UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2016August 31, 2017
ORor
☐ | 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 file number001-08399
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 applicableApplicable
(Former name, former address and former fiscal year, if changed since last report)
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.
YESYes ☒ NONo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YESYes ☒ NONo ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | 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 inRule 12b-2 of the Exchange Act).
YESYes ☐ NONo ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer’sissuer’s classes of common stock, as of the latest practicable date. On December 30, 2016,September 29, 2017, the number of Common Shares, without par value, issued and outstanding was 63,673,654.62,970,687.
ii | ||||||
Item 1. | Financial Statements (Unaudited) | |||||
Consolidated Balance Sheets – | 1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 3. | Defaults Upon Senior Securities (Not applicable) | |||||
Item 4. | Mine Safety Disclosures (Not applicable) | |||||
Item 5. | Other Information (Not applicable) | |||||
Item 6. | Exhibits | |||||
i
Selected statements contained in this Quarterly Report on Form10-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:
• | outlook, strategy or business plans; |
• |
|
future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, balance sheet strengths, debt, financial condition or other financial measures; |
• | pricing trends for raw materials and finished goods and the impact of pricing changes; |
• | demand trends for us or our markets; |
• | additions to product lines and opportunities to participate in new markets; |
• | expected benefits from Transformation |
• | 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 |
• |
|
• | the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, newly-created 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 maintain margins and 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 |
• | effects of judicial rulings; and |
• | othernon-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 effect of national, regional and global economic conditions generally and within major product markets, including a recurrent slowing |
• | the effect of conditions in national and worldwide financial markets; |
• | 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; |
• | 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; |
ii
• | the ability to realize |
ii
• | 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 |
• | the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, civil unrest, international conflicts, |
• | 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 |
• | the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment; |
• | the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters; |
• | deviation of actual results from estimates and/or assumptions used by us in the application of our |
• | 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 Securities and Exchange Commission and other governmental agencies as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; |
• | the effect of |
• | cyber security risks; and |
• | other risks described from time to time in |
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 Form10-Q are based on current information as of the date of this Quarterly Report on Form10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.
iii
Item 1. – Financial Statements
(In thousands)
(Unaudited)
November 30, 2016 | May 31, 2016 | August 31, 2017 | May 31, 2017 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 175,180 | $ | 84,188 | $ | 195,855 | $ | 278,081 | ||||||||
Receivables, less allowances of $3,499 and $4,579 at November 30, 2016 and May 31, 2016, respectively | 429,011 | 439,688 | ||||||||||||||
Receivables, less allowances of $3,789 and $3,444 at August 31, 2017 and May 31, 2017, respectively | 465,113 | 486,730 | ||||||||||||||
Inventories: | ||||||||||||||||
Raw materials | 168,586 | 162,427 | 232,571 | 185,001 | ||||||||||||
Work in process | 85,933 | 86,892 | 102,875 | 95,630 | ||||||||||||
Finished products | 83,339 | 70,016 | 90,433 | 73,303 | ||||||||||||
|
|
|
| |||||||||||||
Total inventories | 337,858 | 319,335 | 425,879 | 353,934 | ||||||||||||
Income taxes receivable | 7,997 | 10,535 | 2,105 | 7,164 | ||||||||||||
Assets held for sale | 10,050 | 10,079 | 9,358 | 9,654 | ||||||||||||
Prepaid expenses and other current assets | 47,385 | 51,290 | 62,855 | 55,406 | ||||||||||||
|
|
|
| |||||||||||||
Total current assets | 1,007,481 | 915,115 | 1,161,165 | 1,190,969 | ||||||||||||
Investments in unconsolidated affiliates | 203,508 | 191,826 | 212,670 | 208,591 | ||||||||||||
Goodwill | 243,918 | 246,067 | 355,455 | 247,673 | ||||||||||||
Other intangible assets, net of accumulated amortization of $56,220 and $49,532 at November 30, 2016 and May 31, 2016, respectively | 88,588 | 96,164 | ||||||||||||||
Other intangible assets, net of accumulated amortization of $68,245 and $63,134 at August 31, 2017 and May 31, 2017, respectively | 247,757 | 82,781 | ||||||||||||||
Other assets | 27,914 | 29,254 | 27,917 | 24,841 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Land | 18,397 | 18,537 | 27,374 | 22,077 | ||||||||||||
Buildings and improvements | 257,950 | 256,973 | 304,705 | 297,951 | ||||||||||||
Machinery and equipment | 973,941 | 945,951 | 1,024,498 | 961,542 | ||||||||||||
Construction in progress | 34,732 | 48,156 | 30,174 | 27,616 | ||||||||||||
|
|
|
| |||||||||||||
Total property, plant and equipment | 1,285,020 | 1,269,617 | 1,386,751 | 1,309,186 | ||||||||||||
Less: accumulated depreciation | 713,705 | 686,779 | 761,161 | 738,697 | ||||||||||||
|
|
|
| |||||||||||||
Total property, plant and equipment, net | 571,315 | 582,838 | 625,590 | 570,489 | ||||||||||||
|
|
|
| |||||||||||||
Total assets | $ | 2,142,724 | $ | 2,061,264 | $ | 2,630,554 | $ | 2,325,344 | ||||||||
|
|
|
| |||||||||||||
Liabilities and equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 278,192 | $ | 290,432 | $ | 384,486 | $ | 368,071 | ||||||||
Short-term borrowings | 497 | 2,651 | 421 | 123 | ||||||||||||
Accrued compensation, contributions to employee benefit plans and related taxes | 65,308 | 75,105 | 73,040 | 86,201 | ||||||||||||
Dividends payable | 14,182 | 13,471 | 14,148 | 13,698 | ||||||||||||
Other accrued items | 41,815 | 45,056 | 55,332 | 41,551 | ||||||||||||
Income taxes payable | 3,364 | 2,501 | 7,485 | 4,448 | ||||||||||||
Current maturities of long-term debt | 873 | 862 | 7,072 | 6,691 | ||||||||||||
|
|
|
| |||||||||||||
Total current liabilities | 404,231 | 430,078 | 541,984 | 520,783 | ||||||||||||
Other liabilities | 63,910 | 63,487 | 66,093 | 61,498 | ||||||||||||
Distributions in excess of investment in unconsolidated affiliate | 67,516 | 52,983 | 58,371 | 63,038 | ||||||||||||
Long-term debt | 576,038 | 577,491 | 773,090 | 571,796 | ||||||||||||
Deferred income taxes, net | 20,267 | 17,379 | 108,289 | 34,300 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities | 1,131,962 | 1,141,418 | 1,547,827 | 1,251,415 | ||||||||||||
Shareholders’ equity—controlling interest | 884,940 | 793,371 | 958,174 | 951,635 | ||||||||||||
Noncontrolling interests | 125,822 | 126,475 | 124,553 | 122,294 | ||||||||||||
|
|
|
| |||||||||||||
Total equity | 1,010,762 | 919,846 | 1,082,727 | 1,073,929 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities and equity | $ | 2,142,724 | $ | 2,061,264 | $ | 2,630,554 | $ | 2,325,344 | ||||||||
|
|
|
|
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC. | ||||
CONSOLIDATED STATEMENTS OF EARNINGS | ||||
(In thousands, except per share amounts) | ||||
(Unaudited) |
Three Months Ended August 31, | ||||||||
2017 | 2016 | |||||||
Net sales | $ | 848,237 | $ | 737,549 | ||||
Cost of goods sold | 715,459 | 590,267 | ||||||
|
|
|
| |||||
Gross margin | 132,778 | 147,282 | ||||||
Selling, general and administrative expense | 88,249 | 81,056 | ||||||
Restructuring and other expense | 2,304 | 1,328 | ||||||
|
|
|
| |||||
Operating income | 42,225 | 64,898 | ||||||
Other income (expense): | ||||||||
Miscellaneous income, net | 348 | 863 | ||||||
Interest expense | (8,807 | ) | (7,870 | ) | ||||
Equity in net income of unconsolidated affiliates | 27,306 | 34,544 | ||||||
|
|
|
| |||||
Earnings before income taxes | 61,072 | 92,435 | ||||||
Income tax expense | 12,998 | 23,899 | ||||||
|
|
|
| |||||
Net earnings | 48,074 | 68,536 | ||||||
Net earnings attributable to noncontrolling interests | 2,540 | 2,969 | ||||||
|
|
|
| |||||
Net earnings attributable to controlling interest | $ | 45,534 | �� | $ | 65,567 | |||
|
|
|
| |||||
Basic | ||||||||
Average common shares outstanding | 62,444 | 61,885 | ||||||
|
|
|
| |||||
Earnings per share attributable to controlling interest | $ | 0.73 | $ | 1.06 | ||||
|
|
|
| |||||
Diluted | ||||||||
Average common shares outstanding | 64,590 | 64,337 | ||||||
|
|
|
| |||||
Earnings per share attributable to controlling interest | $ | 0.70 | $ | 1.02 | ||||
|
|
|
| |||||
Common shares outstanding at end of period | 62,144 | 62,179 | ||||||
Cash dividends declared per share | $ | 0.21 | $ | 0.20 |
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC. | ||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||
(In thousands) | ||||
(Unaudited) |
Three Months Ended August 31, | ||||||||
2017 | 2016 | |||||||
Net earnings | $ | 48,074 | $ | 68,536 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation | 15,872 | (665 | ) | |||||
Pension liability adjustment, net of tax | (6 | ) | — | |||||
Cash flow hedges, net of tax | 1,887 | 625 | ||||||
|
|
|
| |||||
Other comprehensive income (loss) | 17,753 | (40 | ) | |||||
|
|
|
| |||||
Comprehensive income | 65,827 | 68,496 | ||||||
Comprehensive income attributable to noncontrolling interests | 2,979 | 2,973 | ||||||
|
|
|
| |||||
Comprehensive income attributable to controlling interest | $ | 62,848 | $ | 65,523 | ||||
|
|
|
|
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC. | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||
(In thousands) | ||||
(Unaudited) |
Three Months Ended August 31, | ||||||||
2017 | 2016 | |||||||
Operating activities: | ||||||||
Net earnings | $ | 48,074 | $ | 68,536 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 25,365 | 21,831 | ||||||
Provision for deferred income taxes | 7,934 | 20 | ||||||
Bad debt income | (62 | ) | (81 | ) | ||||
Equity in net income of unconsolidated affiliates, net of distributions | (7,755 | ) | 3,898 | |||||
Net loss on assets | 1,425 | 4,396 | ||||||
Stock-based compensation | 3,407 | 3,136 | ||||||
Changes in assets and liabilities, net of impact of acquisitions: | ||||||||
Receivables | 62,678 | 16,954 | ||||||
Inventories | (34,696 | ) | (50,398 | ) | ||||
Prepaid expenses and other current assets | 1,143 | 7,162 | ||||||
Other assets | (350 | ) | 1,246 | |||||
Accounts payable and accrued expenses | (26,791 | ) | 43,061 | |||||
Other liabilities | 2,983 | 1,144 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 83,355 | 120,905 | ||||||
|
|
|
| |||||
Investing activities: | ||||||||
Investment in property, plant and equipment | (18,013 | ) | (16,316 | ) | ||||
Acquisitions, net of cash acquired | (284,505 | ) | — | |||||
Proceeds from sale of assets | 427 | 157 | ||||||
|
|
|
| |||||
Net cash used by investing activities | (302,091 | ) | (16,159 | ) | ||||
|
|
|
| |||||
Financing activities: | ||||||||
Net proceeds from (repayments of) short-term borrowings | 298 | (1,117 | ) | |||||
Proceeds from long-term debt, net of issuance costs | 198,279 | — | ||||||
Principal payments on long-term debt | (219 | ) | (219 | ) | ||||
Proceeds from issuance of common shares, net of tax withholdings | (3,274 | ) | 5,821 | |||||
Payments to noncontrolling interests | (720 | ) | — | |||||
Repurchase of common shares | (45,076 | ) | — | |||||
Dividends paid | (12,778 | ) | (11,894 | ) | ||||
|
|
|
| |||||
Net cash provided (used) by financing activities | 136,510 | (7,409 | ) | |||||
|
|
|
| |||||
Increase (decrease) in cash and cash equivalents | (82,226 | ) | 97,337 | |||||
Cash and cash equivalents at beginning of period | 278,081 | 84,188 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 195,855 | $ | 181,525 | ||||
|
|
|
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net sales | $ | 727,780 | $ | 699,816 | $ | 1,465,329 | $ | 1,457,963 | ||||||||
Cost of goods sold | 604,977 | 590,637 | 1,195,244 | 1,235,768 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross margin | 122,803 | 109,179 | 270,085 | 222,195 | ||||||||||||
Selling, general and administrative expense | 76,487 | 72,722 | 157,543 | 148,673 | ||||||||||||
Impairment of long-lived assets | — | 22,962 | — | 25,962 | ||||||||||||
Restructuring and other expense | 3,272 | 1,523 | 4,600 | 4,592 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 43,044 | 11,972 | 107,942 | 42,968 | ||||||||||||
Other income (expense): | ||||||||||||||||
Miscellaneous income, net | 872 | 996 | 1,735 | 418 | ||||||||||||
Interest expense | (7,658 | ) | (7,799 | ) | (15,528 | ) | (15,653 | ) | ||||||||
Equity in net income of unconsolidated affiliates | 27,124 | 29,247 | 61,668 | 55,828 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings before income taxes | 63,382 | 34,416 | 155,817 | 83,561 | ||||||||||||
Income tax expense | 13,515 | 8,665 | 37,414 | 22,815 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net earnings | 49,867 | 25,751 | 118,403 | 60,746 | ||||||||||||
Net earnings attributable to noncontrolling interests | 3,302 | 2,375 | 6,271 | 5,402 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net earnings attributable to controlling interest | $ | 46,565 | $ | 23,376 | $ | 112,132 | $ | 55,344 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic | ||||||||||||||||
Average common shares outstanding | 62,348 | 62,676 | 62,115 | 63,338 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per share attributable to controlling interest | $ | 0.75 | $ | 0.37 | $ | 1.81 | $ | 0.87 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | ||||||||||||||||
Average common shares outstanding | 64,725 | 64,663 | 64,599 | 65,350 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per share attributable to controlling interest | $ | 0.72 | $ | 0.36 | $ | 1.74 | $ | 0.85 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Common shares outstanding at end of period | 62,562 | 62,101 | 62,562 | 62,101 | ||||||||||||
Cash dividends declared per share | $ | 0.20 | $ | 0.19 | $ | 0.40 | $ | 0.38 |
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net earnings | $ | 49,867 | $ | 25,751 | $ | 118,403 | $ | 60,746 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation | (7,517 | ) | (9,214 | ) | (8,182 | ) | (7,391 | ) | ||||||||
Pension liability adjustment, net of tax | — | — | — | (8 | ) | |||||||||||
Cash flow hedges, net of tax | 1,652 | (2,523 | ) | 2,277 | (1,893 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive loss | (5,865 | ) | (11,737 | ) | (5,905 | ) | (9,292 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income | 44,002 | 14,014 | 112,498 | 51,454 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | 3,155 | 1,760 | 6,128 | 4,731 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income attributable to controlling interest | $ | 40,847 | $ | 12,254 | $ | 106,370 | $ | 46,723 | ||||||||
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Operating activities: | ||||||||||||||||
Net earnings | $ | 49,867 | $ | 25,751 | $ | 118,403 | $ | 60,746 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 21,645 | 20,547 | 43,476 | 41,987 | ||||||||||||
Impairment of long-lived assets | — | 22,962 | — | 25,962 | ||||||||||||
Provision for (benefit from) deferred income taxes | 2,316 | (9,851 | ) | 2,336 | (15,391 | ) | ||||||||||
Bad debt (income) expense | 232 | (2 | ) | 151 | 8 | |||||||||||
Equity in net income of unconsolidated affiliates, net of distributions | (2,824 | ) | (10,389 | ) | 1,074 | (15,902 | ) | |||||||||
Net (gain) loss on sale of assets | (2,912 | ) | (5,854 | ) | 1,484 | (4,248 | ) | |||||||||
Stock-based compensation | 3,824 | 3,880 | 6,960 | 7,657 | ||||||||||||
Changes in assets and liabilities, net of impact of acquisitions: | ||||||||||||||||
Receivables | (7,156 | ) | 23,474 | 9,798 | 66,103 | |||||||||||
Inventories | 31,875 | 31,645 | (18,523 | ) | 23,821 | |||||||||||
Prepaid expenses and other current assets | (1,737 | ) | 17,467 | 5,425 | 28,633 | |||||||||||
Other assets | 1,165 | (3,245 | ) | 2,411 | (2,803 | ) | ||||||||||
Accounts payable and accrued expenses | (65,946 | ) | (72,846 | ) | (22,885 | ) | (31,220 | ) | ||||||||
Other liabilities | 950 | 7,487 | 2,094 | 4,300 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash provided by operating activities | 31,299 | 51,026 | 152,204 | 189,653 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Investing activities: | ||||||||||||||||
Investment in property, plant and equipment | (14,730 | ) | (21,995 | ) | (31,046 | ) | (60,492 | ) | ||||||||
Acquisitions, net of cash acquired | — | (2,950 | ) | — | (2,950 | ) | ||||||||||
Investments in unconsolidated affiliates | — | (226 | ) | — | (1,913 | ) | ||||||||||
Proceeds from sale of assets | 799 | 9,325 | 956 | 9,456 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash used by investing activities | (13,931 | ) | (15,846 | ) | (30,090 | ) | (55,899 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Financing activities: | ||||||||||||||||
Net proceeds from (repayments of) short-term borrowings | (1,037 | ) | 27,499 | (2,154 | ) | (41,012 | ) | |||||||||
Proceeds from long-term debt | — | — | — | 921 | ||||||||||||
Principal payments on long-term debt | (218 | ) | (220 | ) | (437 | ) | (428 | ) | ||||||||
Proceeds from issuance of common shares, net of tax withholdings | (2,849 | ) | 3,666 | 2,972 | 3,064 | |||||||||||
Payments to noncontrolling interests | (6,781 | ) | (1,564 | ) | (6,781 | ) | (4,900 | ) | ||||||||
Repurchase of common shares | — | (43,914 | ) | — | (71,496 | ) | ||||||||||
Dividends paid | (12,828 | ) | (12,065 | ) | (24,722 | ) | (23,616 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash used by financing activities | (23,713 | ) | (26,598 | ) | (31,122 | ) | (137,467 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Increase (decrease) in cash and cash equivalents | (6,345 | ) | 8,582 | 90,992 | (3,713 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 181,525 | 18,772 | 84,188 | 31,067 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Cash and cash equivalents at end of period | $ | 175,180 | $ | 27,354 | $ | 175,180 | $ | 27,354 | ||||||||
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
WORTHINGTON INDUSTRIES, INC.
