Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected statements contained in this “Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Form 10-Q and “Part I – Item 1A. – Risk Factors” of the 2022 Form 10-K.
Unless otherwise indicated, all Note references contained in this Part I – Item 2. refer to the Condensed Notes to Consolidated Financial Statements included in “Part I – Item 1. – Financial Statements” of this Form 10-Q.
Introduction
The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position of Worthington Industries, Inc., together with its subsidiaries (collectively, “we,” “our,” “us”, “Worthington,” or the “Company”), should be read in conjunction with our consolidated financial statements and notes thereto included in “Part I – Item 1. – Financial Statements” of this Form 10-Q. The 2022 Form 10-K includes additional information about Worthington, our operations and our consolidated financial position and should be read in conjunction with this Form 10-Q.
Our operations are managed principally on a products and services basis. Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes. Factors used to identify reportable operating segments include the nature of the products and services provided by each business, the management reporting structure, the similarity of economic characteristics and certain quantitative measures, as prescribed by authoritative accounting guidance.
As of November 30, 2022, we held equity positions in seven operating joint ventures. Three of these joint ventures are consolidated within the Steel Processing operating segment with the equity owned by the other joint venture member(s) shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings 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 four of our joint ventures are accounted for using the equity method.
Recent Business Developments
•On June 2, 2022, the Company acquired Level5® Tools, LLC (“Level5”), a leading provider of drywall tools and related accessories. The net cash purchase price was approximately $56.1 million, with a potential earnout of up to $25.0 million based on performance through 2024.
•On August 3, 2022, the Company sold its 50% noncontrolling equity interest in ArtiFlex Manufacturing, LLC (“ArtiFlex”) to the unaffiliated joint venture member for approximately $42.1 million after adjustments for closing debt and final net working capital. Approximately $6.0 million of the total cash proceeds were attributed to real property in Wooster, Ohio, with a net book value of $6.3 million. This real property was owned by Worthington and leased to ArtiFlex prior to closing of the transaction. The Company recognized a pre-tax loss of approximately $15.8 million in equity income related to the sale of its 50% noncontrolling equity interest portion of the transaction.
•On September 29, 2022, the Company announced that the Worthington Industries, Inc. Board of Directors approved a plan to pursue a separation of the Company’s Steel Processing business which it expects to complete by early 2024. In the months ahead, this plan will be referred to as “Worthington 2024.” Worthington 2024 will result in two independent, publicly-traded companies that are more specialized and fit-for-purpose, with enhanced prospects for growth and value creation. Worthington plans to effect the Separation via a distribution of stock of the Steel Processing business, which is expected to be tax-free to shareholders for U.S. federal income tax purposes. Refer to “Note A – Basis of Presentation” for additional information.
•On October 31, 2022, the Company’s consolidated joint venture, WSP, sold its remaining manufacturing facility, located in Jackson, Michigan, for net proceeds of approximately $21.3 million, resulting in a pre-tax gain of $3.9 million within restructuring and other income, net. Refer to “Note F – Restructuring and Other Income, Net” for additional information.
•On December 20, 2022, Worthington Industries, Inc’s Board of Directors declared a quarterly dividend of $0.31 per share payable on March 29, 2023, to shareholders of record on March 15, 2023.
•On January 5, 2023 the Company announced the implementation of a Board of Directors transition plan, pursuant to which John H. McConnell II was appointed as a member of the Board of Directors, effective on January 4, 2023, and John P. McConnell intends to steps down in June 2023.
22
Table of Contents
Market & Industry Overview
We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of net sales by end market for the second quarter of each of fiscal 2023 and fiscal 2022 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 54% of Steel Processing’s net sales are to the automotive market. North American vehicle production, primarily by Ford, General Motors and Stellantis North America (the “Detroit Three automakers”), has a considerable impact on the activity within this operating segment. The majority of the net sales of one of our unconsolidated joint ventures, Serviacero Worthington, is also to the automotive market.
Approximately 11% of the net sales of our Steel Processing operating segment are to the construction market. The construction market is also the predominant end market for our unconsolidated joint ventures within the Building Products operating segment, 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 prices of framing lumber and steel.
Substantially all of the net sales of our Consumer Products, Building Products, and Sustainable Energy Solutions operating segments and approximately 35% of the net sales of our Steel Processing operating segment are to other markets such as agricultural, appliance, consumer products, heavy-truck, industrial products, lawn and garden. Given the many different products that make up these net sales and the wide variety of end markets, it is very difficult to detail the key market indicators that drive these portions of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing the demand of these end markets.
