UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2019

or

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 1-8399

WORTHINGTON INDUSTRIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Ohio

 

31-1189815

 

 

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

200 Old Wilson Bridge Road, Columbus, Ohio

 

43085

 

 

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

Registrant’s telephone number, including area code:            (614) 438-3210       

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Shares, Without Par Value

WOR

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:      None     

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes      No 

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes       No 

 

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.   Yes       No 

 

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).   Yes        No 

 

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

 

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

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       No 

 

The aggregate market value of the Common Shares (the only common equity of the Registrant) held by non-affiliates of the Registrant, based on the closing price of the Common Shares on the New York Stock Exchange on November 30, 2018, the last business day of the Registrant’s most recently completed second fiscal quarter, was $1,633,376,617.  For this purpose, executive officers and directors of the Registrant are considered affiliates.

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.  On July 23, 2019, the number of Common Shares issued and outstanding was 56,356,576.

DOCUMENT INCORPORATED BY REFERENCE:

 

Selected portions of the Registrant’s definitive Proxy Statement to be furnished to shareholders of the Registrant in connection with the Annual Meeting of Shareholders to be held on September 25, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent provided herein.

 

 

 


 

TABLE OF CONTENTS

 

SAFE HARBOR STATEMENT

ii

PART I

 

 

 

Item 1.

 

Business

1

Item 1A.

 

Risk Factors

9

Item 1B.

 

Unresolved Staff Comments

19

Item 2.

 

Properties

20

Item 3.

 

Legal Proceedings

21

Item 4.

 

Mine Safety Disclosures

21

Supplemental Item.

 

Executive Officers of the Registrant

21

PART II

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

 

Selected Financial Data

25

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

 

Financial Statements and Supplementary Data

51

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

100

Item 9A.

 

Controls and Procedures

100

Item 9B.

 

Other Information

103

PART III

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

104

Item 11.

 

Executive Compensation

105

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

106

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

106

Item 14.

 

Principal Accountant Fees and Services

106

PART IV

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

107

Item 16.

 

Form 10-K Summary

107

Signatures

121

 

 

 

 

i


 

SAFE HARBO R STATEMENT

Selected statements contained in this Annual Report on Form 10-K, including, without limitation, in “PART I – Item 1. – Business” and “PART II – Item 7. – 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:

 

outlook, strategy or business plans;

 

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;

 

pricing trends for raw materials and finished goods and the impact of pricing changes;

 

the ability to improve or maintain margins;

 

expected demand or demand trends for us or our markets;

 

additions to product lines and opportunities to participate in new markets;

 

expected benefits from Transformation and innovation efforts;

 

the ability to improve performance and competitive position at our operations;

 

anticipated working capital needs, capital expenditures and asset sales;

 

anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof;

 

projected profitability potential;

 

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;

 

the successful sale of the WAVE international business;

 

projected capacity and the alignment of operations with demand;

 

the ability to operate profitably and generate cash in down markets;

 

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;

 

expectations for Company and customer inventories, jobs and orders;

 

expectations for the economy and markets or improvements therein;

 

expectations for generating improving and sustainable earnings, earnings potential, margins or shareholder value;

 

effects of judicial rulings; and

 

other non-historical matters.

ii


 

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 thos e projected.  Any number of factors could affect actual results, including, without limitation, those that follow:

 

the effect of national, regional and global economic conditions generally and within major product markets, including a recurrent slowing economy;

 

the effect of conditions in national and worldwide financial markets;

 

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;

 

lower oil prices as a factor in demand for products;

 

product demand and pricing;

 

changes in product mix, product substitution and market acceptance of our products;

 

fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations;

 

the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters;

 

effects of facility closures and the consolidation of operations;

 

the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction, oil and gas, and other industries in which we participate;

 

failure to maintain appropriate levels of inventories;

 

financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business;

 

the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts;

 

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;

 

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;

 

capacity levels and efficiencies, within facilities, within major product markets and within the industries in which we participate as a whole;

 

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;

 

changes in customer demand, inventories, spending patterns, product choices, and supplier choices;

 

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;

iii


 

 

the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment;

 

deviation of actual results from estimates and/or assumptions used by the Company in the application of its significant accounting policies;

 

level of imports and import prices in our markets;

 

the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States Securities and Exchange Commission and other governmental agencies as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

 

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;

 

cyber security risks;

 

the effects of privacy and information security laws and standards; and

 

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 this Annual Report on Form 10-K.

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 Annual Report on Form 10-K are based on current information as of the date of this Annual Report on Form 10-K, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.

 

iv


 

PAR T I

Item 1. — Business

General Overview

Worthington Industries, Inc. is a corporation formed under the laws of the State of Ohio (individually, the “Registrant” or “Worthington Industries” or, collectively with the subsidiaries of Worthington Industries, Inc., “we,” “our,” “Worthington” or the “Company”).  Founded in 1955, Worthington is primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products.  Our manufactured metal products include: pressure cylinders for liquefied petroleum gas (“LPG”), compressed natural gas (“CNG”), oxygen, refrigerant and other industrial gas storage; water well tanks for commercial and residential uses; hand torches and filled hand torch cylinders; propane-filled camping cylinders; helium-filled balloon kits; steel tanks and processing equipment primarily for the oil and gas industry; cryogenic pressure vessels for liquefied natural gas (“LNG”) and other gas storage applications; engineered cabs and operator stations and cab components; and, through our joint ventures, complete ceiling grid solutions; laser welded blanks; light gauge steel framing for commercial and residential construction; and current and past model automotive service stampings.

 

Worthington is headquartered at 200 Old Wilson Bridge Road, Columbus, Ohio 43085, telephone (614) 438-3210.  The common shares of Worthington Industries are traded on the New York Stock Exchange under the symbol WOR.

Worthington Industries maintains an Internet web site at www.worthingtonindustries.com.  This uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Worthington Industries’ web site into this Annual Report on Form 10-K.  Worthington Industries’ Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as Worthington Industries’ definitive proxy materials for annual meetings of shareholders filed pursuant to Section 14 of the Exchange Act, are available free of charge, on or through the Worthington Industries web site, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).

Segments

As of May 31, 2019, we, together with our unconsolidated affiliates, operated 77 manufacturing facilities in 22 states and 11 countries.  Thirty-one of these facilities are operated by wholly-owned and consolidated subsidiaries of the Company.  The remaining facilities are operated by our consolidated and unconsolidated joint ventures.  

 

Our operations are managed principally on a products and services basis and are comprised of three primary operating segments which correspond with our reportable business segments: Steel Processing; Pressure Cylinders; and Engineered Cabs. The Steel Processing operating segment consists of the Worthington Steel business unit (“Worthington Steel”) which operates eight manufacturing facilities; and three consolidated joint ventures: Spartan Steel Coating, LLC (“Spartan”), which operates a cold-rolled, hot-dipped galvanizing line in Monroe, Michigan; TWB Company, L.L.C. (“TWB”), which operates nine laser welded blank facilities and is headquartered in Monroe, Michigan; and Worthington Specialty Processing (“WSP”), which processes wide-sheet steel for the auto industry and operates three facilities in Michigan.  The Pressure Cylinders operating segment consists of the Worthington Cylinders business unit (“Worthington Cylinders”), and operates 19 manufacturing facilities. The Engineered Cabs operating segment consists of the Worthington Industries Engineered Cabs business unit (“Engineered Cabs”), which operates four manufacturing facilities.

 

We hold equity positions in nine joint ventures, which are further discussed in the Joint Ventures section below.  Of these, Spartan, TWB and WSP are consolidated with their operating results reported within our Steel Processing operating segment.

 

1


 

During the fiscal year ended May 31, 201 9 (“fiscal 201 9 ”), the Steel Processing, Pressure Cylinders and Engineered Cabs operating segments served approximately 800, 4,500, and 65 customers, respectively , located primarily in the United States.  International operations accounted for approximately 5 % of our consoli dated net sales during fiscal 201 9 and were comprised primarily of sales to customers in Europe.  No single customer accounted for over 10 % of our consolidated net sales in fiscal 201 9 .

Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note O – Segment Data” of this Annual Report on Form 10-K for a full description of our reportable business segments.

Recent Developments

In November, 2017, our joint venture Worthington Armstrong Venture (“WAVE”) agreed to sell its business and operations in Europe and Asia, to Knauf Group, a family-owned manufacturer of building materials headquartered in Germany.  The sale is part of a broader transaction involving the other party in the joint venture and does not include the WAVE businesses and operations in the Americas.  The transaction is subject to regulatory approvals and other customary closing conditions and is anticipated to close before the end of calendar 2019.  During the first quarter of fiscal 2019, the parties agreed to extend the date by which certain competition clearance conditions were to be satisfied per the original purchase agreement.  In exchange, Knauf Group irrevocably agreed to fund the purchase price which was received by AWI in two distributions, the first on August 1, 2018, and the balance on September 15, 2018.   For further information r efer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – NOTE C – Investments in Unconsolidated Affiliates”.

 

On July 31, 2018, the Company sold its Garden City, Kansas and Dickinson, North Dakota oil & gas equipment manufacturing facilities to Palmer Mfg. & Tank Inc. for $20.3 million, net of selling costs, resulting in a pre-tax gain of $2.0 million recorded in restructuring and other expense (income), net.

During fiscal 2019, the Company announced the following personnel changes:

 

On August 22, 2018, B. Andrew ‘Andy’ Rose was named President and Geoffrey G. Gilmore was named Executive Vice President and Chief Operating Officer (“COO”).  Mark Russell, President and COO, retired.

 

On September 10, 2018, John Lamprinakos, President of Steel Processing, retired.  

 

On September 12, 2018, Catherine M. Lyttle was named Senior Vice President and Chief Human Resources Officer.

 

On November 1, 2018, Joseph B. Hayek was named Vice President and Chief Financial Officer (“CFO”).

 

On May 1, 2019, Eric M. Smolenski was named President of Pressure Cylinders and Jeff R. Klingler was named President of Steel Processing.

On December 31, 2018, the Pressure Cylinders segment sold the operating assets and real property related to its solder business to an affiliate of Lincoln Electric Holdings, Inc. (“Lincoln”) for $26.5 million, and subsequently sold certain brazing assets to Lincoln for an additional $1.1 million, resulting in a pre-tax gain of $11.3 million recorded in restructuring and other expense (income), net.

In February 2019, our Structural Composite Industries, LLC subsidiary (“SCI”) agreed to participate in a tank replacement program for specific composite hydrogen fuel tanks, and recorded a $13.0 million charge to costs of goods sold to reflect our estimated costs of replacing these tanks.  Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – NOTE F – Contingent Liabilities and Commitments” for more information on the tank replacement program.

2


 

On March 20, 2019, the Board of Di rectors of Worthington Industries, Inc. (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 total number of common shares available to repurchase under these authorizations at May 31, 2019 is 9,000,000.  During fiscal 2019, we purchased 4,100,000 common shares having an aggregate cost of $168.1 million compared to 4,375,000 common shares h aving an aggregate cost of $204.3 million in fiscal 2018.

On May 1, 2019, Worthington’s Pressure Cylinder business unit acquired the net assets of Magna Industries Inc., a manufacturer of hand-held torches and certain tools used primarily in plumbing.  The purchase price was $13.5 million including contingent consideration related to an earn-out provision tied to future performance.

Steel Processing

Our Steel Processing reportable segment consists of the Worthington Steel business unit, and our consolidated joint ventures, Spartan, TWB and WSP.  It also included Worthington Steelpac Systems, LLC (“Packaging Solutions”), which designs and manufactures recyclable steel packaging solutions for the movement of products, through May 31, 2017.  For fiscal 2019, fiscal 2018 and fiscal 2017, the percentage of our consolidated net sales generated by the Steel Processing operating segment was approximately 65%, 63% and 69%, respectively.

 

Worthington Steel is one of the largest independent intermediate processors of flat-rolled steel in the United States.  It occupies a niche in the steel industry by focusing on products requiring exact specifications.  These products cannot typically be supplied as efficiently by steel mills to the end-users of these products.

 

As of May 31, 2019, the Steel Processing reportable segment, including Spartan, TWB, and WSP, operated 21 manufacturing facilities located in Ohio (5), Michigan (5), Mexico (4), Tennessee (2), Alabama (1), Indiana (1), Kentucky (1), New York (1), and Canada (1).  

