UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 29, 2020
or
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission file number 001-08399
WORTHINGTON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Ohio |
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31-1189815 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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200 Old Wilson Bridge Road, Columbus, Ohio |
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43085 |
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(Address of principal executive offices) |
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(Zip Code) |
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(614) 438-3210 |
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(Registrant’s telephone number, including area code) |
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Not Applicable |
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Common Shares, Without Par Value |
WOR |
New York Stock Exchange |
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.
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Large accelerated filer |
☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
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Emerging growth company |
☐ |
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 ☒
On March 31, 2020, the number of Common Shares, without par value, issued and outstanding was 55,547,291.
TABLE OF CONTENTS
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Item 1. |
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Consolidated Balance Sheets –February 29, 2020 and May 31, 2019 |
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1 |
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2 |
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3 |
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5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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28 |
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Item 3. |
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42 |
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Item 4. |
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42 |
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Item 1. |
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43 |
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Item 1A. |
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43 |
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Item 2. |
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44 |
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Item 3. |
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44 |
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Item 4. |
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44 |
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Item 5. |
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44 |
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Item 6. |
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45 |
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46 |
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i
Safe Harbor Statement
Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in “PART I – Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events. These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. These forward-looking statements include, without limitation, statements relating to:
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the impacts from COVID-19 and the actions taken by governmental authorities and others related thereto, including the ability of the Company to continue operating facilities in connection therewith, to cut variable costs, or to eventually recall furloughed workers; |
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future or expected cash positions, liquidity or ability to access financial markets and capital; |
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outlook, strategy or business plans; |
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future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, margins, balance sheet strengths, debt, financial condition or other financial measures; |
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pricing trends for raw materials and finished goods and the impact of pricing changes; |
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the ability to improve or maintain margins; |
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expected demand or demand trends for us or our markets; |
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additions to product lines and opportunities to participate in new markets; |
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expected benefits from Transformation and innovation efforts; |
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the ability to improve performance and competitive position at our operations; |
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anticipated working capital needs, capital expenditures and asset sales; |
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anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof; |
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projected profitability potential; |
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the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations; |
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projected capacity and the alignment of operations with demand; |
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the ability to operate profitably and generate cash in down markets; |
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the ability to capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets; |
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expectations for Company and customer inventories, jobs and orders; |
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expectations for the economy and markets or improvements therein; |
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expectations for generating improving and sustainable earnings, earnings potential, margins or shareholder value; |
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effects of judicial rulings; and |
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other non-historical matters. |
Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected. Any number of factors could affect actual results, including, without limitation, those that follow:
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the risks, uncertainties and impacts related to COVID-19 or other actual or potential public health emergencies and actions taken by governmental authorities or others in connection therewith including risks, uncertainties and impacts related to the ability and costs to continue to operate facilities; |
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the effect of national, regional and global economic conditions generally and within major product markets, including significant economic disruptions from COVID-19 and the actions taken in connection therewith; |
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the effect of conditions in national and worldwide financial markets and with respect to the ability of financial institutions to provide capital; |
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the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships; |
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lower oil prices as a factor in demand for products; |
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product demand and pricing; |
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changes in product mix, product substitution and market acceptance of our products; |
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fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations; |
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the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters; |
ii
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effects of facility closures and the consolidation of operations; |
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the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction, oil and gas, and other industries in which we participate; |
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failure to maintain appropriate levels of inventories; |
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financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business; |
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the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts; |
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the ability to realize cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from Transformation initiatives, on a timely basis; |
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the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom; |
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capacity levels and efficiencies, within facilities, within major product markets and within the industries in which we participate as a whole; |
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the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, interruption in utility services, civil unrest, international conflicts, terrorist activities or other causes; |
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changes in customer demand, inventories, spending patterns, product choices, and supplier choices; |
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risks associated with doing business internationally, including economic, political and social instability, foreign currency exchange rate exposure and the acceptance of our products in global markets; |
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the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment; |
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deviation of actual results from estimates and/or assumptions used by the Company in the application of our significant accounting policies; |
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the level of imports and import prices in our markets; |
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the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States governmental agencies as contemplated by the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; |
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the effect of healthcare laws in the United States and potential changes for such laws which may increase our healthcare and other costs and negatively impact our operations and financial results; |
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cyber security risks; |
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the effects of privacy and information security laws and standards; and |
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other risks described from time to time in the filings of Worthington Industries, Inc. with the United States Securities and Exchange Commission, including those described in “PART I – Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 and in “PART II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q. |
We note these factors for investors as contemplated by the Act. It is impossible to predict or identify all potential risk factors. Consequently, you should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Any forward-looking statements in this Quarterly Report on Form 10-Q are based on current information as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.
