.2 |
) |
|
|
-3.9 |
% |
|
|
(11.9 |
) |
Operating income (loss) |
$ |
(19.9 |
) |
|
|
-7.3 |
% |
|
$ |
19.0 |
|
|
|
6.5 |
% |
|
$ |
(38.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost |
$ |
119.3 |
|
|
|
|
|
|
$ |
135.2 |
|
|
|
|
|
|
$ |
(15.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units shipped by principal class of products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products |
|
14,096,440 |
|
|
|
|
|
|
|
17,718,604 |
|
|
|
|
|
|
|
(3,622,164 |
) |
Industrial products |
|
3,284,605 |
|
|
|
|
|
|
|
3,576,129 |
|
|
|
|
|
|
|
(291,524 |
) |
Oil & gas equipment |
|
274 |
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
(45 |
) |
Total Pressure Cylinders |
|
17,381,319 |
|
|
|
|
|
|
|
21,295,052 |
|
|
|
|
|
|
|
(3,913,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by principal class of products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products |
$ |
113.3 |
|
|
|
|
|
|
$ |
118.0 |
|
|
|
|
|
|
$ |
(4.7 |
) |
Industrial products |
|
129.0 |
|
|
|
|
|
|
|
148.0 |
|
|
|
|
|
|
|
(19.0 |
) |
Oil & gas equipment |
|
28.7 |
|
|
|
|
|
|
|
24.7 |
|
|
|
|
|
|
|
4.0 |
|
Total Pressure Cylinders |
$ |
271.0 |
|
|
|
|
|
|
$ |
290.7 |
|
|
|
|
|
|
$ |
(19.7 |
) |
Net sales and operating highlights for the third quarter of fiscal 2020 were as follows:
|
• |
Net sales decreased $19.7 million from the comparable quarter in the prior year, due to lower volumes in the industrial and consumer products businesses. |
|
• |
Operating loss for the current quarter was $19.9 million, compared to operating income of $19.0 million in the comparable prior year quarter, a decrease of $38.9 million. The decrease was primarily the result of higher impairment and restructuring charges, up $45.3 million over the restructuring gain recognized in the prior year quarter, partially offset by the $2.3 million favorable impact of the change in the reserve for the tank replacement program initiated in the prior year quarter. Excluding the impact of these items, operating income was down $8.8 million on lower contributions from both the industrial products and consumer products business, partially offset by improvements in the oil & gas equipment business. For additional information on impairment, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”. |
34
Other
The Other category includes certain income and expense items not allocated to our operating segments, including product liability and healthcare reserves. The Other category also includes the results of the former Engineered Cabs operating segment, on a historical basis, through November 1, 2019, when substantially all the net assets were deconsolidated. The following table presents a summary of operating results for the Other category for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
1.8 |
|
|
|
100.0 |
% |
|
$ |
27.8 |
|
|
|
100.0 |
% |
|
$ |
(26.0 |
) |
Cost of goods sold |
|
2.9 |
|
|
|
161.1 |
% |
|
|
27.8 |
|
|
|
100.0 |
% |
|
|
(24.9 |
) |
Gross loss |
|
(1.1 |
) |
|
|
-61.1 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
(1.1 |
) |
Selling, general and administrative expense |
|
(0.5 |
) |
|
|
-27.8 |
% |
|
|
3.1 |
|
|
|
11.2 |
% |
|
|
(3.6 |
) |
Restructuring and other income |
|
(0.1 |
) |
|
|
-5.6 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
0.1 |
|
Operating loss |
$ |
(0.5 |
) |
|
|
-27.8 |
% |
|
$ |
(3.1 |
) |
|
|
-11.2 |
% |
|
$ |
2.6 |
|
Operating highlights for the third quarter of fiscal 2020 were as follows:
|
• |
Net sales decreased $26.0 million from the comparable period in the prior year due to the deconsolidation of substantially all the net assets of our former Engineered Cabs operating segment effective November 1, 2019. For additional information on the deconsolidation, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation”. |
|
• |
Operating loss of $0.5 million was $2.6 million lower than the comparable period in the prior year, primarily due to lower SG&A expense, partially offset by higher losses at Engineered Cabs. |
35
Nine Months Year-to-Date – Fiscal 2020 Compared to Fiscal 2019
Consolidated Operations
The following table presents consolidated operating results for the periods presented:
