Item 1. – Financial Statements
CONDENSED Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – Basis of Presentation
The consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). Investments in unconsolidated affiliates are accounted for using the equity method. Significant intercompany accounts and transactions have been eliminated.
The Company owns controlling interests in the following four joint ventures: Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), Worthington Samuel Coil Processing LLC (“Samuel” or “Samuel joint venture”) (63%), and Worthington Specialty Processing (“WSP”) (51%). These joint ventures are consolidated with the equity owned by the other joint venture members shown as noncontrolling interests in our consolidated balance sheets, and their portions of net earnings (loss) and other comprehensive income (loss) (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings (loss) and consolidated statements of comprehensive income (loss), respectively. Investments in unconsolidated affiliates are accounted for using the equity method. See further discussion of our unconsolidated affiliates in “NOTE D – Investments in Unconsolidated Affiliates”.
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included. Operating results for the three and six months ended November 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2021 (“fiscal 2021”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (“fiscal 2020”) of Worthington Industries, Inc. (the “2020 Form 10-K”).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Deconsolidation of Engineered Cabs: On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of the Company’s Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse Holdings, LLC (the “Cabs joint venture”), in which the Company retained a 20% noncontrolling interest. Immediately following the contribution, the Cabs joint venture acquired the net assets of Crenlo Cab Products, LLC (“Crenlo”). The investment in the Cabs joint venture is accounted for under the equity method, due to lack of control as more fully described in “NOTE D – Investments in Unconsolidated Affiliates”.
Recently Adopted Accounting Standards
On June 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and additional related ASUs which introduced an expected credit loss model for impairment of financial assets measured at amortized cost, including trade receivables. The model replaces the probable, incurred loss model for those assets and broadens the information an entity must consider when developing its expected credit loss estimate for assets measured at amortized cost. The adoption of the new accounting standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Additionally, there have been no significant changes to our accounting policies as disclosed in our 2020 Form 10-K as a result of the adoption of this new accounting guidance.
5
NOTE B – Revenue Recognition
The following table summarizes net sales by product class for the periods presented:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in thousands)
|
November 30,
|
|
|
November 30,
|
|
Reportable segments by product class:
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Steel Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
$
|
433,556
|
|
|
$
|
481,058
|
|
|
$
|
838,364
|
|
|
$
|
974,704
|
|
Toll
|
|
35,167
|
|
|
|
35,879
|
|
|
|
61,379
|
|
|
|
65,608
|
|
Total
|
|
468,723
|
|
|
|
516,937
|
|
|
|
899,743
|
|
|
|
1,040,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure Cylinders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer products
|
|
121,618
|
|
|
|
128,065
|
|
|
|
254,400
|
|
|
|
247,545
|
|
Industrial products
|
|
134,020
|
|
|
|
130,334
|
|
|
|
262,245
|
|
|
|
282,952
|
|
Oil & gas equipment
|
|
6,646
|
|
|
|
31,737
|
|
|
|
16,543
|
|
|
|
64,035
|
|
Total
|
|
262,284
|
|
|
|
290,136
|
|
|
|
533,188
|
|
|
|
594,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Cabs
|
|
85
|
|
|
|
20,550
|
|
|
|
1,070
|
|
|
|
48,616
|
|
Other
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
36
|
|
Total
|
|
85
|
|
|
|
20,564
|
|
|
|
1,070
|
|
|
|
48,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
731,092
|
|
|
$
|
827,637
|
|
|
$
|
1,434,001
|
|
|
$
|
1,683,496
|
|
We recognize revenue at a point in time, with the exception of the toll processing revenue stream and certain contracts within the oil & gas equipment revenue streams, which are recognized over time. The following table summarizes the over time revenue for the periods presented:
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
November 30,
|
|
|
November 30,
|
|
(in thousands)
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Steel Processing - toll
|
$
|
35,167
|
|
|
$
|
35,879
|
|
|
$
|
61,379
|
|
|
$
|
65,608
|
|
Pressure Cylinders - certain oil & gas equipment contracts
|
|
4,367
|
|
|
|
27,531
|
|
|
|
12,066
|
|
|
|
57,539
|
|
Total over time revenue
|
$
|
39,534
|
|
|
$
|
63,410
|
|
|
$
|
73,445
|
|
|
$
|
123,147
|
|
6
The following table summarizes the unbilled receivables and contract assets for the periods indicated:
|
|
|
November 30,
|
|
|
May 31,
|
|
(in thousands)
|
Balance Sheet Classification
|
|
2020
|
|
|
2020
|
|
Unbilled receivables
|
Receivables
|
|
$
|
4,937
|
|
|
$
|
5,552
|
|
Contract assets
|
Prepaid and other current assets
|
|
$
|
5,636
|
|
|
$
|
4,127
|
|
We have elected the optional exemption, which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an expected duration of one year or less. There are no unsatisfied or partially satisfied performance obligations related to contracts with an expected duration greater than one year.
NOTE C – Investment in Nikola
On June 3, 2020 (the “Effective Date”), Nikola Corporation (“Nikola”) became a public company through a reverse merger with a subsidiary of VectoIQ Acquisition Corporation, a NASDAQ listed publicly traded company. At the Effective Date, we owned 19,048,020 shares of Nikola common stock. During the first quarter of fiscal 2021, we recognized a $796,141,000 pre-tax gain consisting of $508,511,000 in realized gains from the sale of 11,500,000 of our Nikola shares and a charitable contribution of 500,000 of those shares, and an unrealized mark-to-market gain of $287,630,000 for the remaining 7,048,020 Nikola shares we continued to hold at August 31, 2020 when the market price was $40.81 per share. We also recognized $49,511,000 of incremental expenses in operating income related to the Nikola gains consisting of $28,858,000 for discretionary profit sharing and bonus expenses and $20,653,000 for the charitable contribution of the 500,000 Nikola shares to the Worthington Industries Foundation to establish a charitable endowment focused on the communities in which the Company operates.