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 are eliminated.
We ownThe Company owns controlling interests in the following sixfive joint ventures: dHybrid Systems, LLC (“dHybrid”) (79.59%), Spartan Steel Coating, LLC (“Spartan”) (52%), TWB Company, L.L.C. (“TWB”) (55%), Worthington Ar1taş Bas1nçl1Aritaş Basinçli Kaplar Sanayi (“Worthington Aritas”) (75%), Worthington Energy Innovations, LLC (“WEI”) (75%), 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 and other comprehensive lossincome (loss) (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.
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 Form10-Q and Article 10 of RegulationS-X of the Securities and Exchange Commission (“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 onForm 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, 2016August 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 20172018 (“fiscal 2017”2018”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form10-K for the fiscal year ended May 31, 20162017 (“fiscal 2016”2017”) of Worthington Industries, Inc. (the “2016“2017 Form10-K”).
The preparation of 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.
Recently Adopted Accounting Standards
In FebruaryJuly 2015, amended accounting guidance was issued that revised consolidation requirements in order to provide financial statement users with a more useful presentationregarding the measurement of an entity’s economic and operational results.inventory. The amended guidance revisesrequires that inventory accounted for under the consolidation requirementsfirst-in,first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for limited partnerships,under the considerations surrounding the primary beneficiary determination and the consolidation of certain investment funds.last-in,first-out (LIFO) or retail inventory methods. The Company adopted this amended guidance on a prospective basis effective June 1, 2016.2017. The adoption of this guidance did not impact our consolidated financial position or results of operations.
In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs totaling $2,319,000 and $2,491,000 as of November 30, 2016 and May 31, 2016, respectively, have been presented as a component of the carrying amount of long-term debt reported in our consolidated balance sheets. These amounts were previously capitalized and reported within other assets.
In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.
In March 2016, amended accounting guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in the statement of cash flows. The Company early adopted this guidance during the fourth quarter of fiscal 2016. As required for early adoption in an interim period, all adjustments have been reflected as of the beginning of fiscal 2016. Accordingly, income tax expense for the three and six months ended November 30, 2015 has been restated to reflect excess tax benefits associated with share-based payments totaling $136,000 and $694,000, respectively, in current income tax expense, rather than in paid-in capital.
Recently Issued Accounting Standards
In May 2014, amendednew accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The amendednew guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and implementation of guidance related to licensing. The amendednew guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. OurWhile we have not yet identified any material changes in the timing of revenue recognition, our evaluation is ongoing and not complete. However, we currently do not anticipate a material impact on our revenue recognition practices. We expectplan to make a determination as toadopt the timing and method of adoptionnew guidance in the second halffirst quarter of fiscal 2017.2019. The Company will continue to monitor any modifications, clarifications, and interpretations by the FASB that may impact its conclusions.
In July 2015, amended accounting guidance was issued regarding the measurement of inventory. The amended guidance requires that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In February 2016, amendednew accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amendednew guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amendednew guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amendednew guidance on our ongoing financial reporting.
In March 2016, amended accounting guidance was issued regarding derivative instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In June 2016, amendednew accounting guidance was issued related to the measurement of credit losses on financial instruments. The amendednew guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amendednew guidance is effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and we have not determined the effect of the amendednew guidance on our ongoing financial reporting.
In August 2016, amended accounting guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.
In October 2016, amended accounting guidance was issued that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and have not determined the effect of the amended guidance on our ongoing financial reporting.
In November 2016, amended accounting guidance was issued that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated cash flows.
In January 2017, amended accounting guidance was issued to clarify the definition of a business to provide additional guidance to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
In January 2017, amended accounting guidance was issued to simplify the goodwill impairment calculation, by removing Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
In March 2017, amended accounting guidance was issued that requires an employer to report the service cost component of pension and postretirement benefits in the same line as other current employee compensation costs. Additionally, other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside of income from operations. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
In May 2017, amended accounting guidance was issued to provide guidance about which changes to the terms or conditions of a share-based payment award require application of modification accounting. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
NOTE B – Investments in Unconsolidated Affiliates
Our investmentsInvestments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. These include ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero”) (50%), Worthington Armstrong Venture (“WAVE”) (50%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%).
We received distributions from unconsolidated affiliates totaling $62,742,000$19,551,000 during the sixthree months ended November 30, 2016.August 31, 2017. We have received cumulative distributions from WAVE in excess of our investment balance, totaling $67,516,000which resulted in an amount recorded within other liabilities on our consolidated balance sheets of $58,371,000 at November 30, 2016.August 31, 2017. In accordance with the applicable accounting guidance, these excess distributions arewe reclassified the negative 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 it becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes obviousprobable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any 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.
Combined financial information for our unconsolidated affiliates is summarized as follows:
(in thousands) | November 30, 2016 | May 31, 2016 | ||||||
Cash | $ | 59,751 | $ | 112,122 | ||||
Other current assets | 523,625 | 446,796 | ||||||
Noncurrent assets | 352,117 | 352,370 | ||||||
|
|
|
| |||||
Total assets | $ | 935,493 | $ | 911,288 | ||||
|
|
|
| |||||
Current liabilities | $ | 141,808 | $ | 112,491 | ||||
Short-term borrowings | 9,210 | 11,398 | ||||||
Current maturities of long-term debt | 2,807 | 3,297 | ||||||
Long-term debt | 263,646 | 266,942 | ||||||
Other noncurrent liabilities | 19,834 | 21,034 | ||||||
Equity | 498,188 | 496,126 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 935,493 | $ | 911,288 | ||||
|
|
|
|
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Net sales | $ | 387,192 | $ | 389,185 | $ | 804,307 | $ | 793,648 | ||||||||
Gross margin | 96,541 | 84,767 | 220,738 | 173,785 | ||||||||||||
Operating income | 67,365 | 55,810 | 161,762 | 117,057 | ||||||||||||
Depreciation and amortization | 6,973 | 8,068 | 13,793 | 16,165 | ||||||||||||
Interest expense | 2,151 | 2,136 | 4,299 | 4,295 | ||||||||||||
Income tax expense | 3,545 | 2,164 | 11,063 | 4,723 | ||||||||||||
Net earnings | 63,444 | 71,144 | 149,511 | 134,070 |
The financial results of WSP have been included in the amounts presented in the tables above through March 1, 2016. Effective March 1, 2016, the Company obtained effective control over the operations of WSP. As a result, WSP’s results have been consolidated within the financial results of Steel Processing since that date with the minority member’s portion of earnings eliminated within earnings attributable to noncontrolling interests.
(in thousands) | August 31, 2017 | May 31, 2017 | ||||||
Cash | $ | 40,943 | $ | 55,541 | ||||
Other current assets | 591,345 | 559,021 | ||||||
Noncurrent assets | 366,877 | 361,106 | ||||||
|
|
|
| |||||
Total assets | $ | 999,165 | $ | 975,668 | ||||
|
|
|
| |||||
Current liabilities | $ | 157,932 | $ | 156,947 | ||||
Short-term borrowings | 11,063 | 8,172 | ||||||
Current maturities of long-term debt | 4,367 | 5,827 | ||||||
Long-term debt | 268,867 | 268,711 | ||||||
Other noncurrent liabilities | 24,816 | 21,380 | ||||||
Equity | 532,120 | 514,631 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 999,165 | $ | 975,668 | ||||
|
|
|
| |||||
Three Months Ended August 31, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Net sales | $ | 442,624 | $ | 417,115 | ||||
Gross margin | 86,235 | 124,197 | ||||||
Operating income | 57,163 | 94,397 | ||||||
Depreciation and amortization | 7,193 | 6,820 | ||||||
Interest expense | 2,492 | 2,148 | ||||||
Income tax expense | 1,348 | 7,518 | ||||||
Net earnings | 52,474 | 86,067 |
NOTE C – Impairment of Long-Lived Assets
We review the carrying value of our long-lived assets, including intangible assets with definite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.
Impairment testing of long-lived assets with definite useful lives involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, which would be recorded as an impairment charge in our consolidated statement of earnings.
No impairment charges were recognized during the six months ended November 30, 2016.
Impairment charges during the six months ended November 30, 2015, consisted of $3,000,000 related to the then remaining long-lived assets of the Company’s Engineered Cabs facility in Florence, South Carolina, which ceased operations on September 30, 2015, and $22,962,000 for the impairment of the long-lived assets of two oil & gas equipment facilities triggered by a significant decrease in the long-term cash flow projections of that business. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2016 Form 10-K.
NOTE D – Restructuring and Other Expense
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, and rationalizing headcount.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 financial statement caption, in our consolidated statement of earnings for the sixthree months ended November 30, 2016August 31, 2017 is summarized as follows:below:
(in thousands) | Beginning Balance | Expense | Payments | Adjustments | Ending Balance | Beginning Balance | Expense | Payments | Adjustments | Ending Balance | ||||||||||||||||||||||||||||||
Early retirement and severance | $ | 1,831 | $ | 1,572 | $ | (2,707 | ) | $ | 39 | $ | 735 | $ | 253 | $ | 1,877 | $ | (182 | ) | $ | 127 | $ | 2,075 | ||||||||||||||||||
Facility exit and other costs | 653 | 2,019 | (1,295 | ) | - | 1,377 | 536 | 284 | (950 | ) | 131 | �� | 1 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
$ | 2,484 | 3,591 | $ | (4,002 | ) | $ | 39 | $ | 2,112 | $ | 789 | 2,161 | $ | (1,132 | ) | $ | 258 | $ | 2,076 | |||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Net loss on sale of assets | 1,009 | 143 | ||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Restructuring and other expense | $ | 4,600 | $ | 2,304 | ||||||||||||||||||||||||||||||||||||
|
|
During the sixthree months ended November 30, 2016,August 31, 2017, the following activitiesactions were taken related to the Company’s restructuring activities:
The Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the consolidation of the Cryogenics business unit into the Industrial Products business unit. In connection with this matter,the acquisition of Amtrol on June 2, 2017, the Company recognized severance expense of $1,356,000$1,877,000 related to permanent headcount reductions.corporate management positions at Amtrol that were eliminated.
In connection with the closure of the Company’s stainless steel business, Precision Specialty Metals, Inc. (“PSM”), the Company recognized $1,264,000 of facility exit costs.costs of $279,000.
In connection with the closure of the Engineered Cabs facility in Florence, South Carolina,othernon-significant restructuring activities, the Company recognized facility exit costs of $307,000. The Company also recognized a net loss of $101,000 related to the disposal of assets.
In connection with the consolidation of the Company’s existing cryogenics facility in Istanbul, Turkey, to its Greenfield facility in Bandirma, Turkey, the Company recognized facility exit costs of $421,000 and severance expense of $309,000. The consolidation is expected to be complete in the second half of fiscal 2017.
The Company sold the remaining real estate of the legacy Advanced Component Technologies, Inc. (“ACT”) business within Engineered Cabs for cash proceeds of $700,000, resulting in a loss of $822,000.
In connection with other non-significant restructuring activities, the Company recognized a credit to severance expense of $93,000 and facility exit costs totaling $27,000.$5,000. The Company also recognized a net loss on disposal of assets of $86,000.$143,000.
The total liability associated with our restructuring activities as of November 30, 2016August 31, 2017 is expected to be paid in the next twelve months.
NOTE ED – Contingent Liabilities and Commitments
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 affecthave a material adverse effect on our consolidated financial position or future results of operations or cash flows. We believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations or cash flows.
NOTE FE – 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. However, as of November 30, 2016,August 31, 2017, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $9,883,000$9,049,000 at November 30, 2016.August 31, 2017. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amount has been recognized in our consolidated financial statements.
We also had in place $15,662,000 of outstandingstand-by letters of credit issued to third-party service providers at August 31, 2017. The fair value of these guarantee instruments, based on premiums paid, was not material and no amounts were drawn against them at August 31, 2017.
