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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended August 31, 2020

or

 

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

For the transition period from ___________ to ___________

Commission file number 001-08399

WORTHINGTON INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Ohio

 

31-1189815

(State or other jurisdiction of

incorporation or organization)

 

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

 

 

 

200 Old Wilson Bridge Road, Columbus, Ohio

 

43085

(Address of principal executive offices)

 

(Zip Code)

 

(614) 438-3210

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Shares, Without Par Value

WOR

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer 

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  On September 30, 2020, the number of Common Shares, without par value, issued and outstanding was 54,375,748.

 

 

 


TABLE OF CONTENTS

 

Safe Harbor Statement

 

ii

 

 

 

Part I.  Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets –August 31, 2020 and May 31, 2020

 

1

 

 

 

 

 

 

 

Consolidated Statements of Earnings (Loss) –Three Months Ended August 31, 2020 and 2019

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) –Three Months Ended August 31, 2020 and 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –Three Months Ended August 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

Item 2.

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

 

21

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

Part II.  Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

30

 

 

 

 

 

 

Item 1A.

Risk Factors

 

30

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities (Not applicable)

 

30

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures (Not applicable)

 

30

 

 

 

 

 

 

Item 5.

Other Information (Not applicable)

 

31

 

 

 

 

 

 

Item 6.

Exhibits

 

32

 

 

 

Signatures

 

34

 

 

 

i

 


Safe Harbor Statement

Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in “PART I – Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995 (the “Act”).  Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events.  These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases.  These forward-looking statements include, without limitation, statements relating to:

 

 

the impacts from the Novel Coronavirus (“COVID-19”) and the actions taken by governmental authorities and others related thereto, including our ability to continue operating facilities in connection therewith, to cut variable costs, or to eventually recall furloughed workers;

 

future or expected cash positions, liquidity and ability to access financial markets and capital;

 

outlook, strategy or business plans;

 

future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, margins, balance sheet strengths, debt, financial condition or other financial measures;

 

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

 

the ability to improve or maintain margins;

 

expected demand or demand trends for us or our markets;

 

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

 

expected benefits from Transformation and innovation efforts;

 

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

 

anticipated working capital needs, capital expenditures and asset sales;

 

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

 

projected profitability potential;

 

the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations;

 

projected capacity and the alignment of operations with demand;

 

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

 

the ability to capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets;

 

expectations for Company and customer inventories, jobs and orders;

 

expectations for the economy and markets or improvements therein;

 

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

 

effects of judicial rulings; and

 

other non-historical matters.

 

Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected.  Any number of factors could affect actual results, including, without limitation, those that follow:

 

 

the risks, uncertainties and impacts related to COVID-19 and other actual or potential public health emergencies and actions taken by governmental authorities or others in connection therewith, their potential impacts related to the ability and costs to continue to operate facilities and their potential to exacerbate other risks;

 

the effect of national, regional and global economic conditions generally and within major product markets, including significant economic disruptions from COVID-19 and the actions taken therewith;

 

the effect of conditions in national and worldwide financial markets and with respect to the ability of financial institutions to provide capital;

 

the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships;

 

lower oil prices as a factor in demand for products;

 

product demand and pricing;

 

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

 

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

ii

 


 

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

 

effects of facility closures and the consolidation of operations;

 

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

 

failure to maintain appropriate levels of inventories;

 

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

 

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

 

the ability to realize cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from Transformation initiatives, on a timely basis;

 

the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom;

 

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

 

the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, interruption in utility services, civil unrest, international conflicts, terrorist activities or other causes;

 

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

 

risks associated with doing business internationally, including economic, political and social instability, foreign currency exchange rate exposure and the acceptance of our products in global markets;

 

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

 

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

 

the level of imports and import prices in our markets;

 

the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States governmental agencies as contemplated by the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

 

the effect of healthcare laws in the United States and potential changes for such laws, especially in light of the COVID-19 pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results;

 

cyber security risks;

 

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

 

other risks described from time to time in the filings of Worthington Industries, Inc. with the United States Securities and Exchange Commission, including those described in “PART I – Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

We note these factors for investors as contemplated by the Act.  It is impossible to predict or identify all potential risk factors.  Consequently, you should not consider the foregoing list to be a complete set of all potential risks and uncertainties.  Any forward-looking statements in this Quarterly Report on Form 10-Q are based on current information as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.