iii
PART I. FINANCIAL INFORMATION
Item 1. – Financial Statements
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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February 29, |
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May 31, |
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2020 |
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2019 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
103,430 |
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$ |
92,363 |
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Receivables, less allowances of $1,678 and $1,150 at February 29, 2020 |
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and May 31, 2019, respectively |
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472,741 |
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501,944 |
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Inventories: |
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Raw materials |
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177,400 |
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268,607 |
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Work in process |
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91,585 |
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113,848 |
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Finished products |
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107,886 |
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101,825 |
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Total inventories |
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376,871 |
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484,280 |
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Income taxes receivable |
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11,152 |
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10,894 |
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Assets held for sale |
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14,032 |
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6,924 |
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Prepaid expenses and other current assets |
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74,974 |
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69,508 |
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Total current assets |
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1,053,200 |
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|
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1,165,913 |
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Investments in unconsolidated affiliates |
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222,724 |
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214,930 |
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Operating lease assets |
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35,230 |
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- |
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Goodwill |
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321,128 |
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334,607 |
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Other intangible assets, net of accumulated amortization of $89,763 and |
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$87,759 at February 29, 2020 and May 31, 2019, respectively |
|
191,052 |
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196,059 |
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Other assets |
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33,479 |
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20,623 |
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Property, plant and equipment: |
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Land |
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24,212 |
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23,996 |
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Buildings and improvements |
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294,307 |
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310,112 |
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Machinery and equipment |
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1,057,947 |
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1,049,068 |
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Construction in progress |
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51,223 |
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49,423 |
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Total property, plant and equipment |
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1,427,689 |
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1,432,599 |
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Less: accumulated depreciation |
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855,419 |
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853,935 |
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Total property, plant and equipment, net |
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572,270 |
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578,664 |
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Total assets |
$ |
2,429,083 |
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$ |
2,510,796 |
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Liabilities and equity |
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Current liabilities: |
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Accounts payable |
$ |
361,356 |
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$ |
393,517 |
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Accrued compensation, contributions to employee benefit plans and |
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related taxes |
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53,787 |
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78,155 |
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Dividends payable |
|
14,427 |
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14,431 |
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Other accrued items |
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48,797 |
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59,810 |
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Current operating lease liabilities |
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10,757 |
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|
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- |
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Income taxes payable |
|
423 |
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|
1,164 |
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Current maturities of long-term debt |
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296 |
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150,943 |
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Total current liabilities |
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489,843 |
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698,020 |
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Other liabilities |
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71,815 |
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69,976 |
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Distributions in excess of investment in unconsolidated affiliate |
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95,291 |
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121,948 |
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Long-term debt |
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698,552 |
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598,356 |
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Noncurrent operating lease liabilities |
|
27,841 |
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|
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- |
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Deferred income taxes, net |
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73,548 |
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|
74,102 |
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Total liabilities |
|
1,456,890 |
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|
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1,562,402 |
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Shareholders' equity - controlling interest |
|
821,495 |
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|
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831,246 |
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Noncontrolling interests |
|
150,698 |
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|
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117,148 |
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Total equity |
|
972,193 |
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|
|
948,394 |
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Total liabilities and equity |
$ |
2,429,083 |
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$ |
2,510,796 |
|
See notes to consolidated financial statements.