|
Nine Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
2,447.5 |
|
|
|
100.0 |
% |
|
$ |
2,820.7 |
|
|
|
100.0 |
% |
|
$ |
(373.2 |
) |
Cost of goods sold |
|
2,094.0 |
|
|
|
85.6 |
% |
|
|
2,466.7 |
|
|
|
87.4 |
% |
|
|
(372.7 |
) |
Gross margin |
|
353.5 |
|
|
|
14.4 |
% |
|
|
354.0 |
|
|
|
12.6 |
% |
|
|
(0.5 |
) |
Selling, general and administrative expense |
|
260.3 |
|
|
|
10.6 |
% |
|
|
250.5 |
|
|
|
8.9 |
% |
|
|
9.8 |
|
Impairment of goodwill and long-lived assets |
|
75.2 |
|
|
|
3.1 |
% |
|
|
2.4 |
|
|
|
0.1 |
% |
|
|
72.8 |
|
Restructuring and other expense (income), net |
|
1.8 |
|
|
|
0.1 |
% |
|
|
(11.7 |
) |
|
|
-0.4 |
% |
|
|
(13.5 |
) |
Operating income |
|
16.2 |
|
|
|
0.7 |
% |
|
|
112.8 |
|
|
|
4.0 |
% |
|
|
(96.6 |
) |
Miscellaneous income, net |
|
8.3 |
|
|
|
0.3 |
% |
|
|
2.1 |
|
|
|
0.1 |
% |
|
|
6.2 |
|
Interest expense |
|
(24.2 |
) |
|
|
-1.0 |
% |
|
|
(28.5 |
) |
|
|
-1.0 |
% |
|
|
(4.3 |
) |
Loss on extinguishment of debt |
|
(4.0 |
) |
|
|
-0.2 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
(4.0 |
) |
Equity in net income of unconsolidated affiliates (1) |
|
97.6 |
|
|
|
4.0 |
% |
|
|
71.9 |
|
|
|
2.5 |
% |
|
|
25.7 |
|
Income tax expense |
|
(20.5 |
) |
|
|
-0.8 |
% |
|
|
(34.0 |
) |
|
|
-1.2 |
% |
|
|
(13.5 |
) |
Net earnings |
|
73.4 |
|
|
|
3.0 |
% |
|
|
124.3 |
|
|
|
4.4 |
% |
|
|
(50.9 |
) |
Net earnings attributable to noncontrolling interests |
|
10.7 |
|
|
|
0.4 |
% |
|
|
8.6 |
|
|
|
0.3 |
% |
|
|
2.1 |
|
Net earnings attributable to controlling interest |
$ |
62.7 |
|
|
|
2.6 |
% |
|
$ |
115.7 |
|
|
|
4.1 |
% |
|
$ |
(53.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Equity in net income by unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAVE |
$ |
85.8 |
|
|
|
|
|
|
$ |
59.2 |
|
|
|
|
|
|
$ |
26.6 |
|
ClarkDietrich |
|
13.9 |
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
|
|
9.1 |
|
Serviacero Worthington |
|
2.4 |
|
|
|
|
|
|
|
6.8 |
|
|
|
|
|
|
|
(4.4 |
) |
ArtiFlex |
|
3.0 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
1.9 |
|
Other |
|
(7.5 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(7.5 |
) |
Total |
$ |
97.6 |
|
|
|
|
|
|
$ |
71.9 |
|
|
|
|
|
|
$ |
25.7 |
|
Net earnings attributable to controlling interest for the nine months ended February 29, 2020 decreased $53.0 million from the comparable period in the prior year. Net sales and operating highlights for the nine months ended February 29, 2020 were as follows:
|
• |
Net sales decreased $373.2 million from the comparable period in the prior year. The decrease was driven primarily by lower direct volume and lower average selling prices in Steel Processing due to a decline in the overall market price of steel, and lower volume in the industrial products and consumer products businesses in Pressure Cylinders, partially offset by an early termination of a customer take-or-pay contract in Pressure Cylinders which effectively accelerated the recognition of $11.6 million of related sales in future quarters into the first nine months of fiscal 2020. |
|
• |
Gross margin decreased $0.5 million from the comparable period in the prior year which included a $13.0 million charge associated with the tank replacement program. The decrease was primarily due to compressed spreads in Steel Processing, down $25.6 million from the prior year period, driven by estimated inventory holding losses due to declining steel prices, combined with $26.4 million from lower direct volumes and lower volumes in the industrial products and consumer products businesses in Pressure Cylinders. The overall declines were partially offset by an improvement of $14.1 million in Steel Processing’s toll volume and improvements at Pressure Cylinders where gross margin benefited from the early termination of a customer take-or-pay contract in the industrial products business which resulted in a pre-tax benefit of $10.5 million. |
|
• |
SG&A expense increased $9.8 million over the comparable prior year period. The increase was driven primarily by higher wages and healthcare costs. |
|
• |
