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 PSLRA. 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 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 our operations and financial position, 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 our business, operations and 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 CODM reviews financial information for operational decision-making purposes. Factors used to identify 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 February 28, 2023, we held equity positions in seven operating joint ventures and one non-operating joint venture. We own controlling interests in four of these joint ventures, including the non-operating joint venture, and they are consolidated within the Steel Processing operating segment. When we own controlling interests in a joint venture, the equity owned by the other joint venture member(s) is shown as noncontrolling interests in our consolidated balance sheets, and other joint venture members’ portions of net earnings and OCI are shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. We hold noncontrolling investments in the remaining four of our joint ventures and they are accounted for using the equity method.
Recent Business Developments
•On June 2, 2022, we acquired Level5, a leading provider of drywall tools and related accessories. The total purchase price was approximately $59.3 million, with a potential earnout based on performance through 2024. Refer to “Note P – Acquisitions” for additional information.
•On August 3, 2022, we sold our 50% noncontrolling equity interest in ArtiFlex to the unaffiliated joint venture member for net proceeds of approximately $41.8 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 us and leased to ArtiFlex prior to closing of the transaction. For the nine months ended February 28, 2023, we recognized a pre-tax loss of $16.1 million in equity income related to the sale, including a loss of $0.3 million for the settlement of final transaction costs related to the sale during the three months ended February 28, 2023.
•On September 29, 2022, we announced that the Board approved a plan to pursue the Separation of our Steel Processing business which we expect to complete by early 2024. This plan is 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. We plan 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, our 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 expense (income), net. Refer to “Note F – Restructuring and Other Expense (Income), Net” for additional information.
•On January 5, 2023, we announced the implementation of a Board transition plan, pursuant to which John H. McConnell II was appointed as a member of the Board, effective on January 4, 2023, and John P. McConnell intends to step down in June 2023.
24
Table of Contents
•On February 2, 2023, we announced the senior leadership teams for New Worthington and Worthington Steel which will be effective upon the completion of the planned Separation.
•On March 22, 2023, the Board declared a quarterly dividend of $0.31 per share payable on June 29, 2023, to shareholders of record on June 15, 2023.
General Economic and Market Conditions
We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of net sales by end market for the third quarter of each of fiscal 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 53% 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 the Steel Processing operating segment. The majority of the net sales of one of our unconsolidated joint ventures, Serviacero Worthington, is also to the automotive market.
Approximately 12% 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 the U.S. gross domestic product (“U.S. 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, and 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.
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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 generally 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, which generally decreases demand and pricing for our products. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in SG&A.
Inflation has accelerated and government deficits and debt levels remain at high levels in many major markets. Inflationary pressures have been felt across our business in the form of higher input and conversion costs as well as higher overall SG&A. The U.S. Federal Reserve has pushed interest rates to the highest level in more than 15 years in an attempt to slow growth and reduce inflation. The impact of rising interest rates could cause a significant economic downturn and impact several end markets that we serve as well as overall demand for our products and services. Despite the economic headwinds presented by a rising interest rate environment, demand remained steady through the third quarter of fiscal 2023 in most of our end markets and we believe pent-up demand continues to exist in certain markets, like automotive, due to lingering supply chain effects brought on by the COVID-19 pandemic.
We use the following information to monitor our costs and demand in our major end markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
February 28, |
|
|
February 28, |
|
|
|
2023 |
|
|
2022 |
|
|
Inc / (Dec) |
|
|
2023 |
|
|
2022 |
|
|
Inc / (Dec) |
|
U.S. GDP (% growth year-over-year) (1) |
|
|
1.2 |
% |
|
|
6.0 |
% |
|
|
(4.8 |
%) |
|
|
1.8 |
% |
|
|
5.3 |
% |
|
|
(3.5 |
%) |
Hot-Rolled Steel ($ per ton) (2) |
|
$ |
720 |
|
|
$ |
1,421 |
|
|
$ |
(701 |
) |
|
$ |
814 |
|
|
$ |
1,690 |
|
|
$ |
(876 |
) |
Detroit Three Auto Build (000's vehicles) (3) |
|
|
1,614 |
|
|
|
1,522 |
|
|
|
92 |
|
|
|
5,086 |
|
|
|
4,378 |
|
|
|
708 |
|
No. America Auto Build (000's vehicles) (3) |
|
|
3,448 |
|
|
|
3,215 |
|
|
|
233 |
|
|
|
10,789 |
|
|
|
9,628 |
|
|
|
1,161 |
|
Zinc ($ per pound) (4) |
|
$ |
1.44 |
|
|
$ |
1.60 |
|
|
$ |
(0.16 |
) |
|
$ |
1.45 |
|
|
$ |
1.47 |
|
|
$ |
(0.02 |
) |
Natural Gas ($ per mcf) (5) |
|
$ |
3.94 |
|
|
$ |
4.18 |
|
|
$ |
(0.24 |
) |
|
$ |
6.19 |
|
|
$ |
4.37 |
|
|
$ |
1.82 |
|
On-Highway Diesel Fuel Prices ($ per gallon) (6) |
|
$ |
4.57 |
|
|
$ |
3.80 |
|
|
$ |
0.77 |
|
|
$ |
5.05 |
|
|
$ |
3.57 |
|
|
$ |
1.48 |
|
(1)2022 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
Sales to one Steel Processing customer in the automotive industry represented 12.5% and 12.3% of consolidated net sales during the third quarter of fiscal 2023 and the third quarter of 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 third quarter of fiscal 2023, vehicle production for the Detroit Three automakers and the North American vehicle production was up 6% and 7%, respectively, over the prior year quarter.