1
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
|
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Three Months Ended |
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Nine Months Ended |
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February 29, 2020 |
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February 28, 2019 |
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February 29, 2020 |
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February 28, 2019 |
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Net sales |
$ |
763,996 |
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|
$ |
874,381 |
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$ |
2,447,492 |
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$ |
2,820,714 |
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Cost of goods sold |
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648,451 |
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784,360 |
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2,094,045 |
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2,466,762 |
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Gross margin |
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115,545 |
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90,021 |
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353,447 |
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353,952 |
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Selling, general and administrative expense |
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80,928 |
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75,220 |
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260,294 |
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250,529 |
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Impairment of goodwill and long-lived assets |
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34,627 |
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|
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- |
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75,228 |
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|
2,381 |
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Restructuring and other expense (income), net |
|
1,376 |
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(11,176 |
) |
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|
1,781 |
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(11,710 |
) |
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Operating income (loss) |
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(1,386 |
) |
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|
25,977 |
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|
16,144 |
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|
112,752 |
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Other income (expense): |
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Miscellaneous income, net |
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6,985 |
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|
525 |
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|
|
8,316 |
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|
|
2,222 |
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Interest expense |
|
(7,362 |
) |
|
|
(9,341 |
) |
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|
(24,157 |
) |
|
|
(28,541 |
) |
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Loss on extinguishment of debt |
|
- |
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|
|
- |
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|
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(4,034 |
) |
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|
- |
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Equity in net income of unconsolidated affiliates |
|
25,479 |
|
|
|
20,802 |
|
|
|
97,592 |
|
|
|
71,897 |
|
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Earnings before income taxes |
|
23,716 |
|
|
|
37,963 |
|
|
|
93,861 |
|
|
|
158,330 |
|
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Income tax expense |
|
4,828 |
|
|
|
8,415 |
|
|
|
20,506 |
|
|
|
34,032 |
|
|
Net earnings |
|
18,888 |
|
|
|
29,548 |
|
|
|
73,355 |
|
|
|
124,298 |
|
|
Net earnings attributable to noncontrolling interests |
|
3,577 |
|
|
|
2,775 |
|
|
|
10,734 |
|
|
|
8,581 |
|
|
Net earnings attributable to controlling interest |
$ |
15,311 |
|
|
$ |
26,773 |
|
|
$ |
62,621 |
|
|
$ |
115,717 |
|
|
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Basic |
|
|
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Average common shares outstanding |
|
54,930 |
|
|
|
56,478 |
|
|
|
55,078 |
|
|
|
57,650 |
|
|
Earnings per share attributable to controlling interest |
$ |
0.28 |
|
|
$ |
0.47 |
|
|
$ |
1.14 |
|
|
$ |
2.01 |
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Diluted |
|
|
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|
|
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|
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|
Average common shares outstanding |
|
55,898 |
|
|
|
57,974 |
|
|
|
56,164 |
|
|
|
59,389 |
|
|
Earnings per share attributable to controlling interest |
$ |
0.27 |
|
|
$ |
0.46 |
|
|
$ |
1.11 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period |
|
54,598 |
|
|
|
56,181 |
|
|
|
54,598 |
|
|
|
56,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
$ |
0.24 |
|
|
$ |
0.23 |
|
|
$ |
0.72 |
|
|
$ |
0.69 |
|
See notes to consolidated financial statements.
2
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
|
Net earnings |
$ |
18,888 |
|
|
$ |
29,548 |
|
|
$ |
73,355 |
|
|
$ |
124,298 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
(576 |
) |
|
|
1,476 |
|
|
|
10,868 |
|
|
|
(8,857 |
) |
|
Pension liability adjustment, net of tax |
|
138 |
|
|
|
37 |
|
|
|
1,246 |
|
|
|
(60 |
) |
|
Cash flow hedges, net of tax |
|
2,159 |
|
|
|
(596 |
) |
|
|
2,733 |
|
|
|
(7,228 |
) |
|
Other comprehensive income (loss) |
|
1,721 |
|
|
|
917 |
|
|
|
14,847 |
|
|
|
(16,145 |
) |
|
Comprehensive income |
|
20,609 |
|
|
|
30,465 |
|
|
|
88,202 |
|
|
|
108,153 |
|
|
Comprehensive income attributable to noncontrolling interests |
|
3,577 |
|
|
|
2,803 |
|
|
|
10,734 |
|
|
|
8,537 |
|
|
Comprehensive income attributable to controlling interest |
$ |
17,032 |
|
|
$ |
27,662 |
|
|
$ |
77,468 |
|
|
$ |
99,616 |
|
See notes to consolidated financial statements.