Impairment of goodwill and long-lived assets of $75.2 million in the nine months ended February 29, 2020 primarily consisted of $40.6 million related to the write-down of certain assets in Engineered Cabs and $33.4 million related to the write-down of certain oil & gas equipment assets within Pressure Cylinders. For additional information refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”. |
36
|
• |
Interest expense decreased $4.3 million from the comparable period in the prior year. The decrease was due primarily to lower average debt levels and lower average interest rates resulting from the debt refinancing transactions completed in the first quarter of fiscal 2020. |
|
• |
Equity income increased $25.7 million over the comparable period in the prior year, primarily due to a $23.1 million pre-tax gain at WAVE related to the sale of its international operations, a $9.1 million increase in equity income from ClarkDietrich, driven by improved margins, and higher contributions from ArtiFlex, partially offset by lower contributions from Serviacero Worthington. Equity income in the current year was also negatively impacted by a $4.2 million impairment charge to write down our 10% investment in Nisshin to fair value and by a $3.6 million loss related to our retained interest in the newly-formed Cabs joint venture, which included significant transaction-related expenses incurred at the new company. We received cash distributions of $78.3 million from our unconsolidated affiliates during the current year period. For additional information regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Investments in Unconsolidated Affiliates”. |
|
• |
Income tax expense decreased $13.5 million from the comparable period in the prior year, resulting primarily from lower core earnings and the impairment charges in Engineered Cabs and the oil & gas equipment business in Pressure Cylinders partially offset by the gain recognized from the sale of WAVE’s international operations. The net impact of these discrete items was a reduction in current year tax expense of $10.7 million. The current period tax expense was calculated using an estimated annual effective income tax rate of 24.6% versus 23.3% in the prior year comparable period. For additional information regarding the Company’s income taxes refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE M – Income Taxes”. |
Segment Operations
Steel Processing
The following table presents a summary of operating results for our Steel Processing operating segment for the periods presented:
|
Nine Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(dollars in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
1,531.4 |
|
|
|
100.0 |
% |
|
$ |
1,851.4 |
|
|
|
100.0 |
% |
|
$ |
(320.0 |
) |
Cost of goods sold |
|
1,378.1 |
|
|
|
90.0 |
% |
|
|
1,672.9 |
|
|
|
90.4 |
% |
|
|
(294.8 |
) |
Gross margin |
|
153.3 |
|
|
|
10.0 |
% |
|
|
178.5 |
|
|
|
9.6 |
% |
|
|
(25.2 |
) |
Selling, general and administrative expense |
|
109.0 |
|
|
|
7.1 |
% |
|
|
103.7 |
|
|
|
5.6 |
% |
|
|
5.3 |
|
Impairment of long-lived assets |
|
1.3 |
|
|
|
0.1 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
1.3 |
|
Restructuring and other expense |
|
0.7 |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
(0.7 |
) |
Operating income |
$ |
42.3 |
|
|
|
2.8 |
% |
|
$ |
74.8 |
|
|
|
4.0 |
% |
|
$ |
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost |
$ |
1,109.8 |
|
|
|
|
|
|
$ |
1,391.8 |
|
|
|
|
|
|
$ |
(282.0 |
) |
Tons shipped (in thousands) |
|
3,036 |
|
|
|
|
|
|
|
2,774 |
|
|
|
|
|
|
|
262 |
|
Net sales and operating highlights for the nine months ended February 29, 2020 were as follows:
|
• |
Net sales decreased $320.0 million from the comparable period in the prior year, driven by lower direct average selling prices and lower direct volume, which decreased net sales by $207.4 million and $124.3 million, respectively, partially offset by an increase in net sales due to higher toll volume of $20.6 million. The mix of direct versus toll tons processed was 49% to 51% compared to 57% to 43% in the comparable period of fiscal 2019. The change in mix in the current period was driven primarily by the acquisition of the Heidtman Cleveland assets and the consolidation of the Samuel joint venture. |