We use the following information to monitor our costs and demand in our major end markets:
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|
|
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|
|
|
Three Months Ended |
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|
Six Months Ended |
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|
|
November 30, |
|
|
November 30, |
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|
|
2022 |
|
|
2021 |
|
|
Inc / (Dec) |
|
|
2022 |
|
|
2021 |
|
|
Inc / (Dec) |
|
U.S. GDP (% growth year-over-year) (1) |
|
|
1.8 |
% |
|
|
5.0 |
% |
|
|
(3.2 |
%) |
|
|
2.1 |
% |
|
|
4.9 |
% |
|
|
(2.8 |
%) |
Hot-Rolled Steel ($ per ton) (2) |
|
$ |
742 |
|
|
$ |
1,888 |
|
|
$ |
(1,146 |
) |
|
$ |
860 |
|
|
$ |
1,825 |
|
|
$ |
(965 |
) |
Detroit Three Auto Build (000's vehicles) (3) |
|
|
1,711 |
|
|
|
1,481 |
|
|
|
230 |
|
|
|
3,472 |
|
|
|
2,856 |
|
|
|
616 |
|
No. America Auto Build (000's vehicles) (3) |
|
|
3,713 |
|
|
|
3,170 |
|
|
|
544 |
|
|
|
7,341 |
|
|
|
6,413 |
|
|
|
928 |
|
Zinc ($ per pound) (4) |
|
$ |
1.36 |
|
|
$ |
1.46 |
|
|
$ |
(0.10 |
) |
|
$ |
1.46 |
|
|
$ |
1.41 |
|
|
$ |
0.05 |
|
Natural Gas ($ per mcf) (5) |
|
$ |
6.77 |
|
|
$ |
5.26 |
|
|
$ |
1.51 |
|
|
$ |
7.32 |
|
|
$ |
4.47 |
|
|
$ |
2.85 |
|
On-Highway Diesel Fuel Prices ($ per gallon) (6) |
|
$ |
4.26 |
|
|
$ |
3.57 |
|
|
$ |
0.69 |
|
|
$ |
4.84 |
|
|
$ |
3.45 |
|
|
$ |
1.39 |
|
(1)2021 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
23
Table of Contents
U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, declining U.S. GDP growth rates generally indicate a weaker economy. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative (“SG&A”) expenses.
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. Based on current price levels, we expect to have meaningful inventory holding losses in the third quarter of fiscal 2023.
The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2023 (first and second quarters), fiscal 2022 and fiscal 2021:
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|
Fiscal Year |
|
(Dollars per ton)(1) |
|
2023 |
|
|
2022 |
|
|
2021 |
|
1st Quarter |
|
$ |
978 |
|
|
$ |
1,762 |
|
|
$ |
475 |
|
2nd Quarter |
|
$ |
742 |
|
|
$ |
1,888 |
|
|
$ |
625 |
|
3rd Quarter |
|
N/A |
|
|
$ |
1,421 |
|
|
$ |
1,016 |
|
4th Quarter |
|
N/A |
|
|
$ |
1,280 |
|
|
$ |
1,358 |
|
Annual Avg. |
|
$ |
860 |
|
|
$ |
1,588 |
|
|
$ |
869 |
|
(1) CRU Hot-Rolled Index, period average
Sales to one Steel Processing customer in the automotive industry represented 12.3% and 15.6% of consolidated net sales during the second quarter of fiscal 2023 and fiscal 2022, respectively. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During the second quarter of fiscal 2023, vehicle production for the Detroit Three automakers and the North American vehicle production were up 16% and 17%, respectively, over the prior year quarter.
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.
Results of Operations
Second Quarter – Fiscal 2023 Compared to Fiscal 2022
The following discussion provides a review of results for the three months ended November 30, 2022 and 2021.
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|
|
Three Months Ended |
|
|
November 30, |
|
(In millions, except per share amounts) |
2022 |
|
|
2021 |
|
|
Increase/
(Decrease) |
|
Net sales |
$ |
1,175.5 |
|
|
$ |
1,232.9 |
|
|
$ |
(57.4 |
) |
Operating income (loss) |
|
(7.0 |
) |
|
|
90.5 |
|
|
|
(97.5 |
) |
Equity income |
|
36.9 |
|
|
|
60.2 |
|
|
|
(23.3 |
) |
Net earnings attributable to controlling interest |
|
16.2 |
|
|
|
110.3 |
|
|
|
(94.1 |
) |
Earnings per diluted share attributable to controlling interest |
$ |
0.33 |
|
|
$ |
2.15 |
|
|
$ |
(1.82 |
) |
24
Table of Contents
Net Sales and Volume
The following table provides a breakdown of our consolidated net sales by reportable operating segment, along with the respective percentage of the total consolidated net sales of each, for the periods indicated.