Sales for most of our products are generally strongest in our fiscal fourth quarter when our facilities operate at seasonal peaks. Historically, sales have been weaker in our fiscal third quarter, primarily due to reduced seasonal activity in the building and construction industry, as well as customer plant shutdowns due to holidays, particularly in the automotive industry. We do not believe backlog is a significant indicator of our business.
Impact of Raw Material Prices
The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. The steel industry as a whole has been cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. This volatility can significantly affect our steel costs. In an environment of increasing prices for steel and other raw materials, competitive conditions may impact how much of the price increases we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, our financial results could be adversely affected. Also, if steel prices decrease, in general, competitive conditions may impact how quickly we must reduce our prices to our customers, and we could be forced to use higher-priced raw materials to complete orders for which the selling prices have decreased. Declining steel prices could also require us to write-down the value of our inventories to reflect current market pricing. Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and consolidation may continue. Accordingly, if delivery from a major steel supplier is disrupted, it may be more difficult to obtain an alternative supply than in the past.
26
Table of Contents
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 gains in the fourth quarter of fiscal 2023.
The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2023 (first, second and third quarters), fiscal 2022 and fiscal 2021:
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|
|
|
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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 |
|
$ |
720 |
|
|
$ |
1,421 |
|
|
$ |
1,016 |
|
4th Quarter |
|
N/A |
|
|
$ |
1,280 |
|
|
$ |
1,358 |
|
Annual Avg. |
|
$ |
813 |
|
|
$ |
1,588 |
|
|
$ |
869 |
|
(1) CRU Hot-Rolled Index, period average
No matter how efficient, our operations, which use steel as a raw material, create some amount of scrap. The expected price of scrap compared to the price of the steel raw material is factored into pricing. Generally, as the price of steel increases, the price of scrap increases by a similar amount. When increases in scrap prices do not keep pace with the increases in the price of the steel raw material, it can have a negative impact on our margins.
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
Third Quarter – Fiscal 2023 Compared to Fiscal 2022
The following discussion provides a review of results for the three months ended February 28, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
(In millions, except per share amounts) |
2023 |
|
|
2022 |
|
|
Increase/ (Decrease) |
|
Net sales |
$ |
1,103.3 |
|
|
$ |
1,378.2 |
|
|
$ |
(274.9 |
) |
Operating income |
|
30.1 |
|
|
|
37.6 |
|
|
|
(7.5 |
) |
Equity income |
|
36.9 |
|
|
|
47.5 |
|
|
|
(10.6 |
) |
Net earnings attributable to controlling interest |
|
46.3 |
|
|
|
56.3 |
|
|
|
(10.0 |
) |
Earnings per diluted share attributable to controlling interest |
$ |
0.94 |
|
|
$ |
1.11 |
|
|
$ |
(0.17 |
) |
Net Sales and Volume
The following table provides a breakdown of our consolidated net sales by operating segment, along with the respective percentage of the consolidated net sales of each, for the periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
February 28, |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
|
Steel Processing |
$ |
757.0 |
|
|
|
68.6 |
% |
|
$ |
1,052.6 |
|
|
|
76.4 |
% |
|
$ |
(295.6 |
) |
|
Consumer Products |
|
162.6 |
|
|
|
14.7 |
% |
|
|
161.7 |
|
|
|
11.7 |
% |
|
|
0.9 |
|
|
Building Products |
|
151.9 |
|
|
|
13.8 |
% |
|
|
132.9 |
|
|
|
9.6 |
% |
|
|
19.0 |
|
|
Sustainable Energy Solutions |
|
31.8 |
|
|
|
2.9 |
% |
|
|
31.0 |
|
|
|
2.2 |
% |
|
|
0.8 |
|
|
Consolidated Net Sales |
$ |
1,103.3 |
|
|
|
100.0 |
% |
|
$ |
1,378.2 |
|
|
|
100.0 |
% |
|
$ |
(274.9 |
) |
|
27
Table of Contents
The following table provides volume by operating segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Steel Processing (Tons) |
|
917,670 |
|
|
|
998,590 |
|
|
|
(80,920 |
) |
Consumer Products (Units) |
|
19,158,164 |
|
|
|
20,297,372 |
|
|
|
(1,139,208 |
) |
Building Products (Units) |
|
2,494,881 |
|
|
|
2,786,560 |
|
|
|
(291,679 |
) |
Sustainable Energy Solutions (Units) |
|
122,139 |
|
|
|
144,108 |
|
|
|
(21,969 |
) |
•Steel Processing – Net sales decreased $295.6 million from the prior year quarter. The decrease was driven almost entirely by lower average selling prices as steel prices declined significantly from the prior year quarter. Volume also declined during the quarter, but the decrease was isolated to toll processing sales, which were impacted by the divestiture of the operating assets of WSP and therefore was not a significant driver of the decrease in net sales. Direct volume, which results in significantly higher sales dollars, was up slightly over the prior year quarter. The mix of direct versus toll tons processed was 56% to 44% in the current quarter, compared to 51% to 49% in the prior year quarter. The shift in mix towards direct tons was driven primarily by lower tolling volume with our mill customers and the sale of WSP’s remaining manufacturing facility on October 31, 2022.