|
• |
Operating income decreased $32.5 million from the comparable period in the prior year, driven primarily by lower direct spreads, down approximately $20.6 million, due to declining steel prices, combined with lower direct volume. Inventory holding losses were estimated to be $20.9 million in the current period, compared to estimated inventory holding gains of $4.0 million in the comparable period in the prior year. |
37
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods presented:
|
Nine Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(dollars in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
865.5 |
|
|
|
100.0 |
% |
|
$ |
885.5 |
|
|
|
100.0 |
% |
|
$ |
(20.0 |
) |
Cost of goods sold |
|
665.4 |
|
|
|
76.9 |
% |
|
|
712.3 |
|
|
|
80.4 |
% |
|
|
(46.9 |
) |
Gross margin |
|
200.1 |
|
|
|
23.1 |
% |
|
|
173.2 |
|
|
|
19.6 |
% |
|
|
26.9 |
|
Selling, general and administrative expense |
|
140.6 |
|
|
|
16.2 |
% |
|
|
134.1 |
|
|
|
15.1 |
% |
|
|
6.5 |
|
Impairment of goodwill and long-lived assets |
|
33.4 |
|
|
|
3.9 |
% |
|
|
2.4 |
|
|
|
0.3 |
% |
|
|
31.0 |
|
Restructuring and other (income) expense, net |
|
0.7 |
|
|
|
0.1 |
% |
|
|
(11.7 |
) |
|
|
-1.3 |
% |
|
|
(12.4 |
) |
Operating income |
$ |
25.4 |
|
|
|
2.9 |
% |
|
$ |
48.4 |
|
|
|
5.5 |
% |
|
$ |
(23.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material cost |
$ |
373.3 |
|
|
|
|
|
|
$ |
407.4 |
|
|
|
|
|
|
$ |
(34.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units shipped by principal class of products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products |
|
49,669,887 |
|
|
|
|
|
|
|
52,428,516 |
|
|
|
|
|
|
|
(2,758,629 |
) |
Industrial products |
|
9,501,983 |
|
|
|
|
|
|
|
10,807,688 |
|
|
|
|
|
|
|
(1,305,705 |
) |
Oil & gas equipment |
|
1,493 |
|
|
|
|
|
|
|
1,257 |
|
|
|
|
|
|
|
236 |
|
Total Pressure Cylinders |
|
59,173,363 |
|
|
|
|
|
|
|
63,237,461 |
|
|
|
|
|
|
|
(4,064,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by principal class of products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products |
$ |
360.8 |
|
|
|
|
|
|
$ |
352.0 |
|
|
|
|
|
|
$ |
8.8 |
|
Industrial products |
|
412.0 |
|
|
|
|
|
|
|
452.9 |
|
|
|
|
|
|
|
(40.9 |
) |
Oil & gas equipment |
|
92.7 |
|
|
|
|
|
|
|
80.6 |
|
|
|
|
|
|
|
12.1 |
|
Total Pressure Cylinders |
$ |
865.5 |
|
|
|
|
|
|
$ |
885.5 |
|
|
|
|
|
|
$ |
(20.0 |
) |
Net sales and operating highlights for the nine months ended February 29, 2020 were as follows:
|
• |
Net sales decreased $20.0 million from the comparable period in the prior year. The decrease was driven primarily by lower volume in the industrial products business and the impact of divestitures, which decreased net sales by $35.4 million, partially offset by the impact of an early termination of a customer take-or-pay contract within the industrial products business, which effectively accelerated $11.6 million of related sales in future quarters into the current period, and higher volume in the oil & gas equipment business. |
|
• |
Operating income for the current quarter was $25.4 million, compared to $48.4 million in the comparable prior year period, a decrease of $23.0 million. The decrease was primarily the result of higher impairment and restructuring charges, up $43.4 million over the $11.2 million net restructuring gain recognized in the comparable period in the prior year, partially offset by the $2.3 million favorable impact in the current quarter of the change in the reserve for the tank replacement program initiated in the prior year. Excluding the impact of these items, operating income was up $5.1 million, driven primarily by the benefit from the customer take-or-pay contract termination, which accelerated the recognition of future pre-tax earnings of $10.5 million into the current period, partially offset by lower volumes in the consumer products and industrial products businesses. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”. |
38
Other