 

Our Steel Processing reportable segment serves approximately 800 customers, principally in the automotive, aerospace, agricultural, appliance, construction, container, hardware, heavy-truck, HVAC, lawn and garden, leisure and recreation, office furniture and office equipment markets.  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.  For fiscal 2019, Steel Processing’s top three customers represented approximately 31% of the operating segment’s total net sales.

 

Our Steel Processing reportable segment buys coils of steel from integrated steel mills and mini-mills and processes them to the precise type, thickness, length, width, shape and surface quality required by customer specifications.  Computer-aided processing capabilities include, among others:

 

 

cold reducing, which achieves close tolerances of thickness;

 

configured blanking, which mechanically stamps steel into specific shapes;

 

coil fed laser blanking, which uses lasers to cut coils of steel, aluminum and other metals into specific shapes;

 

cutting-to-length, which cuts coils into sheets of exact length;

 

dry-lube, the process of coating steel with a dry, soap-based lubricant;

 

hot-dipped galvanizing, which coats steel with zinc and zinc alloys through a hot-dip process;

 

hydrogen annealing, a thermal process that changes the hardness and certain metallurgical characteristics of steel;

 

laser welding, which joins steel or aluminum blanks and coils with different thicknesses, coatings or material strength;

3


 

 

pickling, a chemical process using an acidic solution to remove surface oxide which develops on hot-rolled steel;

 

slitting, which cuts steel coils or steel sheets to specific widths;

 

oscillate slitting, a slitting process that spools together several narrow coils welded end-to-end into one larger coil;

 

temper rolling, which is the process of light cold-rolling steel;

 

tension leveling, a method of applying pressure to achieve precise flatness tolerances; and

 

non-metallic coating, including  acrylic and paint coating.

 

Our Steel Processing reportable segment also toll processes steel for steel mills, large end-users, service centers and other processors.  Toll processing is different from typical steel processing in that the mill, end-user or other party retains title to the steel and has the responsibility for selling the end product.  Toll processing enhances Worthington Steel’s participation in the market for wide sheet steel and large standard orders, a market generally served by steel mills rather than by intermediate steel processors.

 

The steel processing industry is fragmented and highly competitive.  There are many competitors, including other independent intermediate processors.  Competition is primarily on the basis of price, product quality and the ability to meet delivery requirements. Technical service and support for material testing and customer-specific applications enhance the quality of products (see the Technical Services section below).  However, the extent to which technical service and support capability has improved Steel Processing’s competitive position has not been quantified.  Steel Processing’s ability to meet tight delivery schedules is, in part, based on the proximity of our facilities to customers, suppliers and one another.  The extent to which plant location has impacted Steel Processing’s competitive position has not been quantified.  Processed steel products are priced competitively, primarily based on market factors, including, among other things, market pricing, the cost and availability of raw materials, transportation and shipping costs, and overall economic conditions in the United States and abroad.

Effective in the first quarter of fiscal 2018, the operations of Packaging Solutions were realigned, moving from the Steel Processing reportable segment to the Engineered Cabs reportable segment.

Pressure Cylinders

The Pressure Cylinders reportable segment consists of the Worthington Cylinders business unit. The percentage of our consolidated net sales generated by Pressure Cylinders was approximately 32%, 34% and 28% in fiscal 2019, fiscal 2018 and fiscal 2017 , respectively.  The results of New AMTROL Holdings, Inc. and its subsidiaries (collectively “AMTROL”) have been consolidated within Pressure Cylinders since its acquisition on June 2, 2017.

Our Pressure Cylinders reportable segment manufactures and sells filled and unfilled pressure cylinders, tanks, hand torches, well water and expansion tanks, and oil and gas equipment along with various accessories and related products for diversified end-use market applications.  The following is a description of these markets: 

 

Industrial Products: This market sector includes high pressure and acetylene cylinders for industrial gases, refrigerant and certain propane gas (LPG) cylinders, alternative fuel cylinders, cryogenic equipment and systems and services for handling liquid gases, and other specialty products. Cylinders in this market sector are generally sold to gas producers, cylinder exchangers and industrial distributors. Industrial gas cylinders hold fuel for uses such as cutting, brazing and soldering, semiconductor production, and beverage delivery. Refrigerant gas cylinders are used to hold refrigerant gases for commercial, residential and automotive air conditioning and refrigeration systems.  LPG cylinders hold fuel for barbeque grills, recreational vehicle equipment, residential and light commercial heating systems, industrial forklifts and commercial/residential cooking (the latter, generally outside North America). Alternative fuels includes composite and steel cylinders used to hold CNG and hydrogen for automobiles, buses, and light-duty trucks, and to hold propane/autogas for automobiles and light- and medium-duty trucks. Cryogenic equipment and systems include LNG systems for marine and mining applications, liquid nitrogen storage freezers and shipping containers for organic specimens in healthcare markets, and tanks and trailers for liquefied nitrogen, oxygen, argon, hydrogen, and natural gas. Specialty products include a variety of fire suppression, life support and chemical tanks. 

4


 

 

Consumer Products: This market sector includes propane-filled cylinders for torches, camping stoves and other applications, hand held torches, Balloon Time® helium-filled balloon kits, plumbing tools, well water t anks and expansion tanks. These products are sold primarily to mass merchandisers , retailers and distributors.

 

Oil & Gas Equipment:  This market sector includes steel storage tanks, separation equipment, processing equipment and other products primarily used in the oil and gas markets. This market sector also includes hoists and other marine products which are used principally in shipyard lift systems.

While a large percentage of Pressure Cylinders sales are made to major accounts, this operating segment served approximately 4,500 customers during fiscal 2019.  No single customer represented greater than 10% of net sales for the Pressure Cylinders operating segment during fiscal 2019.  

 

The Pressure Cylinders reportable segment, operates 19 manufacturing facilities located in Alabama, California, Kansas, Kentucky, Maryland, Ohio (5), Oklahoma, Rhode Island, Utah, Wisconsin, Austria, Poland (2), Portugal and Turkey.  

 

For sales in the United States and Canada, high-pressure and low-pressure cylinders are primarily manufactured in accordance with United States Department of Transportation and Transport Canada specifications.  Outside the United States and Canada, cylinders are manufactured according to European norm specifications, as well as various other international standards.  Other products are produced to applicable industry standards including, as applicable, those standards issued by the American Petroleum Institute, ASME and UL.

 

Worthington Cylinders has one principal domestic competitor in the low-pressure LPG cylinder market, and there are a number of foreign competitors in the LPG cylinder market and in the non-refillable refrigerant market.  We believe that Worthington Cylinders has the largest market share in its domestic low-pressure cylinder markets.  In the other cylinder markets, there are several competitors.  Worthington Cylinders is a leading supplier to the European markets for both the high-pressure cylinders and the low-pressure non-refillable cylinders.  Worthington Cylinders generally has a strong competitive position for its industrial, energy, retail and specialty products, but competition varies on a product-by-product basis, and geographically for energy products.  As with our other operating segments, competition is based upon price, service and quality.

 

The Pressure Cylinders reportable segment uses the trade names “Worthington Cylinders”, “AMTROL” and “Alfa” to conduct business.

The Company uses the registered trademark “Balloon Time®” to market helium-filled balloon kits; the registered trademark “BERNZOMATIC®” to market certain fuel cylinders and hand held torches; the trademark “WORTHINGTON PRO-GRADE” to market certain LPG cylinders, hand torches and camping fuel cylinders; the registered trademarks “MAP-PRO®” and “Pro-Max®” to market certain hand torch cylinders; the registered trademark “Mag-Torch®” to market certain hand-held torches; the registered trademark “Superior Tool®” to market certain tools used primarily in plumbing; the registered trademarks “Therm-X-Trol®” and “Extrol®” to market thermal expansion tanks; the registered trademarks “Well X Trol®”, “Champion®”, and “Wel-Flo and Design®” to market well tanks; and the registered trademarks “Hydromax®” and “Boilermate®” to market indirect fired water heaters.

Engineered Cabs

The Engineered Cabs reportable segment consists of the Worthington Industries Engineered Cabs business unit and, effective June 1, 2017, our Packaging Solutions business.  For each of fiscal 2019, fiscal 2018 and fiscal 2017, the percentage of our consolidated net sales generated by the Engineered Cabs operating segment was approximately 3%.

 

Engineered Cabs is headquartered in Columbus, Ohio and operates four manufacturing facilities, one each in Indiana, Ohio, South Dakota and Tennessee, which are located near key assembly locations of original equipment manufacturers.

 

5


 

Engineered Cabs is a non-captive designer and manufacturer of high-quality, custom-engineered open and enclosed cabs and operator stations and custom fabrications and packaging for heavy mobile equipment used primarily in the agricultural, construction, forestry, military and mining industries.  Engineered Cabs’ product design, engineering support and broad manufacturing capabilities enable it to produce custom cabs and structures used in products ranging from small utility equipment to large earthmovers.   Packaging Solutions designs and manufactures reusable custom steel platforms, racks and pallets for supporting, protecting and handling products throughout the shi pping process.

 

In addition to its engineered cab products, this operating segment has the capability to provide a full suite of complementary products such as machined structural components, complex and painted weldments, and engine doors.  Engineered Cabs has the manufacturing capability for metal laser cutting, metal bending and forming, roll-form tube curving and bending, machining, welding – robotic and manual, automated product cleaning and E-coating, top coat painting and assembly.

 

Engineered Cabs produces products for approximately 100 different equipment platforms for approximately 65 customers. For fiscal 2019, Engineered Cabs’ top three customers represented approximately 45% of the operating segment’s total net sales.  Its production levels can range from small and medium production volumes through high volume productions.

 

Engineered Cabs competes with a limited number of large non-captive producers of engineered cabs in the United States, and numerous other suppliers who can perform various functions supplied by the Company.  Many customers can also produce operator cabs in-house.  The Company’s competitive strengths include design and engineering capabilities as well as broad manufacturing capabilities, often providing a fully-integrated complete cab at a more effective cost than customers can produce in-house.  Competitive drivers are related to innovation, quality, delivery and service. 

 

Key supplies for this operating segment include steel sheet and plate, stampings, steel tubing, hardware, controls, wiper systems, glazing materials (glass, polycarbonate), perishables (paint, urethane, caulk), electrical materials, HVAC systems and aesthetic materials (acoustical trim, plastics, foam), which are available from a variety of sources. 

As noted above, effective June 1, 2017, the operations of Packaging Solutions were realigned, moving from the Steel Processing reportable segment to the Engineered Cabs reportable segment.  Packaging Solutions operates one facility in Indiana.

Segment Financial Data

Financial information for the reportable business segments is provided in “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note O – Segment Data”.  

Financial Information About Geographic Areas

For fiscal 2019, our international operations represented 5% of our consolidated net sales, and 6% of our net earnings attributable to controlling interest and 13% of our consolidated net assets at May 31, 2019.  During fiscal 2019, fiscal 2018 and fiscal 2017, we had consolidated operations in Austria, Canada, Mexico, Poland, Portugal, Turkey and the United States.  During these same three fiscal years, our unconsolidated joint ventures had operations in China, France, Mexico, the United Kingdom and the United States.  As noted in the Recent Developments section above, our WAVE joint venture has agreed to sell its business and operations in Europe and Asia.  The transaction is subject to regulatory approvals and other customary closing conditions and is anticipated to close before the end of calendar 2019.  Summary information about our foreign operations, including net sales and fixed assets by geographic region, is provided in “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note A – Summary of Significant Accounting Policies – Risks and Uncertainties” and “Note O – Segment Data” of this Annual Report on Form 10-K.

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Suppliers

The primary raw material purchased by Worthington is steel.  We purchase steel in large quantities at regular intervals from major primary producers of steel, both domestic and foreign.  The amount purchased from any particular supplier varies from year to year depending on a number of factors including market conditions, then current relationships and prices and terms offered.  In nearly all market conditions, steel is available from a number of suppliers and generally any supplier relationship or contract can and has been replaced with little or no significant interruption to our business.  During fiscal 2019, we purchased approximately 2.6 million tons of steel (72% hot-rolled, 12% cold-rolled and 16% galvanized) on a consolidated basis. 