During the second quarter of fiscal 2021, the market price of the Nikola shares dropped from $40.81 per share at August 31, 2020 to $20.41 per share at November 30, 2020, resulting in an unrealized mark-to-market loss of $143,780,000 for the 7,048,020 shares we held at quarter end, and reducing the pre-tax year-to-date realized and unrealized gain on the investment in Nikola to $652,362,000. In addition, during the second quarter, we recorded incremental expenses of $4,570,000 for discretionary bonuses related to the Nikola investment gain, which are subject to service requirements and required to be recognized as they are earned throughout fiscal 2021.
NOTE D – Investments in Unconsolidated Affiliates
Investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. At November 30, 2020, the Company held investments in the following affiliated companies: ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), the Cabs joint venture (20%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero Worthington”) (50%), and Worthington Armstrong Venture (“WAVE”) (50%).
During the first quarter of fiscal 2020, the Company began the process of exploring the potential exit of its ownership interest in Nisshin, its former joint venture in China. As a result, the Company evaluated its investment for potential impairment and concluded the remaining book value of the investment was fully impaired, resulting in an impairment charge of $4,236,000 within equity in net income of unconsolidated affiliates in our consolidated statement of loss for the three months ended August 31, 2019. On December 19, 2019, the Company finalized an agreement to transfer the risks and rewards related to its 10% interest to the other joint venture partners and from that point on, the Company had no further rights or obligations related to the Nisshin joint venture.
On December 31, 2019, the Company contributed the operating net assets, excluding working capital, of its Cleveland facility, (which the Company had previously acquired on October 7, 2019 from Heidtman Steel Products, Inc.) to the Samuel joint venture in exchange for an incremental 31.75% ownership interest in the joint venture. This increased our total ownership interest to 63% and the joint venture’s results have been consolidated within Steel Processing since that time.
On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed the net assets of our primary Engineered Cabs manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota to the newly-formed Cabs joint venture, in which we retained a 20% noncontrolling interest. Immediately following the contribution, the Cabs joint venture acquired the net assets of Crenlo. Our investment in the Cabs joint venture is accounted for under the equity method, due to lack of control.
The Company’s contribution to the Cabs joint venture resulted in recognizing an impairment charge of $35,194,000 in the first quarter of fiscal 2020 when the disposal group met the criteria as assets held for sale. Certain non-core assets of the Engineered Cabs business, including the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana, were retained. Refer to “NOTE E – Impairment of Long-Lived Assets” for additional information on the retained assets.
7
Upon closing of the transaction, the contributed net assets were deconsolidated, resulting in a net gain of $258,000 during fiscal 2020, as summarized below:
(in thousands)
|
|
|
|
Retained investment (at fair value)
|
$
|
13,831
|
|
Contributed net assets (at carrying value)
|
|
13,394
|
|
Gain on deconsolidation
|
|
437
|
|
Less: deal costs
|
|
(179
|
)
|
Net gain on deconsolidation
|
$
|
258
|
|
We received distributions from unconsolidated affiliates totaling $47,116,000 during the six months ended November 30, 2020. We have received cumulative distributions from WAVE in excess of our investment balance, which resulted in an amount recorded within other liabilities on our consolidated balance sheets of $107,951,000 at November 30, 2020. In accordance with the applicable accounting guidance, we reclassified the negative investment balance to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if the investment balance becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any negative investment balance classified as a liability as income immediately.
We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows.
The following tables summarize combined financial information for our unconsolidated affiliates as of the dates, and for the periods presented:
|
November 30,
|
|
|
May 31,
|
|
(in thousands)
|
2020
|
|
|
2020
|
|
Cash
|
$
|
49,957
|
|
|
$
|
68,730
|
|
Other current assets
|
|
564,359
|
|
|
|
528,631
|
|
Noncurrent assets
|
|
391,547
|
|
|
|
399,731
|
|
Total assets
|
$
|
1,005,863
|
|
|
$
|
997,092
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
205,530
|
|
|
$
|
174,709
|
|
Short-term borrowings
|
|
-
|
|
|
|
500
|
|
Current maturities of long-term debt
|
|
10,700
|
|
|
|
37,542
|
|
Long-term debt
|
|
314,730
|
|
|
|
346,690
|
|
Other noncurrent liabilities
|
|
87,087
|
|
|
|
73,656
|
|
Equity
|
|
387,816
|
|
|
|
363,995
|
|
Total liabilities and equity
|
$
|
1,005,863
|
|
|
$
|
997,092
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
November 30,
|
|
|
November 30,
|
|
(in thousands)
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
$
|
451,198
|
|
|
$
|
453,288
|
|
|
$
|
856,518
|
|
|
$
|
923,493
|
|
Gross margin
|
|
96,561
|
|
|
|
95,995
|
|
|
|
189,610
|
|
|
|
193,531
|
|
Operating income
|
|
64,890
|
|
|
|
62,414
|
|
|
|
122,843
|
|
|
|
128,637
|
|
Depreciation and amortization
|
|
8,672
|
|
|
|
7,538
|
|
|
|
16,402
|
|
|
|
14,627
|
|
Interest expense
|
|
2,832
|
|
|
|
3,139
|
|
|
|
5,777
|
|
|
|
6,506
|
|
Income tax expense
|
|
2,322
|
|
|
|
1,272
|
|
|
|
4,052
|
|
|
|
1,853
|
|
Net earnings from continuing operations
|
|
60,943
|
|
|
|
53,483
|
|
|
|
117,516
|
|
|
|
114,624
|
|
Net earnings from discontinued operations
|
|
-
|
|
|
|
46,958
|
|
|
|
-
|
|
|
|
49,770
|
|
Net earnings
|
|
60,943
|
|
|
|
100,441
|
|
|
|
117,516
|
|
|
|
164,394
|
|
The amount presented within the “Net earnings from discontinued operations” caption in the table above reflects the international operations of our WAVE joint venture prior to their sale on September 30, 2019. The sale was part of a broader transaction between the joint venture partner, Armstrong World Industries, Inc. (“AWI”), and Knauf Ceilings and Holding GmbH (“Knauf”), a family-owned manufacturer of building materials headquartered in Germany. In September 2020, we received the final cash distribution of $2,950,000 for our portion of the remaining proceeds of the sale. The Company corrected certain amounts in the table above for the three and six months ended November 30, 2019, to reflect the international operations of our WAVE joint venture within discontinued operations prior to their sale on September 30, 2019, as those amounts were previously included in net sales, gross margin, operating income, and income tax expense.