The Other category includes certain income and expense items not allocated to our operating segments, including product liability and healthcare reserves. The Other category also includes the results of the former Engineered Cabs operating segment, on a historical basis, through November 1, 2019, when substantially all the net assets were deconsolidated. The following table presents a summary of operating results for the Other Category for the periods presented:
|
Nine Months Ended |
|
|||||||||||||||||
|
February 29, |
|
|
% of |
|
|
February 28, |
|
|
% of |
|
|
Increase/ |
|
|||||
(in millions) |
2020 |
|
|
Net sales |
|
|
2019 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Net sales |
$ |
50.5 |
|
|
|
100.0 |
% |
|
$ |
83.8 |
|
|
|
100.0 |
% |
|
$ |
(33.3 |
) |
Cost of goods sold |
|
50.5 |
|
|
|
100.0 |
% |
|
|
81.5 |
|
|
|
97.3 |
% |
|
|
(31.0 |
) |
Gross margin |
|
- |
|
|
|
0.0 |
% |
|
|
2.3 |
|
|
|
2.7 |
% |
|
|
(2.3 |
) |
Selling, general and administrative expense |
|
10.7 |
|
|
|
21.2 |
% |
|
|
12.8 |
|
|
|
15.3 |
% |
|
|
(2.1 |
) |
Impairment of long-lived assets |
|
40.6 |
|
|
|
80.4 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
40.6 |
|
Restructuring and other expense |
|
0.3 |
|
|
|
0.6 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
0.3 |
|
Operating loss |
$ |
(51.6 |
) |
|
|
-102.2 |
% |
|
$ |
(10.5 |
) |
|
|
-12.5 |
% |
|
$ |
(41.1 |
) |
Operating highlights for the nine months ended February 29, 2020 were as follows:
|
• |
Net sales decreased $33.3 million from the comparable period in the prior year. The decrease was driven by the deconsolidation of Engineered Cabs. For additional information on the deconsolidation, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation”. |
|
• |
Operating loss of $51.6 million was $41.1 million higher than the comparable period for the prior year, primarily driven by impairment charges of $40.6 million to write-down certain assets at Engineered Cabs to their estimated fair value in the first quarter of fiscal 2020 and the deconsolidation of Engineered Cabs. For additional information on the deconsolidation and impairment, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”, respectively. |
Liquidity and Capital Resources
During the nine months ended February 29, 2020, we generated $255.8 million of cash from operating activities, invested $71.8 million in property, plant and equipment, and paid $29.6 million to acquire certain operating assets of Heidtman. Additionally, we used $101.5 million of net proceeds from the issuance of long-term debt to redeem $150.0 million of senior unsecured notes, acquired 1,300,000 of our common shares at a total cost of $50.9 million, and paid dividends of $40.2 million. The following table summarizes our consolidated cash flows for the periods presented:
|
Nine Months Ended |
|
|||||
(in millions) |
February 29, 2020 |
|
|
February 28, 2019 |
|
||
Net cash provided by operating activities |
$ |
255.8 |
|
|
$ |
127.2 |
|
Net cash provided (used) by investing activities |
|
(92.2 |
) |
|
|
44.4 |
|
Net cash used by financing activities |
|
(152.5 |
) |
|
|
(180.5 |
) |
Increase (decrease) in cash and cash equivalents |
|
11.1 |
|
|
|
(8.9 |
) |
Cash and cash equivalents at beginning of period |
|
92.4 |
|
|
|
122.0 |
|
Cash and cash equivalents at end of period |
$ |
103.5 |
|
|
$ |
113.1 |
|
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, to the extent not funded by cash provided by operating activities. These resources include cash and cash equivalents and unused committed lines of credit. These committed lines of credit had a total of $509.6 million of borrowing capacity available to be drawn as of April 9, 2020.
Although we do not currently anticipate a need, we believe that we could access the financial markets to be in a position to sell long-term debt or equity securities. However, COVID-19 could create uncertainty and volatility in the financial markets which may impact our ability to access capital and the terms under which we can do so. As the impact of the COVID-19 pandemic on the economy and our operations is fluid and evolves, we will continue to assess cuts to discretionary spending and other variable costs as well as our liquidity needs.