In the Steel Processing operating segment, steel is primarily purchased and processed based on specific customer orders.  The Pressure Cylinders and Engineering Cabs operating segments purchase steel to meet production schedules.  For certain raw materials, there are more limited suppliers -- for example, helium and zinc, which are generally purchased at market prices.  Since there are a limited number of suppliers in the helium and zinc markets, if delivery from a major supplier is disrupted due to a force majeure type occurrence, it may be difficult to obtain an alternative supply.  Raw materials are generally purchased in the open market on a negotiated spot-market basis at prevailing market prices.  Supply contracts are also entered into, some of which have fixed pricing and some of which are indexed (monthly or quarterly).  During fiscal 2019, we purchased steel from the following major suppliers, in alphabetical order: AK Steel Holding Corporation; ArcelorMittal; NLMK USA; North Star BlueScope Steel, LLC; Nucor Corporation; Steel Dynamics, Inc.; and United States Steel Corporation (“U.S. Steel”).  Major suppliers of aluminum to the Pressure Cylinders operating segment in fiscal 2019 were, in alphabetical order:  Arconic Inc.; DK Resources Limited; Geumsan Tech ; Meyer Aluminum; Novelis Corporation; Sapa Group and Shanghai Everskill.  Major suppliers of zinc to the Steel Processing operating segment in fiscal 2019 were, in alphabetical order: Considar Metal Marketing Inc. (a/k/a HudBay); Glencore Ltd; and Teck Resources Limited.  Approximately 31.5 million pounds of zinc and 6.1 million pounds of aluminum were purchased in fiscal 2019.  We believe our supplier relationships are favorable.

Technical Services

We employ a staff of engineers and other technical personnel, and we maintain fully equipped laboratories to support operations.  These facilities enable verification, analysis and documentation of the physical, chemical, metallurgical and mechanical properties of raw materials and products.  Technical Service personnel also work in conjunction with the sales force to specify components and materials required to fulfill customer needs.  Engineers at Engineered Cabs design cabs and cab manufacturing processes according to applicable industry standards. To provide these services, we conduct developmental engineering with respect to product characteristics, requirements and performance.  Laboratory facilities also perform metallurgical and chemical testing as dictated by the regulations of the United States Department of Transportation, Transport Canada, and other associated agencies, along with International Organization for Standardization (ISO), ASTM International, and other customer and industry specific requirements.  An IASI (International Accreditations Service, Incorporated) accredited product material testing laboratory supports some of these efforts.

Seasonality and Backlog

Sales are generally strongest in the fourth quarter of our fiscal year as our operating segments are generally operating at seasonal peaks.  Historically, sales have generally been weaker in the third quarter of our fiscal year, primarily due to reduced activity in the building and construction industry as a result of inclement weather, as well as customer plant shutdowns, particularly in the automotive industry, due to holidays.  We do not believe backlog is a significant indicator of our business.

Employees

As of May 31, 2019, we had approximately 12,000 employees, including those employed by our unconsolidated joint ventures.  Approximately 8% of our consolidated labor force is represented by collective bargaining units.  Worthington believes it has good relationships with its employees, including those covered by collective bargaining units.

Joint Ventures

As part of our strategy to selectively develop new products, markets and technological capabilities and to expand our international presence, while mitigating the risks and costs associated with those activities, as of May 31, 2019, we participated in three consolidated and six unconsolidated joint ventures.

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Consolidated

The results of the following three consolidated joint ventures have been consolidated with the financial results of the Company since the respective dates on which the Company acquired majority ownership or effective control.  The equity owned by the other joint venture members is shown as noncontrolling interests on our consolidated balance sheets and their portions of net earnings are included as net earnings attributable to noncontrolling interests in our consolidated statements of earnings.  The financial results of all of our consolidated joint ventures are consolidated within the Steel Processing operating segment.

 

Spartan is a 52%-owned consolidated joint venture with AK Steel Corporation, located in Monroe, Michigan. It operates a cold-rolled, hot-dipped galvanizing line for toll processing steel coils into galvanized and galvannealed products intended primarily for the automotive industry.

 

TWB is a 55%-owned consolidated joint venture with a subsidiary of Baoshan Iron & Steel Co., Ltd. (“Bao”). TWB is a leading North American supplier of laser welded blanks, tailor welded aluminum blanks, laser welded coils and other laser welded products for use primarily in the automotive industry for products such as inner-door panels, body sides, rails and pillars.  TWB operates facilities in Monroe, Michigan; Glasgow, Kentucky; Antioch and Smyrna, Tennessee; Puebla, Escobedo (Monterrey), Hermosillo and Silao, Mexico; and Cambridge, Ontario, Canada.

 

WSP, a 51%-owned joint venture with a subsidiary of U.S. Steel, operates three steel processing facilities located in Canton, Jackson and Taylor, Michigan, which are managed by Steel Processing. WSP serves primarily as a toll processor for U.S. Steel and others. WSP’s services include slitting, blanking, cutting-to-length, laser blanking, laser welding, tension leveling and warehousing.

Unconsolidated

 

ArtiFlex Manufacturing, LLC (“ArtiFlex”), a 50%-owned joint venture with ITS-H Holdings, LLC, provides an integrated solution for engineering, tooling, stamping, assembly and other services to customers primarily in the automotive industry. ArtiFlex operates five manufacturing facilities: three in Michigan and two in Ohio.

 

Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”), a 25%-owned joint venture with CWBS-MISA, Inc., is an industry leader in the manufacture and supply of light gauge steel framing products in the United States.  ClarkDietrich manufactures a full line of drywall studs and accessories, structural studs and joists, metal lath and accessories, shaft wall studs and track, vinyl and finishing products used primarily in residential and commercial construction.  This joint venture operates 13 manufacturing facilities, one each in Connecticut, Georgia, Illinois, Maryland and Missouri and two each in California, Florida, Ohio, and Texas.

 

Samuel Steel Pickling Company (“Samuel”), a 31.25%-owned joint venture with Samuel Manu-Tech Pickling Inc., operates two steel pickling facilities in Ohio.

 

Serviacero Planos, S. de R.L. de C.V. (“Serviacero Worthington”), a 50%-owned joint venture with Inverzer, S.A. de C.V., operates three steel processing facilities in Mexico, one each in Leon, Queretaro and Monterrey. Serviacero Worthington provides steel processing services, such as pickling, blanking, slitting, multi-blanking and cutting-to-length, to customers in a variety of industries including automotive, appliance and heavy equipment.

 

WAVE, a 50%-owned joint venture with Armstrong Ventures, Inc., a subsidiary of AWI, is one of the two largest global manufacturers of ceiling suspension systems for concealed and lay-in panel ceilings used in commercial and residential ceiling markets.  It competes with the one other global manufacturer and numerous regional manufacturers.  WAVE operates nine facilities in five countries: Cerritos, California; Alpharetta, Georgia; Aberdeen, Maryland; Benton Harbor, Michigan; North Las Vegas, Nevada; Qingpu, Shanghai, China; Team Valley, United Kingdom; Prouvy, France; and Marval, Pune, India.  As noted in the Recent Developments section above, our joint venture WAVE entered into an agreement to sell its business and operations in Europe and Asia.  The transaction is subject to regulatory approvals and other customary closing conditions and is anticipated to close before the end of calendar 2019.  

 

Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd., a 10%-owned unconsolidated joint venture with a subsidiary of NIPPON STEEL NISSHIN CO., LTD. and Marubeni-Itochu Steel Inc., operates one steel processing facility in Pinghu City, Zhejiang, China.

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See “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note C – Investments in Unconsolidated Affiliates” of this Annual Report on Form 10-K for additional inform ation about our unconsolidated joint ventures.

Environmental Regulation

Our manufacturing facilities, generally in common with those of similar industries making similar products, are subject to many federal, state, local and foreign laws and regulations relating to the protection of the environment.  We examine ways to reduce emissions and waste and to decrease costs related to environmental compliance.  The cost of compliance or capital expenditures for environmental control facilities required to meet environmental requirements are not anticipated to be material when compared with overall costs and capital expenditures and, accordingly, are not anticipated to have a material effect on our financial position, results of operations or cash flows, or on the competitive position of Worthington or any particular business segment.

Item 1A.  — Risk Factors  

Future results and the market price for Worthington Industries’ common shares are subject to numerous risks, many of which are driven by factors that cannot be controlled or predicted.  The following discussion, as well as other sections of this Annual Report on Form 10-K, including “PART II—Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” describe certain business risks.  Consideration should be given to the risk factors described below as well as those in the Safe Harbor Statement at the beginning of this Annual Report on Form 10-K, in conjunction with reviewing the forward-looking statements and other information contained in this Annual Report on Form 10-K.  The risks described below are not the only risks we face.  Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial in our operations.

Risks Related to Our Business

General Economic or Industry Downturns and Weakness

Our industries are cyclical and weakness or downturns in the general economy or certain industries could have an adverse effect on our business.   If the domestic or global economies, or certain industry sectors of those economies that are key to our sales, contract or deteriorate, it could result in a corresponding decrease in demand for our products and negatively impact our results of operations and financial condition.  

The automotive and construction industries account for a significant portion of our net sales, and reduced demand from these industries could adversely affect our business.   An overall downturn in the general economy, a disruption in capital and credit markets, high unemployment, reduced consumer confidence or other factors could cause reductions in demand from our end markets in general and, in particular, the automotive and construction end markets.  If demand for the products we sell to the automotive, construction or other end markets which we supply were to be reduced, our sales, financial results and cash flows could be negatively affected.

We face intense competition which may cause decreased demand, decreased market share and/or reduced prices for our products and services.    Our businesses operate in industries that are highly competitive and have been subject to increasing consolidation of customers. Because of the range of the products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors.   Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our businesses and financial results.

Financial difficulties and bankruptcy filings by our customers could have an adverse impact on our businesses.  In past years, some customers have experienced and some continue to experience challenging financial conditions. The financial difficulties of certain customers and/or their failure to obtain credit or otherwise improve their overall financial condition could result in changes within the markets we serve, including plant closings, decreased production, reduced demand, changes in product mix, unfavorable changes in the prices, terms or conditions we are able to obtain and other changes that may result in decreased purchases from us and otherwise negatively impact our businesses. These conditions also increase the risk that our customers may delay or default on their payment obligations to us. If the general economy or any of our markets decline, the risk of bankruptcy filings by and financial difficulties of our customers may increase.  While we have taken and will continue to take steps intended to mitigate the impact of financial difficulties and potential bankruptcy filings by our customers, these matters could have a negative impact on our businesses.

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Volatility in the prices of natural gas and/or oil may adversely affect the demand for products in our oil and gas equipment business.   Volatility or weakness in oil prices or natural gas prices, or the perception of future price weakness, affects the spending patterns of our customers within the oil and gas equipment business and the demand for our products.  This has resulted and may c ontinue to result in the drilling of fewer wells and lower production spending on existing wells, lowering demand for our oil and gas equipment products and negatively impacting our results of operations and financial condition.  Likewise, recent downturns in the oil industry have limited, and may continue to limit, the number of vehicles changing from gasoline as a fuel to CNG, propane or alternative fuels which could negatively impact demand for our alternative fuel cylinders.

Volatility in the United States and worldwide capital and credit markets could impact our end markets and result in negative impacts on demand, increased credit and collection risks and other adverse effects on our businesses.   The domestic and worldwide capital and credit markets have experienced significant volatility, disruptions and dislocations with respect to price and credit availability. These factors caused diminished availability of credit and other capital in our end markets, and for participants in, and the customers of, those markets.  Although domestic credit markets have largely stabilized from the height of the financial crisis, the effects of the financial crisis continue to present additional risks to us, our customers and suppliers. In particular, there is no guarantee that the credit markets or liquidity will not once again be restricted. Additionally, stricter lending standards may make it more difficult and costly for some firms to access the credit markets. Further, uncertainties in Europe regarding the financial sector and sovereign debt and the potential impact on banks in other regions of the world will continue to weigh on global and domestic growth. Although we believe we have adequate access to several sources of contractually committed borrowings and other available credit facilities, these risks could temporarily restrict our ability to borrow money on acceptable terms in the credit markets and potentially could affect our ability to draw on our credit facilities. In addition, restricted access to the credit markets could make it difficult, or in some cases, impossible for customers to borrow money to fund their operations. Lack of, or limited access to, capital would adversely affect our customers’ ability to purchase our products or, in some cases, to pay for our products on a timely basis.

Raw Material Pricing and Availability  

Our operating results may be adversely affected by declining steel prices .  If steel prices or other raw material prices decrease, competitive conditions may impact how quickly we must reduce our prices to our customers, and we could be forced to use higher-priced raw materials then on hand to complete orders for which the selling prices have decreased. Decreasing steel prices could also require us to write-down the value of our inventory to reflect current market pricing.