•Consumer Products – Net sales increased 0.6%, or $0.9 million, over the prior year quarter due to higher average selling prices, partially offset by lower volume and an unfavorable change in product mix.
•Building Products – Net sales increased 14.3%, or $19.0 million over the prior year quarter. The increase was driven by a favorable change in product mix and higher average selling prices, partially offset by lower overall volumes.
•Sustainable Energy Solutions – Net sales increased $0.8 million, or 2.6%, from the prior year quarter primarily due to higher average selling prices.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
Gross Margin |
$ |
143.8 |
|
|
|
13.0 |
% |
|
$ |
143.1 |
|
|
|
10.4 |
% |
|
$ |
0.7 |
|
•Gross margin increased $0.7 million from the prior year quarter to $143.8 million, as higher direct spreads in Steel Processing and a favorable product mix in Building Products were largely offset by a $23.2 million increase in manufacturing expenses, primarily due to inflationary pressures and lower volume in the Consumer Products business.
Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
Selling, general and administrative expense |
$ |
106.1 |
|
|
|
9.6 |
% |
|
$ |
102.9 |
|
|
|
7.5 |
% |
|
$ |
3.2 |
|
•SG&A increased $3.2 million over the prior year quarter due primarily to the net impact of acquisitions and divestitures, partially offset by lower profit sharing and bonus expense.
28
Table of Contents
Other Operating Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Impairment of long-lived assets |
$ |
0.5 |
|
|
$ |
3.1 |
|
|
$ |
(2.6 |
) |
Restructuring and other expense (income), net |
|
0.8 |
|
|
|
(0.5 |
) |
|
|
1.3 |
|
Separation costs |
|
6.3 |
|
|
|
- |
|
|
|
6.3 |
|
•Impairment of long-lived assets in the current year quarter was due to changes in the intended use of certain fixed assets at our Building Products facility in Jefferson, Ohio. Impairment charges in the prior year quarter were due to the write-down of certain production equipment at our Samuel facility in Twinsburg, Ohio facility that was determined to be below fair market value. Refer to “Note E – Impairment of Long-Lived Assets” for additional information.
•Restructuring activity during the current year quarter related primarily to a reduction in workforce at our Columbus, Ohio facility and organizational realignment within Building Products. Restructuring activity in the prior year quarter was driven by a $0.7 million gain recognized on the sale of our Wooster, Ohio facility that was previously leased to ArtiFlex. Refer to “Note F – Restructuring and Other Expense (Income), net” for additional information.
•Separation costs of $6.3 million reflect direct and incremental costs incurred in connection with the planned Separation, including audit, advisory, and legal costs. Refer to “Note A - Basis of Presentation” for additional information.
Miscellaneous Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Miscellaneous income, net |
$ |
1.3 |
|
|
$ |
0.4 |
|
|
$ |
0.9 |
|
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Interest expense, net |
$ |
6.0 |
|
|
$ |
8.1 |
|
|
$ |
(2.1 |
) |
•Interest expense was $6.0 million in the current quarter, down $2.1 million over the prior year quarter due to higher interest income earned on the Company’s cash balances, and to a lesser extent, the impact of lower average debt levels associated with short-term borrowings.