 

 

iii

 


PART I.  FINANCIAL INFORMATION

Item 1. – Financial Statements

WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

August 31,

 

 

May 31,

 

 

2020

 

 

2020

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

650,068

 

 

$

147,198

 

Receivables, less allowances of $1,646 and $1,521 at August 31, 2020

 

 

 

 

 

 

 

and May 31, 2020, respectively

 

423,138

 

 

 

341,038

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

163,762

 

 

 

234,629

 

Work in process

 

82,154

 

 

 

76,497

 

Finished products

 

73,562

 

 

 

93,975

 

Total inventories

 

319,478

 

 

 

405,101

 

Income taxes receivable

 

2,287

 

 

 

8,376

 

Assets held for sale

 

12,857

 

 

 

12,928

 

Investment in Nikola

 

287,630

 

 

 

-

 

Prepaid expenses and other current assets

 

70,999

 

 

 

68,538

 

Total current assets

 

1,766,457

 

 

 

983,179

 

Investments in unconsolidated affiliates

 

208,395

 

 

 

203,329

 

Operating lease assets

 

29,251

 

 

 

31,557

 

Goodwill

 

326,798

 

 

 

321,434

 

Other intangible assets, net of accumulated amortization of $94,877 and

 

 

 

 

 

 

 

$92,774 at August 31, 2020 and May 31, 2020, respectively

 

179,665

 

 

 

184,416

 

Other assets

 

34,541

 

 

 

34,956

 

Property, plant and equipment:

 

 

 

 

 

 

 

Land

 

24,572

 

 

 

24,197

 

Buildings and improvements

 

300,265

 

 

 

302,796

 

Machinery and equipment

 

1,079,899

 

 

 

1,055,139

 

Construction in progress

 

54,991

 

 

 

52,231

 

Total property, plant and equipment

 

1,459,727

 

 

 

1,434,363

 

Less: accumulated depreciation

 

873,781

 

 

 

861,719

 

Total property, plant and equipment, net

 

585,946

 

 

 

572,644

 

Total assets

$

3,131,053

 

 

$

2,331,515

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

294,172

 

 

$

247,017

 

Accrued compensation, contributions to employee benefit plans and

 

 

 

 

 

 

 

related taxes

 

88,145

 

 

 

64,650

 

Dividends payable

 

14,808

 

 

 

14,648

 

Other accrued items

 

50,036

 

 

 

49,974

 

Current operating lease liabilities

 

10,251

 

 

 

10,851

 

Income taxes payable

 

84,612

 

 

 

949

 

Current maturities of long-term debt

 

160

 

 

 

149

 

Total current liabilities

 

542,184

 

 

 

388,238

 

Other liabilities

 

82,814

 

 

 

75,786

 

Distributions in excess of investment in unconsolidated affiliate

 

101,865

 

 

 

103,837

 

Long-term debt

 

707,331

 

 

 

699,516

 

Noncurrent operating lease liabilities

 

23,880

 

 

 

25,763

 

Deferred income taxes, net

 

143,079

 

 

 

71,942

 

Total liabilities

 

1,601,153

 

 

 

1,365,082

 

Shareholders' equity - controlling interest

 

1,382,785

 

 

 

820,821

 

Noncontrolling interests

 

147,115

 

 

 

145,612

 

Total equity

 

1,529,900

 

 

 

966,433

 

Total liabilities and equity

$

3,131,053

 

 

$

2,331,515

 

 

See condensed notes to consolidated financial statements.

 

 

1


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2020

 

 

2019

 

Net sales

$

702,909

 

 

$

855,859

 

Cost of goods sold

 

589,551

 

 

 

738,568

 

Gross margin

 

113,358

 

 

 

117,291

 

Selling, general and administrative expense

 

82,196

 

 

 

90,823

 

Impairment of long-lived assets

 

9,924

 

 

 

40,601

 

Restructuring and other expense, net

 

1,848

 

 

 

455

 

Incremental expenses related to Nikola gains

 

49,511

 

 

 

-

 

Operating loss

 

(30,121

)

 

 

(14,588

)

Other income (expense):

 

 

 

 

 

 

 

Miscellaneous income, net

 

452

 

 

 

695

 

Interest expense

 

(7,590

)

 

 

(9,480

)

Equity in net income of unconsolidated affiliates

 

23,634

 

 

 

24,767

 

Gains on investment in Nikola

 

796,141

 

 

 

-

 

Loss on extinguishment of debt

 

-

 

 

 

(4,034

)

Earnings (loss) before income taxes

 

782,516

 

 

 

(2,640

)

Income tax expense (benefit)

 

163,778

 

 

 

(185

)

Net earnings (loss)

 

618,738

 

 

 

(2,455

)

Net earnings attributable to noncontrolling interests

 