Our operating results may be affected by fluctuations in raw material prices and our ability to pass on increases in raw material costs to our customers.   Our principal raw material is flat-rolled steel, which we purchase from multiple primary steel producers. The steel industry as a whole has been cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. These factors include general economic conditions, domestic and worldwide supply and demand, the influence of hedge funds and other investment funds participating in commodity markets, curtailed production from major suppliers due to factors such as the closing or idling of facilities, accidents or equipment breakdowns, repairs or catastrophic events, labor costs or problems, competition, new laws and regulations, import duties, tariffs, energy costs, availability and cost of steel inputs (e.g., ore, scrap, coke and energy), foreign currency exchange rates and other factors described in the immediately following paragraph. This volatility, as well as any increases in raw material costs, could significantly affect our steel costs and adversely impact our financial results. If our suppliers increase the prices of our critical raw materials, we may not have alternative sources of supply. In addition, in an environment of increasing prices for steel and other raw materials, competitive conditions may impact how much of the price increases we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, our financial results could be adversely affected.

The costs of manufacturing our products and our ability to meet our customers’ demands could be negatively impacted if we experience interruptions in deliveries of needed raw materials or supplies.   If, for any reason, our supply of flat-rolled steel or other key raw materials, such as aluminum, zinc, copper or helium, or other supplies is curtailed or we are otherwise unable to obtain the quantities we need at competitive prices, our business could suffer and our financial results could be adversely affected. Such interruptions could result from a number of factors, including a shortage of capacity in the supplier base of raw materials, energy or the inputs needed to make steel or other supplies, a failure of suppliers to fulfill their supply or delivery obligations, financial difficulties of suppliers resulting in the closing or idling of supplier facilities, other significant events affecting supplier facilities, significant weather events, those factors listed in the immediately preceding paragraph or other factors beyond our control. Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and this consolidation may continue.

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An increas e in the spread between the price of steel and steel scrap prices can have a negative i mpact on our margins.   No matter how efficient , our operations which use steel as a raw material, create some amount of scrap.  The expected price of scrap compared to the price of the steel raw material is generally factored into pricing.  Generally, as t he price of steel increases, the price of scrap increases by a similar amount.   When increases in scrap prices do not ke e p pace with the increases in the price of the steel raw material, it can have a negative impact on our margins.

Inventories

Our businesses could be harmed if we fail to maintain proper inventory levels. We are required to maintain sufficient inventories to accommodate the needs of our customers including, in many cases, short lead times and just-in-time delivery requirements. Although we typically have customer orders in hand prior to placement of our raw material orders for our Steel Processing operating segment, we anticipate and forecast customer demand for each of our operating segments. We purchase raw materials on a regular basis in an effort to maintain our inventory at levels that we believe are sufficient to satisfy the anticipated needs of our customers based upon orders, customer volume expectations, historic buying practices and market conditions. Inventory levels in excess of customer demand may result in the use of higher-priced inventory to fill orders reflecting lower selling prices, if raw material prices have significantly decreased. For example, if steel prices decrease, we could be forced to use higher-priced steel then on hand to complete orders for which the selling price has decreased.  These events could adversely affect our financial results. Conversely, if we underestimate demand for our products or if our suppliers fail to supply quality products in a timely manner, we may experience inventory shortages. Inventory shortages could result in unfilled orders, negatively impacting our customer relationships and resulting in lost revenues, which could harm our businesses and adversely affect our financial results.

Suppliers and Customers

The loss of significant volume from our key customers could adversely affect us . A significant loss of, or decrease in, business from any of our key customers could have an adverse effect on our sales and financial results if we cannot obtain replacement business. Also, due to consolidation in the industries we serve, including the construction, automotive and retail industries, our sales may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments with respect to, one or more of our top customers. In addition, certain of our top customers may be able to exert pricing and other influences on us, requiring us to market, deliver and promote our products in a manner that may be more costly to us. We generally do not have long-term contracts with our customers. As a result, although our customers periodically provide notice of their future product needs and purchases, they generally purchase our products on an order-by-order basis, and the relationship, as well as particular orders, can be terminated at any time.

Many of our key industries, such as automotive, oil and gas, construction and heavy mobile equipment, are cyclical in nature. Many of our key industries, such as automotive, oil and gas, construction and heavy mobile equipment, are cyclical and can be impacted by both market demand and raw material supply, particularly with respect to steel. The demand for our products is directly related to, and quickly impacted by, customer demand in our industries, which can change as the result of changes in the general United States or worldwide economies and other factors beyond our control. Adverse changes in demand or pricing can have a negative effect on our businesses.

Significant reductions in sales to any of the Detroit Three automakers, or to our automotive-related customers in general, could have a negative impact on our business. More than half of the net sales of our Steel Processing operating segment and a significant amount of the net sales of certain joint ventures are to automotive-related customers. Although we do sell to the domestic operations of foreign automakers and their suppliers, a significant portion of our automotive sales are to Ford, General Motors, and FCA US (the “Detroit Three automakers”) and their suppliers. A reduction in sales for any of the Detroit Three automakers could negatively impact our business. Since 2011, automobile producers have been taking steps toward complying with Corporate Average Fuel Economy mileage requirements for new cars and light trucks that they produce. As automobile producers work to produce vehicles in compliance with these standards, they may reduce the amount of steel or begin utilizing alternative materials in cars and trucks to improve fuel economy, thereby reducing demand for steel and resulting in further over-supply of steel in North America.  Certain automakers have begun using greater amounts of aluminum and smaller proportions of steel in some new models.

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A significant reduction in sales to any of our large heavy mobile equipment customers could have a negative impact on ou r business.   Substantially all of the sales of our Engineered Cabs operating segment are to customers who manufacture heavy mobile equipment. A reduction in sales to any of our major customers in this market could negatively impact our business. A reduct ion in demand could result from numerous causes including a reduction in overall market demand for heavy mobile equipment, in-sourcing of engineered cabs by our customers, or increased competition.

The closing or relocation of customer facilities could adversely affect us . Our ability to meet delivery requirements and the overall cost of our products as delivered to customer facilities are important competitive factors. If customers close or move their production facilities further away from our manufacturing facilities which can supply them, it could have an adverse effect on our ability to meet competitive conditions, which could result in the loss of sales. Likewise, if customers move their production facilities outside the United States, it could result in the loss of potential sales for us.

Sales conflicts with our customers and/or suppliers may adversely impact us . In some instances, we may compete with one or more of our customers and/or suppliers in pursuing the same business. In addition, in the Engineered Cabs business, our customers often have the option of producing certain cabs in-house instead of having them supplied by us or our competition and to the extent they elect to produce such cabs in-house, it could adversely affect our sales. Such conflicts may strain our relationships with the parties involved, which could adversely affect our future business with them.

The closing or idling of steel manufacturing facilities could have a negative impact on us. As steel makers have reduced their production capacities by closing or idling production lines, the number of facilities from which we can purchase steel, in particular certain specialty steels, has decreased. Accordingly, if delivery from a supplier is disrupted, particularly with respect to certain types of specialty steel, it may be more difficult to obtain an alternate supply than in the past. These closures and disruptions could also have an adverse effect on our suppliers’ on-time delivery performance, which could have an adverse effect on our ability to meet our own delivery commitments and may have other adverse effects on our businesses.

The loss of key supplier relationships could adversely affect us. Over the years, our various manufacturing operations have developed relationships with certain steel and other suppliers which have been beneficial to us by providing more assured delivery and a more favorable all-in cost, which includes price and shipping costs. If any of those relationships were disrupted, it could have an adverse effect on delivery times and the overall cost and quality of our raw materials, which could have a negative impact on our businesses.  In addition, we do not have long-term contracts with any of our suppliers. If, in the future, we are unable to obtain sufficient amounts of steel and other products at competitive prices and on a timely basis from our traditional suppliers, we may be unable to obtain these products from alternative sources at competitive prices to meet our delivery schedules, which could have a material adverse impact on our results of operations.

Competition

Our businesses are highly competitive, and increased competition could negatively impact our financial results.  Generally, the markets in which we conduct business are highly competitive. Our competitors include a variety of both domestic and foreign companies in all major markets. Competition for most of our products is primarily on the basis of price, product quality and our ability to meet delivery requirements. Depending on a variety of factors, including raw material, energy, labor and capital costs, government control of foreign currency exchange rates and government subsidies of foreign steel producers or competitors, our businesses may be materially adversely affected by competitive forces.  Competition may also increase if suppliers to or customers of our industries begin to more directly compete with our businesses through new facilities, acquisitions or otherwise. As noted above, we can have conflicts with our customers or suppliers who, in some cases, supply the same products and services as we do. Increased competition could cause us to lose market share, increase expenditures, lower our margins or offer additional services at a higher cost to us, which could adversely impact our financial results.

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Material Substitution

If steel prices increase compared to certain substitute materials, the demand for our products could be negatively impacted, which could have an adverse effect on our financial results.   In certain applications, steel competes with other materials, such as aluminum (particularly in the automobile industry), cement and wood (particularly in the construction industry), composites, glass and plastic. Prices of all of these materials fluctuate widely, and differences between the prices of these materials and the price of steel may adversely affect demand for our products and/or encourage material substitution, which could adversely affect the prices of and demand for steel products. The higher cost of steel relative to certain other materials may make material substitution more attractive for certain uses.

If increased government mileage standards for automobiles result in the substitution of other materials for steel, demand for our products could be negatively impacted, which could have an adverse effect on our financial results.   Due to government requirements that manufacturers increase the fuel efficiency of automobiles, the automobile industry is exploring alternative materials to steel to decrease weight. The substitution of lighter weight material for steel in automobiles could adversely affect prices of and demand for our steel products.

Freight and Energy

Increasing freight and energy costs could increase our operating costs, which could have an adverse effect on our financial results.   The availability and cost of freight and energy, such as electricity, natural gas and diesel fuel, are important in the manufacture and transport of our products. Our operations consume substantial amounts of energy, and our operating costs generally increase when energy costs rise. Factors that may affect our energy costs include significant increases in fuel, oil or natural gas prices, unavailability of electrical power or other energy sources due to droughts, hurricanes or other natural causes or due to shortages resulting from insufficient supplies to serve customers, or interruptions in energy supplies due to equipment failure or other causes. During periods of increasing energy and freight costs, we may be unable to fully recover our operating cost increases through price increases without reducing demand for our products. Our financial results could be adversely affected if we are unable to pass all of the cost increases on to our customers or if we are unable to obtain the necessary freight and/or energy. Also, increasing energy costs could put a strain on the transportation of our materials and products if the increased costs force certain transporters to discontinue their operations.

We depend on third parties for freight services, and increases in the costs or the lack of availability of freight services can adversely affect our operations.   We rely primarily on third parties for transportation of our products as well as delivery of our raw materials, primarily by truck.  If, due to a lack of freight services, raw materials are not delivered to us in a timely manner, we may be unable to manufacture and deliver our products to meet customer demand.  Likewise, if due to a lack of freight service, we cannot deliver our products in a timely manner, it could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our results of operations. In addition, any increase in the cost of the transportation of raw materials or our products, as a result of increases in fuel or labor costs, higher demand for logistics services or otherwise, may adversely affect our results of operations as we may not be able to pass such cost increases on to our customers.

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Information Sys tems

We are subject to information system security risks and systems integration issues that could disrupt our internal operations. We are dependent upon information technology and networks in connection with a variety of business activities including the distribution of information internally and to our customers and suppliers. This information technology is subject to potential damage or interruption from a variety of sources, including, without limitation, computer viruses, security breaches, and natural disasters.  We could also be adversely affected by system or network disruptions if new or upgraded business management systems are defective, not installed properly or not properly integrated into operations.  In addition, security breaches of our information systems could result in unauthorized disclosure or destruction of confidential or proprietary information and/or loss of the functionality of our systems. Various measures have been implemented to manage our risks related to information system and network disruptions and to prevent attempts to gain unauthorized access to our information systems. While we undertake mitigating activities to counter these risks, a system failure could negatively impact our operations and financial results and cyber attacks could threaten the integrity of our trade secrets and sensitive intellectual property.