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
November 30, |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
|
Steel Processing |
$ |
841.9 |
|
|
|
71.6 |
% |
|
$ |
937.8 |
|
|
|
76.1 |
% |
|
$ |
(95.9 |
) |
|
Consumer Products |
|
153.8 |
|
|
|
13.1 |
% |
|
|
140.8 |
|
|
|
11.4 |
% |
|
|
13.0 |
|
|
Building Products |
|
141.7 |
|
|
|
12.1 |
% |
|
|
121.1 |
|
|
|
9.8 |
% |
|
|
20.6 |
|
|
Sustainable Energy Solutions |
|
38.1 |
|
|
|
3.2 |
% |
|
|
33.1 |
|
|
|
2.7 |
% |
|
|
5.0 |
|
|
Other |
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
Consolidated Net Sales |
$ |
1,175.5 |
|
|
|
100.0 |
% |
|
$ |
1,232.8 |
|
|
|
100.0 |
% |
|
$ |
(57.3 |
) |
|
The following table provides volume by reportable operating segment for the periods presented.
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|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Steel Processing (Tons) |
|
925,434 |
|
|
|
1,067,589 |
|
|
|
(142,155 |
) |
Consumer Products (Units) |
|
16,583,326 |
|
|
|
18,698,589 |
|
|
|
(2,115,263 |
) |
Building Products (Units) |
|
2,367,770 |
|
|
|
2,565,025 |
|
|
|
(197,255 |
) |
Sustainable Energy Solutions (Units) |
|
155,687 |
|
|
|
155,001 |
|
|
|
686 |
|
•Steel Processing – Net sales decreased $95.9 million from the prior year quarter. The decrease was driven primarily by lower average selling prices, and to a lesser extent, lower tolling volume, partially offset by contributions from the acquisition of Tempel on December 1, 2021. The mix of direct versus toll tons processed was 54% to 46% in the current quarter, compared to 47% to 53% in the prior year quarter. The shift in mix towards direct tons was driven primarily by lower tolling volume with the steel mills and the exit of our consolidated joint venture, WSP.
•Consumer Products – Net sales increased 9.2%, or $13.0 million, over the prior year quarter as higher average selling prices more than offset the impact of lower overall volumes, which were down 13%, excluding contributions from the Level 5 acquisition. End consumer demand began to slow during the quarter, which when combined with reduced inventory levels at certain retail customers, led to lower overall customer orders.
•Building Products – Net sales increased 17.0%, or $20.6 million over the prior year quarter. The increase was driven primarily by higher average selling prices, partially offset by lower volumes. Units shipped were down 8% as customers reduced orders due to higher than optimal inventory levels.
•Sustainable Energy Solutions – Net sales increased $5.0 million, or 15.1%, from the prior year quarter due to the combined impact of increased volume and higher average selling prices.
Gross Margin
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|
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|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
Gross Margin |
$ |
105.8 |
|
|
|
9.0 |
% |
|
$ |
184.6 |
|
|
|
15.0 |
% |
|
$ |
(78.8 |
) |
25
Table of Contents
•Gross margin decreased $78.8 million from the prior year quarter to $105.8 million due primarily to lower contributions from Steel Processing, down $79.7 million, as declining steel prices resulted in an estimated $95.2 million unfavorable swing related to estimated inventory holding losses in the current quarter compared to estimated inventory holding gains in the prior year quarter.
Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
Selling, general and administrative expense |
$ |
107.8 |
|
|
|
9.2 |
% |
|
$ |
96.1 |
|
|
|
7.8 |
% |
|
$ |
11.7 |
|
•SG&A expense increased $11.7 million over the prior year quarter due primarily to the impact of acquisitions, partially offset by lower profit sharing and bonus accruals.
Other Operating Costs/Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Restructuring and other income, net |
$ |
4.3 |
|
|
$ |
2.0 |
|
|
$ |
2.3 |
|
Separation costs |
|
9.2 |
|
|
|
- |
|
|
|
9.2 |
|
•Restructuring and other income, net in both periods was driven by gains realized from the sale of long-lived assets, including a $3.9 million pre-tax gain in the current year quarter related to the sale of our WSP joint venture’s facility in Jackson, Michigan and a $1.8 million pre-tax gain in the prior year quarter related to our exit from the former Cabs facility located in Stow, Ohio. Refer to “Note F – Restructuring and Other Income, Net” for additional information.