2,063

 

 

 

2,321

 

Net earnings (loss) attributable to controlling interest

$

616,675

 

 

$

(4,776

)

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

Average common shares outstanding

 

54,070

 

 

 

55,241

 

Earnings (loss) per share attributable to controlling interest

$

11.41

 

 

$

(0.09

)

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

Average common shares outstanding

 

54,942

 

 

 

55,241

 

Earnings (loss) per share attributable to controlling interest

$

11.22

 

 

$

(0.09

)

 

 

 

 

 

 

 

 

Common shares outstanding at end of period

 

53,362

 

 

 

54,871

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.25

 

 

$

0.24

 

 

See condensed notes to consolidated financial statements.

 

 

2


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2020

 

 

2019

 

Net earnings (loss)

$

618,738

 

 

$

(2,455

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

8,308

 

 

 

4,782

 

Pension liability adjustment, net of tax

 

372

 

 

 

1,013

 

Cash flow hedges, net of tax

 

2,562

 

 

 

(2,639

)

Other comprehensive income

 

11,242

 

 

 

3,156

 

Comprehensive income

 

629,980

 

 

 

701

 

Comprehensive income attributable to noncontrolling interests

 

2,063

 

 

 

2,321

 

Comprehensive income (loss) attributable to controlling interest

$

627,917

 

 

$

(1,620

)

 

See condensed notes to consolidated financial statements.

 

 

3


WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended August 31,

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

Net earnings (loss)

$

618,738

 

 

$

(2,455

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

22,211

 

 

 

24,177

 

Impairment of long-lived assets

 

9,924

 

 

 

40,601

 

Provision for (benefit from) deferred income taxes

 

71,031

 

 

 

(3,498

)

Bad debt expense

 

94

 

 

 

168

 

Equity in net income of unconsolidated affiliates, net of distributions

 

(6,757

)

 

 

5,082

 

Net loss on sale of assets

 

402

 

 

 

618

 

Stock-based compensation

 

4,856

 

 

 

3,995

 

Gains on investment in Nikola

 

(796,141

)

 

 

-

 

Charitable contribution of Nikola shares

 

20,653

 

 

 

-

 

Loss on extinguishment of debt

 

-

 

 

 

4,034

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

(82,194

)

 

 

14,981

 

Inventories

 

85,622

 

 

 

44,282

 

Accounts payable

 

47,154

 

 

 

(37,234

)

Accrued compensation and employee benefits

 

23,852

 

 

 

(23,215

)

Income taxes payable

 

83,664

 

 

 

10,556

 

Other operating items, net

 

14,279

 

 

 

(17,723

)

Net cash provided by operating activities

 

117,388

 

 

 

64,369

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Investment in property, plant and equipment

 

(32,871

)

 

 

(22,174

)

Proceeds from sale of Nikola shares

 

487,859

 

 

 

-

 

Proceeds from sale of assets

 

-

 

 

 

9,176

 

Net cash provided (used) by investing activities

 

454,988

 

 

 

(12,998

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt, net of issuance costs

 

-

 

 

 

101,598

 

Principal payments on long-term obligations and debt redemption costs

 

(97

)

 

 

(153,977

)

Payments for issuance of common shares, net of tax withholdings

 

(1,150

)

 

 

(3,213

)

Payments to noncontrolling interests

 

(560

)

 

 

-

 

Repurchase of common shares

 

(54,320

)

 

 

(29,599

)

Dividends paid

 

(13,379

)

 

 

(12,960

)

Net cash used by financing activities

 

(69,506

)

 

 

(98,151

)

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

502,870

 

 

 

(46,780

)

Cash and cash equivalents at beginning of period

 

147,198

 

 

 

92,363

 

Cash and cash equivalents at end of period

$

650,068

 

 

$

45,583

 

 

See condensed notes to consolidated financial statements.

 

 

4


WORTHINGTON INDUSTRIES, INC.

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”.  On December 31, 2019, we acquired an additional 31.75% interest in Samuel, increasing our ownership to a 63% controlling interest, with Samuel’s results being consolidated within the Steel Processing operating segment since the acquisition date.  

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 months ended August 31, 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”.

The Company’s contribution to the Cabs joint venture consisted of the net assets of our primary Engineered Cabs manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota.  As a result of the contribution, an impairment charge of $35,194,000 was recognized during 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.

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:

 

5


(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

 

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 changes to our significant accounting policies as disclosed in our 2020 Form 10-K as a result of the adoption of this new accounting guidance.