Business Disruptions

Disruptions to our business or the business of our customers or suppliers could adversely impact our operations and financial results.   Business disruptions, including increased costs for, or interruptions in, the supply of energy or raw materials, resulting from shortages of supply or transportation, severe weather events (such as hurricanes, tsunamis, earthquakes, tornados, floods and blizzards), casualty events (such as explosions, fires or material equipment breakdown), acts of terrorism, pandemic disease, labor disruptions, the idling of facilities due to reduced demand (resulting from a downturn in economic activity or otherwise) or other events (such as required maintenance shutdowns), could cause interruptions to our businesses as well as the operations of our customers and suppliers. While we maintain insurance coverage that can offset some losses relating to certain types of these events, losses from business disruptions could have an adverse effect on our operations and financial results and we could be adversely impacted to the extent any such losses are not covered by insurance or cause some other adverse impact to us.

Foreign Operations

Economic, political and other risks associated with foreign operations could adversely affect our international financial results.   Although the substantial majority of our business activity takes place in the United States, we derive a portion of our revenues and earnings from operations in foreign countries, and we are subject to risks associated with doing business internationally. We have wholly-owned facilities in Austria, Poland, Portugal and Turkey and joint venture facilities in Canada, China, France, India, Mexico and the United Kingdom, and are active in exploring other foreign opportunities. The risks of doing business in foreign countries include, among other factors: the potential for adverse changes in the local political climate, in diplomatic relations between foreign countries and the United States or in government policies, laws or regulations; terrorist activity that may cause social disruption; logistical and communications challenges; costs of complying with a variety of laws and regulations; difficulty in staffing and managing geographically diverse operations; deterioration of foreign economic conditions; inflation and fluctuations in interest rates; foreign currency exchange rate fluctuations; foreign exchange restrictions; differing local business practices and cultural considerations; restrictions on imports and exports or sources of supply, including energy and raw materials; changes in duties, quotas, tariffs, taxes or other protectionist measures; and potential issues related to matters covered by the Foreign Corrupt Practices Act, regulations related to import/export controls, the Office of Foreign Assets Control sanctions program, anti-boycott provisions or similar laws. We believe that our business activities outside of the United States involve a higher degree of risk than our domestic activities, and any one or more of these factors could adversely affect our operating results and financial condition. In addition, global and regional economic conditions and the volatility of worldwide capital and credit markets have significantly impacted and may continue to significantly impact our foreign customers and markets. These factors may result in decreased demand in our foreign operations and have had significant negative impacts on our business. Refer to the General Economic or Industry Downturns and Weakness risk factors herein for additional information concerning the impact of the global economic conditions and the volatility of capital and credit markets on our business.

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Joint Ventures

A change in the relationship between the members of any of our joint ventures may have an adverse effect on that joint venture . We have been successful in the development and operation of various joint ventures, and our equity in net income from our joint ventures, particularly WAVE, has been important to our financial results. We believe an important element in the success of any joint venture is a solid relationship between the members of that joint venture. If there is a change in ownership, a change of control, a change in management or management philosophy, a change in business strategy or another event with respect to a member of a joint venture that adversely impacts the relationship between the joint venture members, it could adversely impact that joint venture. The other members in our joint ventures may also, as a result of financial or other reasons, be unable or unwilling to fulfill their obligations in the respective joint ventures.  In addition, joint ventures necessarily involve special risks. Whether or not we hold a majority interest or maintain operational control in a joint venture, the other members in our joint ventures may have economic or business interests or goals that are inconsistent with our interests or goals. For example, the other members in our joint ventures may exercise veto rights to block actions that we believe to be in our best interests, may take action contrary to our policies or objectives with respect to our investments, or may be unable or unwilling to fulfill their obligations or commitments to the joint venture.

Acquisitions

We may be unable to successfully consummate, manage or integrate our acquisitions or our acquisitions may not meet our expectations. A portion of our growth has occurred through acquisitions.  We may from time to time continue to seek attractive opportunities to acquire businesses, enter into joint ventures and make other investments that are complementary to our existing strengths. There are no assurances, however, that any acquisition opportunities will arise or, if they do, that they will be consummated, or that any needed additional financing for such opportunities will be available on satisfactory terms when required. In addition, acquisitions involve risks that the businesses acquired will not perform in accordance with expectations, that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect, that we may assume unknown liabilities from the seller, that the acquired businesses may not be integrated successfully and that the acquisitions may strain our management resources or divert management’s attention from other business concerns. International acquisitions may present unique challenges and increase our exposure to the risks associated with foreign operations and countries. Also, failure to successfully integrate any of our acquisitions may cause significant operating inefficiencies and could adversely affect our operations and financial condition.  Even if the operations of an acquisition are integrated successfully, we may fail to realize the anticipated benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated timeframe, or at all. Failing to realize the benefits could have a material adverse effect on our financial condition and results of operations.

Capital Expenditures

Our business requires capital investment and maintenance expenditures, and our capital resources may not be adequate to provide for all of our cash requirements.   Many of our operations are capital intensive. For the five-year period ended May 31, 2019, our total capital expenditures, including acquisitions and investment activity, were approximately $871.6 million.  Additionally, as of May 31, 2019, we were obligated to make aggregate lease payments of $33.4 million under operating lease agreements in the coming years. Our businesses also require expenditures for maintenance of our facilities. We currently believe that we have adequate resources (including cash and cash equivalents, cash provided by operating activities, availability under existing credit facilities and unused lines of credit) to meet our cash needs for normal operating costs, capital expenditures, debt repayments, dividend payments, future acquisitions and working capital for our existing businesses. However, given the potential for challenges, uncertainty and volatility in the domestic and global economies and financial markets, there can be no assurance that our capital resources will be adequate to provide for all of our cash requirements.

Litigation

We may be subject to legal proceedings or investigations, the resolution of which could negatively affect our results of operations and liquidity in a particular period.   Our results of operations or liquidity in a particular period could be affected by an adverse ruling in any legal proceedings or investigations which may be pending against us or filed against us in the future. We are also subject to a variety of legal and compliance risks, including, without limitation, potential claims relating to product liability, product recall, privacy and information security, health and safety, environmental matters, intellectual property rights, taxes and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. While we believe that we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist and additional legal proceedings and contingencies may arise from time to time. An adverse ruling or settlement or an unfavorable change in laws, rules or regulations could have a material adverse effect on our results of operations or liquidity in a particular period.

15


 

Claims and Insurance

Adverse claims experience, to the extent not covered by insurance, may have an adverse effect on our financial results.   We self-insure most of our risks for product recall, cyber liability and pollution liability.  We also self-insure a significant portion of our potential liability for workers’ compensation, product liability, general liability, property liability, automobile liability and employee medical claims, and in order to reduce risk for these liabilities, we purchase insurance from highly-rated, licensed insurance carriers that cover most claims in excess of the applicable deductible or retained amounts. We also maintain reserves for the estimated cost to resolve certain open claims that have been made against us (which may include active product recall or replacement programs), as well as an estimate of the cost of claims that have been incurred but not reported. The occurrence of significant claims, our failure to adequately reserve for such claims, a significant cost increase to maintain our insurance or the failure of our insurance providers to perform could have an adverse impact on our financial condition and results of operations.

Accounting and Tax-Related Estimates

We are required to make accounting and tax-related estimates, assumptions and judgments in preparing our consolidated financial statements, and actual results may differ materially from the estimates, assumptions and judgments that we use.  In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States, we are required to make certain estimates and assumptions that affect the accounting for and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made because certain information that is used in the preparation of our consolidated financial statements is dependent on future events, or cannot be calculated with a high degree of precision from data available to us. In some cases, these estimates and assumptions are particularly difficult to determine and we must exercise significant judgment. Some of the estimates, assumptions and judgments having the greatest amount of uncertainty, subjectivity and complexity are related to our accounting for bad debts, returns and allowances, inventory, self-insurance reserves, derivatives, stock-based compensation, deferred tax assets and liabilities and asset impairments. Our actual results may differ materially from the estimates, assumptions and judgments that we use, which could have a material adverse effect on our financial condition and results of operations.

Tax Laws and Regulations

Tax increases or changes in tax laws or regulations could adversely affect our financial results.   We are subject to tax and related obligations in the jurisdictions in which we operate or do business, including state, local, federal and foreign taxes. The taxing rules of the various jurisdictions in which we operate or do business often are complex and subject to varying interpretations. Tax authorities may challenge tax positions that we take or historically have taken, and may assess taxes where we have not made tax filings or may audit the tax filings we have made and assess additional taxes. Some of these assessments may be substantial, and also may involve the imposition of penalties and interest. In addition, governments could change their existing tax laws, impose new taxes on us or increase the rates at which we are taxed in the future. The payment of substantial additional taxes, penalties or interest resulting from tax assessments, or the imposition of any new taxes, could materially and adversely impact our results of operations and financial condition.

Principal Shareholder

Our principal shareholder may have the ability to exert significant influence in matters requiring a shareholder vote and could delay, deter or prevent a change in control of Worthington Industries.   Pursuant to our charter documents, certain matters such as those in which a person would attempt to acquire or take control of the Company, must be approved by the vote of the holders of common shares representing at least 75% of Worthington Industries’ outstanding voting power. Approximately 30% of our outstanding common shares are beneficially owned, directly or indirectly, by John P. McConnell, our Chairman of the Board and Chief Executive Officer. As a result of his beneficial ownership of our common shares, Mr. McConnell may have the ability to exert significant influence in these matters and other proposals upon which our shareholders may vote.

16


 

Key Employees

If we lose senior management or other key employees, our business may be adversely affected. Our ability to successfully operate, grow our business and implement our business strategies is largely dependent on the efforts, abilities and services of our senior management and other key employees. The loss of any of these individuals or our inability to attract, train and retain additional personnel could reduce the competitiveness of our business or otherwise impair our operations or prospects. Our future success will also depend, in part, on our ability to attract and retain qualified personnel, including engineers and other skilled technicians, who have experience in the application of our products and are knowledgeable about our business, markets and products. We cannot assure that we will be able to retain our existing senior management personnel or other key employees or attract additional qualified personnel when needed. The loss of any member of our management team could adversely impact our business and operations.  We have not entered into any formal employment contracts with or other stand-alone change in control provisions relative to our executive officers.  However, we do have certain change in control provisions in our various compensation plans.  We may modify our management structure from time to time or reduce our overall workforce, which may create marketing, operational and other business risks.

Credit Ratings

Ratings agencies may downgrade our credit ratings, which may make it more difficult for us to raise capital and could increase our financing costs.   Any downgrade in our credit ratings may make raising capital more difficult, may increase the cost and affect the terms of future borrowings, may affect the terms under which we purchase goods and services and may limit our ability to take advantage of potential business opportunities. In addition, the interest rate on our revolving credit facility is tied to our credit ratings, and any downgrade of our credit ratings would likely result in an increase in the cost of borrowings under our revolving credit facility.

Difficult Financial Markets

Should we be required to raise capital in the future, we could face higher borrowing costs, less available capital, more stringent terms and tighter covenants or, in extreme conditions, an inability to raise capital.  Although we currently have significant borrowing availability under our existing credit facilities and should be able to access other capital if needed, should those facilities become unavailable due to covenant or other defaults, or should financial results tighten so that we otherwise cannot raise capital outside our existing facilities, or the terms under which we do so change, we may be negatively impacted. Any adverse change in our access to capital or the terms of our borrowings, including increased costs, could have a negative impact on our financial condition.

Environmental, Health and Safety

We may incur additional costs related to environmental and health and safety matters. Our operations and facilities are subject to a variety of federal, state, local and foreign laws and regulations relating to the protection of the environment and human health and safety. Compliance with these laws and regulations and any changes therein may sometimes involve substantial operating costs and capital expenditures, and any failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in increased costs and capital expenditures and potentially fines and civil or criminal sanctions, third-party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Over time, we and predecessor operators of our facilities have generated, used, handled and disposed of hazardous and other regulated wastes.  Environmental liabilities, including cleanup obligations, could exist at our facilities or at off-site locations where materials from our operations were disposed of or at facilities we have divested, which could result in future expenditures that cannot be currently quantified and which could reduce our profits and cash flow. We may be held strictly liable for any contamination of these sites, and the amount of any such liability could be material. Under the “joint and several” liability principle of certain environmental laws, we may be held liable for all remediation costs at a particular site, even with respect to contamination for which we are not responsible. In addition, changes in environmental and human health and safety laws, rules, regulations or enforcement policies could have a material adverse effect on our business, financial condition or results of operations.