•Separation costs of $9.2 million reflect direct and incremental costs incurred in connection with the planned Separation of the Company’s Steel Processing business, including audit, advisory, and legal costs. Refer to “Note A - Basis of Presentation” for additional information.
Equity Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
WAVE |
$ |
19.0 |
|
|
$ |
22.4 |
|
|
$ |
(3.4 |
) |
ClarkDietrich |
|
16.1 |
|
|
|
27.5 |
|
|
|
(11.4 |
) |
Serviacero Worthington |
|
1.9 |
|
|
|
8.8 |
|
|
|
(6.9 |
) |
ArtiFlex (1) |
|
- |
|
|
|
1.8 |
|
|
|
(1.8 |
) |
Workhorse |
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
0.1 |
|
Total Equity Income |
$ |
36.8 |
|
|
$ |
60.2 |
|
|
$ |
(23.4 |
) |
(1) On August 3, 2022, the Company sold its 50% equity interest in ArtiFlex.
•Equity income from unconsolidated joint ventures decreased $23.4 million from the prior year quarter to $36.8 million, driven primarily by lower contributions from ClarkDietrich and Serviacero Worthington.
26
Table of Contents
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Miscellaneous income, net |
$ |
1.4 |
|
|
$ |
1.0 |
|
|
$ |
0.4 |
|
Adjusted EBIT
We evaluate operating segment performance based on adjusted earnings (loss) before interest and taxes (“adjusted EBIT”). EBIT is calculated by adding interest expense and income tax expense to net earnings attributable to controlling interest. Adjusted EBIT excludes impairment and restructuring charges (gains), but may also exclude other items that management believes are not reflective of, and thus should not be included when evaluating, the performance of our ongoing operations, including direct and incremental costs incurred in connection with the planned Separation of the Company’s Steel Processing business. Adjusted EBIT is a non-GAAP measure and is used by management to evaluate segment performance, engage in financial and operational planning and determine incentive compensation because we believe that this measure provides additional perspective and, in some circumstances is more closely correlated to, the performance of our ongoing operations.
The following table provides a reconciliation of consolidated net earnings attributable to controlling interest to adjusted EBIT for the periods presented:
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
(In millions) |
2022 |
|
|
2021 |
|
Net earnings attributable to controlling interest |
$ |
16.2 |
|
|
$ |
110.3 |
|
Interest expense |
|
7.6 |
|
|
|
7.3 |
|
Income tax expense |
|
4.1 |
|
|
|
31.2 |
|
Earnings before interest and taxes |
$ |
27.9 |
|
|
$ |
148.8 |
|
Incremental expense related to Level5 earnout |
|
0.5 |
|
|
|
- |
|
Restructuring and other income, net (1) |
|
(2.3 |
) |
|
|
(1.9 |
) |
Separation costs |
|
9.2 |
|
|
|
- |
|
Adjusted earnings before interest and taxes |
$ |
35.3 |
|
|
$ |
146.9 |
|
(1) Excludes the impact of the noncontrolling interests.
The following table provides a summary of adjusted EBIT by segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Steel Processing |
$ |
(17.2 |
) |
|
$ |
71.9 |
|
|
$ |
(89.1 |
) |
Consumer Products |
|
13.5 |
|
|
|
17.6 |
|
|
|
(4.1 |
) |
Building Products |
|
41.2 |
|
|
|
54.7 |
|
|
|
(13.5 |
) |
Sustainable Energy Solutions |
|
1.1 |
|
|
|
0.8 |
|
|
|
0.3 |
|
Other |
|
(3.3 |
) |
|
|
1.9 |
|
|
|
(5.2 |
) |
Total Adjusted EBIT |
$ |
35.3 |
|
|
$ |
146.9 |
|
|
$ |
(111.6 |
) |
•Steel Processing – Adjusted EBIT was down $89.1 million from the prior year quarter to a loss of $17.2 million on lower contributions of both operating income and equity income. Excluding restructuring, operating income was down $84.5 million from the prior year quarter driven primarily by an estimated $95.2 million unfavorable swing related to estimated inventory holding losses of $53.1 million in the current quarter compared to estimated inventory holding gains of $42.1 in the prior year quarter. Adjusted EBIT was also negatively impacted by lower equity income from Serviacero Worthington, down $6.9 million from the prior year quarter, as lower steel prices reduced spreads.
27
Table of Contents
•Consumer Products – Adjusted EBIT was down $4.1 million in the current quarter to $13.5 million, as the favorable impact of higher average selling prices was more than offset by lower volumes and higher input and production costs including $0.7 million of incremental material cost related to the remaining Level5 inventory that was written-up to fair value at acquisition.