NOTE GF – Debt and Receivables Securitization
On July 28, 2017, we issued $200,000,000 aggregate principal amount of senior unsecured notes due August 1, 2032 (the “2032 Notes”). The 2032 Notes bear interest at a rate of 4.30%. The 2032 Notes were sold to the public at 99.901% of the principal amount thereof, to yield 4.309% to maturity. We used a portion of the net proceeds from the offering to repay amounts then outstanding under our multi-year revolving credit facility and amounts then outstanding under our revolving trade accounts receivable securitization facility, both of which are described in more detail below. We entered into an interest rate swap in June 2017, in anticipation of the issuance of the 2032 Notes. The interest rate swap had a notional amount of $150,000,000 to hedge the risk of changes in the semi-annual interest rate payments attributable to changes in the benchmark interest rate during the several days leading up to the issuance of the 2032 Notes. Upon pricing of the 2032 Notes, the derivative instrument was settled resulting in a gain of approximately $3,098,000, which was reflected in accumulated other comprehensive income (“AOCI”). Approximately $2,114,000 and $198,000 were allocated to debt issuance costs and the debt discount. The debt issuance costs and the debt discount were recorded on the consolidated balance sheet within long-term debt as a contra-liability. The unamortized portion of the debt issuance costs and debt discount was $2,103,000 and $197,000, respectively, at August 31, 2017.
We maintain a $500,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders that matures in April 2020. Borrowings under the Credit Facility typically have maturities of less than one year. However, we can extend the term of amounts borrowed by renewing these borrowings for the term of the Credit Facility. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime rate or Fed Funds rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at November 30, 2016.
We hadAugust 31, 2017. As discussed in “NOTE E – Guarantees,” we provided $15,662,000 in letters of credit totaling $15,266,000 outstandingfor third-party beneficiaries as of November 30, 2016. These letters of credit have been issued to third parties and had no amounts drawn against them at November 30, 2016.August 31, 2017. While not drawn against at November 30, 2016, $13,600,000August 31, 2017, $14,050,000 of these letters of credit were issued against availability under the Credit Facility, leaving $486,400,000$485,950,000 available under the Credit Facility at November 30, 2016.August 31, 2017.
We also maintain a $100,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”) which expiresthat matures in January 2018. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $100,000,000 of undivided ownership interests in this pool of accounts receivable to a third-party bank. We retain an undivided interest in this pool and are subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables more than 90 days past due, receivables offset by an allowance for doubtful accounts due to bankruptcy or other cause, concentrations over certain limits with specific customers and certain reserve amounts, we believe additional risk of loss is minimal. As of November 30, 2016,August 31, 2017, no undivided ownership interests in this pool of accounts receivable had been sold.
NOTE HG – Other Comprehensive Income
The following table summarizes the tax effects on each component of OCI for the three months ended November 30:August 31:
2016 | 2015 | |||||||||||||||||||||||
Before-Tax | Tax | Net-of-Tax | Before-Tax | Tax | Net-of-Tax | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Foreign currency translation | $ | (7,517 | ) | $ | - | $ | (7,517 | ) | $ | (9,214 | ) | $ | - | $ | (9,214 | ) | ||||||||
Pension liability adjustment | - | - | - | - | - | - | ||||||||||||||||||
Cash flow hedges | 2,047 | (395 | ) | 1,652 | (3,805 | ) | 1,282 | (2,523 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other comprehensive loss | $ | (5,470 | ) | $ | (395 | ) | $ | (5,865 | ) | $ | (13,019 | ) | $ | 1,282 | $ | (11,737 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the tax effects on each component of OCI for the six months ended November 30:
2016 | 2015 | |||||||||||||||||||||||
Before-Tax | Tax | Net-of-Tax | Before-Tax | Tax | Net-of-Tax | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Foreign currency translation | $ | (8,182 | ) | $ | - | $ | (8,182 | ) | $ | (7,391 | ) | $ | - | $ | (7,391 | ) | ||||||||
Pension liability adjustment | - | - | - | (8 | ) | - | (8 | ) | ||||||||||||||||
Cash flow hedges | 3,135 | (858 | ) | 2,277 | (2,567 | ) | 674 | (1,893 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other comprehensive loss | $ | (5,047 | ) | $ | (858 | ) | $ | (5,905 | ) | $ | (9,966 | ) | $ | 674 | $ | (9,292 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation Pension liability adjustment Cash flow hedges Other comprehensive income (loss) 2017 2016 Before-Tax Tax Net-of-Tax Before-Tax Tax Net-of-Tax (in thousands) $ 15,872 $ - $ 15,872 $ (665 ) $ - $ (665 ) - (6 ) (6 ) - - - 2,993 (1,106 ) 1,887 1,088 (463 ) 625 $ 18,865 $ (1,112 ) $ 17,753 $ 423 $ (463 ) $ (40 )
NOTE IH – Changes in Equity
The following table provides a summary of the changes in total equity, shareholders’ equity attributable to controlling interest, and equity attributable to noncontrolling interests for the sixthree months ended November 30, 2016:August 31, 2017:
Controlling Interest | Controlling Interest | |||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Additional Paid-in Capital | Accumulated Other Comprehensive Loss, Net of Tax | Retained Earnings | Total | Non- controlling Interests | Total | Additional Paid-in Capital | Accumulated Other Comprehensive Loss, Net of Tax | Retained Earnings | Total | Non controlling Interests | Total | ||||||||||||||||||||||||||||||||||||
Balance at May 31, 2016 | $ | 298,984 | $ | (28,565 | ) | $ | 522,952 | $ | 793,371 | $ | 126,475 | $ | 919,846 | |||||||||||||||||||||||||||||||||||
Balance at May 31, 2017 | $ | 303,391 | $ | (27,775 | ) | $ | 676,019 | $ | 951,635 | $ | 122,294 | $ | 1,073,929 | |||||||||||||||||||||||||||||||||||
Net earnings | - | - | 112,132 | 112,132 | 6,271 | 118,403 | - | - | 45,534 | 45,534 | 2,540 | 48,074 | ||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | (5,762 | ) | - | (5,762 | ) | (143 | ) | (5,905 | ) | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | 17,314 | - | 17,314 | 439 | 17,753 | ||||||||||||||||||||||||||||||||||||||||||
Common shares issued, net of withholding tax | 2,972 | - | - | 2,972 | - | 2,972 | (3,274 | ) | - | - | (3,274 | ) | - | (3,274 | ) | |||||||||||||||||||||||||||||||||
Common shares in NQ plans | 948 | - | - | 948 | - | 948 | 536 | - | - | 536 | - | 536 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 7,040 | - | - | 7,040 | - | 7,040 | 4,822 | - | - | 4,822 | - | 4,822 | ||||||||||||||||||||||||||||||||||||
Purchases and retirement of common shares | (4,235 | ) | - | (40,841 | ) | (45,076 | ) | - | (45,076 | ) | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared | - | - | (25,761 | ) | (25,761 | ) | - | (25,761 | ) | - | - | (13,317 | ) | (13,317 | ) | - | (13,317 | ) | ||||||||||||||||||||||||||||||
Dividends to noncontrolling interest | - | - | - | - | (6,781 | ) | (6,781 | ) | - | - | - | - | (720 | ) | (720 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Balance at November 30, 2016 | $ | 309,944 | $ | (34,327 | ) | $ | 609,323 | $ | 884,940 | $ | 125,822 | $ | 1,010,762 | |||||||||||||||||||||||||||||||||||
Balance at August 31, 2017 | $ | 301,240 | $ | (10,461 | ) | $ | 667,395 | $ | 958,174 | $ | 124,553 | $ | 1,082,727 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The components of the changes in accumulated other comprehensive loss were as follows:
(in thousands) | Foreign Currency Translation | Pension Liability Adjustment | Cash Flow Hedges | Accumulated Other Comprehensive Loss | Foreign Currency Translation | Pension Liability Adjustment | Cash Flow Hedges | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||
Balance as of May 31, 2016 | $ | (18,728 | ) | $ | (17,061 | ) | $ | 7,224 | $ | (28,565 | ) | |||||||||||||||||||||
Other comprehensive income (loss) before reclassifications | (8,039 | ) | - | 8,050 | 11 | |||||||||||||||||||||||||||
Balance as of May 31, 2017 | $ | (17,358 | ) | $ | (14,819 | ) | $ | 4,402 | $ | (27,775 | ) | |||||||||||||||||||||
Other comprehensive income before reclassifications | 15,433 | - | 6,798 | 22,231 | ||||||||||||||||||||||||||||
Reclassification adjustments to income (a) | - | - | (4,915 | ) | (4,915 | ) | - | - | (3,805 | ) | (3,805 | ) | ||||||||||||||||||||
Income taxes | - | - | (858 | ) | (858 | ) | - | (6 | ) | (1,106 | ) | (1,112 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Balance as of November 30, 2016 | $ | (26,767 | ) | $ | (17,061 | ) | $ | 9,501 | $ | (34,327 | ) | |||||||||||||||||||||
Balance as of August 31, 2017 | $ | (1,925 | ) | $ | (14,825 | ) | $ | 6,289 | $ | (10,461 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
(a) | The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed in “NOTE N – Derivative Instruments and Hedging Activities.” |
NOTE JI – Stock-Based Compensation
Non-Qualified Stock Options
During the sixthree months ended November 30, 2016,August 31, 2017, we grantednon-qualified stock options covering a total of 111,00090,200 common shares under our stock-based compensation plans. The option price of $42.30$47.76 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 $11.60$14.99 per share. The calculatedpre-tax stock-based compensation expense for these stock options, after an estimate for forfeitures, is $1,146,000$1,203,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:
Dividend yield | % | |||
Expected volatility | % | |||
Risk-free interest rate | % | |||
Expected term (years) | 6.0 |
Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the United States 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 sixthree months ended November 30, 2016,August 31, 2017, we granted an aggregate of 513,300122,400 service-based restricted common shares under our stock-based compensation plans. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the daterespective dates of grant, or $42.13$47.81 per share. The calculatedpre-tax stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $19,347,000$5,208,000 and will be recognized on a straight-line basis over the three-year service-based 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 targets for the three-year periods ending May 31, 2017, 2018, 2019 and 2019.2020. These performance share awards will be paid, to the extent earned, in common shares of the Company 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 theirthe respective grant dates of the performance shares and thepre-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 sixthree months ended November 30, 2016,August 31, 2017, we granted performance share awards covering an aggregate of 67,00054,700 common shares (at target levels). The calculatedpre-tax stock-based compensation expense for these performance shares is $3,009,000$2,768,000 and will be recognized over the three-year performance period.
NOTE KJ – Income Taxes
Income tax expense for the sixthree months ended November 30,August 31, 2017 and 2016 and November 30, 2015 reflected estimated annual effective income tax rates of 28.5%30.5% and 30.9%31.2%, 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. Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of Worthington Aritas (a foreign corporation), and TWB’s wholly-owned foreign corporations is reported in our consolidated tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annualpre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 20172018 could be materially different from the forecasted rate as of November 30, 2016.August 31, 2017.
NOTE LK – Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the three and six months ended November 30, 2016August 31, 2017 and 2015:2016:
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended August 31, | ||||||||||||||||||||||
(in thousands, except per share amounts) | 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||
Numerator (basic & diluted): | ||||||||||||||||||||||||
Net earnings attributable to controlling interest-income available to common shareholders | $ | 46,565 | $ | 23,376 | $ | 112,132 | $ | 55,344 | ||||||||||||||||
Net earnings attributable to controlling interest -income available to common shareholders | $ | 45,534 | $ | 65,567 | ||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||
Denominator for basic earnings per share attributable to controlling interest—weighted average common shares | 62,348 | 62,676 | 62,115 | 63,338 | 62,444 | 61,885 | ||||||||||||||||||
Effect of dilutive securities | 2,377 | 1,987 | 2,484 | 2,012 | 2,146 | 2,452 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Denominator for diluted earnings per share attributable to controlling interest—adjusted weighted average common shares | 64,725 | 64,663 | 64,599 | 65,350 | 64,590 | 64,337 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Basic earnings per share attributable to controlling interest | $ | 0.75 | $ | 0.37 | $ | 1.81 | $ | 0.87 | $ | 0.73 | $ | 1.06 | ||||||||||||
Diluted earnings per share attributable to controlling interest | $ | 0.72 | $ | 0.36 | $ | 1.74 | $ | 0.85 | $ | 0.70 | $ | 1.02 |
Stock options and restrictedcovering 161,429 common shares covering 110,354 and 367,094 common shares for the three months ended November 30, 2016 and 2015, respectively, and 92,923 and 346,557 common shares for the six months ended November 30, 2016 and 2015, respectively, have been excluded from the computation of diluted earnings per share for the three months ended August 31, 2016 because the effect of their inclusion would have been “anti-dilutive.”“anti-dilutive” for that period.
NOTE ML – Segment Operations
Summarized financial information for our reportable segments is shown in the following table:
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended August 31, | ||||||||||||||||||||||
(in thousands) | 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Steel Processing | $ | 508,806 | $ | 467,812 | $ | 1,014,480 | $ | 958,612 | $ | 543,491 | $ | 505,674 | ||||||||||||
Pressure Cylinders | 194,661 | 201,173 | 399,870 | 425,567 | 269,811 | 205,209 | ||||||||||||||||||
Engineered Cabs | 22,463 | 28,699 | 48,044 | 67,316 | 31,946 | 25,581 | ||||||||||||||||||
Other | 1,850 | 2,132 | 2,935 | 6,468 | 2,989 | 1,085 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net sales | $ | 727,780 | $ | 699,816 | $ | 1,465,329 | $ | 1,457,963 | $ | 848,237 | $ | 737,549 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating income (loss) | ||||||||||||||||||||||||
Steel Processing | $ | 35,448 | $ | 26,642 | $ | 90,230 | $ | 50,280 | $ | 32,872 | $ | 54,782 | ||||||||||||
Pressure Cylinders | 11,304 | (10,309 | ) | 25,409 | 6,510 | 10,458 | 14,105 | |||||||||||||||||
Engineered Cabs | (3,381 | ) | (4,290 | ) | (5,224 | ) | (13,581 | ) | (361 | ) | (1,843 | ) | ||||||||||||
Other | (327 | ) | (71 | ) | (2,473 | ) | (241 | ) | (744 | ) | (2,146 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total operating income | $ | 43,044 | $ | 11,972 | $ | 107,942 | $ | 42,968 | $ | 42,225 | $ | 64,898 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Impairment of long-lived assets | ||||||||||||||||||||||||
Steel Processing | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Pressure Cylinders | - | 22,962 | - | 22,962 | ||||||||||||||||||||
Engineered Cabs | - | - | - | 3,000 | ||||||||||||||||||||
Other | - | - | - | - | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total impairment of long-lived assets | $ | - | $ | 22,962 | $ | - | $ | 25,962 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Restructuring and other expense (income) | ||||||||||||||||||||||||
Restructuring and other expense | ||||||||||||||||||||||||
Steel Processing | $ | 318 | $ | 2,258 | $ | 1,284 | $ | 2,720 | $ | 279 | $ | 966 | ||||||||||||
Pressure Cylinders | 1,963 | (16 | ) | 2,109 | 715 | 1,877 | 146 | |||||||||||||||||
Engineered Cabs | 1,004 | 765 | 1,210 | 2,643 | 4 | 206 | ||||||||||||||||||
Other | (13 | ) | (1,484 | ) | (3 | ) | (1,486 | ) | 144 | 10 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total restructuring and other expense | $ | 3,272 | $ | 1,523 | $ | 4,600 | $ | 4,592 | $ | 2,304 | $ | 1,328 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
(in thousands) | August 31, 2017 | May 31, 2017 | ||||||||||||||||||||||
Total assets | ||||||||||||||||||||||||
Steel Processing | $ | 882,161 | $ | 882,863 | ||||||||||||||||||||
Pressure Cylinders | 1,176,298 | 766,611 | ||||||||||||||||||||||
Engineered Cabs | 68,738 | 62,141 | ||||||||||||||||||||||
Other | 503,357 | 613,729 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Total assets | $ | 2,630,554 | $ | 2,325,344 | ||||||||||||||||||||
|
|
Effective June 1, 2017, we made certain organizational changes impacting the internal reporting and management structure of Packaging Solutions. As a result of these organizational changes, management responsibilities and internal reporting were realigned, moving Packaging Solutions from the Steel Processing operating segment to the Engineered Cabs operating segment. Previously reported results have not been restated and are immaterial for all periods presented.