17


 

Legislation and Regulations

Certain proposed legislation and regulations may have an adverse impact on the economy in general and in our markets specifically, which may adversely affect our businesses.   Our businesses may be negatively impacted by a variety of new or proposed legislation or regulations. For example, legislation and regulations proposing increases in taxation on, or heightened regulation of, greenhouse gas emissions may result in higher prices for steel, higher prices for utilities required to run our facilities, higher fuel costs for us and our suppliers and distributors and other adverse impacts. To the extent that new legislation or regulations increase our costs, we may not be able to fully pass these costs on to our customers without a resulting decline in sales and adverse impact to our profits. Likewise, to the extent new legislation or regulations would have an adverse effect on the economy, our markets or the ability of domestic businesses to compete against foreign operations, we could also be adversely impacted.

Legislation, regulations or other events which could adversely affect the ability or cost to recover natural gas or oil may negatively affect our business.   In recent years, increasing amounts of oil and natural gas have been produced through the hydraulic fracking process throughout the United States and North America. This has resulted in decreasing energy costs, particularly for natural gas and similar energy products. This reduction has helped lower energy costs for U.S. businesses. Also, some of our recent acquisitions supply products which are used by companies engaged in hydraulic fracking. If legislation, regulations or other events limit the ability to recover such fuels through hydraulic fracking or increase the cost thereof, it could have a negative impact on our business, the U.S. economy and U.S. businesses in general, which could result in decreased demand for our products or otherwise negatively impact our business.

The impact of U.S. health care laws could adversely affect our businesses. In the wake of the Patient Protection and Affordable Care Act (“Obamacare”), U.S. health care costs have increased. Many project that there will continue to be significant increases in health care costs which could adversely impact the U.S. economy and U.S. businesses. This could result in a decreased demand for our products, as well as an increase in expenditures for health care costs for our personnel, both of which would negatively impact our profits.  Congress has considered amending or replacing Obamacare, but it is uncertain if any changes or a replacement will be affected or what the impact of any such changes or replacement will be.

 

Changes to global data privacy laws and cross-border transfer requirements could adversely affect our businesses and operations.    Our businesses depend on the transfer of data between our affiliated entities, to and from our business partners, and with third-party service provides, which may be subject to global data privacy laws and cross-border transfer restrictions.  In particular, the European Union recently implemented the General Data Protection Regulation (“GDPR”), which contains numerous requirements that must be complied with in connection with how we handle personal data related to our European-based operations and employees.   A number of U.S. states have also recently introduced and passed legislation to expand data breach notification rules and to mirror some of the protections provided by GDPR.   While we take steps to comply with these legal requirements, the volatility and changes to the applicability of those laws may impact our ability to effectively transfer data across borders in support of our business operations. Compliance with GDPR, or other regulatory standards, could also increase our cost of doing business and/or force us to change our business practices in a manner adverse to our businesses. In addition, violations of GDPR may result in significant fines, penalties and damage to our brands and businesses which could, individually or in the aggregate, materially harm our businesses and reputation.

 

Significant changes to the U.S. federal government’s trade policies, including new tariffs or the renegotiation or termination of existing trade agreements and/or treaties, may adversely affect our financial performance . 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 re-negotiated 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.

18


 

Additionally, the U.S. federal government has imposed, and is considering imposing additional tariffs on certain foreign goods. T he U.S. federal government has imposed tariffs on certain steel products imported into the United States . Although the new steel tariffs may benefit portions of our business, these tariffs, as well as country-specific or product-specific exemptions, may also lead to steel prices fl uctuations and retaliatory actions from foreign governments and/or modifications to the purchasing patterns of our customers that could adversely affect our business or the steel industry as a whole. In particular, certain foreign governments, including Canada, China and Mexico, as well as the European Union, have instituted or are considering imposing tariffs on certain U.S. goods. Restrictions on trade with foreign countries, imposition of customs d uties or further modifications to U.S. international trade policy have the potential to disrupt our supply chain or the supply chains of our customers and to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof, potentially leading to negative effects on our business.

Seasonality

Our operations have been subject to seasonal fluctuations that may impact our cash flows for a particular period. Historically our sales are generally strongest in the fourth quarter of the fiscal year when all of our business segments are normally operating at seasonal peaks, and our sales are generally weaker in the third quarter of the fiscal year, primarily due to reduced activity in the building and construction industry as a result of the colder, more inclement weather, as well as customer plant shutdowns in the automotive industry due to holidays. Our quarterly results may also be affected by the timing of large customer orders. Consequently, our cash flow from operations may fluctuate significantly from quarter to quarter. If, as a result of any such fluctuation, our quarterly cash flows were significantly reduced, we may be unable to service our indebtedness or maintain compliance with certain covenants under our credit facilities. A default under any of the documents governing our indebtedness could prevent us from borrowing additional funds, limit our ability to pay interest or principal and allow our lenders to declare the amounts outstanding to be immediately due and payable and to exercise certain other remedies.

Impairment Charges

Weakness or instability in the general economy, our markets or our results of operations could result in future asset impairments, which would reduce our reported earnings and net worth.   We review the carrying value of our long-lived assets, excluding purchased goodwill and intangible assets with indefinite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount.  If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, if any, to be recognized. For long-lived assets other than goodwill, an impairment loss is recognized to the extent that the carrying amount of the asset or asset group exceeds fair value. Goodwill and intangible assets with indefinite lives are tested for impairment annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. For goodwill and indefinite lived intangible assets, we test for impairment by first evaluating qualitative factors including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. If there are no concerns raised from this evaluation, no further testing is performed.  If, however, our qualitative analysis indicates it is more likely than not that the fair value is less than the carrying amount, a quantitative analysis is performed. The quantitative analysis compares the fair value of each reporting unit or indefinite-lived intangible asset to the respective carrying amount, and an impairment loss is recognized in our consolidated statements of earnings equivalent to the excess of the carrying amount over the fair value. Fair value is determined based on discounted cash flows or appraised values, as appropriate.  Either way, our policy is to perform a quantitative analysis over each reporting unit at least every three years. Economic conditions remain fragile in some markets and the possibility remains that the domestic or global economies, or certain industry sectors that are key to our sales, may deteriorate. If certain of our business segments are adversely affected by challenging economic and financial conditions, we may be required to record future impairments, which would negatively impact our results of operations.

Item 1B.  — Unresolved Staff Comments

None.

19


 

Item 2.  — P roperties .

General

Our principal corporate offices are located in an owned office building in Columbus, Ohio, which also houses the principal corporate offices of our Pressure Cylinders and Engineered Cabs operating segments. Our Steel Processing corporate offices are located in an office building next to the principal corporate offices where we lease office space.  We also own three facilities in Columbus, Ohio used for administrative and medical purposes.  As of May 31, 2019, excluding our consolidated and unconsolidated joint ventures, we operated 31 manufacturing facilities and 12 warehouses.  Altogether, as of May 31, 2019, we owned or leased a total of approximately 10,600,000 square feet of space for our operations, of which approximately 9,200,000 square feet (10,200,000 square feet with warehouses) was devoted to manufacturing, product distribution and sales offices.  Major leases contain renewal options for periods of up to 10 years.  For information concerning rental obligations, refer to “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Cash Obligations and Other Commercial Commitments ” as well as “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note S – Operating Leases” of this Annual Report on Form 10-K.  We believe these facilities are well maintained and in good operating condition, and are sufficient to meet our current needs.

Steel Processing

As of May 31, 2019, our wholly-owned operations within the Steel Processing operating segment operated a total of eight manufacturing facilities, seven of which are owned by the Company, and one which is leased.  These facilities are located in Alabama, Indiana, New York and Ohio (5).  As of May 31, 2019, this operating segment also owned one warehouse in Ohio and one warehouse in South Carolina.  As noted above, this operating segment’s corporate offices are located in Columbus, Ohio.

Pressure Cylinders

As of May 31, 2019, our wholly-owned operations within the Pressure Cylinders operating segment operated a total of 19 manufacturing facilities, 17 of which are owned by the Company and two of which are leased.  These facilities are located in Alabama, California, Kansas, Kentucky, Maryland, Ohio (5), Oklahoma, Rhode Island, Utah, Wisconsin, Austria, Poland (2), Portugal and Turkey.  As of May 31, 2019, Pressure Cylinders also operated two owned warehouses, one each in Austria and Poland, and six leased warehouses, one each in Ohio, Rhode Island, and Kentucky, and three in Portugal.  As noted above, this operating segment’s corporate offices are located in Columbus, Ohio.

Engineered Cabs

As of May 31, 2019, Engineered Cabs operated four manufacturing facilities, two owned by the Company, which are located in South Dakota and Tennessee, and two leased by the Company, which are located in Indiana and Ohio.  As of May 31, 2019, this operating segment also had four leased warehouses, which are located in South Dakota (2) and Tennessee (2).  As noted above, this operating segment’s corporate offices are located in Columbus, Ohio.  

Other

The Company also owns a manufacturing facility in Wooster, Ohio, that is subject to a lease agreement with our automotive body panels joint venture, ArtiFlex.  

Joint Ventures

As outlined below, our consolidated and unconsolidated joint ventures operate a total of 46 manufacturing facilities.

Consolidated

 

Spartan owns and operates one manufacturing facility in Monroe, Michigan.

 

TWB operates nine manufacturing facilities, one owned facility located in Monroe, Michigan, and eight leased facilities located in Kentucky, Tennessee (2), Canada, and Mexico (4).

20


 

 

W SP owns and operates three steel processing facilities located in Michigan.

Unconsolidated

 

ArtiFlex operates five manufacturing facilities, three of which are owned.  These facilities are located in Michigan (3), and Ohio (2).

 

ClarkDietrich operates 13 manufacturing facilities, one each in Connecticut, Georgia, Illinois, Maryland and Missouri and two each in California, Florida, Ohio and Texas.  The two facilities in Ohio are owned.  The remaining 11 facilities are leased.

 

Samuel owns and operates two steel pickling facilities in Ohio.

 

Serviacero Worthington owns and operates three steel processing facilities in Mexico. 

 

WAVE operates nine manufacturing facilities in five countries, five of which are located in the United States, including one owned facility each in Michigan and Nevada, and one leased facility each in California, Georgia and Maryland.  The foreign facilities include one owned facility each in China, France and India, and one leased facility in the United Kingdom.  As noted in the Recent Developments section of Item 1. – Business, WAVE has entered into an agreement to sell its operations in Europe and Asia.

 

Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd, operates one steel processing facility in Pinghu City, Zhejiang, China.

Item 3.  — Legal Proceedings

The Company is involved in various judicial and administrative proceedings, as both plaintiff and defendant, arising in the ordinary course of business.  The Company does not believe that any such proceedings will have a material adverse effect on its business, financial position, results of operation or cash flows.

Item 4.  — Mine Safety Disclosures

Not Applicable

Supplemental Item — Executive Officers of the Registrant

The following table lists the names, positions held and ages of the individuals serving as executive officers of the Registrant as of July 30, 2019.

 


Name

Age

Position(s) with the Registrant

Present Office

Held Since

John P. McConnell

65

Chairman of the Board and Chief Executive Officer; a Director

1996

B. Andrew Rose

49

President

2018

Geoffrey G. Gilmore

47

Executive Vice President and Chief Operating Officer

2018

Joseph B. Hayek

47

Vice President and Chief Financial Officer

2018

Dale T. Brinkman

66

Senior Vice President-Administration, General Counsel and Secretary

2000

Jeff R. Klingler

47

President – The Worthington Steel Company

2019

Eric M. Smolenski

49

President – Worthington Cylinder Corporation

2019

Catherine M. Lyttle

60

Senior Vice President and Chief Human Resources Officer

2018

Richard G. Welch

61

Corporate Controller

2000

Virgil L. Winland

71

Senior Vice President-Manufacturing

2001

 

John P. McConnell has served as Worthington Industries’ Chief Executive Officer since June 1993, as a Director of Worthington Industries continuously since 1990, and as Chairman of the Board of Worthington Industries since September 1996.  Mr. McConnell also serves as the Chair of the Executive Committee of Worthington Industries’ Board of Directors.  He served in various other positions with the Company from 1975 to June 1993.

 

21


 

B. Andrew ‘Andy’ Rose has served as President of Worthington Industries since August 22, 2018.  M r. Rose served as Chief Financial Officer on an interim basis from August 22, 2018 to November 1, 2018.  Mr. Rose served as Executive Vice President and Chief Financial Officer of Worthington Industries from July 2014 to August 2018 and as Vice President a nd Chief Financial Officer of Worthington Industries from December 2008 to July 2014 .  From 2007 to 2008, he served as a senior investment professional with MCG Capital Corporation, a publicly-traded company specializing in debt and equity investments in middle market companies; and from 2002 to 2007, he was a founding partner at Peachtree Equity Partners, L.P., a private equity firm backed by Goldman Sachs.