•Building Products – Adjusted EBIT decreased $13.5 million from the prior year quarter to $41.2 million, on lower contributions of equity income, down $14.8 million from the strong results in the prior year quarter, partially offset by a $1.4 million increase in operating income driven by higher average selling prices and a favorable product mix.
•Sustainable Energy Solutions – Adjusted EBIT increased $0.3 million over the prior year quarter to $1.1 million on the favorable impact of higher average selling prices, partially offset by higher production costs and an unfavorable product mix.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Interest Expense |
$ |
7.6 |
|
|
$ |
7.3 |
|
|
$ |
0.3 |
|
•Interest expense was $7.6 million in the current quarter, up $0.3 million over the prior year quarter due to the impact of higher average debt levels associated with short-term borrowings.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
November 30, |
|
(In millions) |
2022 |
|
|
Effective Tax Rate |
|
|
2021 |
|
|
Effective Tax Rate |
|
|
Increase/
(Decrease) |
|
Income tax expense |
$ |
4.1 |
|
|
|
23.7 |
% |
|
$ |
31.2 |
|
|
|
22.8 |
% |
|
$ |
(27.1 |
) |
•Income tax expense was $4.1 million in the current quarter compared to income tax expense of $31.2 million in the prior year quarter. The decrease was driven by lower pre-tax earnings. Tax expense in the current quarter reflected an estimated annual effective rate of 23.7% compared to 22.8% for the prior year quarter. For additional information regarding our income taxes, refer to “Note M – Income Taxes”.
Six Months Year-to-Date – Fiscal 2023 compared to Fiscal 2022
The following discussion provides a review of results for the six months ended November 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
(In millions, except per share amounts) |
2022 |
|
|
2021 |
|
|
Increase/
(Decrease) |
|
Net sales |
$ |
2,584.2 |
|
|
$ |
2,343.7 |
|
|
$ |
240.5 |
|
Operating income |
|
59.7 |
|
|
|
226.3 |
|
|
|
(166.6 |
) |
Equity income |
|
68.6 |
|
|
|
113.1 |
|
|
|
(44.5 |
) |
Net earnings attributable to controlling interest |
|
80.3 |
|
|
|
242.8 |
|
|
|
(162.5 |
) |
Earnings per diluted share attributable to controlling interest |
$ |
1.63 |
|
|
$ |
4.71 |
|
|
|
(3.08 |
) |
28
Table of Contents
Net Sales and Volume
The following table provides a breakdown of our consolidated net sales by reportable operating segment, along with the respective percentage of the total consolidated net sales represented by each, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
Steel Processing |
$ |
1,880.8 |
|
|
|
72.8 |
% |
|
$ |
1,760.7 |
|
|
|
75.1 |
% |
|
$ |
120.1 |
|
Consumer Products |
|
342.5 |
|
|
|
13.3 |
% |
|
|
288.6 |
|
|
|
12.3 |
% |
|
|
53.9 |
|
Building Products |
|
292.0 |
|
|
|
11.3 |
% |
|
|
235.9 |
|
|
|
10.1 |
% |
|
|
56.1 |
|
Sustainable Energy Solutions |
|
68.9 |
|
|
|
2.7 |
% |
|
|
58.6 |
|
|
|
2.5 |
% |
|
|
10.3 |
|
Other |
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
Consolidated Net Sales |
$ |
2,584.2 |
|
|
|
100.0 |
% |
|
$ |
2,343.8 |
|
|
|
100.0 |
% |
|
$ |
240.4 |
|
The following table provides volume by reportable operating segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Steel Processing (Tons) |
|
1,900,083 |
|
|
|
2,129,877 |
|
|
|
(229,794 |
) |
Consumer Products (Units) |
|
38,966,668 |
|
|
|
40,086,729 |
|
|
|
(1,120,061 |
) |
Building Products (Units) |
|
5,289,933 |
|
|
|
5,450,736 |
|
|
|
(160,803 |
) |
Sustainable Energy Solutions (Units) |
|
288,820 |
|
|
|
285,677 |
|
|
|
3,143 |
|
•Steel Processing – Net sales increased $120.1 million over the prior year period. The increase was driven primarily by contributions from Tempel, which was acquired on December 1, 2021, partially offset by lower average selling prices and lower tolling volumes. The mix of direct versus toll tons processed was 56% to 44% in the current year period, compared to 48% to 52% in the prior year period. The shift in mix towards direct tons was driven primarily by lower tolling volume with the steel mills and the exit of our consolidated toll processing joint venture, WSP.