8
NOTE E – Impairment of Long-Lived Assets
Fiscal 2021: During the second quarter of fiscal 2021, we identified an impairment indicator related to the oil & gas equipment operations in Tulsa, Oklahoma due to the economic impact of the COVID-19 pandemic and related market softness. As a result, we tested the long-lived assets consisting of fixed and customer list intangible assets with net book values of $7,375,000 and $2,374,000, respectively, for impairment. The fair value of the fixed assets was determined to be $5,934,000 (using observable Level 2 inputs) resulting in an impairment charge of $1,441,000. Additionally, the customer list intangible assets were deemed to be fully impaired (using unobservable Level 3 inputs) and written off.
During the first quarter of fiscal 2021, we recorded impairment charges totaling $9,924,000 as impairment indicators were identified as follows:
|
•
|
The future undiscounted cash flows of the cryogenics business primarily operated out of the Theodore, Alabama facility did not support its book value. As a result, property, plant and equipment with a carrying value of $13,526,000 were written down to their estimated fair value of $9,193,000 (determined using Level 2 inputs), resulting in an impairment charge of $4,333,000. Additionally, the customer list intangible assets with a carrying value of $3,662,000 were deemed to be fully impaired (using unobservable Level 3 inputs) and written off. These assets were subsequently sold in October 2020 (refer to “NOTE F – Restructuring and Other Expense, Net” for additional information on this sale).
|
|
•
|
We decided to discontinue our operation of the manufacturing line for alternative fuel cylinders at the Jefferson, Ohio facility. As a result, long-lived assets with a carrying value of $1,823,000 were written down to their estimated fair market value of $400,000 (determined using Level 2 inputs), resulting in an impairment charge of $1,423,000.
|
|
•
|
The Company recognized a $506,000 impairment charge related to the Superior Tools business that was acquired as part of Magna Industries, Inc. in fiscal 2019 and subsequently sold.
|
Fiscal 2020: During the first quarter of fiscal 2020, we committed to plans to sell substantially all of the net assets of its Engineered Cabs business with the exception of the fabricated products facility in Stow, Ohio, and the steel packaging facility in Greensburg, Indiana. As the disposal group met the criteria for classification as assets held for sale as of August 31, 2019, those net assets were presented separately as assets held for sale in our consolidated balance sheet as of August 31, 2019. In accordance with the applicable accounting guidance, such net assets were recorded at the lower of net book value or fair value less costs to sell. The book value of the disposal group exceeded its estimated fair market value of $12,860,000 (determined using Level 2 inputs), resulting in an impairment charge of $35,194,000 during the first quarter of fiscal 2020. Included in the impairment charge were lease ROU assets with a net book value of $905,000 that were deemed fully impaired and written off. We also identified an impairment indicator for the long-lived assets of the fabricated products business as the planned sale would have an adverse impact on the manner and extent in which these assets were used. As a result, fixed assets with a net book value of $1,469,000 and lease ROU assets with a net book value of $3,938,000 were deemed to be fully impaired and written off during the first quarter of fiscal 2020.
NOTE F – Restructuring and Other Expense, Net
We consider restructuring activities to be programs whereby we fundamentally change our operations, such as closing and consolidating manufacturing facilities or moving manufacturing of a product to another location. Restructuring activities may also involve substantial realignment of the management structure of a business unit in response to changing market conditions.
9
In October 2020, the Pressure Cylinders business completed the sale of its cryogenic and hydrogen trailer business, including the Theodore, Alabama manufacturing site, and the cryo-science and microbulk storage unit business. In connection with these transactions, the Company realized net cash proceeds of $21,223,000 after working capital adjustments, which generated a pre-tax loss of $7,072,000, primarily related to allocated goodwill.
A progression of the liabilities associated with our restructuring activities, combined with a reconciliation to the restructuring and other expense, net financial statement caption, in our consolidated statement of earnings is summarized below for the six-month period ended November 30, 2020:
|
|
Balance, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, as of
|
|
(in thousands)
|
|
May 31, 2020
|
|
|
Expense
|
|
|
Payments
|
|
|
Adjustments
|
|
|
November 30, 2020
|
|
Early retirement and severance
|
|
$
|
6,536
|
|
|
$
|
1,227
|
|
|
$
|
(5,637
|
)
|
|
$
|
(99
|
)
|
|
$
|
2,027
|
|
Facility exit and other costs
|
|
|
156
|
|
|
|
1,145
|
|
|
|
(1,222
|
)
|
|
|
74
|
|
|
|
153
|
|
|
|
$
|
6,692
|
|
|
$
|
2,372
|
|
|
$
|
(6,859
|
)
|
|
$
|
(25
|
)
|
|
$
|
2,180
|
|
Net loss on sale of assets
|
|
|
|
|
|
|
7,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense, net
|
|
|
|
|
|
$
|
9,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total liability associated with our restructuring activities as of November 30, 2020 is expected to be paid in the next twelve months.
NOTE G – Contingent Liabilities and Commitments
Legal Proceedings
We are defendants in certain legal actions. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, would not significantly affect our consolidated financial position or future results of operations. We also believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.
Voluntary Tank Replacement Program
In February 2019, our Structural Composites Industries, LLC subsidiary (“SCI”) agreed to participate in a tank replacement program for specific design sizes of its composite hydrogen fuel tanks, which are integrated into a customer’s hydrogen fuel cells used to fuel material handling equipment, primarily rider pallet jacks in warehouses. As of November 30, 2020, the Company has a reserve of $4,948,000 related to this matter, which is our best estimate of the remaining direct costs related to the replacement program, which are expected to be paid in the next six months. The actual cost incurred by the Company related to this matter may vary from the initial estimate.
NOTE H – Guarantees
We do not have guarantees that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had in place $15,050,000 of outstanding stand-by letters of credit issued to third-party service providers at November 30, 2020. No amounts were drawn against them at November 30, 2020.