 

Geoffrey G. Gilmore has served as Executive Vice President and Chief Operating Officer of Worthington Industries since August 22, 2018.  Mr. Gilmore served as President of Worthington Cylinder Corporation from June 2016 to August 2018.  He served as President of The Worthington Steel Company from August 2012 through May 2016.  From July 2011 to July 2012, he served as Vice President-Purchasing for Worthington Industries.  From April 2010 to July 2011, he served as General Manager of The Worthington Steel Company’s Delta, Ohio facility; and from June 2006 to February 2010, he served as Director of Automotive Sales for The Worthington Steel Company.  Mr. Gilmore served in various other positions with the Company from 1998 to June 2006.  

 

Joseph B. Hayek has served as Worthington Industries’ Vice President and Chief Financial Officer since November 1, 2018.  Mr. Hayek served as Vice President and General Manager of Worthington’s Oil and Gas Equipment business from March 2017 to November 2018.  From April 2014 to March 2017, Mr. Hayek served as Worthington Industries’ Vice President – Mergers & Acquisitions and Corporate Development. Prior to joining Worthington, Mr. Hayek served as President of Sarcom, Inc., a value-added IT solutions provider (n/k/a PCM Sales, Inc.) and the largest division of PCM, Inc.   

 

Dale T. Brinkman has served as Worthington Industries’ Vice President-Administration since December 1998 and as Worthington Industries’ General Counsel since September 1982.  He has been Secretary of Worthington Industries since September 2000 and served as Assistant Secretary of Worthington Industries from September 1982 to September 2000.

 

Jeff R. Klinger has served as President of The Worthington Steel Company since May 1, 2019. Mr. Klingler served as General Manager of various business units within The Worthington Steel Company from May 2014 until April 2019.  He served as vice president of sales, marketing and procurement for Banner Services Corporation from 2008 until 2014, after serving in numerous capacities with The Worthington Steel Company from 1992 to 2008.    

 

Eric M. Smolenski has served as President of Worthington Cylinder Corporation since May 1, 2019. Mr. Smolenski served as General Manager of Worthington Cylinder Corporation’s industrial products business unit from May 2017 until April 2019 and its oil and gas business unit from January 2015 until May 2017. He joined Worthington in 1994 and has worked in numerous accounting, finance, human resources and information technology capacities, including vice president of human resources from 2006 to 2012 and chief information officer from 2012 to 2014.

 

Catherine M. Lyttle has served as Senior Vice President and Chief Human Resources Officer since September 2018.  Ms. Lyttle served as Vice President-Communications and Investor Relations of Worthington Industries from April 2009 to September 2018.  She served as Vice President of Communications of Worthington Industries from January 1999 to April 2009.  Ms. Lyttle served as Vice President of Marketing for the Columbus Chamber of Commerce from 1987 to September 1997 and as Vice President of JMAC Hockey from 1997 to 1999.

 

Richard G. Welch has served as the Corporate Controller of Worthington Industries since March 2000 and prior thereto, he served as Assistant Controller of Worthington Industries from August 1999 to March 2000.  He served as Principal Financial Officer of Worthington Industries on an interim basis from September 2008 to December 2008.  

 

Virgil L. Winland has served as Senior Vice President-Manufacturing of Worthington Industries since January 2001.  He served in various other positions with the Company from 1971 to January 2001, including as President of Worthington Cylinder Corporation from June 1998 through January 2001.

 

Executive officers serve at the pleasure of the Worthington Industries Board of Directors of the Registrant.  There are no family relationships among any of the Registrant's executive officers or directors.  No arrangements or understandings exist pursuant to which any individual has been, or is to be, selected as an executive officer of the Registrant.

22


 

PAR T II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Shares Information

The common shares of Worthington Industries, Inc. (“Worthington Industries”) trade on the New York Stock Exchange (“NYSE”) under the symbol "WOR" and are listed in most newspapers as "WorthgtnInd."  As of July 23, 2019, Worthington Industries had 5,045 registered shareholders.           

The Board reviews the dividend on a quarterly basis and establishes the dividend rate based upon Worthington Industries’ financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which the directors may deem relevant.  While Worthington Industries has paid a dividend every quarter since becoming a public company in 1968, there is no guarantee this will continue in the future.   We currently have no material contractual or regulatory restrictions on the payment of dividends.

Shareholder Return Performance

The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or Regulation 14C under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate such information into such a filing.

The following graph compares the five-year cumulative return on Worthington Industries’ common shares, the S&P Midcap 400 Index and the S&P 1500 Steel Composite Index.  The graph assumes that $100 was invested at May 31, 2014, in Worthington Industries’ common shares and each index.

 

 

 

 

5/14

 

 

5/15

 

 

5/16

 

 

5/17

 

 

5/18

 

 

5/19

 

Worthington Industries, Inc.

 

$

100.00

 

 

$

68.88

 

 

$

97.15

 

 

$

111.05

 

 

$

129.21

 

 

$

94.04

 

S&P Midcap 400 Index

 

$

100.00

 

 

$

112.28

 

 

$

111.81

 

 

$

131.00

 

 

$

150.46

 

 

$

142.28

 

S&P 1500 Steel Composite Index

 

$

100.00

 

 

$

89.94

 

 

$

84.83

 

 

$

104.07

 

 

$

136.64

 

 

$

89.34

 

 

Data and graph provided by Zacks Investment Research, Inc. Copyright© 2019, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved. Used with permission .

23


 

Worthington Industries is a component of the S&P Midcap 400 Index.  The S&P 1500 Steel Composite Index, of which Worthington Industries is also a component, is the most specific index r elative to the largest line of business of Worthington Industries and its subsidiaries.  At May 31, 2019 , the S&P 1500 Steel Composite Index included 13 steel related companies from the S&P 500, S&P Midcap 400 and S&P 600 indices:   AK Steel Holding Corpora tion; Allegheny Technologies Inc orporated ; Carpenter Technology Corporation; Commercial Metals Company; Haynes International, Inc.; Nucor Corporation; Olympic Steel, Inc.; Reliance Steel & Aluminum Co.; Steel Dynamics, Inc.; SunCoke Energy, Inc.; TimkenSte el Corporation; United States Steel Corporation; and Worthington Industries, Inc.

Issuer Purchases of Equity Securities

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 Exchange Act) of common shares of Worthington Industries, Inc. during each month of the fiscal quarter ended May 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

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)

 

March 1-31, 2019

 

 

86,675

 

 

$

36.03

 

 

 

86,675

 

 

 

9,913,325

 

April 1-30, 2019 (2)

 

 

824,102

 

 

$

39.30

 

 

 

820,611

 

 

 

9,092,714

 

May 1-31, 2019

 

 

92,714

 

 

$

39.92

 

 

 

92,714

 

 

 

9,000,000

 

Total

 

 

1,003,491

 

 

$

39.08

 

 

 

1,000,000

 

 

 

 

 

 

 

(1)

The number shown represents, as of the end of each period, the maximum number of common shares that could be purchased under the publicly announced repurchase authorizations then in effect.  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 shares then available for repurchase to 10,000,000.  A total of 1,000,000 common shares have been repurchased since the latest authorization, leaving 9,000,000 common shares available for repurchase at May 31, 2019.

The common shares available for repurchase under the authorization currently in effect may be purchased 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 appropriate factors.  Repurchases may be made on the open market or through privately negotiated transactions.

 

(2)

Includes an aggregate of 3,491 common shares surrendered by employees in the period from April 1, 2019 through April 30, 2019 to satisfy tax withholding obligations upon the vesting of restricted common shares.  These common shares were not counted against the share repurchase authorizations in effect during the fiscal quarter ended May 31, 2019 and discussed in footnote (1) above.

24


 

Item 6. – Selected Financial Data

 

 

Fiscal Years Ended May 31,

 

(In thousands, except per share amounts)

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

FINANCIAL RESULTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

3,759,556

 

 

$

3,581,620

 

 

$

3,014,108

 

 

$

2,819,714

 

 

$

3,384,234

 

Cost of goods sold

 

3,279,601

 

 

 

3,018,763

 

 

 

2,478,203

 

 

 

2,367,121

 

 

 

2,920,701

 

Gross margin

 

479,955

 

 

 

562,857

 

 

 

535,905

 

 

 

452,593

 

 

 

463,533

 

Selling, general and administrative expense

 

338,392

 

 

 

367,460

 

 

 

316,373

 

 

 

297,402

 

 

 

295,920

 

Impairment of goodwill and long-lived assets

 

7,817

 

 

 

61,208

 

 

 

-

 

 

 

25,962

 

 

 

100,129

 

Restructuring and other expense (income), net

 

(11,018

)

 

 

(7,421

)

 

 

6,411

 

 

 

7,177

 

 

 

6,927

 

Operating income

 

144,764

 

 

 

141,610

 

 

 

213,121

 

 

 

122,052

 

 

 

60,557

 

Miscellaneous income, net

 

2,716

 

 

 

2,996

 

 

 

3,764

 

 

 

11,267

 

 

 

795

 

Interest expense

 

(38,063

)

 

 

(38,675

)

 

 

(29,796

)

 

 

(31,670

)

 

 

(35,800

)

Equity in net income of unconsolidated affiliates

 

97,039

 

 

 

103,139

 

 

 

110,038

 

 

 

114,966

 

 

 

87,476

 

Earnings before income taxes

 

206,456

 

 

 

209,070

 

 

 

297,127

 

 

 

216,615

 

 

 

113,028

 

Income tax expense

 

43,183

 

 

 

8,220

 

 

 

79,190

 

 

 

58,987

 

 

 

25,772

 

Net earnings

 

163,273

 

 

 

200,850

 

 

 

217,937

 

 

 

157,628

 

 

 

87,256

 

Net earnings attributable to noncontrolling interests

 

9,818

 

 

 

6,056

 

 

 

13,422

 

 

 

13,913

 

 

 

10,471

 

Net earnings attributable to controlling interest

$

153,455

 

 

$

194,794

 

 

$

204,515

 

 

$

143,715

 

 

$

76,785

 

Earnings per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to controlling interest

$

2.61

 

 

$

3.09

 

 

$

3.15

 

 

$

2.22

 

 

$

1.12

 

Depreciation and amortization

$

95,602

 

 

$

103,359

 

 

$

86,793

 

 

$

84,699

 

 

$

85,089

 

Capital expenditures (including acquisitions and investments)

 

94,901

 

 

 

361,116

 

 

 

68,386

 

 

 

136,837

 

 

 

210,346

 

Cash dividends declared

 

53,391

 

 

 

51,771

 

 

 

51,448

 

 

 

47,949

 

 

 

48,308

 

Per common share

$

0.92

 

 

$

0.84

 

 

$

0.80

 

 

$

0.76

 

 

$

0.72

 

Average common shares outstanding - diluted

 

58,823

 

 

 

63,042

 

 

 

64,874

 

 

 

64,755

 

 

 

68,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

$

1,165,913

 

 

$

1,241,122

 

 

$

1,190,969

 

 

$

915,115

 

 

$

991,848

 

Total current liabilities

 

698,020

 

 

 

646,895

 

 

 

520,783

 

 

 

430,078

 

 

 

524,392

 

Working capital

$

467,893

 

 

$

594,227

 

 

$

670,186

 

 

$

485,037

 

 

$

467,456

 

Total property, plant and equipment, net

$

578,664

 

 

$

584,970

 

 

$

570,489

 

 

$

582,838

 

 

$

513,190

 

Total assets

 

2,510,796

 

 

 

2,621,787

 

 

 

2,325,344

 

 

 

2,061,264

 

 

 

2,082,305

 

Total debt

 

749,299

 

 

 

750,368

 

 

 

578,610

 

 

 

581,004

 

 

 

667,905

 

Total shareholders' equity - controlling interest

 

831,246

 

 

 

918,769

 

 

 

951,635

 

 

 

793,371

 

 

 

749,112

 

Per share

$

14.99

 

 

$

15.60

 

 

$

15.15

 

 

$

12.89

 

 

$

11.68

 

Common shares outstanding

 

55,468

 

 

 

58,877

 

 

 

62,802

 

 

 

61,534

 

 

 

64,141

 

 

The Selected Financial Data above reflects the impact of the following acquisitions and dispositions from the date of the transactions:  the May 2019 acquisition of the net assets of Magna Industries, Inc.; the December 2018 disposal of the Company’s solder business in Winston-Salem, North Carolina; the July 2018 disposal of the Garden City, Kansas and Dickinson, North Dakota oil & gas equipment facilities; the Company’s March 2018 disposal of its 65% stake in Worthington Energy Innovations, LLC (“WEI”); the June 2017 acquisition of AMTROL; the consolidation of WSP since March 2016 when the Company obtained effective control of this joint venture; the January 2016 acquisition of the assets of NetBraze, LLC through their disposal in January 2019; the December 2015 acquisition of the assets of the CryoScience business of Taylor Wharton; the May 2015 disposal of the aluminum high-pressure cylinder business; the January 2015 disposal of the Advanced Component Technologies, Inc. business; the January 2015 acquisition of the assets of Rome Strip Steel Company, Inc.; the October 2014 acquisition of dHybrid Systems, LLC through the May 2019 wind-down of its operations; the August 2014 acquisition of the assets of Midstream Equipment Fabrication LLC; and the July 2014 acquisition of the assets of James Russell Engineering Works, Inc.