•Consumer Products – Net sales increased 18.7%, or $53.9 million, over the prior year period. The increase was driven by higher average selling prices, and, to a lesser extent, contributions from the June 2, 2022 acquisition of Level5. Excluding Level5 units shipped in the current period, overall volumes were down 5% as retail customers reduced inventory levels resulting in lower customer orders.
•Building Products – Net sales increased 23.8%, or $56.1 million, over the prior year period. The increase was driven primarily by higher average selling prices, partially offset by lower volumes.
•Sustainable Energy Solutions – Net sales increased $10.3 million, or 17.6%, over the prior year period due to the combined impact of increased volume and higher average selling prices.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
Gross Margin |
$ |
275.1 |
|
|
|
10.6 |
% |
|
$ |
404.0 |
|
|
|
17.2 |
% |
|
$ |
(128.9 |
) |
29
Table of Contents
•Gross margin decreased $128.9 million from the prior year period to $275.1 million, due primarily to lower contributions from Steel Processing, down $137.8 million, as declining steel prices resulted in an estimated $143.7 million unfavorable swing from prior year estimated inventory holding gains to current year estimated holding losses.
Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
Net sales |
|
|
2021 |
|
|
Net sales |
|
|
(Decrease) |
|
Selling, general and administrative expense |
$ |
211.3 |
|
|
|
8.2 |
% |
|
$ |
192.0 |
|
|
|
8.2 |
% |
|
$ |
19.3 |
|
•SG&A expense increased $19.3 million over the prior year period due primarily to the impact of acquisitions, partially offset by lower profit sharing and bonus expense.
Other Operating Costs/Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Impairment of long-lived assets |
$ |
0.3 |
|
|
$ |
- |
|
|
$ |
0.3 |
|
Restructuring and other income, net |
|
3.9 |
|
|
|
14.3 |
|
|
|
(10.4 |
) |
Separation costs |
|
9.2 |
|
|
|
- |
|
|
|
(9.2 |
) |
•Impairment of long-lived assets in the current year period was driven by our commitment to a plan to sell certain fixed assets at our Samuel joint venture’s facility in Cleveland, Ohio that were written down to fair value less cost to sell.
•Restructuring and other income, net in the current year period was driven by gains realized from the sale of long-lived assets, including a $3.9 million gain realized from the sale of WSP’s manufacturing facility in Jackson, Michigan. Refer to “Note F – Restructuring and Other Income, Net” for additional information.
•Separation costs of $9.2 million reflect direct and incremental costs incurred in connection with the planned Separation of the Company’s Steel Processing business, including audit, advisory, and legal costs. Refer to “Note A - Basis of Presentation” for additional information.
Equity Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
WAVE |
$ |
42.8 |
|
|
$ |
48.1 |
|
|
$ |
(5.3 |
) |
ClarkDietrich |
|
36.2 |
|
|
|
44.8 |
|
|
|
(8.6 |
) |
Serviacero Worthington |
|
3.7 |
|
|
|
18.1 |
|
|
|
(14.4 |
) |
ArtiFlex |
|
(13.4 |
) |
|
|
3.0 |
|
|
|
(16.4 |
) |
Workhorse |
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
0.2 |
|
Total Equity Income |
$ |
68.6 |
|
|
$ |
113.1 |
|
|
$ |
(44.5 |
) |
•Equity income decreased $44.5 million from the prior year period to $68.6 million. The decrease was driven by a $15.8 million pre-tax loss related to the sale of our noncontrolling equity interest in ArtiFlex and lower contributions from WAVE, ClarkDietrich, and Serviacero Worthington.
30
Table of Contents
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Miscellaneous income (expense), net |
$ |
(3.7 |
) |
|
$ |
1.7 |
|
|
$ |
(5.4 |
) |
•Miscellaneous expense in the current year period was driven primarily by the annuitization of a portion of the total projected benefit obligation of the inactive Gerstenslager Company Bargaining Unit Employees’ Pension Plan, which resulted in a pre-tax, non-cash settlement charge of $4.8 million to accelerate a portion of deferred pension cost.
Adjusted EBIT
The following table provides a reconciliation of consolidated net earnings attributable to controlling interest to adjusted EBIT for the periods presented:
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
(In millions) |
2022 |
|
|
2021 |
|
Net earnings attributable to controlling interest |
$ |
80.3 |
|
|
$ |
242.8 |
|
Interest expense |
|
16.2 |
|
|
|
15.0 |
|
Income tax expense |
|
23.6 |
|
|
|
71.4 |
|
Earnings before interest and taxes |
$ |
120.1 |
|
|
$ |
329.2 |
|
Incremental expense related to Level5 earnout |
|
1.1 |
|
|
$ |
- |
|
Impairment of long-lived assets (1) |
|
0.2 |
|
|
|
- |
|
Restructuring and other income, net (1) |
|
(3.6 |
) |
|
|
(8.3 |
) |
Separation costs |
|
9.2 |
|
|
|
- |
|
Pension settlement charge |
|
4.8 |
|
|
|
- |
|
Loss on sale of investment in ArtiFlex |
|
15.8 |
|
|
|
- |
|
Adjusted earnings before interest and taxes (1) |
$ |
147.6 |
|
|
$ |
320.9 |
|
(1) Excludes the impact of the noncontrolling interests.