3
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
$ |
18,888 |
|
|
$ |
29,548 |
|
|
$ |
73,355 |
|
|
$ |
124,298 |
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
22,780 |
|
|
|
23,625 |
|
|
|
69,553 |
|
|
|
71,643 |
|
|
Impairment of goodwill and long-lived assets |
|
34,627 |
|
|
|
- |
|
|
|
75,228 |
|
|
|
2,381 |
|
|
Provision for (benefit from) deferred income taxes |
|
(5,006 |
) |
|
|
(730 |
) |
|
|
(1,661 |
) |
|
|
21,493 |
|
|
Bad debt expense |
|
273 |
|
|
|
201 |
|
|
|
584 |
|
|
|
454 |
|
|
Equity in net income of unconsolidated affiliates, net of distributions |
|
(4,474 |
) |
|
|
(865 |
) |
|
|
(19,271 |
) |
|
|
3,298 |
|
|
Net gain on sale of assets |
|
(5,838 |
) |
|
|
(12,606 |
) |
|
|
(5,237 |
) |
|
|
(10,203 |
) |
|
Stock-based compensation |
|
2,725 |
|
|
|
1,143 |
|
|
|
10,000 |
|
|
|
7,755 |
|
|
Loss on extinguishment of debt |
|
- |
|
|
|
- |
|
|
|
4,034 |
|
|
|
- |
|
|
Changes in assets and liabilities, net of impact of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
5,992 |
|
|
|
1,546 |
|
|
|
15,517 |
|
|
|
55,793 |
|
|
Inventories |
|
3,024 |
|
|
|
(1,054 |
) |
|
|
90,907 |
|
|
|
(38,525 |
) |
|
Accounts payable |
|
29,630 |
|
|
|
19,002 |
|
|
|
(28,347 |
) |
|
|
(51,158 |
) |
|
Accrued compensation and employee benefits |
|
(9,144 |
) |
|
|
(11,391 |
) |
|
|
(22,740 |
) |
|
|
(38,769 |
) |
|
Other operating items, net |
|
(6,156 |
) |
|
|
3,619 |
|
|
|
(6,072 |
) |
|
|
(21,273 |
) |
|
Net cash provided by operating activities |
|
87,321 |
|
|
|
52,038 |
|
|
|
255,850 |
|
|
|
127,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in property, plant and equipment |
|
(21,219 |
) |
|
|
(19,379 |
) |
|
|
(71,774 |
) |
|
|
(60,554 |
) |
|
Acquisitions |
|
(500 |
) |
|
|
- |
|
|
|
(29,783 |
) |
|
|
- |
|
|
Distributions from unconsolidated affiliate |
|
- |
|
|
|
1,492 |
|
|
|
- |
|
|
|
56,693 |
|
|
Proceeds from sale of assets |
|
119 |
|
|
|
27,843 |
|
|
|
9,318 |
|
|
|
48,290 |
|
|
Net cash provided (used) by investing activities |
|
(21,600 |
) |
|
|
9,956 |
|
|
|
(92,239 |
) |
|
|
44,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt, net of issuance costs |
|
- |
|
|
|
- |
|
|
|
101,464 |
|
|
|
- |
|
|
Principal payments on long-term obligations and debt redemption costs |
|
(344 |
) |
|
|
(303 |
) |
|
|
(154,811 |
) |
|
|
(1,104 |
) |
|
Proceeds from issuance of common shares, net of tax withholdings |
|
429 |
|
|
|
104 |
|
|
|
(6,595 |
) |
|
|
(4,645 |
) |
|
Payments to noncontrolling interests |
|
- |
|
|
|
- |
|
|
|
(1,453 |
) |
|
|
(6,327 |
) |
|
Repurchase of common shares |
|
(21,373 |
) |
|
|
(28,587 |
) |
|
|
(50,972 |
) |
|
|
(129,020 |
) |
|
Dividends paid |
|
(13,263 |
) |
|
|
(13,119 |
) |
|
|
(40,177 |
) |
|
|
(39,371 |
) |
|
Net cash used by financing activities |
|
(34,551 |
) |
|
|
(41,905 |
) |
|
|
(152,544 |
) |
|
|
(180,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
31,170 |
|
|
|
20,089 |
|
|
|
11,067 |
|
|
|
(8,851 |
) |
|
Cash and cash equivalents at beginning of period |
|
72,260 |
|
|
|
93,027 |
|
|
|
92,363 |
|
|
|
121,967 |
|
|
Cash and cash equivalents at end of period |
$ |
103,430 |
|
|
$ |
113,116 |
|
|
$ |
103,430 |
|
|
$ |
113,116 |
|
See notes to consolidated financial statements.
4
WORTHINGTON INDUSTRIES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – Basis of Presentation
The unaudited consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). They have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