NOTE M – Acquisitions
On June 2, 2017, the Company acquired Amtrol, a leading manufacturer of pressure cylinders and water system tanks with operations in the U.S. and Europe. The total purchase price was $291,921,000 after adjusting for excess working capital and was funded primarily with cash on hand. The net assets became part of the Pressure Cylinders operating segment at closing, with the well water and expansion tank operations aligning under the consumer products business and the refrigerant, liquid propane and industrial and specialty gas operations aligning under the industrial products business. Total acquisition-related expenses were $3,568,000 of which $1,568,000 was incurred during the three months ended August 31, 2017.
The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets acquired and liabilities assumed are fully evaluated by the Company, including but not limited to, the fair value accounting, legal and tax matters, obligations, and deferred taxes.
The assets acquired and liabilities assumed were recognized at their preliminary acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired. In connection with the acquisition, we identified and valued the following identifiable intangible assets:
(in thousands) | November 30, 2016 | May 31, 2016 | ||||||
Total assets | ||||||||
Steel Processing | $ | 836,265 | $ | 819,853 | ||||
Pressure Cylinders | 763,716 | 787,786 | ||||||
Engineered Cabs | 65,273 | 75,124 | ||||||
Other | 477,470 | 378,501 | ||||||
|
|
|
| |||||
Total assets | $ | 2,142,724 | $ | 2,061,264 | ||||
|
|
|
|
(in thousands) | Amount | Useful Life (Years) | ||||||
Category | ||||||||
Customer relationships | $ | 90,800 | 14-17 | |||||
Trade names | 62,200 | Indefinite | ||||||
Technology | 13,000 | 15-16 | ||||||
|
| |||||||
Total acquired identifiable intangible assets | $ | 166,000 | ||||||
|
|
The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes a going-concern element that represents our ability to earn a higher rate of return on this group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is not expected to be deductible for income tax purposes.
The following table summarizes the consideration transferred for the assets of Amtrol and the preliminary fair value assigned to the assets acquired and liabilities assumed at the acquisition date:
(in thousands) | ||||
Cash | $ | 6,893 | ||
Accounts receivable | 40,212 | |||
Inventories | 37,249 | |||
Prepaid expenses | 981 | |||
Other assets | 2,550 | |||
Intangible assets | 166,000 | |||
Property, plant and equipment | 52,870 | |||
|
| |||
Total assets | 306,755 | |||
Accounts payable | 25,945 | |||
Accrued liabilities | 21,016 | |||
Long-term debt including current maturities | 2,287 | |||
Other accrued items | 3,993 | |||
Deferred income taxes, net | 64,495 | |||
|
| |||
Net identifiable assets | 189,019 | |||
Goodwill | 102,902 | |||
|
| |||
Purchase price | $ | 291,921 | ||
Less: excess working capital | (523 | ) | ||
|
| |||
Cash paid at closing | $ | 291,398 | ||
|
|
The Company’s results of operations for the three months ended August 31, 2017 included the operating results of Amtrol since the date of acquisition. Net sales and operating loss of Amtrol were $57,346,000 and $2,611,000, respectively, for the three months ended August 31, 2017. The following unaudited pro forma information presents consolidated financial information as if Amtrol had been acquired at the beginning of fiscal 2017. Depreciation and amortization expense included in the pro forma results reflect the preliminary acquisition-date fair values assigned to the definite-lived intangible assets and fixed assets of Amtrol assuming a June 1, 2016 acquisition date. Adjustment has also been made for acquisition-related costs incurred in each period presented. Pro forma results for the three months ended August 31, 2017, have also been adjusted to remove the impact of the acquisition-date fair value adjustments to inventories and accrued severance costs related to headcount reductions at Amtrol initiated during the current period, as discussed in “NOTE C – Restructuring and Other Expense.” The pro forma adjustments noted above have been adjusted for the applicable income tax impact. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.
Three months ended August 31, | ||||||||
(in thousands, except per share amounts) | 2017 | 2016 | ||||||
Net sales | $ | 848,237 | $ | 795,544 | ||||
Net earnings attributable to controlling interest | $ | 49,471 | $ | 70,357 | ||||
Diluted earnings per share attributable to controlling interest | $ | 0.77 | $ | 1.09 |
NOTE N – 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 at the end of each period.
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 to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
Foreign Currency RateExchange 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 United States dollars also subjects us to exposure related to fluctuating foreign 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. At November 30, 2016, we had posted total cash collateral of $154,000 to our margin accounts. 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 O – 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 financial statement captionline in which they were recorded in ourthe consolidated balance sheet at November 30, 2016:August 31, 2017:
Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||
(in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||
Commodity contracts | Receivables | $ | 15,807 | Accounts payable | $ | 489 | Receivables | $ | 6,282 | Accounts payable | $ | - | ||||||||||||||||
Other assets | 101 | Other liabilities | - | Other assets | 257 | Other liabilities | - | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
15,908 | 489 | 6,539 | - | |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Interest rate contracts | Receivables | - | Accounts payable | 141 | Receivables | - | Accounts payable | 150 | ||||||||||||||||||||
Other assets | - | Other liabilities | 195 | Other assets | - | Other liabilities | 150 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
- | 336 | - | 300 | |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Totals | $ | 15,908 | $ | 825 | $ | 6,539 | $ | 300 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||
Commodity contracts | Receivables | $ | 4,149 | Accounts payable | $ | 131 | Receivables | $ | 2,508 | Accounts payable | $ | 37 | ||||||||||||||||
Other assets | 41 | Other liabilities | - | Other assets | 32 | Other liabilities | - | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
4,190 | 131 | 2,540 | 37 | |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Foreign currency contracts | Receivables | 514 | Accounts payable | - | ||||||||||||||||||||||||
Foreign exchange contracts | Receivables | - | Accounts payable | 5 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Totals | $ | 4,704 | $ | 131 | $ | 2,540 | $ | 42 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Total derivative instruments | $ | 20,612 | $ | 956 | $ | 9,079 | $ | 342 | ||||||||||||||||||||
|
|
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instrumentscontracts on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $100,000$42,000 increase in receivables with a corresponding increase in accounts payable.
The following table summarizes the fair value of our derivative instruments and the financial statement captionrespective line in which they were recorded in the consolidated balance sheet at May 31, 2016:2017:
Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||
(in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||
Commodity contracts | Receivables | $ | 13,224 | Accounts payable | $ | 696 | Receivables | $ | 7,148 | Accounts payable | $ | 111 | ||||||||||||||||||
Other assets | 3,589 | Other liabilities | 80 | Other assets | 6 | Other liabilities | 159 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
16,813 | 776 | 7,154 | 270 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
Interest rate contracts | Receivables | - | Accounts payable | 155 | Receivables | - | Accounts payable | 141 | ||||||||||||||||||||||
Other assets | - | Other liabilities | 306 | Other assets | - | Other liabilities | 160 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
- | 461 | - | 301 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
Totals | $ | 16,813 | $ | 1,237 | $ | 7,154 | $ | 571 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||
Commodity contracts | Receivables | $ | 4,660 | Accounts payable | $ | 761 | Receivables | $ | 1,110 | Accounts payable | $ | 570 | ||||||||||||||||||
Other assets | 317 | Other liabilities | - | Other assets | - | Other liabilities | 1 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
4,977 | 761 | 1,110 | 571 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
Foreign currency contracts | Receivables | - | Accounts payable | 15 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||
- | 15 | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||
Foreign exchange contracts | Receivables | 62 | Accounts payable | - | ||||||||||||||||||||||||||
Totals | $ | 4,977 | $ | 776 | $ | 1,172 | $ | 571 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
Total derivative instruments | $ | 21,790 | $ | 2,013 | $ | 8,326 | $ | 1,142 | ||||||||||||||||||||||
|
|
|
|
The amounts in the table above reflect the fair value of the Company’s derivative instrumentscontracts on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $300,000 decrease$100,000 increase in receivables with a corresponding decreaseincrease in accounts payable.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest ratesrate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same financial statement captionline associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.
The following table summarizes our cash flow hedges outstanding at November 30, 2016:August 31, 2017:
(in thousands) | Notional Amount | Maturity Date | Notional Amount | Maturity Date | ||||||||
Commodity contracts | $ | 49,224 | December 2016 - December 2018 | $ | 25,372 | September 2017 - June 2019 | ||||||
Interest rate contracts | 16,201 | September 2019 | 18,221 | September 2019 |
The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCIAOCI into earnings for derivative instruments designated as cash flow hedges during the three months ended November 30, 2016August 31, 2017 and 2015:2016:
Location of | Location of | |||||||||||||||
Gain (Loss) | Gain (Loss) | Gain | Gain | |||||||||||||
Reclassified | Reclassified | (Ineffective | (Ineffective | |||||||||||||
Gain (Loss) | from | from | Portion) | Portion) | ||||||||||||
Recognized | Accumulated | Accumulated | and Excluded | and Excluded | ||||||||||||
in OCI | OCI | OCI | from | from | ||||||||||||
(Effective | (Effective | (Effective | Effectiveness | Effectiveness | ||||||||||||
(in thousands) | Portion) | Portion) | Portion) | Testing | Testing | |||||||||||
For the three months ended November 30, 2016: | ||||||||||||||||
Commodity contracts | $ | 7,157 | Cost of goods sold | $ | 5,737 | Cost of goods sold | $ | - | ||||||||
Interest rate contracts | 160 | Interest expense | (467 | ) | Interest expense | - | ||||||||||
|
|
|
|
|
| |||||||||||
Totals | $ | 7,317 | $ | 5,270 | $ | - | ||||||||||
|
|
|
|
|
| |||||||||||
For the three months ended November 30, 2015: | ||||||||||||||||
Commodity contracts | $ | (10,210 | ) | Cost of goods sold | $ | (6,460 | ) | Cost of goods sold | $ | - | ||||||
Interest rate contracts | (201 | ) | Interest expense | (146 | ) | Interest expense | - | |||||||||
|
|
|
|
|
| |||||||||||
Totals | (10,411 | ) | (6,606 | ) | - | |||||||||||
|
|
|
|
|
|
The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the six months ended November 30, 2016 and 2015:
Location of | Location of | |||||||||||||||
Gain (Loss) | Gain (Loss) | Gain | Gain | |||||||||||||
Reclassified | Reclassified | (Ineffective | (Ineffective | |||||||||||||
Gain (Loss) | from | from | Portion) | Portion) | ||||||||||||
Recognized | Accumulated | Accumulated | and Excluded | and Excluded | ||||||||||||
in OCI | OCI | OCI | from | from | ||||||||||||
(Effective | (Effective | (Effective | Effectiveness | Effectiveness | ||||||||||||
(in thousands) | Portion) | Portion) | Portion) | Testing | Testing | |||||||||||
For the six months ended November 30, 2016: | ||||||||||||||||
Interest rate contracts | $ | 7,926 | Interest expense | $ | 5,485 | Interest expense | $ | - | ||||||||
Commodity contracts | 124 | Cost of goods sold | (570 | ) | Cost of goods sold | - | ||||||||||
|
|
|
|
|
| |||||||||||
Totals | $ | 8,050 | $ | 4,915 | $ | - | ||||||||||
|
|
|
|
|
| |||||||||||
For the six months ended November 30, 2015: | ||||||||||||||||
Interest rate contracts | $ | (167 | ) | Interest expense | $ | (285 | ) | Interest expense | $ | - | ||||||
Commodity contracts | (18,336 | ) | Cost of goods sold | (15,647 | ) | Cost of goods sold | - | |||||||||
Foreign currency contracts | - | Miscellaneous income, net | (4 | ) | Miscellaneous income, net | - | ||||||||||
|
|
|
|
|
| |||||||||||
Totals | $ | (18,503 | ) | $ | (15,936 | ) | $ | - | ||||||||
|
|
|
|
|
|
Portion) Testing For the three months ended August 31, 2017: Commodity contracts Interest rate contracts Totals For the three months ended August 31, 2016: Commodity contracts Interest rate contracts Totals Location of Location of Gain (Loss) Gain (Loss) Gain Gain Reclassified Reclassified (Ineffective (Ineffective Gain (Loss) from from Portion) Portion) Recognized Accumulated Accumulated and Excluded and Excluded in OCI OCI OCI from from (Effective (Effective (Effective Effectiveness Effectiveness (in thousands) Portion) Portion) Testing $ 3,734 Cost of goods sold $ 4,168 Cost of goods sold $ - 3,064 Interest expense (363 ) Interest expense - $ 6,798 $ 3,805 $ - $ 769 Cost of goods sold $ (252 ) Cost of goods sold $ - (36 ) Interest expense (103 ) Interest expense - $ 733 $ (355 ) $ -
The estimated net amount of the losses recognized in accumulated OCIAOCI at November 30, 2016August 31, 2017 expected to be reclassified into net earnings within the succeeding twelve months is $11,131,000$5,666,000 (net of tax of $6,147,000)$3,425,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2016,August 31, 2017, and will change before actual reclassification from OCIother comprehensive income to net earnings during the fiscal years ending May 31, 20172018 and 2018.May 31, 2019.
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.