Equity Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
WAVE |
$ |
18.9 |
|
|
$ |
18.6 |
|
|
$ |
0.3 |
|
ClarkDietrich |
|
18.9 |
|
|
|
21.4 |
|
|
|
(2.5 |
) |
Serviacero Worthington |
|
(0.2 |
) |
|
|
4.7 |
|
|
|
(4.9 |
) |
ArtiFlex (1) |
|
(0.3 |
) |
|
|
1.8 |
|
|
|
(2.1 |
) |
Workhorse |
|
(0.4 |
) |
|
|
1.0 |
|
|
|
(1.4 |
) |
Total Equity Income |
$ |
36.9 |
|
|
$ |
47.5 |
|
|
$ |
(10.6 |
) |
29
Table of Contents
(1) On August 3, 2022, we sold our 50% noncontrolling equity interest in ArtiFlex. Activity for the three months ended February 28, 2023, represents settlement of final deal costs associated with the sale.
•Equity income from unconsolidated joint ventures decreased $10.6 million from the prior year quarter driven by lower contributions from Serviacero Worthington and ClarkDietrich, down $4.9 million and $2.5 million, respectively, combined with the divestiture of ArtiFlex which contributed $1.8 million in the prior year quarter. Lower contributions from Serviacero Worthington were primarily the result of reduced spreads driven by falling steel prices. ClarkDietrich’s results have declined from historical levels as prior year results benefited from customers executing purchases in advance of rising steel prices. ClarkDietrich’s current year volumes have been impacted by reduced demand in the construction end market.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
(In millions) |
2023 |
|
|
Effective Tax Rate |
|
|
2022 |
|
|
Effective Tax Rate |
|
|
Increase/ (Decrease) |
|
Income tax expense |
$ |
12.1 |
|
|
|
22.8 |
% |
|
$ |
18.7 |
|
|
|
23.2 |
% |
|
$ |
(6.6 |
) |
•Income tax expense was $12.1 million in the current quarter compared to income tax expense of $18.7 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 22.8% compared to 23.2% for the prior year quarter. For additional information regarding our income taxes, refer to “Note M – Income Taxes.”
Adjusted EBIT
We evaluate operating performance on the basis of adjusted EBIT. EBIT, a non-GAAP financial measure is calculated by adding interest expense and income tax expense to net earnings attributable to controlling interest. Adjusted EBIT excludes impairment and restructuring expense (income), but may also exclude other items, as described below, that management believes are not reflective of, and thus should not be included when evaluating the performance of our ongoing operations. Adjusted EBIT is a non-GAAP financial measure and is used by management to evaluate operating performance, engage in financial and operational planning and determine incentive compensation because we believe that this financial measure provides additional perspective on the performance of our ongoing operations. Additionally, management believes these non-GAAP financial measures provide useful information to investors because they allow for meaningful comparisons and analysis of trends in our businesses and enable investors to evaluate operations and future prospects in the same manner as management.
The following table provides a reconciliation from consolidated net earnings attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
(In millions) |
2023 |
|
|
2022 |
|
Net earnings attributable to controlling interest |
$ |
46.3 |
|
|
$ |
56.3 |
|
Interest expense, net |
|
6.0 |
|
|
|
8.1 |
|
Income tax expense |
|
12.1 |
|
|
|
18.7 |
|
EBIT |
$ |
64.4 |
|
|
$ |
83.1 |
|
True-up of Level5 earnout accrual (1) |
|
(1.0 |
) |
|
|
- |
|
Impairment of long-lived assets (2) |
|
0.5 |
|
|
|
2.0 |
|
Restructuring and other expense (income), net (3) |
|
0.8 |
|
|
|
(0.5 |
) |
Separation costs (4) |
|
6.3 |
|
|
|
- |
|
Loss on sale of investment in ArtiFlex (5) |
|
0.3 |
|
|
|
- |
|
Adjusted EBIT |
$ |
71.3 |
|
|
$ |
84.6 |
|
(1)Reflects a pre-tax benefit of $1.0 million within SG&A expense to reverse the compensation expense accrued during the first six months of fiscal 2023 for anticipated payout under the first annual earnout opportunity associated with the Level5 acquisition.
30
Table of Contents
(2)Impairment charges are excluded because they do not occur in the ordinary course of our ongoing business operations, are inherently unpredictable in timing and amount, and are non-cash, so their exclusion facilitates the comparison of historical, current and forecasted financial results.
(3)Restructuring activities consist of established programs that are not part of our ongoing operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions). Excludes the impact of noncontrolling interests.
(4)Reflects direct and incremental costs incurred in connection with the anticipated Separation, including audit, advisory, and legal costs.
(5)On August 3, 2022, we sold our 50% noncontrolling equity investment in ArtiFlex, resulting in a pre-tax loss of $16.1 million in equity income related to the sale, including a loss of $0.3 million for the settlement of final transaction costs related to the sale during the three months ended February 28, 2023.