NOTE B – Revenue Recognition

The following tables summarize net sales by product class and by timing of revenue recognition for the periods presented:

(in thousands)

Three months ended August 31,

 

Reportable segments by product class:

2020

 

 

2019

 

Steel Processing

 

 

 

 

 

 

 

Direct

$

404,808

 

 

$

493,646

 

Toll

 

26,212

 

 

 

29,729

 

Total

 

431,020

 

 

 

523,375

 

 

 

 

 

 

 

 

 

Pressure Cylinders

 

 

 

 

 

 

 

Consumer products

 

132,782

 

 

 

119,480

 

Industrial products

 

128,225

 

 

 

152,618

 

Oil & gas equipment

 

9,897

 

 

 

32,298

 

Total

 

270,904

 

 

 

304,396

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Engineered Cabs

 

985

 

 

 

28,066

 

Other

 

-

 

 

 

22

 

Total

 

985

 

 

 

28,088

 

 

 

 

 

 

 

 

 

Total

$

702,909

 

 

$

855,859

 

 

 

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 August 31,

 

(in thousands)

2020

 

 

2019

 

Steel Processing - toll

$

26,212

 

 

$

29,729

 

Pressure Cylinders - certain oil & gas equipment contracts

 

7,699

 

 

 

30,008

 

Total over time revenue

$

33,911

 

 

$

59,737

 

 

 


6


The following table summarizes the unbilled receivables and contract assets for the periods indicated:

 

 

 

 

August 31,

 

 

May 31,

 

(in thousands)

Balance Sheet Classification

 

2020

 

 

2020

 

Unbilled receivables

Receivables

 

$

4,325

 

 

$

5,552

 

Contract assets

Prepaid and other current assets

 

$

5,114

 

 

$

4,127

 

 

The Company has 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, the Company owned 19,048,020 shares of Nikola common stock.  During the first quarter of fiscal 2021, the Company recognized a $796,141,000 pre-tax gain consisting of $508,511,000 of realized gains from the sale or contribution of 12,000,000 of its Nikola shares, and an unrealized mark-to-market gain of $287,630,000 related to the shares the Company continues to own.  The Company also recognized in operating income $49,511,000 of incremental expenses related to the Nikola gains, $28,858,000 for discretionary profit sharing and bonus expenses and $20,653,000 for the contribution of 500,000 shares of Nikola common stock to the Worthington Industries Foundation to establish a charitable endowment focused on the communities in which it operates.  The 7,048,020 shares of Nikola common stock that the Company continues to own are subject to a lock-up agreement that restricts our ability to sell, transfer or otherwise monetize these shares until early December 2020.  Going forward, the value of these shares will change according to the fluctuations in the market price of the stock and the change in fair value of this investment will be reflected in the statement of earnings as an unrealized gain or loss.  

 

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 August 31, 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. As a result, from that point on the Company has 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 substantially all of the net assets of our Engineered Cabs business to a newly-formed 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 contribution to the Cabs joint venture consisted of the net assets of our primary Engineered Cabs manufacturing facilities located in Greeneville, Tennessee and Watertown, South Dakota.  Our investment in the Cabs joint venture is accounted for under the equity method, due to lack of control.

 

We received distributions from unconsolidated affiliates totaling $16,877,000 during the three months ended August 31, 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 $101,865,000 at August 31, 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

7


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:  

 

August 31,

 

 

May 31,

 

(in thousands)

2020

 

 

2020

 

Cash

$

45,319

 

 

$

68,730

 

Other current assets

 

541,267

 

 

 

528,631

 

Noncurrent assets

 

396,757

 

 

 

399,731

 

Total assets

$

983,343

 

 

$

997,092

 

 

 

 

 

 

 

 

 

Current liabilities

$

185,271

 

 

$

174,709

 

Short-term borrowings

 

-

 

 

 

500

 

Current maturities of long-term debt

 

19,097

 

 

 

37,542

 

Long-term debt

 

327,246

 

 

 

346,690

 

Other noncurrent liabilities

 

71,333

 

 

 

73,656

 

Equity

 

380,396

 

 

 

363,995

 

Total liabilities and equity

$

983,343

 

 

$

997,092

 

 

 

Three Months Ended August 31,

 

(in thousands)

2020

 

 

2019

 

Net sales

$

405,320

 

 

$

470,205

 

Gross margin

 

93,049

 

 

 

97,536

 

Operating income

 

57,953

 

 

 

66,223

 

Depreciation and amortization

 

7,730

 

 

 

7,089

 

Interest expense

 

2,945

 

 

 

3,367

 

Income tax expense

 

1,730

 

 

 

581

 

Net earnings from continuing operations

 

56,573

 

 

 

61,141

 

Net earnings from discontinued operations

 

-

 

 

 

2,812

 

Net earnings

 

56,573

 

 

 

63,953

 

 

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.  As of August 31, 2020, WAVE has a $5,900,000 receivable from AWI ($2,950,000 of which is Worthington’s portion), related to the remaining proceeds of the sale which are subject to post-closing adjustments as provided by the purchase agreement.  In September 2020, we received a cash distribution for the full amount of the remaining proceeds of the sale.  The Company corrected certain amounts in the table above for the three months ended August 31, 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.    