The following table summarizes our economic(non-designated) derivative instruments outstanding at November 30, 2016:August 31, 2017:
(in thousands) | Notional Amount | Maturity Date(s) | Notional Amount | Maturity Date(s) | ||||||||
Commodity contracts | $ | 22,389 | December 2016 - August 2018 | $ | 20,346 | September 2017 - February 2019 | ||||||
Foreign currency contracts | 14,149 | December 2016 - August 2017 | ||||||||||
Foreign exchange contracts | 4,921 | September 2017 |
The following table summarizes the gain (loss) recognized in earnings for economic(non-designated) derivative financial instruments during the three months ended November 30, 2016August 31, 2017 and 2015:2016:
Gain (Loss) Recognized | ||||||||||||
in Earnings for the | ||||||||||||
Location of Gain (Loss) | Three Months Ended November 30, | |||||||||||
(in thousands) | Recognized in Earnings | 2016 | 2015 | |||||||||
Commodity contracts | Cost of goods sold | $ | 2,003 | $ | (5,390 | ) | ||||||
Foreign currency contracts | Miscellaneous income, net | (599 | ) | 70 | ||||||||
|
|
|
| |||||||||
Total | $ | 1,404 | $ | (5,320 | ) | |||||||
|
|
|
|
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the six months ended November 30, 2016 and 2015:
Gain (Loss) Recognized | ||||||||||||||||||||||||
Gain (Loss) Recognized | In Earnings for the | |||||||||||||||||||||||
in Earnings for the | Three Months Ended | |||||||||||||||||||||||
Location of Gain (Loss) | Six Months Ended November 30, | Location of Gain (Loss) | August 31, | |||||||||||||||||||||
(in thousands) | Recognized in Earnings | 2016 | 2015 | Recognized in Earnings | 2017 | 2016 | ||||||||||||||||||
Commodity contracts | Cost of goods sold | $ | 4,911 | $ | (8,145 | ) | Cost of goods sold | $ | 2,334 | $ | 2,908 | |||||||||||||
Foreign currency contracts | Miscellaneous income, net | (665 | ) | 70 | ||||||||||||||||||||
Foreign exchange contracts | Miscellaneous income, net | (208 | ) | (66 | ) | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | $ | 4,246 | $ | (8,075 | ) | $ | 2,126 | $ | 2,842 | |||||||||||||||
|
|
|
|
The gain (loss) on the foreign currency exchange contracts derivatives significantly offsets the gain (loss) on the hedged item.
NOTE O – 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, 2016,August 31, 2017, our assets and liabilities measured at fair value on a recurring basis were as follows:
(in thousands) | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Totals | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Totals | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Derivative instruments (1) | $ | - | $ | 20,612 | $ | - | $ | 20,612 | ||||||||||||||||||||||||
Derivative contracts (1) | $ | - | $ | 9,079 | $ | - | $ | 9,079 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total assets | $ | - | $ | 20,612 | $ | - | $ | 20,612 | $ | - | $ | 9,079 | $ | - | $ | 9,079 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Derivative instruments (1) | $ | - | $ | 956 | $ | - | $ | 956 | ||||||||||||||||||||||||
Derivative contracts (1) | $ | - | $ | 342 | $ | - | $ | 342 | ||||||||||||||||||||||||
Contingent consideration obligation (2) | - | - | 4,549 | 4,549 | - | - | 593 | 593 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total liabilities | $ | - | $ | 956 | $ | 4,549 | $ | 5,505 | $ | - | $ | 342 | $ | 593 | $ | 935 | ||||||||||||||||
|
|
|
|
|
|
|
|
At May 31, 2016,2017, our assets and liabilities measured at fair value on a recurring basis were as follows:
(in thousands) | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Totals | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Totals | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Derivative instruments (1) | $ | - | $ | 21,790 | $ | - | $ | 21,790 | ||||||||||||||||||||||||
Derivative contracts (1) | $ | - | $ | 8,326 | $ | - | $ | 8,326 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total assets | $ | - | $ | 21,790 | $ | - | $ | 21,790 | $ | - | $ | 8,326 | $ | - | $ | 8,326 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Derivative instruments (1) | $ | - | $ | 2,013 | $ | - | $ | 2,013 | ||||||||||||||||||||||||
Contingent consideration obligations (2) | - | - | 4,519 | 4,519 | ||||||||||||||||||||||||||||
Derivative contracts (1) | $ | - | $ | 1,142 | $ | - | $ | 1,142 | ||||||||||||||||||||||||
Contingent consideration obligation (2) | - | - | 585 | 585 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total liabilities | $ | - | $ | 2,013 | $ | 4,519 | $ | 6,532 | $ | - | $ | 1,142 | $ | 585 | $ | 1,727 | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | The fair value of our derivative instruments is based on the present value of the expected future cash flows considering the risks involved, includingnon-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 N – Derivative Instruments and Hedging Activities” for additional information regarding our use of derivative instruments. |
(2) | The fair value of the contingent consideration |
The fair value ofnon-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, 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 $593,821,000$835,414,000 and $609,245,000$618,059,000 at November 30, 2016August 31, 2017 and May 31, 2016,2017, respectively. The carrying amount of long-term debt, including current maturities, was $576,911,000$780,162,000 and $578,353,000$578,487,000 at November 30, 2016August 31, 2017 and May 31, 2016,2017, respectively.
Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected statements contained in this “Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Quarterly Report on Form10-Q and “Part I—Item 1A.—Risk Factors” of our Annual Report on Form10-K for the fiscal year ended May 31, 2016.2017.
Introduction
The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position of Worthington Industries, Inc., together with its subsidiaries (collectively, “we,” “our,” “Worthington,” or our “Company”), should be read in conjunction with our consolidated financial statements and notes thereto included in “Item 1. – Financial–Financial Statements” of this Quarterly Report on Form10-Q. Our Annual Report on Form10-K for the fiscal year ended May 31, 20162017 (“fiscal 2016”2017”) includes additional information about Worthington, our operations and our consolidated financial position and should be read in conjunction with this Quarterly Report on Form10-Q.
As of November 30, 2016,August 31, 2017, excluding our joint ventures, we operated 2934 manufacturing facilities worldwide, principally in three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs. Our remaining operating segment consists ofThe Worthington Energy Innovations (“WEI”), which operating segment does not meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, and therefore is combined and reported in the “Other” category.
We alsoAs of August 31, 2017, we held equity positions in 12 active11 joint ventures, which operated 5051 manufacturing facilities worldwide, as of November 30, 2016. Sixworldwide. Five of these joint ventures are consolidated with the equity owned by the other joint venture member(s) shown as noncontrolling interests in our consolidated balance sheets, and their portionportions of net earnings and other comprehensive lossincome (loss) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. The remaining six of these joint ventures are accounted for using the equity method.
Overview
The Company’s performance during the second quarter of fiscal 2017 was highlighted by near record earnings at Steel Processing and steady contributions from joint ventures. The Company delivered overall sales growth of 4% driven primarily by15% for the first quarter of fiscal 2018 over the comparable period of fiscal 2017, on contributions from the acquisition of Amtrol on June 2, 2017, as discussed below underRecent Business Developments, and higher average direct selling prices in Steel Processing due.Net earnings declined from the record levels achieved in the prior year quarter, when rising steel prices led to recent increasesrecord direct spreads at Steel Processing. By comparison, steel prices were relatively stable during the first quarter of fiscal 2018 resulting in flat-rolled steel pricing andsmall inventory holding losses. Pressure Cylinders’ results were down from the prior year quarter as contributions from the consolidation of the WSP joint venture effective March 1, 2016. Margins also improved during the quarter on a favorable pricing spread in Steel Processing, primarily related to coated products,Amtrol and strength in the consumer products business and improvement in the alternative fuels business within Pressure Cylinders. Weaknessimprovements in the oil & gas equipment business within Pressure Cylinders business continues to weigh on our results. We have reduced costswere more than offset by incremental expense directly associated with the Amtrol acquisition and declines in an attempt to match demand in this market while maintaining capacity to respond to an eventual market upturn.the alternative fuels business.
Equity in net income of unconsolidated affiliates (“equity income”) decreased $2.1$7.2 million from the prior year quarter ondue primarily to lower contributions from ClarkDietrich. However,ClarkDietrich, partially offset by minor increases at WAVE and Serviacero. ClarkDietrich’s contribution to equity income actually improved after adjusting for $4.0was $7.9 million of litigation gains recognized inlower than the prior year. The contribution from Serviacero was also up onyear quarter as higher steel pricing. Strong automotive and construction markets in the U.S. are benefiting these businesses.prices compressed margins. We received distributions from unconsolidated joint ventures of $24.3$19.6 million during the secondfirst quarter of fiscal 2017.2018.
Recent Business Developments
On June 2, 2017, the Company acquired Amtrol, a leading manufacturer of pressure cylinders and water system tanks with operations in the U.S. and Europe. The total purchase price was $291.9 million after adjusting for excess working capital and was funded primarily with cash on hand. The net assets became part of the Pressure Cylinders operating segment at closing, with the well water and expansion tank operations aligning under the consumer products business and the refrigerant, liquid propane and industrial and specialty gas operations aligning under the industrial products business. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE M – Acquisitions.”
On July 28, 2017, the Company completed the exitpublic offering of $200.0 million aggregate principal amount of senior unsecured notes. The notes bear interest at a rate of 4.30% and mature on August 1, 2032. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE F – Debt and Receivables Securitization.”
Effective June 1, 2017, the businesses withinCompany changed the internal reporting and management structure of its former Construction Services operating segment duringPackaging Solutions business. As a result, management responsibilities and internal reporting were realigned, moving from Steel Processing to Engineered Cabs. Previously reported results have not been restated and are immaterial for all periods presented.
During the first quarter of fiscal 2017.
The Company’s laser blanking joint venture, TWB Company, L.L.C. (“TWB”), commissioned two new production lines in Mexico during the second quarter of fiscal 2017.
During the second quarter of fiscal 2017,2018, the Company announced certain organizational changes impacting its Pressure Cylinders operating segment, including the consolidationrepurchased a total of the Cryogenics business unit into the Industrial Products business unit.875,000 common shares for $45.1 million at an average price of $51.52 per share.
On December 20, 2016,September 27, 2017, the Board of Directors of Worthington Industries, Inc. (the “Board”) declared a quarterly dividend of $0.20$0.21 per share payable on MarchDecember 29, 2017, to shareholders of record on MarchDecember 15, 2017.
On September 27, 2017, the Board authorized the repurchase of up to an additional 6,828,855 of the Company’s common shares, increasing the total number of common shares available for repurchase to 10,000,000.
Market & Industry Overview
We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for the secondfirst quarter of each of fiscal 20172018 and fiscal 20162017 is illustrated in the following chart:
The automotive industry is one of the largest consumers of flat-rolled steel, and thus the largest end market for our Steel Processing operating segment. Approximately 64%58% of theSteel Processing’s net sales of our Steel Processing operating segment are to the automotive market. North American vehicle production, primarily by Ford, General Motors and FCA US (the “Detroit Three automakers”), has a considerable impact on the activity within this operating segment. The majority of the net sales of three of our unconsolidated joint ventures are also to the automotive end market.
Approximately 12%14% of the net sales of our Steel Processing operating segment and 48% of the net sales of our Engineered Cabs operating segment are to the construction market. The construction market is also the predominant end market for two of our unconsolidated joint ventures: WAVE and ClarkDietrich. While the market price of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including U.S. gross domestic product (“GDP”), the Dodge Index of construction contracts and, in the case of ClarkDietrich, trends in the relative price of framing lumber and steel.
Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 24%28% and 52% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, industrial, lawn and garden, agriculture, oil & gas equipment, heavy truck, mining, forestry and appliance. Given the many different products that make up these net sales and the wide variety of end markets, it is very difficult to detail the key market indicators that drive these portions of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing these operating segments.businesses.
We use the following information to monitor our costs and demand in our major end markets:
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended August 31, | ||||||||||||||||||||||||||||||||||
2016 | 2015 | Inc / (Dec) | 2016 | 2015 | Inc / (Dec) | 2017 | 2016 | Inc / (Dec) | ||||||||||||||||||||||||||||
U.S. GDP (% growth year-over-year)1 | 1.7 | % | 1.0 | % | 0.7 | % | 1.6 | % | 1.2 | % | 0.4 | % | 2.0 | % | 1.5 | % | 0.5 | % | ||||||||||||||||||
Hot-Rolled Steel ($ per ton)2 | $ | 544 | $ | 419 | $ | 125 | $ | 581 | $ | 440 | $ | 141 | $ | 604 | $ | 617 | $ | (13 | ) | |||||||||||||||||
Detroit Three Auto Build (000’s vehicles)3 | 2,388 | 2,495 | (107 | ) | 4,768 | 4,814 | (46 | ) | 2,124 | 2,330 | (206 | ) | ||||||||||||||||||||||||
No. America Auto Build (000’s vehicles)3 | 4,619 | 4,619 | - | 9,182 | 9,012 | 170 | 4,197 | 4,648 | (451 | ) | ||||||||||||||||||||||||||
Zinc ($ per pound)4 | $ | 0.83 | $ | 0.75 | $ | 0.08 | $ | 0.83 | $ | 0.82 | $ | 0.01 | $ | 1.22 | $ | 0.98 | $ | 0.24 | ||||||||||||||||||
Natural Gas ($ per mcf)5 | $ | 1.90 | $ | 2.59 | $ | (0.69 | ) | $ | 1.90 | $ | 2.69 | $ | (0.79 | ) | $ | 2.95 | $ | 2.69 | $ | 0.26 | ||||||||||||||||
On-Highway Diesel Fuel Prices ($ per gallon)6 | $ | 2.78 | $ | 2.50 | $ | 0.28 | $ | 2.59 | $ | 2.63 | $ | (0.04 | ) | $ | 2.54 | $ | 2.39 | $ | 0.15 | |||||||||||||||||
Crude Oil—WTI ($ per barrel)6 | $ | 53.00 | $ | 44.71 | $ | 8.29 | $ | 49.52 | $ | 47.96 | $ | 1.56 | $ | 46.67 | $ | 46.04 | $ | 0.63 |
1 2016 figures based on revised actuals2 CRUHot-Rolled Index; period average3 IHS Global4 LME Zinc; period average5 NYMEX Henry Hub Natural Gas; period average6 Energy Information Administration; period average |
U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasing U.S. GDP growth rates generally indicate a weaker economy. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative (“SG&A”) expense.
The market price ofhot-rolled steel is one of the most significant factors impacting our selling prices and operating results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs.
The following table presents the average quarterly market price per ton ofhot-rolled steel during fiscal 20172018 (first and second quarters)quarter), fiscal 20162017 and fiscal 2015:2016:
(Dollars per ton1) | (Dollars per ton1) | |||||||||||||||||||||||
Fiscal Year | Fiscal Year | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
1st Quarter | $ | 617 | $ | 461 | $ | 673 | $ | 604 | $ | 617 | $ | 461 | ||||||||||||
2nd Quarter | $ | 544 | $ | 419 | $ | 651 | N/A | $ | 544 | $ | 419 | |||||||||||||
3rd Quarter | N/A | $ | 383 | $ | 578 | N/A | $ | 608 | $ | 381 | ||||||||||||||
4th Quarter | N/A | $ | 507 | $ | 464 | N/A | $ | 636 | $ | 486 | ||||||||||||||
Annual Avg. | $ | 581 | $ | 443 | $ | 592 | $ | 604 | $ | 601 | $ | 437 |
1CRUHot-Rolled Index, period average |
No single customer contributed more than 10% of our consolidated net sales during the second quarterfirst quarters of fiscal 2018 or fiscal 2017. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During the secondfirst quarter of fiscal 2017, overall2018, vehicle production for the Detroit Three automakers was down 4%9%, while North American vehicle production as a whole was flat.down 10%.
Certain other commodities, such as zinc, natural gas and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plantmanufacturing operations and indirectly through transportation and freight expense.