39
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 $255.8 million during the nine months ended February 29, 2020 compared to $127.2 million in the comparable period of fiscal 2019. The increase in net cash provided by operating activities was driven primarily by lower working capital needs due to declining steel prices and lower volumes partially offset by the impact of lower net earnings.
Investing Activities
Net cash used by investing activities was $92.2 million during the nine months ended February 29, 2020 compared to net cash provided by investing activities of $44.4 million in the comparable prior year period. The change from the prior year period was driven primarily by $56.7 million in excess distributions from WAVE received during the first nine months of fiscal 2019. We received $9.3 million in proceeds from asset sales, net of selling costs, primarily from the sale of the cryogenics business in Turkey compared to $48.3 million in proceeds from asset sales, net of selling costs, in the comparable period in the prior year. We also paid $29.6 million in the current year to acquire certain operating assets of Heidtman and invested $11.2 million more in property, plant and equipment.
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 $152.5 million during the nine months ended February 29, 2020 compared to $180.5 million in the comparable prior year period. During the nine months ended February 29, 2020, the Company paid $154.0 million to redeem the $150.0 aggregate principal amount of unsecured senior notes. The redemption was funded in part by the issuance of euro-denominated unsecured Senior Notes, which resulted in net cash proceeds of $101.5 million. The net cash effect of these items was partially offset by a decrease of $78.0 million in share repurchases in the current period.
Long-term debt and short-term borrowings – As of February 29, 2020, we were in compliance with our short-term and long-term financial debt covenants. Our debt agreements do not include credit rating triggers or material adverse change provisions. Our credit ratings at February 29, 2020 were unchanged from those reported as of May 31, 2019.
On August 23, 2019, two of our European subsidiaries issued a €36,700,000 principal amount unsecured 1.56% Series A Senior Note due August 23, 2031 (the “2031 Note”) and €55,000,000 aggregate principal amount of unsecured 1.90% Series B Senior Notes due August 23, 2034 (the “2034 Notes”), (collectively, the “Senior Notes”). The Senior Notes were issued in a private placement and as discussed above, the proceeds thereof were used in the refinancing of existing indebtedness of the Company and its consolidated subsidiaries. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE I – Debt and Receivables Securitization” of this Quarterly Report on Form 10-Q for more information.
Common shares – The Worthington Industries Board declared a quarterly dividend of $0.24 per common share for the third quarter of fiscal 2020 compared to $0.23 per common share for the third quarter of fiscal 2019. Dividends paid on our common shares totaled $40.2 million and $39.4 million during the nine months ended February 29, 2020 and February 28, 2019, respectively. On March 25, 2020, the Worthington Industries Board declared a quarterly dividend of $0.24 per share payable on June 29, 2020, to shareholders of record on June 15, 2020.
On September 27, 2017, the Worthington Industries Board authorized the repurchase of up to 6,828,855 of the outstanding common shares of Worthington Industries, Inc., and on March 20, 2019, the Worthington Industries Board authorized the repurchase of up to an additional 6,600,000 of outstanding common shares. These common shares may be repurchased 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. The total number of common shares available for repurchase at February 29, 2020 was 7,700,000.
40
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Worthington Industries Board. The Worthington Industries 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 2019 Form 10-K.
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 February 29, 2020, 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 $6.7 million at February 29, 2020. 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 Issued Accounting Standards
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended accounting guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations; however, we do not expect the amended accounting guidance to have a material impact on our ongoing financial reporting.
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, inventories, 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 apparent from other sources. Critical accounting policies are defined as those that reflect our significant judgments and 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 consolidated 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 2019 Form 10-K.
During the first quarter of fiscal 2020, the Company committed to plans to sell substantially all of the net assets of its Engineered Cabs business with the exception of the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana. As of August 31, 2019, the disposal group met the criteria for classification as assets held for sale and the net assets were recorded at the lower of net book value or fair value, less cost to sell, and presented separately as assets held for sale in our consolidated balance sheet. The book value of the disposal group exceeded its estimated fair market value of $12.9 million (determined using Level 2 inputs) and resulted in the recording of a $35.2 million impairment charge during the first quarter of fiscal 2020. Included in the impairment charge were lease ROU assets with a net book value of $0.9 million that were deemed fully impaired and written off. The Company also identified an impairment indicator for the long-lived assets of the Engineered Cabs fabricated products business as the sale will have an adverse impact on the manner and extent in which the remaining assets are used, resulting in an impairment charge of $5.4 million during the first quarter of fiscal 2020. On November 1, 2019, the assets of the disposal group were contributed to the Cabs joint venture. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE A – Basis of Presentation” and “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”.