At February 29, 2020, the Company owned controlling interests in the following four joint ventures: Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), Worthington Samuel Coil Processing LLC (“Samuel”) (63%), and Worthington Specialty Processing (“WSP”) (51%). These joint ventures are consolidated in the Company’s financial statement, and the equity owned by the other joint venture members shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings and other comprehensive income (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. Investments in unconsolidated affiliates are accounted for using the equity method. See further discussion on unconsolidated affiliates in “NOTE C – Investments in Unconsolidated Affiliates”. As more fully described in “NOTE P – Acquisitions,” on December 31, 2019, we acquired an additional 31.75% interest in Samuel, increasing our ownership to a 63% controlling interest, with Samuel’s results being consolidated within the Steel Processing operating segment since the acquisition date. The transaction resulted in a one-time net pre-tax gain of $6,055,000 within miscellaneous income in our consolidated statement of earnings for the three and nine months ended February 29, 2020.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included and significant intercompany accounts and transactions have been eliminated.
Operating results for the three and nine months ended February 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2020 (“fiscal 2020”), particularly in light of the novel coronavirus (“COVID-19”) and its effects on the domestic and global economies. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and a reduction in demand for many products from direct or ultimate customers. Accordingly, businesses have adjusted, reduced or suspended operating activities. This has negatively impacted several of the markets we serve, including the North American automotive market, which shut down production in mid-March 2020. While a number of our plants are operating as essential businesses, some of our plants have suspended or cut back on operating levels and shifts, and additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2019 (“fiscal 2019”) of Worthington Industries, Inc. (the “2019 Form 10-K”) and “Part II – Item 1A – Risk Factors” of this 10-Q.
Deconsolidation of Engineered Cabs: On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of the Company’s Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse Holdings, LLC (the “Cabs joint venture”), in which the Company retained a 20% noncontrolling interest. Immediately following the contribution, the Cabs joint venture acquired the net assets of Crenlo Cab Products, LLC (“Crenlo”). The investment in the Cabs joint venture is accounted for under the equity method, due to lack of control as more fully described in “NOTE C – Investments in Unconsolidated Affiliates”.
The Company’s contribution to the Cabs joint venture consisted of the net assets of its two primary manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota. In anticipation of the transaction for substantially all the net assets of the Engineered Cabs business, an impairment charge of $35,194,000 was recognized when the disposal group met the criteria as assets held for sale as of August 31, 2019. Certain non-core assets of the Engineered Cabs business, including the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana, were retained. The Company is in the process of evaluating strategic alternatives for the retained assets. Refer to “NOTE E – Impairment of Goodwill and Long-Lived Assets” for additional information.