Results of Operations
SecondFirst Quarter – Fiscal 20172018 Compared to Fiscal 20162017
Consolidated Operations
The following table presents consolidated operating results for the periods indicated:
Three Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||||||||||||||||||||||||||
% of | % of | Increase/ | % of | % of | Increase/ | |||||||||||||||||||||||||||||||||||
(In millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | 2017 | Net sales | 2016 | Net sales | (Decrease) | ||||||||||||||||||||||||||||||
Net sales | $ | 727.8 | 100.0 | % | $ | 699.9 | 100.0 | % | $ | 27.9 | $ | 848.2 | 100.0 | % | $ | 737.5 | 100.0 | % | $ | 110.7 | ||||||||||||||||||||
Cost of goods sold | 605.0 | 83.1 | % | 590.7 | 84.4 | % | 14.3 | 715.5 | 84.4 | % | 590.2 | 80.0 | % | 125.3 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Gross margin | 122.8 | 16.9 | % | 109.2 | 15.6 | % | 13.6 | 132.7 | 15.6 | % | 147.3 | 20.0 | % | (14.6 | ) | |||||||||||||||||||||||||
Selling, general and administrative expense | 76.5 | 10.5 | % | 72.7 | 10.4 | % | 3.8 | 88.2 | 10.4 | % | 81.1 | 11.0 | % | 7.1 | ||||||||||||||||||||||||||
Impairment of long-lived assets | — | 0.0 | % | 23.0 | 3.3 | % | (23.0 | ) | ||||||||||||||||||||||||||||||||
Restructuring and other expense | 3.3 | 0.5 | % | 1.5 | 0.2 | % | 1.8 | 2.3 | 0.3 | % | 1.3 | 0.2 | % | 1.0 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Operating income | 43.0 | 5.9 | % | 12.0 | 1.7 | % | 31.0 | 42.2 | 5.0 | % | 64.9 | 8.8 | % | (22.7 | ) | |||||||||||||||||||||||||
Miscellaneous income, net | 0.9 | 0.1 | % | 1.0 | 0.1 | % | (0.1 | ) | 0.3 | 0.0 | % | 0.9 | 0.1 | % | (0.6 | ) | ||||||||||||||||||||||||
Interest expense | (7.6 | ) | -1.0 | % | (7.8 | ) | -1.1 | % | (0.2 | ) | (8.8 | ) | -1.0 | % | (7.9 | ) | -1.1 | % | 0.9 | |||||||||||||||||||||
Equity in net income of unconsolidated affiliates (1) | 27.1 | 3.7 | % | 29.2 | 4.2 | % | (2.1 | ) | 27.3 | 3.2 | % | 34.5 | 4.7 | % | (7.2 | ) | ||||||||||||||||||||||||
Income tax expense | (13.5 | ) | -1.9 | % | (8.6 | ) | -1.2 | % | 4.9 | (13.0 | ) | -1.5 | % | (23.9 | ) | -3.2 | % | (10.9 | ) | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net earnings | 49.9 | 6.9 | % | 25.8 | 3.7 | % | 24.1 | 48.0 | 5.7 | % | 68.5 | 9.3 | % | (20.5 | ) | |||||||||||||||||||||||||
Net earnings attributable to noncontrolling interests | 3.3 | 0.5 | % | 2.4 | 0.3 | % | 0.9 | 2.5 | 0.3 | % | 2.9 | 0.4 | % | (0.4 | ) | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net earnings attributable to controlling interest | $ | 46.6 | 6.4 | % | $ | 23.4 | 3.3 | % | $ | 23.2 | $ | 45.5 | 5.4 | % | $ | 65.6 | 8.9 | % | $ | (20.1 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
(1) Equity income by unconsolidated affiliate | ||||||||||||||||||||||||||||||||||||||||
WAVE | $ | 18.7 | $ | 19.1 | $ | (0.4 | ) | $ | 22.2 | $ | 20.7 | $ | 1.5 | |||||||||||||||||||||||||||
ClarkDietrich | 4.3 | 6.4 | (2.1 | ) | 0.7 | 8.6 | (7.9 | ) | ||||||||||||||||||||||||||||||||
Serviacero | 2.0 | 0.4 | 1.6 | 3.0 | 2.0 | 1.0 | ||||||||||||||||||||||||||||||||||
ArtiFlex | 2.1 | 2.6 | (0.5 | ) | 1.5 | 2.9 | (1.4 | ) | ||||||||||||||||||||||||||||||||
WSP | — | 0.7 | (0.7 | ) | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | (0.1 | ) | 0.3 | (0.4 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total | $ | 27.1 | $ | 29.2 | $ | (2.1 | ) | $ | 27.3 | $ | 34.5 | $ | (7.2 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
Net earnings attributable to controlling interest for the three months ended November 30, 2016 increased $23.2August 31, 2017 decreased $20.1 million from the comparable period in the prior year. Net sales and operating highlights were as follows:
Net sales increased $27.9$110.7 million fromover the comparable period in the prior year. The increase was driven primarily by contributions from the acquisition of Amtrol, which totaled $57.3 million, and higher average direct selling prices in Steel Processing, partially offset by lower volumes in Engineered Cabs and certain Pressure Cylinders businesses.up $43.2 million over the prior year. The net impactbalance of these factors increased consolidated net sales by $17.0 million. The remainingthe increase was primarily due to higher tolling volumes in Steel Processing, driven by the consolidationresult of the WSP joint venture effective March 1, 2016.increased volume at Pressure Cylinders and Engineered Cabs.
Gross margin increased $13.6decreased $14.6 million from the comparable period in the prior year. The improvement was driven primarilyContributions from the acquisition of Amtrol were more than offset by a favorable pricing spreadlower spreads in Steel Processing, which increased gross margin by $21.1down approximately $23.4 million partially offset by higher manufacturing expenses, which negatively impacted gross margin by $5.8 million due in partfrom the prior year quarter when rising steel prices led to production/start-up costs associated with new production lines at our TWB joint venture.significant inventory holding gains.
SG&A expense increased $3.8$7.1 million over the comparable period in the prior year periodyear. The increase was driven primarily by the consolidation of WSP and the impact of prior year acquisitions in Pressure Cylinders.the Amtrol acquisition, partially offset by lower profit sharing and bonus expense. Overall, SG&A expense is trending in line with the prior year quarter at 10.5%was 10.4% of consolidated net sales.sales compared to 11.0% in the comparable period of the prior year.
Impairment charges of $23.0Restructuring and other expense totaled $2.3 million in the prior yearcurrent period and consisted primarily of severance accruals at Pressure Cylinders related to the impairment of certain long-lived assets in our oil & gas equipment business.corporate management positions at Amtrol that were eliminated. For additional information regarding the Company’s restructuring activities, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.Restructuring and Other Expense.”
|
Interest expense increased $0.9 million over the comparable period in the prior year. The increase was primarily due to the issuance of $200.0 million of aggregate principal amount senior unsecured notes due August 1, 2032. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE F – Debt and Receivables Securitization.”
Equity income decreased $0.2$7.2 million from the comparable period in the prior year due primarily to lower short-term borrowings.
Equity income decreased $2.1 million from the comparable period in the prior year on lower contributions from ClarkDietrich. However,ClarkDietrich, partially offset by minor increases at WAVE and Serviacero. ClarkDietrich’s contribution to equity income actually improved after adjusting for $4.0was $7.9 million of litigation gains recognized inlower than the prior year. The contribution from Serviacero was also up onyear quarter as higher steel pricing.prices compressed margins. We received distributions of $24.3$19.6 million from our unconsolidated affiliates during the quarter. For additional financialinformation regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.Affiliates.”
Income tax expense increased $4.9decreased $10.9 million from the comparable period in the prior year due primarily to higherlower earnings. The increase in tax expense was partially offset by a $6.3 million tax benefit associated with share-based payment awards. The current quarter expense was calculated using an estimated annual effective income tax rate of 28.5%30.5% versus 30.9%31.2% in the prior year quarter. Discrete items in the current quarter reduced income tax expense by $6.2 million, including a net benefit of $3.8 million related to the acquisition of Amtrol. Discrete items in the prior year quarter reduced income tax expense by $5.8 million. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE KJ – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.
Segment Operations
Steel Processing
The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:
Three Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||||||||||||||||||||||||||
% of | % of | Increase/ | % of | % of | Increase/ | |||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | 2017 | Net sales | 2016 | Net sales | (Decrease) | ||||||||||||||||||||||||||||||
Net sales | $ | 508.8 | 100.0 | % | $ | 467.8 | 100.0 | % | $ | 41.0 | $ | 543.5 | 100.0 | % | $ | 505.7 | 100.0 | % | $ | 37.8 | ||||||||||||||||||||
Cost of goods sold | 437.2 | 85.9 | % | 406.0 | 86.8 | % | 31.2 | 473.8 | 87.2 | % | 413.0 | 81.7 | % | 60.8 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Gross margin | 71.6 | 14.1 | % | 61.8 | 13.2 | % | 9.8 | 69.7 | 12.8 | % | 92.7 | 18.3 | % | (23.0 | ) | |||||||||||||||||||||||||
Selling, general and administrative expense | 35.8 | 7.0 | % | 32.9 | 7.0 | % | 2.9 | 36.5 | 6.7 | % | 36.9 | 7.3 | % | (0.4 | ) | |||||||||||||||||||||||||
Restructuring and other expense | 0.3 | 0.1 | % | 2.3 | 0.5 | % | (2.0 | ) | 0.3 | 0.1 | % | 1.0 | 0.2 | % | (0.7 | ) | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Operating income | $ | 35.5 | 7.0 | % | $ | 26.6 | 5.7 | % | $ | 8.9 | $ | 32.9 | 6.1 | % | $ | 54.8 | 10.8 | % | $ | (21.9 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Material cost | $ | 339.0 | $ | 322.5 | $ | 16.5 | $ | 379.2 | $ | 312.7 | $ | 66.5 | ||||||||||||||||||||||||||||
Tons shipped (in thousands) | 1,021 | 828 | 193 | 968 | 1,032 | (64 | ) |
Net sales and operating highlights were as follows:
Net sales increased $41.0$37.8 million fromover the comparable period in the prior year driven primarily by higher average direct selling prices, which increased net sales by $30.9 million. The remaining increase was due to higher tolling volume driven$43.2 million, partially offset by the consolidation of the WSP joint venture effective March 1, 2016.lower toll volume. The mix of direct versus toll tons processed was 49%56% to 51%44% compared to 62%52% to 38%48% in the prior year quarter. The change in mix was primarily the result of the consolidation of the WSP joint venture.
Operating income increased $8.9decreased $21.9 million from the comparable period in the prior year ondue to a favorable pricinglower spread which increased gross margin by $12.9between average selling prices and material costs, down approximately $23.4 million partially offset by higher manufacturing expenses, which negatively impacted gross margin by $4.4 million due in partfrom the prior year quarter when rising steel prices led to production/start-up costs associated with new production lines at our TWB joint venture. SG&A expense increased $2.9 million driven by the consolidation of WSP and an increase in corporate allocated costs. Restructuring and other expense in the current quarter consisted primarily of costs related to the closure of Precision Specialty Metals, Inc. (“PSM”).significant inventory holding gains.
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods indicated:
Three Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||||||||||||||||||||||||||
% of | % of | Increase/ | % of | % of | Increase/ | |||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | 2017 | Net sales | 2016 | Net sales | (Decrease) | ||||||||||||||||||||||||||||||
Net sales | $ | 194.7 | 100.0 | % | $ | 201.2 | 100.0 | % | $ | (6.5 | ) | $ | 269.8 | 100.0 | % | $ | 205.2 | 100.0 | % | $ | 64.6 | |||||||||||||||||||
Cost of goods sold | 145.9 | 74.9 | % | 154.6 | 76.8 | % | (8.7 | ) | 212.0 | 78.6 | % | 154.0 | 75.0 | % | 58.0 | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Gross margin | 48.8 | 25.1 | % | 46.6 | 23.2 | % | 2.2 | 57.8 | 21.4 | % | 51.2 | 25.0 | % | 6.6 | ||||||||||||||||||||||||||
Selling, general and administrative expense | 35.5 | 18.2 | % | 33.9 | 16.8 | % | 1.6 | 45.4 | 16.8 | % | 37.0 | 18.0 | % | 8.4 | ||||||||||||||||||||||||||
Impairment of long-lived assets | — | 0.0 | % | 23.0 | 11.4 | % | (23.0 | ) | ||||||||||||||||||||||||||||||||
Restructuring and other expense | 2.0 | 1.0 | % | — | 0.0 | % | 2.0 | 1.9 | 0.7 | % | 0.1 | 0.0 | % | 1.8 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 11.3 | 5.8 | % | $ | (10.3 | ) | -5.1 | % | $ | 21.6 | |||||||||||||||||||||||||||||
Operating income | $ | 10.5 | 3.9 | % | $ | 14.1 | 6.9 | % | $ | (3.6 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Material cost | $ | 76.3 | $ | 85.5 | $ | (9.2 | ) | $ | 120.6 | $ | 82.9 | $ | 37.7 | |||||||||||||||||||||||||||
Net sales by principal class of products: | ||||||||||||||||||||||||||||||||||||||||
Consumer products | $ | 55.4 | $ | 49.5 | $ | 5.9 | $ | 108.7 | $ | 81.8 | $ | 26.9 | ||||||||||||||||||||||||||||
Industrial products | 98.9 | 102.7 | (3.8 | ) | 113.0 | 79.1 | 33.9 | |||||||||||||||||||||||||||||||||
Alternative fuels | 29.2 | 24.0 | 5.2 | 23.7 | 29.8 | (6.1 | ) | |||||||||||||||||||||||||||||||||
Oil & gas equipment | 11.2 | 25.0 | (13.8 | ) | 24.4 | 14.5 | 9.9 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total Pressure Cylinders | $ | 194.7 | $ | 201.2 | $ | (6.5 | ) | $ | 269.8 | $ | 205.2 | $ | 64.6 | |||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Units shipped by principal class of products: | ||||||||||||||||||||||||||||||||||||||||
Consumer products | 10,383,747 | 10,523,692 | (139,945 | ) | 16,354,427 | 16,146,717 | 207,710 | |||||||||||||||||||||||||||||||||
Industrial products | 5,790,436 | 5,990,875 | (200,439 | ) | 3,976,290 | 2,632,343 | 1,343,947 | |||||||||||||||||||||||||||||||||
Alternative fuels | 134,190 | 107,121 | 27,069 | 109,856 | 136,062 | (26,206 | ) | |||||||||||||||||||||||||||||||||
Oil & gas equipment | 434 | 1,044 | (610 | ) | 703 | 756 | (53 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total Pressure Cylinders | 16,308,807 | 16,622,732 | (313,925 | ) | 20,441,276 | 18,915,878 | 1,525,398 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
Net sales and operating highlights were as follows:
Net sales increased $64.6 million over the comparable period in the prior year due to contributions from the Amtrol acquisition, which totaled $57.3 million, and higher volumes in the oil & gas equipment business, partially offset by lower volumes in the alternative fuels business.
Operating income decreased $6.5$3.6 million from the comparable period in the prior year. The decrease was driven by lower volumesincremental items directly associated with the Amtrol acquisition, which resulted in a net operating loss of $2.6 million for the acquired business. This included $2.6 million of additional expense within cost of goods sold for thewrite-up of inventory to fair value that was subsequently sold, $1.6 million of acquisition-related costs within SG&A expense and a $1.9 million severance accrual within restructuring expense. Improvements in the oil & gas equipment business and industrial productslower SG&A spend for the legacy cylinder businesses partiallywas largely offset by improvements in consumer products and alternative fuels. The most significant decline was in oil & gas equipment, where net sales decreased 55%, or $13.8 million, on weak demand. Net sales in the industrial products business were down $3.8 million on lower volume due to weak demand across our refillable propane cylinder products, as well as softness for high pressure industrial cylinders in Europe. An improved product mix in the consumer products business led to higher net sales despite an overall decline in units shipped. Net sales were also updeclines in the alternative fuels business on higher volume.