NOTE E – Impairment of Long-Lived Assets

Fiscal 2021:  During the first quarter of fiscal 2021, management determined indicators of impairment were present with regard to the cryogenics business primarily operated out of Theodore, Alabama with European distribution in Austria.  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 and written off.  The fair value of the customer list intangible assets was determined using unobservable Level 3 inputs.  

8


During the first quarter of fiscal 2021, the Company decided to discontinue its 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.

During the first quarter of fiscal 2021, 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, the Company 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 three months ended August 31, 2019.  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.  The Company 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.

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 period presented:

 

 

 

Balance, as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, as of

 

(in thousands)

 

May 31, 2020

 

 

Expense

 

 

Payments

 

 

Adjustments

 

 

August 31, 2020

 

Early retirement and severance

 

$

6,536

 

 

$

1,033

 

 

$

(3,675

)

 

$

(102

)

 

$

3,792

 

Facility exit and other costs

 

 

156

 

 

 

815

 

 

 

(214

)

 

 

22

 

 

 

779

 

 

 

$

6,692

 

 

$

1,848

 

 

$

(3,889

)

 

$

(80

)

 

$

4,571

 

 

The total liability associated with our restructuring activities as of August 31, 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 August 31, 2020, the Company has a reserve of $4,950,000 related to this matter, which we believe is sufficient to absorb our remaining direct costs related to the replacement program.  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 August 31, 2020.  No amounts were drawn against them at August 31, 2020.

 

9


NOTE I – Debt

On August 23, 2019, two of our European subsidiaries issued a €36,700,000 principal amount unsecured 1.56% Series A Senior Note due August 23, 2031 (the “2031 Note”) and €55,000,000 aggregate principal amount of unsecured 1.90% Series B Senior Notes due August 23, 2034 (the “2034 Notes”), (collectively, the “Senior Notes”).  The 2031 Note is to be repaid in the principal amount of €30,000,000, together with accrued interest, on August 23, 2029, with the remaining €6,700,000 principal amount payable on August 23, 2031, together with accrued interest.  The 2034 Notes are to be repaid in the aggregate principal amount of €23,300,000, together with accrued interest, on August 23, 2031, with the remaining €31,700,000 aggregate principal amount payable on August 23, 2034, together with accrued interest.  Debt issue costs of $134,000 were incurred in connection with the issuance of the Senior Notes and have been recorded on the consolidated balance sheets within long-term debt as a contra-liability.  They will be amortized, through interest expense, in our consolidated statements of earnings (loss) over the term of the respective Senior Notes.  The unamortized portion of the debt issuance costs was $123,000 at August 31, 2020.

The Senior Notes were issued in a private placement and the proceeds thereof were used in the redemption of $150,000,000 aggregate principal amount of unsecured 6.50% senior notes that were set to mature on April 15, 2020 (the “2020 Notes”).  The 2020 Notes were redeemed in full on August 30, 2019.  In connection with the early redemption, the Company recognized a loss of $4,034,000, which has been presented separately in our consolidated statements of earnings (loss).

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 August 31, 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 August 31,

 

 

2020

 

 

2019

 

 

Before-Tax

 

 

Tax

 

 

Net-of-Tax

 

 

Before-Tax

 

 

Tax

 

 

Net-of-Tax

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

$

7,608

 

 

 

700

 

 

$

8,308

 

 

$

4,782

 

 

$

-

 

 

$

4,782

 

Pension liability adjustment

 

488

 

 

 

(116

)

 

 

372

 

 

 

1,304

 

 

 

(291

)

 

 

1,013

 

Cash flow hedges

 

3,253

 

 

 

(691

)

 

 

2,562

 

 

 

(3,325

)

 

 

686

 

 

 

(2,639

)

Other comprehensive income

$

11,349

 

 

$

(107

)

 

$

11,242

 

 

$

2,761

 

 

$

395

 

 

$

3,156

 

 

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

 

 

 

-