10
NOTE I – Debt
We maintain a $500,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders which matures in February 2023. Borrowings under the Credit Facility have maturities of up to one year. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime Rate or Overnight Bank Funding Rate. The applicable margin is determined by our credit rating. There were no borrowings or letters of credit outstanding under the Credit Facility at November 30, 2020.
NOTE J – Other Comprehensive Income
The following table summarizes the tax effects on each component of OCI for the periods presented:
|
Three months ended November 30,
|
|
|
2020
|
|
|
2019
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(1,027
|
)
|
|
|
(24
|
)
|
|
$
|
(1,051
|
)
|
|
$
|
6,662
|
|
|
$
|
-
|
|
|
$
|
6,662
|
|
Pension liability adjustment
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
117
|
|
|
|
(22
|
)
|
|
|
95
|
|
Cash flow hedges
|
|
19,540
|
|
|
|
(4,322
|
)
|
|
|
15,218
|
|
|
|
4,016
|
|
|
|
(803
|
)
|
|
|
3,213
|
|
Other comprehensive income
|
$
|
18,509
|
|
|
$
|
(4,346
|
)
|
|
$
|
14,163
|
|
|
$
|
10,795
|
|
|
$
|
(825
|
)
|
|
$
|
9,970
|
|
|
Six months ended November 30,
|
|
|
2020
|
|
|
2019
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
|
Tax
|
|
|
Net-of-Tax
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
6,581
|
|
|
|
676
|
|
|
$
|
7,257
|
|
|
$
|
11,444
|
|
|
$
|
-
|
|
|
$
|
11,444
|
|
Pension liability adjustment
|
|
484
|
|
|
|
(116
|
)
|
|
|
368
|
|
|
|
1,421
|
|
|
|
(313
|
)
|
|
|
1,108
|
|
Cash flow hedges
|
|
22,793
|
|
|
|
(5,012
|
)
|
|
|
17,781
|
|
|
|
691
|
|
|
|
(117
|
)
|
|
|
574
|
|
Other comprehensive income
|
$
|
29,858
|
|
|
$
|
(4,452
|
)
|
|
$
|
25,406
|
|
|
$
|
13,556
|
|
|
$
|
(430
|
)
|
|
$
|
13,126
|
|
11
NOTE K – Changes in Equity
The following tables summarize the changes in equity by component and in total for the periods presented:
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Loss,
|
|
|
Retained
|
|
|
|
|
|
|
controlling
|
|
|
|
|
|
(in thousands)
|
|
Capital
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Total
|
|
|
Interests
|
|
|
Total
|
|
Balance at May 31, 2020
|
|
$
|
283,776
|
|
|
$
|
(35,217
|
)
|
|
$
|
572,262
|
|
|
$
|
820,821
|
|
|
$
|
145,612
|
|
|
$
|
966,433
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
616,675
|
|
|
|
616,675
|
|
|
|
2,063
|
|
|
|
618,738
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
11,242
|
|
|
|
-
|
|
|
|
11,242
|
|
|
|
-
|
|
|
|
11,242
|
|
Common shares issued, net of withholding tax
|
|
|
(1,150
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,150
|
)
|
|
|
-
|
|
|
|
(1,150
|
)
|
Common shares in NQ plans
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
-
|
|
|
|
90
|
|
Stock-based compensation
|
|
|
3,022
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,022
|
|
|
|
-
|
|
|
|
3,022
|
|
Purchases and retirement of common shares
|
|
|
(7,536
|
)
|
|
|
-
|
|
|
|
(46,784
|
)
|
|
|
(54,320
|
)
|
|
|
-
|
|
|
|
(54,320
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,595
|
)
|
|
|
(13,595
|
)
|
|
|
-
|
|
|
|
(13,595
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(560
|
)
|
|
|
(560
|
)
|
Balance at August 31, 2020
|
|
$
|
278,202
|
|
|
$
|
(23,975
|
)
|
|
$
|
1,128,558
|
|
|
$
|
1,382,785
|
|
|
$
|
147,115
|
|
|
$
|
1,529,900
|
|
Net earnings (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,044
|
)
|
|
|
(74,044
|
)
|
|
|
5,532
|
|
|
|
(68,512
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
14,163
|
|
|
|
-
|
|
|
|
14,163
|
|
|
|
-
|
|
|
|
14,163
|
|
Common shares issued, net of withholding tax
|
|
|
2,294
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,294
|
|
|
|
-
|
|
|
|
2,294
|
|
Common shares in NQ plans
|
|
|
292
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292
|
|
|
|
-
|
|
|
|
292
|
|
Stock-based compensation
|
|
|
3,499
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,499
|
|
|
|
-
|
|
|
|
3,499
|
|
Purchases and retirement of common shares
|
|
|
(4,486
|
)
|
|
|
-
|
|
|
|
(34,077
|
)
|
|
|
(38,563
|
)
|
|
|
-
|
|
|
|
(38,563
|
)
|
Contribution to Samuel joint venture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
925
|
|
|
|
925
|
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,527
|
)
|
|
|
(13,527
|
)
|
|
|
-
|
|
|
|
(13,527
|
)
|
Balance at November 30, 2020
|
|
$
|
279,801
|
|
|
$
|
(9,812
|
)
|
|
$
|
1,006,910
|
|
|
$
|
1,276,899
|
|
|
$
|
153,572
|
|
|
$
|
1,430,471
|
|
|
|
Controlling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Loss,
|
|
|
Retained
|
|
|
|
|
|
|
controlling
|
|
|
|
|
|
(in thousands)
|
|
Capital
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Total
|
|
|
Interests
|
|
|
Total
|
|
Balance at May 31, 2019
|
|
$
|
283,177
|
|
|
$
|
(43,464
|
)
|
|
$
|
591,533
|
|
|
$
|
831,246
|
|
|
$
|
117,148
|
|
|
$
|
948,394
|
|
Net earnings (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,776
|
)
|
|
|
(4,776
|
)
|
|
|
2,321
|
|
|
|
(2,455
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
3,156
|
|
|
|
-
|
|
|
|
3,156
|
|
|
|
-
|
|
|
|
3,156
|
|
Common shares issued, net of withholding tax
|
|
|
(3,213
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,213
|
)
|
|
|
-
|
|
|
|
(3,213