Operating income increased $21.6 million from the comparable period in the prior year on lower impairment and restructuring charges, which declined a combined $21.0 million. Improvements in the consumer products and alternative fuels businesses were largely offset by continued declines in the oil & gas equipment business.
Engineered Cabs
The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods indicated:
Three Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||||||||||||||||||||||||||
(In millions) | 2016 | % of Net sales | 2015 | % of Net sales | Increase/ (Decrease) | 2017 | % of Net sales | 2016 | % of Net sales | Increase/ (Decrease) | ||||||||||||||||||||||||||||||
Net sales | $ | 22.5 | 100.0 | % | $ | 28.7 | 100.0 | % | $ | (6.2 | ) | $ | 31.9 | 100.0 | % | $ | 25.6 | 100.0 | % | $ | 6.3 | |||||||||||||||||||
Cost of goods sold | 21.2 | 94.2 | % | 27.4 | 95.5 | % | (6.2 | ) | 28.0 | 87.8 | % | 23.3 | 91.0 | % | 4.7 | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Gross margin | 1.3 | 5.8 | % | 1.3 | 4.5 | % | - | 3.9 | 12.2 | % | 2.3 | 9.0 | % | 1.6 | ||||||||||||||||||||||||||
Selling, general and administrative expense | 3.7 | 16.4 | % | 4.9 | 17.1 | % | (1.2 | ) | 4.3 | 13.5 | % | 3.9 | 15.2 | % | 0.4 | |||||||||||||||||||||||||
Restructuring and other expense | 1.0 | 4.4 | % | 0.7 | 2.4 | % | 0.3 | - | 0.0 | % | 0.2 | 0.8 | % | (0.2 | ) | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Operating loss | $ | (3.4 | ) | -15.1 | % | $ | (4.3 | ) | -15.0 | % | $ | 0.9 | $ | (0.4 | ) | -1.3 | % | $ | (1.8 | ) | -7.0 | % | $ | 1.4 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Material cost | $ | 10.2 | $ | 13.4 | $ | (3.2 | ) | $ | 14.2 | $ | 11.2 | $ | 3.0 |
Net sales and operating highlights were as follows:
Net sales decreased $6.2increased $6.3 million fromover the comparable period in the prior year on lower volume due to declines in market demand.higher volume.
Operating loss improved $0.9$1.4 million to $3.4$0.4 million. The improvement resulted from successful cost reduction efforts, which ledwas due to athe favorable impact of higher gross margin as a percentage of net sales and a 24% decline in SG&A expense.volumes.
Other
The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in the Other category, including costs associated with our captive insurance company. The following table presents a summary of operating results for the Other category for the periods indicated:
Three Months Ended November 30, | ||||||||||||||||||||
(In millions) | 2016 | % of Net sales | 2015 | % of Net sales | Increase/ (Decrease) | |||||||||||||||
Net sales | $ | 1.9 | 100.0 | % | $ | 2.2 | 100.0 | % | $ | (0.3 | ) | |||||||||
Cost of goods sold | 0.7 | 36.8 | % | 2.7 | 122.7 | % | (2.0 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Gross margin | 1.2 | 63.2 | % | (0.5 | ) | -22.7 | % | 1.7 | ||||||||||||
Selling, general and administrative expense | 1.5 | 78.9 | % | 1.1 | 50.0 | % | 0.4 | |||||||||||||
Restructuring and other income | - | 0.0 | % | (1.5 | ) | -68.2 | % | 1.5 | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Operating loss | $ | (0.3 | ) | -15.8 | % | $ | (0.1 | ) | -4.5 | % | $ | (0.2 | ) | |||||||
|
|
|
|
|
|
Net sales and operating highlights were as follows:
Net sales decreased $0.3 million from the comparable period in the prior year due to declines at WEI.
Operating loss of $0.3 million in the current period was driven primarily by losses at WEI.
Six Months Year-to-Date – Fiscal 2017 Compared to Fiscal 2016
Consolidated Operations
The following table presents consolidated operating results for the periods indicated:
Six Months Ended November 30, | ||||||||||||||||||||
% of | % of | Increase/ | ||||||||||||||||||
(In millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | |||||||||||||||
Net sales | $ | 1,465.3 | 100.0 | % | $ | 1,458.0 | 100.0 | % | $ | 7.3 | ||||||||||
Cost of goods sold | 1,195.2 | 81.6 | % | 1,235.8 | 84.8 | % | (40.6 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Gross margin | 270.1 | 18.4 | % | 222.2 | 15.2 | % | 47.9 | |||||||||||||
Selling, general and administrative expense | 157.6 | 10.8 | % | 148.6 | 10.2 | % | 9.0 | |||||||||||||
Impairment of long-lived assets | — | 0.0 | % | 26.0 | 1.8 | % | (26.0 | ) | ||||||||||||
Restructuring and other expense | 4.6 | 0.3 | % | 4.6 | 0.3 | % | — | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Operating income | 107.9 | 7.4 | % | 43.0 | 2.9 | % | 64.9 | |||||||||||||
Miscellaneous income, net | 1.7 | 0.1 | % | 0.5 | 0.0 | % | 1.2 | |||||||||||||
Interest expense | (15.5 | ) | -1.1 | % | (15.7 | ) | -1.1 | % | (0.2 | ) | ||||||||||
Equity in net income of unconsolidated affiliates (1) | 61.7 | 4.2 | % | 55.8 | 3.8 | % | 5.9 | |||||||||||||
Income tax expense | (37.4 | ) | -2.6 | % | (22.8 | ) | -1.6 | % | 14.6 | |||||||||||
|
|
|
|
|
| |||||||||||||||
Net earnings | 118.4 | 8.1 | % | 60.8 | 4.2 | % | 57.6 | |||||||||||||
Net earnings attributable to noncontrolling interests | 6.3 | 0.4 | % | 5.4 | 0.4 | % | 0.9 | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Net earnings attributable to controlling interest | $ | 112.1 | 7.7 | % | $ | 55.4 | 3.8 | % | $ | 56.7 | ||||||||||
|
|
|
|
|
| |||||||||||||||
(1) Equity income by unconsolidated affiliate | ||||||||||||||||||||
WAVE | $ | 39.5 | $ | 41.2 | $ | (1.7 | ) | |||||||||||||
ClarkDietrich | 12.9 | 9.0 | 3.9 | |||||||||||||||||
Serviacero | 4.0 | 1.2 | 2.8 | |||||||||||||||||
ArtiFlex | 5.0 | 4.2 | 0.8 | |||||||||||||||||
WSP | — | 1.5 | (1.5 | ) | ||||||||||||||||
Other | 0.3 | (1.3 | ) | 1.6 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 61.7 | $ | 55.8 | $ | 5.9 | ||||||||||||||
|
|
|
|
|
|
Net earnings attributable to controlling interest for the six months ended November 30, 2016 increased $56.7 million from the comparable period in the prior year. Net sales and operating highlights were as follows:
Net sales increased $7.3 million from the comparable period in the prior year. The increase was the result of higher average direct selling prices in Steel Processing, which favorably impacted net sales by $37.4 million, partially offset by lower volume in Engineered Cabs and certain Pressure Cylinders businesses. Higher tolling volumes in Steel Processing, driven by the consolidation of WSP, also contributed to the overall increase in net sales.
Gross margin increased $47.9 million from the comparable period in the prior year. A favorable pricing spread, primarily in Steel Processing and to a lesser extent in Pressure Cylinders, increased gross margin by $76.4 million. The favorable impact of higher spreads was partially offset by lower volume in certain Pressure Cylinders businesses and higher overall manufacturing expenses, which reduced gross margin by a combined $27.6 million.
SG&A expense increased $9.0 million over the comparable prior year period. The increase was primarily driven by the consolidation of WSP and the impact of prior year acquisitions in Pressure Cylinders, which increased SG&A expense by a combined $6.0 million. Higher profit sharing and bonus expense and a $1.5 million increase in accrued legal expense also contributed to the overall increase.
|
Interest expense decreased $0.2 million from the comparable period in the prior year on lower short-term borrowings.
Equity income increased $5.9 million from the comparable period in the prior year on higher contributions from ClarkDietrich and Serviacero. Equity income at ClarkDietrich was $3.9 million higher than the prior year period despite a $4.0 million favorable impact related to legal settlements in the prior year. The contribution from Serviacero was also up on higher steel pricing. Strong automotive and construction markets in the U.S. are benefiting these businesses. We received distributions of $62.7 million from our unconsolidated affiliates during the six months ended November 30, 2016. For additional financial regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.
Income tax expense increased $14.6 million from the comparable period in the prior year due to higher earnings. The increase in tax expense was partially offset by the following items recorded in the current year: (i) a $10.9 million tax benefit associated with share-based payment awards, and (ii) a $1.2 million tax benefit related to foreign tax credits. Tax expense of $37.4 million for the six months was calculated using an estimated annual effective rate of 28.5% versus 30.9% in the prior year comparable period. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE K – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.
Segment Operations
Steel Processing
The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:
Six Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||||||||||||||||||||||||||
% of | % of | Increase/ | % of | % of | Increase/ | |||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | |||||||||||||||||||||||||||||||||||
(In millions) | 2017 | Net sales | 2016 | Net sales | (Decrease) | |||||||||||||||||||||||||||||||||||
Net sales | $ | 1,014.5 | 100.0 | % | $ | 958.6 | 100.0 | % | $ | 55.9 | $ | 3.0 | 100.0 | % | $ | 1.1 | 100.0 | % | $ | 1.9 | ||||||||||||||||||||
Cost of goods sold | 850.3 | 83.8 | % | 839.8 | 87.6 | % | 10.5 | 1.6 | 53.3 | % | - | 0.0 | % | 1.6 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Gross margin | 164.2 | 16.2 | % | 118.8 | 12.4 | % | 45.4 | 1.4 | 46.7 | % | 1.1 | 100.0 | % | 0.3 | ||||||||||||||||||||||||||
Selling, general and administrative expense | 72.7 | 7.2 | % | 65.8 | 6.9 | % | 6.9 | 2.0 | 66.7 | % | 3.2 | 290.9 | % | (1.2 | ) | |||||||||||||||||||||||||
Restructuring and other expense | 1.3 | 0.1 | % | 2.7 | 0.3 | % | (1.4 | ) | 0.1 | 3.3 | % | - | 0.0 | % | 0.1 | |||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Operating income | $ | 90.2 | 8.9 | % | $ | 50.3 | 5.2 | % | $ | 39.9 | ||||||||||||||||||||||||||||||
Operating loss | $ | (0.7 | ) | -23.3 | % | $ | (2.1 | ) | -190.9 | % | $ | 1.4 | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Material cost | $ | 651.7 | $ | 670.8 | $ | (19.1 | ) | |||||||||||||||||||||||||||||||||
Tons shipped (in thousands) | 2,051 | 1,695 | 356 |
Net sales and operating highlights were as follows:
Net sales increased $55.9$1.9 million from the comparable period in the prior year driven primarily by higher average direct selling prices, which increased net sales by $37.4 million. The remaining increase was due to higher tolling volume driven by the consolidation of the WSP joint venture effective March 1, 2016. The mix of direct versus toll tons processed was 51% to 49% compared to 61% to 39% in the comparable period of fiscal 2016. The change in mix was primarily the result of the consolidation of the WSP joint venture.
Operating income increased $39.9 million fromover the comparable period in the prior year on higher gross margin, partially offset by higher SG&A expense. Higher spreads between average selling prices and material costs increased gross margin by $56.5 million. The favorable impact of higher spreads was partially offset by higher manufacturing expenses, which negatively impacted gross margin by $12.2 million due to higher profit sharing and bonus expense and production/start-up costs associated with new production linesvolumes at our TWB joint venture. SG&A expense increased $6.9 million driven by an increase in corporate allocated costs, the consolidation of WSP and higher profit sharing and bonus expense. Restructuring and other expense in the current period consisted primarily of costs related to the closure of PSM.
Pressure Cylinders
The following table presents a summary of operating results for our Pressure Cylinders operating segment for the periods indicated:
Six Months Ended November 30, | ||||||||||||||||||||
% of | % of | Increase/ | ||||||||||||||||||
(Dollars in millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | |||||||||||||||
Net sales | $ | 399.9 | 100.0 | % | $ | 425.6 | 100.0 | % | $ | (25.7 | ) | |||||||||
Cost of goods sold | 299.9 | 75.0 | % | 324.6 | 76.3 | % | 24.7 | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Gross margin | 100.0 | 25.0 | % | 101.0 | 23.7 | % | (1.0 | ) | ||||||||||||
Selling, general and administrative expense | 72.5 | 18.1 | % | 70.8 | 16.6 | % | 1.7 | |||||||||||||
Impairment of long-lived assets | — | 0.0 | % | 23.0 | 5.4 | % | (23.0 | ) | ||||||||||||
Restructuring and other expense | 2.1 | 0.5 | % | 0.7 | 0.2 | % | 1.4 | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Operating income | $ | 25.4 | 6.4 | % | $ | 6.5 | 1.5 | % | $ | 18.9 | ||||||||||
|
|
|
|
|
| |||||||||||||||
Material cost | $ | 159.2 | $ | 184.6 | $ | (25.4 | ) | |||||||||||||
Net sales by principal class of products: | ||||||||||||||||||||
Consumer products | $ | 116.1 | $ | 104.5 | $ | 11.6 | ||||||||||||||
Industrial products | 199.2 | 214.4 | (15.2 | ) | ||||||||||||||||
Alternative fuels | 58.9 | 48.8 | 10.1 | |||||||||||||||||
Oil & gas equipment | 25.7 | 57.9 | (32.2 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total Pressure Cylinders | $ | 399.9 | $ | 425.6 | $ | (25.7 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Units shipped by principal class of products: | ||||||||||||||||||||
Consumer products | 22,472,659 | 22,501,637 | (28,978 | ) | ||||||||||||||||
Industrial products | 12,480,584 | 13,227,314 | (746,730 | ) | ||||||||||||||||
Alternative fuels | 270,252 | 199,077 | 71,175 | |||||||||||||||||
Oil & gas equipment | 1,190 | 2,364 | (1,174 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total Pressure Cylinders | 35,224,685 | 35,930,392 | (705,707 | ) | ||||||||||||||||
|
|
|
|
|
|
Net sales and operating highlights were as follows:
Net sales decreased $25.7 million from the comparable period in the prior year. The decrease was driven by lower volumes in the oil & gas equipment and industrial products businesses, partially offset by improvements in consumer products and alternative fuels. The most significant decline was in oil & gas equipment, where net sales decreased 56%, or $32.2 million, on weak demand. Net sales in the industrial products business were down $15.2 million on lower volume due to weak demand across our refillable propane cylinder products, as well as softness for high pressure industrial cylinders in Europe. An improved product mix in the consumer products business led to higher net sales despite an overall decline in units shipped. Net sales were also up in the alternative fuels business on higher volume.
Operating income increased $18.9 million from the comparable period in the prior year primarily on lower impairment and restructuring charges, which declined a combined $21.6 million. Improvements in the consumer products and alternative fuels businesses were largely offset by continued declines in the oil & gas equipment business.