The following table provides a summary of adjusted EBIT by segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Steel Processing |
$ |
17.7 |
|
|
$ |
179.6 |
|
|
$ |
(161.9 |
) |
Consumer Products |
|
34.4 |
|
|
|
38.1 |
|
|
|
(3.7 |
) |
Building Products |
|
94.0 |
|
|
|
103.5 |
|
|
|
(9.5 |
) |
Sustainable Energy Solutions |
|
(0.3 |
) |
|
|
(1.8 |
) |
|
|
1.5 |
|
Other |
|
1.8 |
|
|
|
1.5 |
|
|
|
0.3 |
|
Total Adjusted EBIT |
$ |
147.6 |
|
|
$ |
320.9 |
|
|
|
(173.3 |
) |
•Steel Processing – Adjusted EBIT was down $161.9 million from the prior year period to $17.7 million, on lower contributions of both operating income and equity income. Excluding restructuring, operating income was down $151.9 million from the prior year period driven primarily by an estimated $143.7 million unfavorable swing related to estimated inventory holding losses of $54.6 million in the current year period compared to estimated inventory holding gains of $89.1 million in the prior year period. Adjusted EBIT was also negatively impacted by lower equity income at Serviacero Worthington, down $14.4 million from the prior year period, as lower steel prices reduced spreads.
31
Table of Contents
•Consumer Products – Adjusted EBIT was down $3.7 million from the prior year period to $34.4 million as the favorable impact of higher average selling prices was more than offset by lower volumes and higher input and production costs, including $2.7 million of incremental material cost related to Level 5 inventory that was written-up to fair value at acquisition. Adjusted EBIT was also negatively impacted by higher SG&A expense, up $9.9 million, primarily on the impact of the Level5 acquisition.
•Building Products – Adjusted EBIT decreased $9.5 million from the prior year period to $94.0 million, on lower contributions of equity income, which were down $13.9 million, partially offset by a $4.3 million increase in operating income driven by higher average selling prices and a favorable product mix.
•Sustainable Energy Solutions – Adjusted EBIT was a loss of $0.3 million, favorable by $1.5 million compared to the prior year period, driven by increased volume and higher average selling prices, partially offset by higher production costs and an unfavorable product mix.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2022 |
|
|
2021 |
|
|
(Decrease) |
|
Interest Expense |
$ |
16.2 |
|
|
$ |
15.0 |
|
|
$ |
1.2 |
|
•Interest expense was $16.2 million in the current year period, up $1.2 million over the prior year period due to the impact of higher average debt levels associated with short-term borrowings.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
(In millions) |
2022 |
|
|
Effective Tax Rate |
|
|
2021 |
|
|
Effective Tax Rate |
|
|
Increase/
(Decrease) |
|
Income tax expense |
$ |
23.6 |
|
|
|
23.7 |
% |
|
$ |
71.4 |
|
|
|
22.8 |
% |
|
$ |
(47.8 |
) |
•Income tax expense was down $47.8 million in the current year period to $23.6 million. The decrease was driven primarily by lower pre-tax earnings. Tax expense in the current year period reflected an estimated annual effective rate of 23.7% compared to 22.8% for the prior year period. For additional information regarding our income taxes, refer to “Note M – Income Taxes”.
Liquidity and Capital Resources
During the six months ended November 30, 2022, we generated $214.0 million of cash from operating activities, invested $46.0 million in property, plant and equipment, spent $56.1 million to acquire Level5, and generated net cash proceeds of $71.6 million from the sale of assets, including $36.1 million from the sale of our noncontrolling equity interest in ArtiFlex. Additionally, we repaid $43.1 million of short-term borrowings and paid dividends of $29.1 million on Worthington Industries, Inc.’s common shares. The following table summarizes our consolidated cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
November 30, |
|
(in millions) |
2022 |
|
|
2021 |
|
Net cash provided (used) by operating activities |
$ |
214.0 |
|
|
$ |
(168.9 |
) |
Net cash used by investing activities |
|
(30.7 |
) |
|
|
(124.1 |
) |
Net cash used by financing activities |
|
(88.2 |
) |
|
|
(122.1 |
) |
Increase (decrease) in cash and cash equivalents |
|
95.1 |
|
|
|
(415.1 |
) |
Cash and cash equivalents at beginning of period |
|
34.5 |
|
|
|
640.3 |
|
Cash and cash equivalents at end of period |
$ |
129.6 |
|
|
$ |
225.2 |
|
32
Table of Contents
We believe that the available borrowing capacity of our committed line of credit is sufficient to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, working capital, to the extent not funded by cash provided by operating activities, for at least 12 months and for the foreseeable future thereafter, and expenditures related to the Separation of our Steel Processing business.