The following table provides a summary of adjusted EBIT by operating segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Steel Processing |
$ |
7.8 |
|
|
$ |
7.1 |
|
|
$ |
0.7 |
|
Consumer Products |
|
17.9 |
|
|
|
26.7 |
|
|
|
(8.8 |
) |
Building Products |
|
51.5 |
|
|
|
49.6 |
|
|
|
1.9 |
|
Sustainable Energy Solutions |
|
(1.4 |
) |
|
|
(2.8 |
) |
|
|
1.4 |
|
Other |
|
(4.5 |
) |
|
|
4.0 |
|
|
|
(8.5 |
) |
Total Adjusted EBIT |
$ |
71.3 |
|
|
$ |
84.6 |
|
|
$ |
(13.3 |
) |
•Steel Processing – Adjusted EBIT was up $0.7 million over the prior year quarter to $7.8 million due to an improvement in operating income which was largely offset by a $4.9 million decline in contribution of equity income from Serviacero Worthington due to inventory holding losses in the current quarter versus inventory holding gains in the prior year quarter. Operating income was up $8.1 million over the prior year quarter to $10.8 million. Excluding the $3.2 million of combined impairment and restructuring charges in the prior year quarter, operating income was up $4.9 million over the prior year quarter, as the favorable impact of higher spreads was partially offset by a $12.3 million increase in manufacturing costs due to increased wages, benefits and maintenance costs. Inventory holding losses, estimated to be $26.6 million in the current quarter, were comparable to the estimated inventory holding losses of $24.9 million in the prior year quarter.
•Consumer Products – Adjusted EBIT was down $8.8 million in the current quarter to $17.9 million, as the favorable impact of higher average selling prices was more than offset by lower volumes and higher input and production costs due to inflationary cost pressures. Adjusted EBIT in the prior year quarter benefitted from price increases ahead of inflationary pressures.
•Building Products – Adjusted EBIT increased $1.9 million from the prior year quarter to $51.5 million primarily due to a favorable product mix and higher average selling prices, partially offset by higher input and production costs and lower contributions of equity income. Equity income for the current quarter totaled $37.8 million, down $2.2 million from the prior year quarter, as ClarkDietrich’s results declined $2.5 million from the record levels in the prior year quarter while WAVE’s results improved slightly.
•Sustainable Energy Solutions – Adjusted EBIT was a loss of $1.4 million, favorable by $1.4 million to the prior year quarter’s loss, as higher average selling prices improved margins, but were partially offset by higher production costs.
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Table of Contents
Nine Months Year-to-Date – Fiscal 2023 compared to Fiscal 2022
The following discussion provides a review of results for the nine months ended February 28, 2023 and 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
(In millions, except per share amounts) |
2023 |
|
|
2022 |
|
|
Increase/ (Decrease) |
|
Net sales |
$ |
3,687.5 |
|
|
$ |
3,721.9 |
|
|
$ |
(34.4 |
) |
Operating income |
|
89.8 |
|
|
|
263.9 |
|
|
|
(174.1 |
) |
Equity income |
|
105.5 |
|
|
|
160.6 |
|
|
|
(55.1 |
) |
Net earnings attributable to controlling interest |
|
126.6 |
|
|
|
299.1 |
|
|
|
(172.5 |
) |
Earnings per diluted share attributable to controlling interest |
$ |
2.57 |
|
|
$ |
5.83 |
|
|
$ |
(3.26 |
) |
Net Sales and Volume
The following table provides a breakdown of our consolidated net sales by operating segment, along with the respective percentage of the consolidated net sales represented by each, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
Steel Processing |
$ |
2,637.8 |
|
|
|
71.5 |
% |
|
$ |
2,813.2 |
|
|
|
75.6 |
% |
|
$ |
(175.4 |
) |
Consumer Products |
|
505.1 |
|
|
|
13.7 |
% |
|
|
450.3 |
|
|
|
12.1 |
% |
|
|
54.8 |
|
Building Products |
|
443.9 |
|
|
|
12.0 |
% |
|
|
368.8 |
|
|
|
9.9 |
% |
|
|
75.1 |
|
Sustainable Energy Solutions |
|
100.7 |
|
|
|
2.8 |
% |
|
|
89.6 |
|
|
|
2.4 |
% |
|
|
11.1 |
|
Consolidated Net Sales |
$ |
3,687.5 |
|
|
|
100.0 |
% |
|
$ |
3,721.9 |
|
|
|
100.0 |
% |
|
$ |
(34.4 |
) |
The following table provides volume by operating segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Steel Processing (Tons) |
|
2,817,752 |
|
|
|
3,128,466 |
|
|
|
(310,714 |
) |
Consumer Products (Units) |
|
58,124,832 |
|
|
|
60,384,101 |
|
|
|
(2,259,269 |
) |
Building Products (Units) |
|
7,784,814 |
|
|
|
8,237,296 |
|
|
|
(452,482 |
) |
Sustainable Energy Solutions (Units) |
|
410,959 |
|
|
|
429,785 |
|
|
|
(18,826 |
) |
•Steel Processing – Net sales decreased $175.4 million from the prior year period, as the impact of lower average selling prices and lower tolling volumes more than offset the impact of the Tempel Steel Company (“Tempel”) acquisition. The mix of direct versus toll tons processed was 56% to 44% in the current year period, compared to 49% to 51% in the prior year period. The shift in mix towards direct tons was driven primarily by lower tolling volume with our mill customers and the sale of WSP’s remaining manufacturing facility on October 31, 2022.