|
)
|
Common shares in NQ plans
|
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
|
|
74
|
|
Stock-based compensation
|
|
|
4,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,545
|
|
|
|
-
|
|
|
|
4,545
|
|
Purchases and retirement of common shares
|
|
|
(3,814
|
)
|
|
|
-
|
|
|
|
(25,785
|
)
|
|
|
(29,599
|
)
|
|
|
-
|
|
|
|
(29,599
|
)
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,460
|
)
|
|
|
(13,460
|
)
|
|
|
-
|
|
|
|
(13,460
|
)
|
Balance at August 31, 2019
|
|
$
|
280,769
|
|
|
$
|
(40,308
|
)
|
|
$
|
547,512
|
|
|
$
|
787,973
|
|
|
$
|
119,469
|
|
|
$
|
907,442
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
52,086
|
|
|
|
52,086
|
|
|
|
4,836
|
|
|
|
56,922
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
9,970
|
|
|
|
-
|
|
|
|
9,970
|
|
|
|
-
|
|
|
|
9,970
|
|
Common shares issued, net of withholding tax
|
|
|
(3,811
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,811
|
)
|
|
|
-
|
|
|
|
(3,811
|
)
|
Common shares in NQ plans
|
|
|
239
|
|
|
|
-
|
|
|
|
-
|
|
|
|
239
|
|
|
|
-
|
|
|
|
239
|
|
Stock-based compensation
|
|
|
2,880
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,880
|
|
|
|
-
|
|
|
|
2,880
|
|
Purchases and retirement of common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,446
|
)
|
|
|
(13,446
|
)
|
|
|
-
|
|
|
|
(13,446
|
)
|
Dividends to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,453
|
)
|
|
|
(1,453
|
)
|
Balance at November 30, 2019
|
|
$
|
280,077
|
|
|
$
|
(30,338
|
)
|
|
$
|
586,152
|
|
|
$
|
835,891
|
|
|
$
|
122,852
|
|
|
$
|
958,743
|
|
12
The following tables summarize the changes in accumulated other comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Pension
|
|
|
|
|
|
|
Other
|
|
|
|
Currency
|
|
|
Liability
|
|
|
Cash Flow
|
|
|
Comprehensive
|
|
(in thousands)
|
|
Translation
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Loss
|
|
Balance as of May 31, 2020
|
|
$
|
(9,142
|
)
|
|
$
|
(21,886
|
)
|
|
$
|
(4,189
|
)
|
|
$
|
(35,217
|
)
|
Other comprehensive income before reclassifications
|
|
|
6,581
|
|
|
|
484
|
|
|
|
16,765
|
|
|
|
23,830
|
|
Reclassification adjustments to income (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
6,028
|
|
|
|
6,028
|
|
Income tax effect
|
|
|
676
|
|
|
|
(116
|
)
|
|
|
(5,013
|
)
|
|
|
(4,453
|
)
|
Balance as of November 30, 2020
|
|
$
|
(1,885
|
)
|
|
$
|
(21,518
|
)
|
|
$
|
13,591
|
|
|
$
|
(9,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Pension
|
|
|
|
|
|
|
Other
|
|
|
|
Currency
|
|
|
Liability
|
|
|
Cash Flow
|
|
|
Comprehensive
|
|
(in thousands)
|
|
Translation
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Loss
|
|
Balance as of May 31, 2019
|
|
$
|
(19,639
|
)
|
|
$
|
(17,856
|
)
|
|
$
|
(5,969
|
)
|
|
$
|
(43,464
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
2,948
|
|
|
|
79
|
|
|
|
(5,975
|
)
|
|
|
(2,948
|
)
|
Reclassification adjustments to income (a)
|
|
|
8,496
|
|
|
|
1,342
|
|
|
|
6,666
|
|
|
|
16,504
|
|
Income tax effect
|
|
|
-
|
|
|
|
(313
|
)
|
|
|
(117
|
)
|
|
|
(430
|
)
|
Balance as of November 30, 2019
|
|
$
|
(8,195
|
)
|
|
$
|
(16,748
|
)
|
|
$
|
(5,395
|
)
|
|
$
|
(30,338
|
)
|
(a) The statement of earnings (loss) classification of amounts reclassified to income include:
(1) Foreign currency translation – result of $7,454,000 related to the sale of the cryogenics business in Turkey; and $1,042,000 related to the impairment of Nisshin, the Company’s former joint venture in China.
(2) Pension liability adjustment – result of the settlement of certain participant balances within the pension plan maintained by WAVE.
(3) Cash flow hedges – disclosed in “NOTE P – Derivative Instruments and Hedging Activities”.
NOTE L – Stock-Based Compensation
Non-Qualified Stock Options
During the six months ended November 30, 2020, we granted non-qualified stock options covering a total of 116,300 common shares under our stock-based compensation plans. The weighted average exercise price of $36.93 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $10.43 per share. The calculated pre-tax stock-based compensation expense for these stock options is $1,213,000 and will be recognized on a straight-line basis over the three-year vesting period, net of any forfeitures. The following assumptions were used to value these stock options:
Dividend yield
|
|
|
2.94
|
%
|
Expected volatility
|
|
|
40.82
|
%
|
Risk-free interest rate
|
|
|
0.42
|
%
|
Expected term (years)
|
|
|
6.0
|
|
Expected volatility is based on the historical volatility of Worthington Industries, Inc.’s common shares and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.
Service-Based Restricted Common Shares
During the six months ended November 30, 2020, we granted an aggregate of 341,650 service-based restricted common shares under our stock-based compensation plans, which generally vest three years after their grant date. The fair value of these restricted common shares was equal to the closing market price of the underlying common shares on the date of grant, or $37.89 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares is $12,946,000 and will be recognized on a straight-line basis over the three-year service-based vesting period.