41
During the second quarter of fiscal 2020, the Company’s exploration of strategic alternatives related to its investment in ArtiFlex resulted in the need to evaluate this investment for potential impairment. Based on the analysis performed, the Company concluded its investment was not impaired, as then current and projected cash flows were deemed sufficient to recover the remaining book value of $54.6 million. However, it is possible the Company’s estimate of future cash flows could decline to a level that no longer supports the current book value of the investment. Factors which could have an adverse impact on the current cash flow projections, include, but are not limited to deteriorating market conditions as well as potential outcomes that may result from management’s review of strategic alternatives.
On February 12, 2020, the Company announced a plan to consolidate its oil & gas equipment manufacturing operations in Wooster, Ohio into its existing manufacturing facility in Bremen, Ohio. The closure is expected to be complete by the end of fiscal 2020. As a result, the Company tested the long-lived assets of the combined asset group, consisting of fixed assets and customer list intangible assets with a net book value of $14.3 million and $6.6 million, respectively, for impairment. The book value of the fixed assets was determined to be in excess of fair value, resulting in an impairment charge of $4.7 million during the third quarter of fiscal 2020. Additionally, the customer list intangible assets were deemed fully impaired and written off. Fair value of the fixed assets was determined using observable Level 2 inputs and the fair value of the customer list intangible assets was determined using unobservable Level 3 inputs. The land and building of the Wooster facility met the criteria for assets held for sale and, accordingly, have been presented as assets held for sale in the consolidated balance sheet. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”.
As a result of the impairment charges noted above, the Company also performed an interim goodwill impairment test of the oil & gas reporting unit. The results of the analysis indicated that the fair value of the reporting unit no longer supported the book value of the corresponding goodwill, resulting in an impairment charge of $22.1 million during the third quarter of fiscal 2020. The key assumptions used in the fair value calculation were projected cash flows and the discount rate, which represent unobservable Level 3 inputs. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”.
During the third quarter of fiscal 2020, the Company’s consolidated joint venture, WSP committed to a plan to sell the Canton, Michigan facility and some of the production equipment at that facility. As the disposal group met the criteria for classification as assets held for sale as of February 29, 2020, the net assets were recorded at the lower of net book value or fair value, less cost to sell, and presented separately as assets held for sale in our consolidated balance sheet. The book value of $8.9 million exceeded the estimated fair market value (determined using Level 2 inputs), resulting in an impairment charge of $1.3 million. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE E – Impairment of Goodwill and Long-Lived Assets”.
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 2019 Form 10-K.
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 quarterly period ended February 29, 2020). 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 quarterly period ended February 29, 2020) 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.
42
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 our 2019 Form 10-K, as filed with the U.S. Securities and Exchange Commission on July 30, 2019, and available at www.sec.gov or at www.worthingtonindustries.com, we included a detailed discussion of our risk factors. Other than as noted below, our risk factors have not changed significantly from those disclosed in our 2019 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 2019 Form 10-K as well as any of the risks described below 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 2019 Form 10-K and the risks described below 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, consolidated financial condition and/or future results.
The novel coronavirus (COVID-19) and other possible pandemics and similar outbreaks, could result in material adverse effects on our business, financial position, results of operations and cash flows. The novel coronavirus (“COVID-19”) pandemic, and the various governmental, industry and consumer actions related thereto, are having and could continue to have negative impacts on our business and have created or could create conditions in our other risk factors noted above. These impacts include, without limitation potential significant volatility or decreases in the demand for our products, changes in customer and consumer behavior and preferences, disruptions in or closures of our manufacturing operations or those of our customers and suppliers, disruptions within our supply chain, limitations on our employees’ ability to work and travel, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, and related financial and commodity volatility, including volatility in raw material and other input costs.
It is uncertain what the impact of various legislation and other responses being taken in the United States and other countries will have on the economy, international trade, our industries, our businesses and the businesses of our customers and suppliers.