•Consumer Products – Net sales increased 12.2%, or $54.8 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 5.9% as retail customers reduced inventory levels resulting in lower customer orders.
•Building Products – Net sales increased 20.4%, or $75.1 million, over the prior year period. The increase was driven primarily by higher average selling prices.
•Sustainable Energy Solutions – Net sales increased $11.1 million or 12.4%, over the prior year period, driven by higher average selling prices.
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Table of Contents
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
Gross Margin |
$ |
418.9 |
|
|
|
11.4 |
% |
|
$ |
547.1 |
|
|
|
14.7 |
% |
|
$ |
(128.2 |
) |
•Gross margin decreased $128.2 million from the prior year period to $418.9 million, due primarily to a $134.1 million decline in contribution from Steel Processing, as declining steel prices resulted in an estimated $145.4 million unfavorable swing from prior year estimated inventory holding gains to current year estimated holding losses. Manufacturing expenses were also up $119.1 million, as inflationary pressures increased costs across all segments. The lower contribution from Steel Processing was partially offset by a $10.3 million improvement in Building Products driven primarily by higher average selling prices and a favorable product mix.
Selling, General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
Net sales |
|
|
2022 |
|
|
Net sales |
|
|
(Decrease) |
|
Selling, general and administrative expense |
$ |
317.3 |
|
|
|
8.6 |
% |
|
$ |
294.9 |
|
|
|
7.9 |
% |
|
$ |
22.4 |
|
•SG&A increased $22.4 million over the prior year period driven primarily by the net impact of acquisitions and divestitures, partially offset by lower profit sharing and bonus expense.
Other Operating Costs/Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Impairment of long-lived assets |
$ |
0.8 |
|
|
$ |
3.1 |
|
|
$ |
(2.3 |
) |
Restructuring and other income, net |
|
(4.6 |
) |
|
|
(14.8 |
) |
|
|
10.2 |
|
Separation costs |
|
15.6 |
|
|
|
- |
|
|
|
(15.6 |
) |
•Impairment of long-lived assets in the current year period consisted of $0.5 million related to changes in the intended use of certain fixed assets at our Building Products facility in Jefferson, Ohio and $0.3 million related to our commitment to a plan to sell certain fixed assets at our Samuel facility in Cleveland, Ohio that were written down to fair value less cost to sell. Impairment charges in the prior year period related to the write-down of certain production equipment at our Samuel facility in Twinsburg, Ohio that was determined to be below fair market value. Refer to “Note E – Impairment of Long-Lived Assets” for additional information.
•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 former manufacturing facility in Jackson, Michigan. Restructuring activity in the prior year period related primarily to the divestiture of WSP’s manufacturing facility in Canton, Michigan, which generated a pre-tax gain of $12.2 million and our exit from the former Engineered Cabs facility located in Stow, Ohio, which generated a pre-tax gain of $1.8 million. Refer to “Note F – Restructuring and Other Expense (Income), Net” for additional information.
•Separation costs of $15.6 million reflect direct and incremental costs incurred in connection with the planned Separation, including audit, advisory, and legal costs. Refer to “Note A – Basis of Presentation” for additional information.
33
Table of Contents
Miscellaneous income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Miscellaneous income (expense), net |
$ |
(2.4 |
) |
|
$ |
2.1 |
|
|
$ |
(4.5 |
) |
•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, as of the purchase date of the annuity contract, which resulted in a pre-tax, non-cash settlement charge of $4.8 million in the first quarter of fiscal 2023 to accelerate a portion of deferred pension cost.
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Interest expense, net |
$ |
22.2 |
|
|
$ |
23.2 |
|
|
$ |
(1.0 |
) |
•Interest expense was $22.2 million in the current year period, down $1.0 million from the prior year period due to higher interest income, and to a lesser extent, the impact of lower average debt levels associated with short-term borrowings.