5
Upon closing of the transaction, the contributed net assets were deconsolidated, resulting in a one-time net gain of $50,000 within restructuring and other expense (income), net in our consolidated statements of earnings for the three months ended November 30, 2019, as summarized below.
|
(in thousands) |
|
|
|
|
Retained investment (at fair value) |
$ |
13,623 |
|
|
Contributed net assets (at carrying value) |
|
13,394 |
|
|
Gain on deconsolidation |
|
229 |
|
|
Less: deal costs |
|
(179 |
) |
|
Net gain on deconsolidation |
$ |
50 |
|
In accordance with the applicable accounting guidance, our minority ownership interest in the Cabs joint venture was recorded at fair value as of the closing date. The Company’s estimate of fair value was based on a preliminary valuation of the net assets of the Cabs joint venture. For additional information regarding the fair value of our minority ownership interest in the Cabs joint venture, refer to “NOTE R – Fair Value”.
Recently Adopted Accounting Standards
On June 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (“Topic 842”), which replaces most existing lease accounting guidance under U.S. GAAP. See “NOTE D – Leases” for additional information regarding the Company’s adoption of Topic 842, including newly-required disclosures.
On June 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“Topic 815”), which amended the existing hedge accounting guidance under U.S. GAAP. The ASU is intended to simplify and clarify the accounting and disclosure requirements for hedging activities by more closely aligning the results of cash flow and fair value hedge accounting with the underlying risk management activities. The adoption of the standard had no current or historical impact on our consolidated financial position or results of operations. See “NOTE Q – Derivative Instruments and Hedging Activities” for additional information.
Recently Issued Accounting Standards
In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended accounting guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this amended accounting guidance will have on our consolidated financial position and results of operations; however, we do not expect the amended accounting guidance to have a material impact on our ongoing financial reporting.
Reclassification
Certain prior period amounts have been reclassified within the operating section of the consolidated statements of cash flows for consistency with the current period presentation.
6
NOTE B – Revenue Recognition
The following tables summarize net sales by product class for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
|
Reportable segments by product class: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
$ |
450,413 |
|
|
$ |
527,970 |
|
|
$ |
1,425,117 |
|
|
$ |
1,756,842 |
|
|
Toll |
|
40,723 |
|
|
|
27,901 |
|
|
|
106,331 |
|
|
|
94,559 |
|
|
Total |
$ |
491,136 |
|
|
$ |
555,871 |
|
|
$ |
1,531,448 |
|
|
$ |
1,851,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure Cylinders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial products |
$ |
129,042 |
|
|
$ |
148,018 |
|
|
$ |
411,994 |
|
|
$ |
452,883 |
|
|
Consumer products |
|
113,258 |
|
|
|
118,006 |
|
|
|
360,803 |
|
|
|
352,023 |
|
|
Oil & gas equipment |
|
28,695 |
|
|
|
24,666 |
|
|
|
92,730 |
|
|
|
80,584 |
|
|
Total |
$ |
270,995 |
|
|
$ |
290,690 |
|
|
$ |
865,527 |
|
|
$ |
885,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Cabs |
$ |
1,830 |
|
|
$ |
27,817 |
|
|
$ |
50,446 |
|
|
$ |
83,798 |
|
|
Other |
|
35 |
|
|
|
3 |
|
|
|
71 |
|
|
|
25 |
|
|
Total |
$ |
1,865 |
|
|
$ |
27,820 |
|
|
$ |
50,517 |
|
|
$ |
83,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
763,996 |
|
|
$ |
874,381 |
|
|
$ |
2,447,492 |
|
|
$ |
2,820,714 |
|
We recognize revenue at a point in time, with the exception of the toll processing revenue stream and certain contracts within the oil & gas equipment revenue stream, which are recognized over time. The following table summarizes the over time revenue for the periods presented:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
(in thousands) |
February 29, 2020 |
|
|
February 28, 2019 |
|
|
February 29, 2020 |
|
|
February 28, 2019 |
|
||||
|
Steel Processing - toll |
$ |
40,723 |
|
|
$ |
27,901 |
|||||||||