Despite our efforts to manage the impacts, the degree to which COVID-19 and related actions ultimately impact our business, financial position, results of operations and cash flows will depend on factors beyond our control including the duration, spread and severity of the outbreak, the actions taken to contain COVID-19 and mitigate its public health effects, the impact on the U.S. and global economies and demand for our products, and how quickly and to what extent normal economic and operating conditions resume.
Risks related to actions with respect to international trade by the U.S. government and foreign governments. The U.S. federal government has altered U.S. international trade policy and has indicated its intention to renegotiate or terminate, certain existing trade agreements and treaties with foreign governments. Most recently, the U.S. federal government has renegotiated the North American Free Trade Agreement (“NAFTA”) with Mexico and Canada. While the renegotiated form of NAFTA has yet to be fully implemented, the U.S. federal government’s potential decision to withdraw or materially modify NAFTA or other existing trade agreements or treaties may adversely impact our business, customers and/or suppliers by disrupting trade and commercial transactions and/or adversely affecting the U.S. economy or specific portions thereof.
Further, it is uncertain what impact COVID-19 and the reactions of governmental authorities and others thereto will have on international trade and what impact any changes in international trade will have on the economy or on the businesses of the Company and those of its customers and its suppliers.
43
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 quarterly period ended February 29, 2020:
|
|
|
|
|
|
|
|
|
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) |
|
||||
December 1- 31, 2019 |
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
8,250,000 |
|
January 1- 31, 2020 |
|
368,557 |
|
|
|
39.05 |
|
|
|
368,557 |
|
|
|
7,881,443 |
|
February 1- 29, 2020 |
|
181,443 |
|
|
|
38.41 |
|
|
|
181,443 |
|
|
|
7,700,000 |
|
Total |
|
550,000 |
|
|
$ |
38.84 |
|
|
|
550,000 |
|
|
|
|
|
(1) |
On September 27, 2017, the Worthington Industries Board authorized the repurchase of up to 6,828,855 of the outstanding common shares of Worthington Industries, Inc. On March 20, 2019, the Worthington Industries Board authorized the repurchase of up to an additional 6,600,000 of the Company’s common shares, increasing the total number of common shares then available for repurchase to 10,000,000. The numbers shown in this column represent, as of the end of each period, the maximum number of common shares that were available for repurchase under these authorizations. A total of 2,300,000 common shares have been repurchased since the latest authorization, leaving 7,700,000 common shares available for repurchase at February 29, 2020. Repurchases may be made on the open market or through privately negotiated transactions. |
Item 3. – Defaults Upon Senior Securities
Not applicable.
Item 4. – Mine Safety Disclosures
Not applicable.
Item 5. – Other Information
Not applicable.
44
Item 6. – Exhibits
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.1 |
|
Amended Articles of Incorporation of Worthington Industries, Inc., as filed with the Ohio Secretary of State on October 13, 1998 (Incorporated herein by reference to Exhibit 3(a) to the Quarterly Report on Form 10-Q of Worthington Industries, Inc. for the quarterly period ended August 31, 1998 (SEC File No. 0-4016)) P |
|
|
|
3.2 |
|
|
|
|
|
10.1 |
|
|
|
|
|
10.2 |
|
|
|
|
|
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 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document – the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document # |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document # |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document # |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document # |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document # |
|
|
|
104 |
|
Cover Page Interactive Data File – the cover page from this Quarterly Report on Form 10-Q for the quarterly period ended February 29, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments). |
* |
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 Inline XBRL (Extensible Business Reporting Language): |
|
(i) |
Consolidated Balance Sheets at February 29, 2020 and May 31, 2019; |
|
(ii) |
Consolidated Statements of Earnings for the three and nine months ended February 29, 2020 and February 28, 2019; |
|
(iii) |
Consolidated Statements of Comprehensive Income for the three and nine months ended February 29, 2020 and February 28, 2019; |
|
(iv) |
Consolidated Statements of Cash Flows for the three and nine months ended February 29, 2020 and February 28, 2019; and |
|
(v) |
Notes to Consolidated Financial Statements. |
45
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: April 9, 2020 |
By: |
/s/ Joseph B. Hayek |
|
|
Joseph B. Hayek, |
|
|
Vice President and Chief Financial Officer |
|
|
(On behalf of the Registrant as Duly Authorized Officer and as Principal Financial Officer) |
|
|
|
46