Equity Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
WAVE |
$ |
61.7 |
|
|
$ |
66.7 |
|
|
$ |
(5.0 |
) |
ClarkDietrich |
|
55.1 |
|
|
|
66.2 |
|
|
|
(11.1 |
) |
Serviacero Worthington |
|
3.5 |
|
|
|
22.9 |
|
|
|
(19.4 |
) |
ArtiFlex (1) |
|
(13.7 |
) |
|
|
4.8 |
|
|
|
(18.5 |
) |
Workhorse |
|
(1.1 |
) |
|
|
- |
|
|
|
(1.1 |
) |
Total Equity Income |
$ |
105.5 |
|
|
$ |
160.6 |
|
|
$ |
(55.1 |
) |
(1) On August 3, 2022, we sold our 50% noncontrolling equity interest in ArtiFlex. Activity for the nine months ended February 28, 2023, includes a $16.1 million pre-tax loss related to the sale.
•Equity income from our unconsolidated joint ventures decreased $55.1 million from the prior year period to $105.5 million due to a $16.1 million pre-tax loss related to the sale of our noncontrolling equity interest in ArtiFlex and lower contributions from all of our unconsolidated joint ventures. The lower contribution from Serviacero Worthington was primarily the result of reduced spreads driven by falling steel prices.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
(In millions) |
2023 |
|
|
Effective Tax Rate |
|
|
2022 |
|
|
Effective Tax Rate |
|
|
Increase/ (Decrease) |
|
Income tax expense |
$ |
35.7 |
|
|
|
22.8 |
% |
|
$ |
90.1 |
|
|
|
23.2 |
% |
|
$ |
(54.4 |
) |
34
Table of Contents
•Income tax expense was down $54.4 million in the current year period to $35.7 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 22.8% compared to 23.2% for the prior year period. For additional information regarding our income taxes, refer to “Note M – Income Taxes.”
Adjusted EBIT
The following table provides a reconciliation from consolidated net earnings attributable to controlling interest (the most comparable GAAP measure) to the non-GAAP measure of adjusted EBIT for the periods presented:
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
(In millions) |
2023 |
|
|
2022 |
|
Net earnings attributable to controlling interest |
$ |
126.6 |
|
|
$ |
299.1 |
|
Interest expense, net |
|
22.2 |
|
|
|
23.2 |
|
Income tax expense |
|
35.7 |
|
|
|
90.1 |
|
EBIT |
$ |
184.5 |
|
|
$ |
412.4 |
|
Impairment of long-lived assets (1) |
|
0.7 |
|
|
|
2.0 |
|
Restructuring and other income, net (2) |
|
(2.7 |
) |
|
|
(8.9 |
) |
Separation costs (3) |
|
15.6 |
|
|
|
- |
|
Pension settlement charge (4) |
|
4.8 |
|
|
|
- |
|
Loss on sale of investment in ArtiFlex |
|
16.1 |
|
|
|
- |
|
Adjusted EBIT |
$ |
219.0 |
|
|
$ |
405.5 |
|
(1)Impairment charges are excluded because they do not occur in the ordinary course of our ongoing business operations, are inherently unpredictable in timing and amount, and are non-cash, so their exclusion facilitates the comparison of historical, current and forecasted financial results. Excludes the impact of the noncontrolling interests.
(2)Restructuring activities consist of established programs that are not part of our ongoing operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions). Excludes the impact of the noncontrolling interests.
(3)Reflects direct and incremental costs incurred in connection with the anticipated Separation, including audit, advisory, and legal costs.
(4)During the first quarter of 2023, we completed the pension lift-out transaction to transfer a portion of the total projected benefit obligation of The Gerstenslager Company Bargaining Unit Employees' Pension Plan to a third-party insurance company, resulting in a non-cash settlement charge of $4.7 million to accelerate a portion of the overall deferred pension cost.
The following table provides a summary of adjusted EBIT by operating segment for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
|
|
|
|
|
|
|
Increase/ |
|
(In millions) |
2023 |
|
|
2022 |
|
|
(Decrease) |
|
Steel Processing |
$ |
25.5 |
|
|
$ |
186.7 |
|
|
$ |
(161.2 |
) |
Consumer Products |
|
52.4 |
|
|
|
64.8 |
|
|
|
(12.4 |
) |
Building Products |
|
145.4 |
|
|
|
153.0 |
|
|
|
(7.6 |
) |
Sustainable Energy Solutions |
|
(1.7 |
) |
|
|
(4.6 |
) |
|
|
2.9 |
|
Other |
|
(2.6 |
) |
|
|
5.6 |
|
|
|
(8.2 |
) |
Total Adjusted EBIT |
$ |
219.0 |
|
|
$ |
405.5 |
|
|
|
(186.5 |
) |
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•Steel Processing – Adjusted EBIT was down $161.2 million from the prior year period to $25.5 million, due to a $151.9 million decline in operating income contribution and a $19.4 million decline in equity income contribution. Excluding impairment and restructuring activity, operating income was down $146.6 million from the prior year period driven primarily by an estimated $145.4 million unfavorable swing related to estimated inventory holding losses of $81.2 million in the current year period compared to estimated inventory holding gains of $64.2 million in the prior year period, partially offset by the favorable impact of higher spreads. Adjusted EBIT was also negatively impacted by $19.4 million in lower equity income at Serviacero Worthington from the prior year period, as lower steel prices reduced spreads.
