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MarketScreener Homepage  >  Equities  >  Nyse  >  Worthington Industries, Inc.    WOR

WORTHINGTON INDUSTRIES, INC.

(WOR)
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WORTHINGTON INDUSTRIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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04/09/2020 | 04:53pm EDT
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.



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Recent Business Developments

• On July 26, 2019, the Company completed the sale of Worthington Aritas

BasInçlI 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.'sCleveland 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".


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• 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:

                               [[Image Removed]]

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

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



                                         Three Months Ended                                       Nine Months Ended
                                   February 29,       February 28,       Inc / (Dec)       February 29,        February 28,       Inc / (Dec)
                                       2020               2019                                 2020                2019
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

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© Edgar Online, source Glimpses

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