Although we do not currently anticipate a need based on our current operating structure, we believe that we could access the financial markets to be in a position to sell long-term debt or equity securities. However, lingering supply chain disruptions and other challenges caused by the COVID-19 pandemic and softening economic conditions could create uncertainty and volatility in the financial markets, which may impact our ability to access capital and the terms under which we can do so. As the impact of such challenges on the economy and our operations is evolving, we will continue to review our discretionary spending and other variable costs as well as our liquidity needs.
We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. We are also in the process of evaluating our post-Separation capital structure. Should we seek such additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs. We may also from time to time seek to retire or repurchase our outstanding debt through cash purchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in such transaction may or may not be material.
Operating Activities
Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices, requiring higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.
Net cash provided by operating activities was $214.0 million during the six months ended November 30, 2022, compared to a net operating cash outflow of $168.9 million during the six months ended November 30, 2021. This change was primarily due to a $451.9 million decrease in net operating working capital (accounts receivable, inventories, and accounts payable) requirements over the prior year six-month period, mainly driven by the impact of lower average steel prices.
Investing Activities
Net cash used by investing activities was $30.7 million during the six months ended November 30, 2022 compared to $124.1 million during the prior year period. Net cash used by investing activities in the prior year period resulted primarily from cash used to acquire certain assets of the Shiloh Industries’ U.S BlankLight ® business on June 8, 2021, for $104.8 million. Net cash used by investing activities in the current year period resulted from the purchase of the Level5 business on June 2, 2022, for $56.1 million, net of cash acquired, and capital expenditures of $46.0 million, partially offset by combined cash proceeds of $71.4 million from the sale of our equity investment in ArtiFlex, and the sale of our WSP Jackson, Michigan facility and other long-lived assets.
Investment activities are largely discretionary, and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisition opportunities will be consummated, or that any needed additional financing will be available on satisfactory terms if required.
Financing Activities
Net cash used by financing activities was $88.2 million during the six months ended November 30, 2022 compared to $122.1 million in the prior year period. The change was primarily due to $43.1 million of net repayments of short-term borrowings in the current year period and the repurchase of 1,235,000 common shares of Worthington Industries, Inc., at a cost of $73.6 million, in the prior year period.
Common shares – On December 20, 2022, the Worthington Industries, Inc. Board of Directors declared a quarterly dividend of $0.31 per share payable on March 29, 2023, to shareholders of record on March 15, 2023.
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On March 20, 2019, the Worthington Industries, Inc. Board of Directors authorized the repurchase of up to 6,600,000 of Worthington Industries, Inc.’s outstanding common shares.
On March 24, 2021, the Worthington Industries, Inc. Board of Directors authorized the repurchase of up to an additional 5,618,464 common shares, increasing the total number of common shares then authorized for repurchase to 10,000,000. As of November 30, 2022, 6,065,000 common shares remained available for repurchase under these two authorizations.
The common shares available for repurchase under the authorizations currently in effect may be repurchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately negotiated transactions.
Long-term debt and short-term borrowings – As of November 30, 2022, we were in compliance with the financial covenants of our short-term and long-term financial debt agreements. Our debt agreements do not include credit rating triggers or material adverse change provisions. During the first quarter of fiscal 2023, our credit rating was upgraded from Baa3 to Baa2 by Moody’s Investors Service, Inc. There were no outstanding borrowings drawn against our AR Facility at November 30, 2022, leaving the full borrowing capacity of $175.0 million available for future use. This is in addition to $500.0 million of short-term borrowing capacity available under our Credit Facility.
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Worthington Industries, Inc. Board of Directors. The Worthington Industries, Inc. Board of Directors reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments will continue in the future.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, inventories, intangible assets, accrued liabilities, income and other tax accruals, contingencies and litigation, and business combinations. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that reflect our significant judgments and uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our consolidated financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such policies. Our critical accounting policies have not significantly changed from those discussed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of the 2022 Form 10-K.