•Consumer Products – Adjusted EBIT was down $12.4 million from the prior year period to $52.4 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 Level5 inventory that was written-up to fair value at acquisition. Adjusted EBIT was also negatively impacted by $11.2 million of higher SG&A, primarily due to the impact of the Level5 acquisition.
•Building Products – Adjusted EBIT decreased $7.6 million from the prior year period to $145.4 million due to a $16.1 million decline in equity income contribution, partially offset by a $7.0 million increase in operating income. Lower equity income was due to a $11.1 million and $5.0 million decrease in equity income at ClarkDietrich and WAVE, respectively, driven primarily by lower volumes. The increase in operating income was primarily driven by higher average selling prices and a favorable product mix, partially offset by higher input and production costs.
•Sustainable Energy Solutions – Adjusted EBIT was a loss of $1.7 million, favorable by $2.9 million compared to the prior year period, driven by higher average selling prices, partially offset by higher production costs and an unfavorable product mix.
Liquidity and Capital Resources
During the nine months ended February 28, 2023, we generated $396.1 million of cash from operating activities, invested $68.7 million in property, plant and equipment, spent $56.1 million to acquire Level5, and generated net cash proceeds of $71.3 million from the sale of assets, including $35.8 million from the sale of our 50% noncontrolling equity interest in ArtiFlex. Additionally, we repaid $44.4 million of short-term borrowings and paid dividends of $44.2 million on the common shares. The following table summarizes our consolidated cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
February 28, |
|
(in millions) |
2023 |
|
|
2022 |
|
Net cash provided (used) by operating activities |
$ |
396.1 |
|
|
$ |
(94.7 |
) |
Net cash used by investing activities |
|
(53.7 |
) |
|
|
(413.2 |
) |
Net cash used by financing activities |
|
(109.6 |
) |
|
|
(88.1 |
) |
Increase (decrease) in cash and cash equivalents |
|
232.8 |
|
|
|
(596.0 |
) |
Cash and cash equivalents at beginning of period |
|
34.5 |
|
|
|
640.3 |
|
Cash and cash equivalents at end of period |
$ |
267.3 |
|
|
$ |
44.3 |
|
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 planned Separation.
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 further 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.
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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 any 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 $396.1 million during the nine months ended February 28, 2023, compared to net cash used by operating activities of $94.7 million during the nine months ended February 28, 2022. This change was primarily due to a $466.2 million decrease in net operating working capital (accounts receivable, inventories, and accounts payable) requirements over the prior year nine-month period, mainly driven by the impact of lower average steel prices.
Investing Activities
Net cash used by investing activities was $53.7 million during the nine months ended February 28, 2023 compared to $413.2 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 and Tempel on December 1, 2021 for $272.5 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 $68.7 million, partially offset by combined cash proceeds of $71.3 million from the sale of our 50% noncontrolling 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 $109.6 million during the nine months ended February 28, 2023 compared to $88.1 in the prior year period. The change was primarily due to $44.4 million of net repayments of short-term borrowings in the current year period and the repurchase of 2,235,000 common shares, at a cost of $127.8 million, in the prior year period.
Common shares – On March 22, 2023, the Board declared a quarterly dividend of $0.31 per share payable on June 29, 2023, to shareholders of record on June 15, 2023.
On March 20, 2019, the Board authorized the repurchase of up to 6,600,000 common shares.
On March 24, 2021, the Board 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 February 28, 2023, 6,065,000 common shares remained available for repurchase under these two authorizations.
The common shares may be repurchased under these authorizations 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.
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Long-term debt and short-term borrowings – As of February 28, 2023, 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. There were no outstanding borrowings drawn against our AR Facility at February 28, 2023, 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.
During the third quarter of fiscal 2023, we repurchased $5,615,000 of the 2026 Notes through open market purchases. This repurchase activity generated a gain of $77,000, which is recorded in Miscellaneous income (expense), net in the consolidated statements of earnings. Refer to “Note I – Debt” for additional information.
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board 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 of dividends will continue in the future.
Critical Accounting Estimates
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.