13
Market-Based Restricted Common Shares
On June 25, 2020, we granted an aggregate of 45,000 restricted common shares to three key employees under one of our stock-based compensation plans. Vesting of these restricted common share awards is contingent upon the price of Worthington Industries, Inc.’s common shares reaching $65.00 per share and remaining at or above that price for 90 consecutive days during the five-year period following the date of grant and the completion of a three-year service vesting period. The grant-date fair value of these restricted common shares, as determined by a Monte Carlo simulation model, was $20.87 per share. The following assumptions were used to determine the grant-date fair value and the derived service period for these restricted common shares:
Dividend yield
|
|
|
2.71
|
%
|
Expected volatility
|
|
|
41.50
|
%
|
Risk-free interest rate
|
|
|
0.32
|
%
|
The calculated pre-tax stock-based compensation expense for these restricted common shares is $939,000 and will be recognized on a straight-line basis over the three-year service vesting period.
Performance Share Awards
We have awarded performance shares to certain key employees under our stock-based compensation plans. These performance shares are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income target, in each case for the three-year periods ending May 31, 2021, 2022 and 2023. These performance share awards will be paid, to the extent earned, in common shares of Worthington Industries, Inc. in the fiscal quarter following the end of the applicable three-year performance period. The fair values of our performance shares are determined by the closing market prices of the underlying common shares at the respective grant dates of the performance shares and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the six months ended November 30, 2020, we granted performance share awards covering an aggregate of 65,400 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $2,415,000. The ultimate pre-tax stock-based compensation expense to be recognized over the three-year performance period on all tranches will vary based on our periodic assessment of the probability of the targets being achieved.
NOTE M – Income Taxes
Income tax expense for the six months ended November 30, 2020 and 2019 reflected estimated annual effective income tax rates of 21.5% and 24.8%, respectively. The annual effective income tax rates exclude any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings (loss). Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, Samuel and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan, Samuel and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan, Samuel and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of TWB’s wholly-owned foreign corporations is reported in our consolidated income tax expense (benefit). Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2021 could be materially different from the forecasted rate as of November 30, 2020.
14
NOTE N – Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share attributable to controlling interest for the periods presented:
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
(in thousands, except per share amounts)
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator (basic & diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to controlling interest -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss) available to common shareholders
|
$
|
(74,044
|
)
|
|
$
|
52,086
|
|
|
$
|
542,631
|
|
|
$
|
47,310
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - weighted average common shares
|
|
52,988
|
|
|
|
55,059
|
|
|
|
53,532
|
|
|
|
55,150
|
|
Effect of dilutive securities
|
|
-
|
|
|
|
1,013
|
|
|
|
907
|
|
|
|
1,055
|
|
Denominator for diluted earnings (loss) per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
controlling interest - adjusted weighted average common shares
|
$
|
52,988
|
|
|
$
|
56,072
|
|
|
|
54,439
|
|
|
|
56,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to controlling interest
|
$
|
(1.40
|
)
|
|
$
|
0.95
|
|
|
$
|
10.14
|
|
|
$
|
0.86
|
|
Diluted earnings (loss) per share attributable to controlling interest
|
$
|
(1.40
|
)
|
|
$
|
0.93
|
|
|
$
|
9.97
|
|
|
$
|
0.84
|
|
Stock options covering an aggregate of 405,433 common shares for the three months ended November 30, 2019, and 492,011 and 391,563 common shares for the six months ended November 30, 2020 and 2019, respectively, have been excluded from the computation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive for those periods. All potentially dilutive shares (stock options and restricted common shares covering an aggregate of 1,030,835 common shares) have been excluded from the computation of diluted loss per share for the three months ended November 30, 2020, because the effect would have been anti-dilutive due to the overall net loss for the period.
15
NOTE O – Segment Operations
The following table presents summarized financial information for our reportable segments as of the dates, and for the periods presented:
|
Three Months Ended November 30,
|
|
|
Six Months Ended November 30,
|
|
(in thousands)
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
468,723
|
|
|
$
|
516,937
|
|
|
$
|
899,743
|
|
|
$
|
1,040,312
|
|
Pressure Cylinders
|
|
262,284
|
|
|
|
290,136
|
|
|
|
533,188
|
|
|
|
594,532
|
|
Other
|
|
85
|
|
|
|
20,564
|
|
|
|
1,070
|
|
|
|
48,652
|
|
Total net sales
|
$
|
731,092
|
|
|
$
|
827,637
|
|
|
$
|
1,434,001
|
|
|
$
|
1,683,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
37,824
|
|
|
$
|
17,172
|
|
|
$
|
51,441
|
|
|
$
|
23,340
|
|
Pressure Cylinders
|
|
3,305
|
|
|
|
15,647
|
|
|
|
11,947
|
|
|
|
45,270
|
|
Other
|
|
(322
|
)
|
|
|
(1,919
|
)
|
|
|
(1,081
|
)
|
|
|
(47,051
|
)
|
Segment operating income
|
|
40,807
|
|
|
|
30,900
|
|
|
|
62,307
|
|
|
|
21,559
|
|
Unallocated corporate and other
|
|
1,127
|
|
|
|
1,218
|
|
|
|
(983
|
)
|
|
|
(4,029
|
)
|
Incremental expenses related to Nikola gains
|
|
(4,570
|
)
|
|
|
-
|
|
|
|
(54,081
|
)
|
|
|
-
|
|
Total operating income
|
$
|
37,364
|
|
|
$
|
32,118
|
|
|
$
|
7,243
|
|
|
$
|
17,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure Cylinders
|
$
|
3,815
|
|
|
$
|
-
|
|
|
|
13,739
|
|
|
|
-
|
|
Other
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,601
|
|
Total impairment of long-lived assets
|
$
|
3,815
|
|
|
$
|
-
|
|
|
$
|
13,739
|
|
|
$
|
40,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
375
|
|
|
$
|
-
|
|
|
$
|
1,846
|
|
|
$
|
(26
|
)
|
Pressure Cylinders
|
|
7,257
|
|
|
|
-
|
|
|
|
7,571
|
|
|
|
-
|
|
Other
|
|
(36
|
)
|
|
|
(50
|
)
|
|
|
27
|
|
|
|
431
|
|
Total restructuring and other expense (income), net
|
$
|
7,596
|
|
|
$
|
(50
|
)
|
|
$
|
9,444
|
|
|
$
|
405
|
|
|
November 30,
|
|
|
May 31,
|
|
(in thousands)
|
2020
|
|
|
2020
|
|
Total assets
|
|
|
|
|
|
|
|
Steel Processing
|
$
|
886,578
|
|
|
$
|
821,657
|
|
Pressure Cylinders
|
|
1,016,404
|
|
|
|
1,104,603
|
|
Other (1)
|
|
1,124,403
|
|
|
|
405,255
|
|
Total assets
|
$
|
3,027,385
|
|
|
$
|
2,331,515
|
|
|
(1)
|
The material changes in total assets primarily relate to the Company’s investment in Nikola. For additional information, refer to “NOTE C – Investment in Nikola”.