25


 

Item 7. – Management’s Discussion and Analysis o f Financial Condition and Results of Operations

Selected statements contained in this “Item 7. – 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 Annual Report on Form 10-K and “Part I - Item 1A. - Risk Factors” of this Annual Report on Form 10-K.

Introduction

Worthington Industries, Inc. is a corporation formed under the laws of the State of Ohio (individually, the “Registrant” or “Worthington Industries” or, collectively with the subsidiaries of Worthington Industries, Inc., “we,” “our,” “Worthington” or the “Company”).  Founded in 1955, Worthington is primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products.  Our manufactured metal products include: pressure cylinders for liquefied petroleum gas (“LPG”), compressed natural gas (“CNG”), oxygen, refrigerant and other industrial gas storage; water well tanks for commercial and residential uses; hand torches and filled hand torch cylinders; propane-filled camping cylinders; helium-filled balloon kits; steel tanks and processing equipment primarily for the oil and gas industry; cryogenic pressure vessels for liquefied natural gas (“LNG”) and other gas storage applications; engineered cabs and operator stations and cab components; and, through our joint ventures, complete ceiling grid solutions; laser welded blanks; light gauge steel framing for commercial and residential construction; and current and past model automotive service stampings.  Our number one goal is to increase shareholder value, which we seek to accomplish by optimizing existing operations, developing and commercializing new products and applications, and pursuing strategic acquisitions and joint ventures.

As of May 31, 2019, excluding our joint ventures, we operated 31 manufacturing facilities worldwide, principally in three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs.

We also held equity positions in nine joint ventures, which operated 46 manufacturing facilities worldwide, as of May 31, 2019.  Three of these joint ventures are consolidated within Steel Processing with the equity owned by the other joint venture member(s) shown as noncontrolling interests in our consolidated balance sheets, and the other joint venture member(s)’ portion of net earnings and other comprehensive income 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 six of these joint ventures are unconsolidated and accounted for using the equity method.

Overview

Operating income was up $3.2 million, or 2.2%, on lower impairment and restructuring charges in fiscal 2019.  The Company’s results continued to be impacted by fluctuating steel prices that have resulted from the ongoing steel tariffs, which have increased selling prices in Steel Processing but have created short-term margin pressure across most of our businesses.  The run-up in steel prices that began in the latter part of fiscal 2018 continued into the first quarter of fiscal 2019, peaking at $918 per ton in July 2018, but steel prices have since receded to lower levels.  The recent decline in steel prices has led to inventory holding losses of $4.4 million in fiscal 2019 versus inventory holding gains of $17.8 million in fiscal 2018.  

Higher material prices have also put pressure on margins in our Pressure Cylinders business as costs for both steel and helium increased during fiscal 2019.  However, margins have begun to improve as the result of recent increases to selling prices and other costs mitigation efforts taken by the Company.  Pressure Cylinder results for fiscal 2019 were also negatively impacted by a $13.0 million charge associated with a tank replacement program for certain composite hydrogen fuel tanks, as described further under Recent Business Developments .

Equity in net income of unconsolidated affiliates (“equity income”) decreased $6.1 million as higher contributions from WAVE were more than offset by a $4.0 million impairment charge to write down our 10% investment in Zhejiang Nisshin Worthington Precision Specialty Steel (“Nisshin”) to its estimated fair value and declines in the other unconsolidated joint ventures.  

26


 

Recent Business Developments

 

On July 31, 2018, the Company sold its Garden City, Kansas and Dickinson, North Dakota oil & gas equipment manufacturing facilities to Palmer Mfg. & Tank Inc. for $20.3 million, net of selling costs resulting in a pre-tax gain of $2.0 million recorded in restructuring and other expense (income), net.

 

In September 2018, the Company received a one-time special cash distribution of $35.0 million from WAVE representing the primary portion of its share of the proceeds received by Armstrong World Industries, Inc. (“AWI”) in connection with the pending sale of the combined international operations of WAVE and AWI.  The Company expects to receive total proceeds of up to $45.0 million (including the $35.0 million received to date) in connection with the sale transaction, subject to certain closing adjustments provided in the purchase agreement, which is anticipated to close before the end of calendar 2019.  Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note C – Investments in Unconsolidated Affiliates” of this Annual Report on Form 10-K for more information on this pending sale.

 

In October 2018, the Company received a $25.0 million one-time special cash distribution from WAVE in connection with a financing transaction completed by WAVE in October 2018.

 

On December 31, 2018, the Pressure Cylinders segment sold the operating assets and real property related to its solder business to an affiliate of Lincoln Electric Holdings, Inc. (“Lincoln”) for $26.5 million, and subsequently sold certain brazing assets to Lincoln for an additional $1.1 million, resulting in a pre-tax gain of $11.3 million recorded in restructuring and other expense (income), net.

 

In February 2019, our Structural Composites Industries, LLC subsidiary (“SCI”) agreed to fund a tank replacement program for specific composite hydrogen fuel tanks, and recorded a $13.0 million charge to costs of goods sold to reflect our estimated costs of replacing these tanks.  Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note F – Contingent Liabilities and Commitments” of this Annual Report on Form 10-K for more information on the tank replacement program.

 

On March 20, 2019, the Board of Directors of Worthington Industries, Inc. (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.  During fiscal 2019, the Company repurchased a total of 4,100,000 common shares for $168.1 million at an average price of $41.00 per share.  The total number of common shares available for repurchase at May 31, 2019 was 9,000,000.

 

On May 1, 2019, the Company acquired the net assets of Magna Industries, Inc., a Cleveland-based manufacturer of Mag-Torch® hand-held torches and Superior Tool plumbing tools.  The total purchase price was $13.5 million including $2.0 million of contingent consideration related to an earn-out provision tied to future performance. Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note P – Acquisitions” of this Annual Report on Form 10-K.

 

On June 26, 2019, the Worthington Industries Board declared a quarterly dividend of $0.24 per share, an increase of $0.01 per share from the previous quarterly rate.  The dividend is payable on September 27, 2019 to shareholders of record on September 13, 2019.

27


 

Market & Industry Overview

We sell our products and services to a diverse customer base and a broad range of end markets.  The breakdown of our net sales by end market for fiscal 2019 and fiscal 2018 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 59% of the net sales of our Steel Processing operating segment 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 end market.

Approximately 12% of the net sales of our Steel Processing operating segment and 35% of the net sales of our Engineered Cabs 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 29% and 65% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, industrial, 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 this portion of our business.  However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing the demand of these end markets.

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

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs. 2018

 

 

2018 vs. 2017

 

U.S. GDP (% growth year-over-year) 1

 

 

3.0

%

 

 

2.3

%

 

 

1.6

%

 

 

0.7

%

 

 

0.7

%

Hot-Rolled Steel ($ per ton) 2

 

$

783

 

 

$

687

 

 

$

593

 

 

$

96

 

 

$

94

 

Detroit Three Auto Build (000’s vehicles) 3

 

 

8,411

 

 

 

8,605

 

 

 

9,216

 

 

 

(194

)

 

 

(611

)

No. America Auto Build (000’s vehicles) 3

 

 

16,872

 

 

 

16,894

 

 

 

18,329

 

 

 

(22

)

 

 

(1,435

)

Zinc ($ per pound) 4

 

$

1.23

 

 

$

1.42

 

 

$

1.13

 

 

$

(0.19

)

 

$

0.29

 

Natural Gas ($ per mcf) 5

 

$

3.05

 

 

$

2.89

 

 

$

3.01

 

 

$

0.16

 

 

$

(0.12

)

On-Highway Diesel Fuel Prices ($ per gallon) 6

 

$

3.17

 

 

$

2.87

 

 

$

2.58

 

 

$

0.30

 

 

$

0.29

 

Crude Oil – WTI ($ per barrel) 6

 

$

61.98

 

 

$

56.75

 

 

$

48.80

 

 

$

5.23

 

 

$

7.95

 

 

1

2018/2017 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

28


 

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 str onger 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 produc tion and in selling, general and administrative (“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 decline in steel prices experienced during the last three quarters of fiscal 2019 is expected to continue to result in inventory holding losses in the first and second quarters of fiscal 2020.

The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2019, fiscal 2018 and fiscal 2017:

 

 

 

Fiscal Year

 

(Dollars per ton 1 )

 

2019

 

 

2018

 

 

2017

 

1 st Quarter

 

$

900

 

 

$

604

 

 

$

617

 

2 nd Quarter

 

$

836

 

 

$

608

 

 

$

511

 

3 rd Quarter

 

$

725

 

 

$

674

 

 

$

608

 

4 th Quarter

 

$

672

 

 

$

860

 

 

$

636

 

Annual Avg.

 

$

783

 

 

$

687

 

 

$

593

 

 

 

1

CRU Hot-Rolled Index

No single customer accounted for more than 10% of our consolidated net sales during fiscal 2019.  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 fiscal 2019, vehicle production for the Detroit Three automakers was down 2% from fiscal 2018, while North American vehicle production as a whole was flat.

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 plant operations and indirectly through transportation and freight expense.

29


 

Results of Operations

Fiscal 2019 Compared to Fiscal 2018

Consolidated Operations

The following table presents consolidated operating results for the periods indicated:

 

 

Fiscal Year Ended May 31,

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

Increase/

 

(Dollars in millions)

2019

 

 

Net sales

 

 

2018

 

 

Net sales

 

 

(Decrease)

 

Net sales

$

3,759.6

 

 

 

100.0

%

 

$

3,581.6

 

 

 

100.0

%

 

$

178.0

 

Cost of goods sold

 

3,279.6

 

 

 

87.2

%

 

 

3,018.7

 

 

 

84.3

%

 

 

260.9

 

Gross margin

 

480.0

 

 

 

12.8

%

 

 

562.9

 

 

 

15.7

%

 

 

(82.9

)

Selling, general and administrative expense

 

338.4

 

 

 

9.0

%

 

 

367.5

 

 

 

10.3

%

 

 

(29.1

)

Impairment of goodwill and long-lived assets

 

7.8

 

 

 

0.2

%

 

 

61.2

 

 

 

1.7

%

 

 

(53.4

)

Restructuring and other income, net

 

(11.0

)

 

 

-0.3

%

 

 

(7.4

)

 

 

-0.2

%

 

 

3.6

 

Operating income

 

144.8

 

 

 

3.9

%

 

 

141.6

 

 

 

4.0

%

 

 

3.2

 

Miscellaneous income, net

 

2.8

 

 

 

0.1

%

 

 

3.1

 

 

 

0.1

%

 

 

(0.3

)

Interest expense

 

(38.1

)

 

 

-1.0

%

 

 

(38.7

)

 

 

-1.1

%

 

 

(0.6

)

Equity in net income of unconsolidated affiliates

 

97.0

 

 

 

2.6

%

 

 

103.1

 

 

 

2.9

%

 

 

(6.1

)

Income tax expense

 

(43.2

)

 

 

-1.1

%

 

 

(8.2

)

 

 

-0.2

%

 

 

35.0

 

Net earnings

 

163.3

 

 

 

4.4

%

 

 

200.9

 

 

 

5.6

%

 

 

(37.6

)

Net earnings attributable to noncontrolling interests

 

9.8

 

 

 

0.3

%

 

 

6.1

 

 

 

0.2

%

 

 

3.7

 

Net earnings attributable to controlling interest

$

153.5

 

 

 

4.1

%

 

$

194.8

 

 

 

5.5

%

 

$

(41.3

)