WORTHINGTON ENTERPRISES, INC. 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 endedMay 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 ofWorthington 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 endedMay 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 ofFebruary 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 ofFebruary 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. InMarch 2020 , theWorld Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to spread throughoutthe 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 inmid-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
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Recent Business Developments
• On
BasInçlI Kaplar Sanayi ("Worthington Aritas"), its Turkish manufacturer
of cryogenic pressure vessels. The Company received cash proceeds, net of
transaction costs, of
of
• On
€36.7 million principal amount unsecured 1.56% Series A Senior Note due
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
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
sale of its international operations to
("Knauf"), as part of the broader transaction between Knauf and Armstrong
venture. Our portion of the net gain, subject to post-closing adjustments,
was
1. - Financial Statements - Notes to Consolidated Financial Statements -
NOTE
this transaction.
• On
capital, related to
("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
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
assets of our Engineered Cabs business to a newly-formed joint venture, Taxi
retained a 20% noncontrolling interest. Certain non-core assets of the
Engineered Cabs business, including the fabricated products facility in
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
risks and rewards related to its 10% minority ownership interest in the
joint venture in
1. - Financial Statements - Notes to Consolidated Financial Statements -
NOTE
this transaction.
• On December 31, 2019 , the Company contributed the recently acquired
operating net assets related to Heidtman's
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
in miscellaneous income, net in our consolidated statement of earnings for
the three and nine months ended
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
gas equipment manufacturing operations in
facility in
charges of
Financial Statements - Notes to Consolidated Financial Statements - NOTE E -
Impairment of
Statements - Notes to Consolidated Financial Statements - NOTE F -
Restructuring and Other Expense (Income), Net".
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• On
joint venture announced a plan to consolidate its manufacturing operations
in
million. For additional information refer to "Item 1. - Financial Statements
- Notes to Consolidated Financial Statements - NOTE E - Impairment of
to Consolidated Financial Statements - NOTE F - Restructuring and Other
Expense (Income), Net".
• On
"Worthington Industries Board") declared a quarterly dividend of
share payable on
• During the first nine months of fiscal 2020, the Company repurchased a total
of 1,300,000 common shares for
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.
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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
(1.20 ) $ 2.28 $ 3.17
$ 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
average 6
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 inU.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasingU.S. GDP growth rates generally indicate a weaker economy. Changes inU.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.
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