|
For purposes of measuring segment operating income (loss), certain income and expense items, including product liability and healthcare reserves recorded by our corporate office and the incremental expenses related to Nikola gains are not allocated to operating segments, but are shown as reconciling items to the total operating income. See “NOTE C – Investment in Nikola” for additional information on the incremental expenses related to Nikola gains.
NOTE P – Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and, therefore, do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings (loss) at the end of each period.
16
Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
Foreign Currency Exchange Rate Risk Management – We conduct business in several major international currencies and are, therefore, subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency exchange rate fluctuations. The translation of foreign currencies into U.S. dollars also subjects us to exposure related to fluctuating currency exchange rates; however, derivative instruments are not used to manage this risk.
Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative contracts to manage the associated price risk.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty, and management believes the risk of loss is remote and, in any event, would not be material.
Refer to "NOTE Q – Fair Value" for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.
The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at November 30, 2020:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
13,991
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
|
Other assets
|
|
|
156
|
|
|
Other liabilities
|
|
|
-
|
|
Totals
|
|
|
|
$
|
14,147
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
9,708
|
|
|
Accounts payable
|
|
$
|
1,803
|
|
|
|
Other assets
|
|
|
201
|
|
|
Other liabilities
|
|
|
86
|
|
|
|
|
|
|
9,909
|
|
|
|
|
|
1,889
|
|
Foreign currency exchange contracts
|
|
Receivables
|
|
|
-
|
|
|
Accounts payable
|
|
|
13
|
|
Long term foreign currency exchange contracts
|
|
Other assets
|
|
|
-
|
|
|
Other liabilities
|
|
|
49
|
|
Totals
|
|
|
|
|
-
|
|
|
|
|
|
62
|
|
Total derivative instruments
|
|
|
|
$
|
24,056
|
|
|
|
|
$
|
1,951
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $2,427,000 increase in receivables with a corresponding increase in accounts payable.
17
The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at May 31, 2020:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
(in thousands)
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
-
|
|
|
Accounts payable
|
|
$
|
4,294
|
|
|
|
Other assets
|
|
|
79
|
|
|
Other liabilities
|
|
|
479
|
|
Totals
|
|
|
|
$
|
79
|
|
|
|
|
$
|
4,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Receivables
|
|
$
|
-
|
|
|
Accounts payable
|
|
$
|
3,826
|
|
|
|
Other assets
|
|
|
96
|
|
|
Other liabilities
|
|
|
178
|
|
|
|
|
|
|
96
|
|
|
|
|
|
4,004
|
|
Foreign currency exchange contracts
|
|
Receivables
|
|
|
6
|
|
|
Accounts payable
|
|
|
-
|
|
Totals
|
|
|
|
$
|
102
|
|
|
|
|
$
|
4,004
|
|
Total derivative instruments
|
|
|
|
$
|
181
|
|
|
|
|
$
|
8,777
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $1,780,000 increase in receivables with a corresponding increase in accounts payable.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. The earnings effects of these derivative instruments are presented in the same statement of earnings (loss) line items as the earnings effects of the hedged items. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative instrument.
The following table summarizes our cash flow hedges outstanding at November 30, 2020:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date
|
Commodity contracts
|
|
$
|
73,689
|
|
|
December 2020 - March 2022
|
18
The following table summarizes the gain (loss) recognized in OCI and the loss reclassified from AOCI into net earnings (loss) for derivative instruments designated as cash flow hedges for the periods presented:
|
|
Gain (Loss)
|
|
|
Location of Loss
|
|
Loss Reclassified
|
|
(in thousands)
|
|
Recognized in OCI
|
|
|
Reclassified from AOCI into net Earnings
|
|
from AOCI into net Earnings
|
|
For the three months ended November 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
16,381
|
|
|
Cost of goods sold
|
|
$
|
(2,690
|
)
|
Interest rate contracts
|
|
|
-
|
|
|
Interest expense
|
|
|
(470
|
)
|
Totals
|
|
$
|
16,381
|
|
|
|
|
$
|
(3,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended November 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
10
|
|
|
Cost of goods sold
|
|
$
|
(4,228
|
)
|
Interest rate contracts
|
|
|
(326
|
)
|
|
Interest expense
|
|
|
(7
|
)
|
Foreign currency contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
(97
|
)
|
Totals
|
|
$
|
(316
|
)
|
|
|
|
$
|
(4,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the six months
|
|
|
|
|
|
|
|
|
|
|
ended November 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
16,765
|
|
|
Cost of goods sold
|
|
$
|
(5,331
|
)
|
Interest rate contracts
|
|
|
-
|
|
|
Interest expense
|
|
|
(697
|
)
|
Totals
|
|
$
|
16,765
|
|
|
|
|
$
|
(6,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the six months
|
|
|
|
|
|
|
|
|
|
|
ended November 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
(5,649
|
)
|
|
Cost of goods sold
|
|
$
|
(6,520
|
)
|
Interest rate contracts
|
|
|
(326
|
)
|
|
Interest expense
|
|
|
(127
|
)
|
Foreign currency contracts
|
|
|
-
|
|
|
Miscellaneous income, net
|
|
|
(19
|
)
|
Totals
|
|
$
|
(5,975
|
)
|
|
|
|
$
|
(6,666
|
)
|
The estimated net amount of the losses recognized in AOCI at November 30, 2020 expected to be reclassified into net earnings (loss) within the succeeding twelve months is $12,557,000 (net of tax of $3,470,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2020, and will change before actual reclassification from OCI to net earnings (loss) during the fiscal years ending May 31, 2021 and May 31, 2022.
Economic (Non-designated) Hedges
We enter into foreign currency exchange contracts to manage our foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings (loss).
The following table summarizes our economic (non-designated) derivative instruments outstanding at November 30, 2020:
|
|
Notional
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
Maturity Date(s)
|
Commodity contracts
|
|
$
|
51,909
|
|
|
December 2020 - April 2022
|
Foreign currency exchange contracts
|
|
|
9,068
|
|
|
December 2020 - July 2021
|
The following table summarizes the loss recognized in earnings (loss) for economic (non-designated) derivative financial instruments for the periods presented:
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
In Earnings (Loss) for the
|
|
|
|
Location of Gain (Loss)
|
|
Three Months Ended November 30,
|
|
(in thousands)
|
|
Recognized in Earnings (Loss)
|
|
2020
|
|
|
2019
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
8,905
|
|
|
$
|
(1,673
|
)
|
Foreign currency exchange contracts
|
|
Miscellaneous income, net
|
|
|
1
|
|
|
|
15
|
|
Total
|
|
|
|
$
|
8,906
|
|
|
$
|
(1,658
|
)
|
19
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
in Earnings for the
|
|
|
|
Location of Gain (Loss)
|
|
Six Months Ended November 30,
|
|
(in thousands)
|
|
Recognized in Earnings
|
|
2020
|
|
|
2019
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
12,198
|
|
|
$
|
(3,916
|
)
|
Foreign currency exchange contracts
|
|
Miscellaneous income, net
|
|
|
(73
|
)
|
|
|
(89
|
)
|
Total
|
|
|
|
$
|
12,125
|
|
|
$
|
(4,005
|
)
|
NOTE Q – Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1 – Observable prices in active markets for identical assets and liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Recurring Fair Value Measurements
At November 30, 2020, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
24,056
|
|
|
$
|
-
|
|
|
$
|
24,056
|
|
Investment in Nikola (2)
|
|
|
143,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,850
|
|
Total assets
|
|
$
|
143,850
|
|
|
$
|
24,056
|
|
|
$
|
-
|
|
|
$
|
167,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
1,951
|
|
|
$
|
-
|
|
|
$
|
1,951
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,951
|
|
|
$
|
-
|
|
|
$
|
1,951
|
|
At May 31, 2020, our assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
181
|
|
|
$
|
-
|
|
|
$
|
181
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
181
|
|
|
$
|
-
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (1)
|
|
$
|
-
|
|
|
$
|
8,777
|
|
|
$
|
-
|
|
|
$
|
8,777
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
8,777
|
|
|
$
|
-
|
|
|
$
|
8,777
|
|
20
|
(1)
|
The fair value of our derivative instruments is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “NOTE P – Derivative Instruments and Hedging Activities” for additional information regarding our use of derivative instruments.
|
|
(2)
|
The fair value of the investment in Nikola is based on the share price of Nikola common stock at November 30, 2020.
|
Non-Recurring Fair Value Measurements
At November 30, 2020, our assets measured at fair value on a non-recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used (1)
|
|
$
|
-
|
|
|
$
|
6,334
|
|
|
$
|
-
|
|
|
$
|
6,334
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
6,334
|
|
|
$
|
-
|
|
|
$
|
6,334
|
|
|
(1)
|
Comprised of our oil & gas equipment assets in Tulsa, Oklahoma with an estimated fair value of $5,934,000, and our alternative fuel cylinders assets at the Jefferson, Ohio facility with an estimated fair market value of $400,000. Refer to “NOTE E – Impairment of Long-Lived Assets” for additional information.
|
At May 31, 2020, our assets measured at fair value on a non-recurring basis were as follows:
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Totals
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,623
|
|
|
$
|
13,623
|
|
Long-lived assets held for sale (2)
|
|
|
-
|
|
|
|
4,084
|
|
|
|
-
|
|
|
|
4,084
|
|
Long-lived assets held and used (3)
|
|
|
-
|
|
|
|
6,477
|
|
|
|
2,800
|
|
|
|
9,277
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
10,561
|
|
|
$
|
16,423
|
|
|
$
|
26,984
|
|
|
(1)
|
On November 1, 2019, in connection with the contribution of substantially all of the net assets of the Engineered Cabs business to the newly-formed Cabs joint venture, we obtained a 20% minority ownership interest. In accordance with the applicable accounting guidance, our minority ownership interest in the Cabs joint venture was recorded at its acquisition date fair value of $13,623,000.
|
|
(2)
|
During the third quarter of fiscal 2020, we committed to a plan to sell the Canton, Michigan facility of our consolidated WSP joint venture and some of the production equipment at that facility. In accordance with the applicable accounting guidance this production equipment was written down to its estimated fair value of $700,000.
|
During the third quarter of fiscal 2020, in connection with the closure of the oil & gas equipment manufacturing operations in Wooster, Ohio, fixed assets consisting of land and a building were written down to their estimated fair market value of $3,384,000.
|
(3)
|
During the fourth quarter of 2020, in connection with the annual indefinite lived assets impairment test, certain European tradenames were written down to their estimated fair market value of $2,800,000.
|
In May 2020, the Company committed to a plan to shut down the packaging solutions business in Greensburg, Indiana. As a result, long-lived assets were written down to their estimated fair market value of $266,000.
During the third quarter of fiscal 2020, in connection with the closure of the oil & gas equipment manufacturing operations in Wooster, Ohio, the fixed assets at Wooster, Ohio were written down to their then estimated fair market value of $6,211,000.
The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, income taxes receivable, other assets, accounts payable, accrued compensation, contributions to employee benefit plans and related taxes,
21
other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $799,064,000 and $740,678,000 at November 30, 2020 and May 31, 2020, respectively. The carrying amount of long-term debt, including current maturities, was $707,500,000 and $699,665,000 at November 30, 2020 and May 31, 2020, respectively.
22