Engineered Cabs
The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods indicated:
Six Months Ended November 30, | ||||||||||||||||||||
% of | % of | Increase/ | ||||||||||||||||||
(In millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | |||||||||||||||
Net sales | $ | 48.0 | 100.0 | % | $ | 67.3 | 100.0 | % | $ | (19.3 | ) | |||||||||
Cost of goods sold | 44.4 | 92.5 | % | 65.0 | 96.6 | % | (20.6 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Gross margin | 3.6 | 7.5 | % | 2.3 | 3.4 | % | 1.3 | |||||||||||||
Selling, general and administrative expense | 7.6 | 15.8 | % | 10.3 | 15.3 | % | (2.7 | ) | ||||||||||||
Impairment of long-lived assets | - | 0.0 | % | 3.0 | 4.5 | % | (3.0 | ) | ||||||||||||
Restructuring and other expense | 1.2 | 2.5 | % | 2.6 | 3.9 | % | (1.4 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Operating loss | $ | (5.2 | ) | -10.8 | % | $ | (13.6 | ) | -20.2 | % | $ | 8.4 | ||||||||
|
|
|
|
|
| |||||||||||||||
Material cost | $ | 21.4 | $ | 31.4 | $ | (10.0 | ) |
Net sales and operating highlights were as follows:
Net sales decreased $19.3 million from the comparable period in the prior year due to declines in market demand.
Operating loss improved $8.4 million to $5.2 million on lower impairment and restructuring charges and the impact of cost reduction efforts, which led to margin improvements and a 26% decline in SG&A expense.
Other
The Other category includes the WEI operating segment, which does not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in the Other category, including costs associated with our captive insurance company. The following table presents a summary of operating results for the Other category for the periods indicated:
Six Months Ended November 30, | ||||||||||||||||||||
% of | % of | Increase/ | ||||||||||||||||||
(In millions) | 2016 | Net sales | 2015 | Net sales | (Decrease) | |||||||||||||||
Net sales | $ | 2.9 | 100.0 | % | $ | 6.5 | 100.0 | % | $ | (3.6 | ) | |||||||||
Cost of goods sold | 0.7 | 24.1 | % | 6.4 | 98.5 | % | (5.7 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Gross margin | 2.2 | 75.9 | % | 0.1 | 1.5 | % | 2.1 | |||||||||||||
Selling, general and administrative expense | 4.7 | 162.1 | % | 1.8 | 27.7 | % | 2.9 | |||||||||||||
Restructuring and other income | - | 0.0 | % | (1.5 | ) | -23.1 | % | 1.5 | ||||||||||||
|
|
|
|
|
| |||||||||||||||
Operating loss | $ | (2.5 | ) | -86.2 | % | $ | (0.2 | ) | -3.1 | % | $ | (2.3 | ) | |||||||
|
|
|
|
|
|
Net sales and operating highlights were as follows:
Net sales decreased $3.6 million from the comparable period in the prior year as the former Construction Services operating segment ceased operations during the first quarter of fiscal 2017.WEI.
Operating loss of $2.5$0.7 million inrepresents a $1.4 million improvement over the current periodprior year period. The improvement was driven primarily by a $1.5 million increase in legal expenses.higher earnings at WEI.
Liquidity and Capital Resources
During the sixthree months ended November 30, 2016,August 31, 2017, we generated $152.2$83.4 million of cash from operating activities, invested $31.0$18.0 million in property, plant and equipment, spent $284.5 million on acquisitions and paid dividends of $24.7$12.8 million on our common shares. Additionally, we paid $45.1 million to repurchase 875,000 of our common shares. The following table summarizes our consolidated cash flows for the sixthree months ended November 30, 2016August 31, 2017 and 2015:2016:
Six Months Ended November 30, | Three Months Ended August 31, | |||||||||||||||
(in millions) | 2016 | 2015 | 2017 | 2016 | ||||||||||||
Net cash provided by operating activities | $ | 152.2 | $ | 189.7 | $ | 83.4 | $ | 120.9 | ||||||||
Net cash used by investing activities | (30.1 | ) | (55.9 | ) | (302.1 | ) | (16.2 | ) | ||||||||
Net cash used by financing activities | (31.1 | ) | (137.5 | ) | ||||||||||||
Net cash provided (used) by financing activities | 136.5 | (7.4 | ) | |||||||||||||
|
|
|
| |||||||||||||
Increase (decrease) in cash and cash equivalents | 91.0 | (3.7 | ) | (82.2 | ) | 97.3 | ||||||||||
Cash and cash equivalents at beginning of period | 84.2 | 31.1 | 278.1 | 84.2 | ||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of period | $ | 175.2 | $ | 27.4 | $ | 195.9 | $ | 181.5 | ||||||||
|
|
|
|
We believe we have access to adequate resources to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, and working capital. These resources include cash and cash equivalents, cash provided by operating activities and unused lines of credit. We also believe that we have adequate access to the financial markets to allow us to be in a position to sell long-term debt or equity securities. However, uncertainty and volatility in the financial markets may impact our ability to access capital and the terms under which we can do so.
Operating Activities
Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices due to higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.
Net cash provided by operating activities was $152.2$83.4 million during the sixthree months ended November 30, 2016August 31, 2017 compared to $189.7$120.9 million in the comparable period of fiscal 2016.2017. The decrease was driven primarily by an increasethe decline in working capital levels as a result of higher average steel prices partially offset by higher net earnings.earnings and lower distributions from unconsolidated joint ventures.
Investing Activities
Net cash used by investing activities was $30.1$302.1 million during the sixthree months ended November 30, 2016August 31, 2017 compared to $55.9$16.2 million in the prior year period. The decreaseincrease from the prior year period was driven primarily by lowerthe acquisition of Amtrol on June 2, 2017, which reduced cash by $284.5 million, net of cash acquired. We also made capital expenditures.expenditures of $18.0 million during the first three months of fiscal 2018.
Investment activities are largely discretionary, and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms when required.
Financing Activities
Net cash usedprovided by financing activities was $31.1$136.5 million during the sixthree months ended November 30, 2016August 31, 2017 compared to $137.5a net cash outflow of $7.4 million in the comparable prior year period. The decreaseincrease from the prior year period was driven primarily by the absenceissuance of $200.0 million aggregate principal amount of senior unsecured notes on July 28, 2017, partially offset by share repurchases and lower repaymentsrepurchases. During the first three months of short-term borrowings.fiscal 2018, we paid $45.1 million to repurchase 875,000 of our common shares.
As of November 30, 2016,August 31, 2017, we were in compliance with our short-term and long-term financial debt covenants. These debt agreements do not include credit rating triggers or material adverse change provisions. Ourprovisions.Our credit ratings at November 30, 2016August 31, 2017 were unchanged from those reported as of May 31, 2016.2017.
Common shares— - The Board of Directors of Worthington Industries, Inc. (the “Board”) declared a quarterly dividend of $0.21 per common share for the first quarter of fiscal 2018 compared to $0.20 per common share for the first and second quartersquarter of fiscal 2017 compared to $0.19 per common share for the first and second quarters of fiscal 2016.2017. Dividends paid on our common shares totaled $24.7$12.8 million and $23.6$11.9 million during the sixthree months ended November 30,August 31, 2017 and 2016, and 2015, respectively. On December 20, 2016,September 27, 2017, the Board declared a quarterly dividend of $0.20$0.21 per share payable on MarchDecember 29, 2017, to shareholders of record on MarchDecember 15, 2017.
On June 25, 2014, the Board authorized the repurchase of up to 10,000,000 of our outstanding common shares. A total of 5,953,8556,828,855 common shares have been repurchased under this authorization, including 875,000 during the first three months of fiscal 2018, leaving 4,046,1453,171,145 common shares available for repurchase. NoOn September 27, 2017, the Board authorized the repurchase of up to an additional 6,828,855 of the Company’s common shares, were repurchased under this authorization duringincreasing the first and second quarterstotal number of fiscal 2017.common shares available for repurchase to 10,000,000.
The common shares available for repurchase under this authorizationthe authorizations, described above, may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately negotiated transactions.
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments will continue in the future.
Contractual Cash Obligations and Other Commercial Commitments
Our contractual cash obligations and other commercial commitments have not changed significantly from those disclosed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Cash Obligations and Other Commercial Commitments” of our 20162017 Form10-K, other than the changes in borrowings, as described in “Part I – Item 1. – Financial Statements – NOTE GF – Debt and Receivables Securitization” of this Quarterly Report on Form10-Q.
Off-Balance Sheet Arrangements
We do not have guarantees or otheroff-balance sheet financing arrangements 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. However, as of November 30, 2016,August 31, 2017, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $9.9$9.0 million at November 30, 2016.August 31, 2017. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to this guarantee is not probable and, therefore, no amounts have been recognized in our consolidated financial statements.
Recently Adopted Accounting Standards
In FebruaryJuly 2015, amended accounting guidance was issued that revised consolidation requirements in order to provide financial statement users with a more useful presentationregarding the measurement of an entity’s economic and operational results.inventory. The amended guidance revisesrequires that inventory accounted for under the consolidation requirementsfirst-in,first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has no impact on inventory accounted for limited partnerships,under the considerations surrounding the primary beneficiary determination and the consolidation of certain investment funds.last-in,first-out (LIFO) or retail inventory methods. The Company adopted this amended guidance on a prospective basis effective June 1, 2016.2017. The adoption of this guidance did not impact our consolidated financial position or results of operations.
In April 2015, amended accounting guidance was issued that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability itself. The amended guidance does not apply to line-of-credit arrangements. Accordingly, issuance costs related to line-of-credit arrangements will continue to be presented as an asset and amortized ratably over the term of the arrangement. The Company adopted this guidance on a retrospective basis effective June 1, 2016. As a result, debt issuance costs totaling $2.3 million and $2.5 million as of November 30, 2016 and May 31, 2016, respectively, have been presented as a component of the carrying amount of long-term debt reported in our consolidated balance sheets. These amounts were previously capitalized and reported within other assets.
In September 2015, amended accounting guidance was issued regarding adjustments to provisional amounts recorded in conjunction with a business combination. The amended guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company adopted this amended guidance on a prospective basis effective June 1, 2016. The adoption of this guidance did not impact our consolidated financial position or results of operations.
In March 2016, amended accounting guidance was issued that simplifies the accounting for share-based payments. The amended guidance impacts several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, statutory withholding requirements, and classification in the statement of cash flows. The Company early adopted this guidance during the fourth quarter of fiscal 2016. As required for early adoption in an interim period, all adjustments have been reflected as of the beginning of fiscal 2016. Accordingly, income tax expense for the three and six months ended November 30, 2015 has been restated to reflect excess tax benefits associated with share-based payments totaling $136,000 and $694,000, respectively, in current income tax expense, rather than in paid-in capital.
Recently Issued Accounting Standards
In May 2014, amendednew accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The amendednew guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, additional guidance was issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the identification of performance obligations and implementation of guidance related to licensing. The amendednew guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amended guidance permits the use of either the retrospective or cumulative effect transition method. We are in the process of evaluating the effect this guidance will have on the presentation of our consolidated financial statements and related disclosures. OurWhile we have not yet identified any material changes in the timing of revenue recognition, our evaluation is ongoing and not complete. However, we currently do not anticipate a material impact on our revenue recognition practices. We expectplan to make a determination as toadopt the timing and method of adoptionnew guidance in the second halffirst quarter of fiscal 2017.
In July 2015, amended accounting guidance was issued regarding2019. The Company will continue to monitor any modifications, clarifications, and interpretations by the measurement of inventory. The amended guidance requiresFASB that inventory accounted for under the first-in, first-out (FIFO) or average cost methods be measured at the lower of cost and net realizable value, where net realizable value represents the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amended guidance has nomay impact on inventory accounted for under the last-in, first-out (LIFO) or retail inventory methods. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.its conclusions.
In February 2016, amendednew accounting guidance was issued that replaces most existing lease accounting guidance under U.S. GAAP. Among other changes, the amendednew guidance requires that lease assets and liabilities be recognized on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The amendednew guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, and the change is to be applied using a modified retrospective approach as of the beginning of the earliest period presented. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amendednew guidance on our ongoing financial reporting.
In March 2016, amended accounting guidance was issued regarding derivative instruments designated as hedging instruments. The amended guidance clarifies that a change in the counterparty to such a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the change may be applied either prospectively or retrospectively. We do not expect the adoption of this amended accounting guidance to have a material impact on our consolidated financial position or results of operations.
In June 2016, amendednew accounting guidance was issued related to the measurement of credit losses on financial instruments. The amendednew guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amendednew guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and we have not determined the effect of the amendednew guidance on our ongoing financial reporting.
In August 2016, amended accounting guidance was issued to clarify the proper cash flow presentation of certain specific types of cash payments and cash receipts. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and we have not determined the effect of the amended guidance on our ongoing financial reporting.
In October 2016, amended accounting guidance was issued that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position, results of operations and cash flows, and have not determined the effect of the amended guidance on our ongoing financial reporting.
In November 2016, amended accounting guidance was issued that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated cash flows.
In January 2017, amended accounting guidance was issued to clarify the definition of a business to provide additional guidance to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
In January 2017, amended accounting guidance was issued to simplify the goodwill impairment calculation, by removing Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
In March 2017, amended accounting guidance was issued that requires an employer to report the service cost component of pension and postretirement benefits in the same line as other current employee compensation costs. Additionally, other components of net benefit cost are to be presented in the income statement separately from the service cost component and outside of income from operations. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
In May 2017, amended accounting guidance was issued to provide guidance about which changes to the terms or conditions of a share-based payment award require application of modification accounting. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material impact on our consolidated financial position or results of operations.
In August 2017, amended accounting guidance was issued that modifies hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to simplify application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations, and have not determined the effect on our ongoing financial reporting.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, intangible assets, accrued liabilities, income and other tax accruals, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily obtained from other sources. Critical accounting policies are defined as those that require our significant judgments and involve uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such policies. Our critical accounting policies have not significantly changed from those discussed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of our 20162017 Form10-K.
Item 3. – Quantitative and Qualitative Disclosures About Market Risk
Market risks have not changed significantly from those disclosed in “Part II—Item 7A. – Quantitative and Qualitative Disclosures About Market Risk” of our 20162017 Form10-K.
Item 4. – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures [as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)] that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of our principal executive officer and our principal financial officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form10-Q (the fiscal quarter ended November 30, 2016)August 31, 2017). Based on that evaluation, our principal executive officer and our principal financial officer have concluded that such disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes that occurred during the period covered by this Quarterly Report on Form10-Q (the fiscal quarter ended November 30, 2016)August 31, 2017) in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Various legal actions, which generally have arisen in the ordinary course of business, are pending against the Company. None of this pending litigation, individually or collectively, is expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “PART I – Item 1A. – Risk Factors” of the Annual Report on Form10-K of Worthington Industries, Inc. for the fiscal year ended May 31, 20162017 (the “2016“2017 Form10-K”), as filed with the Securities and Exchange Commission on August 1, 2016,July 24, 2017, and available at www.sec.gov or at www.worthingtonindustries.com, we included a detailed discussion of our risk factors. Our risk factors have not changed significantly from those disclosed in our 20162017 Form10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form10-Q. Any of the risks described in our 20162017 Form10-K could materially affect our business, consolidated financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in our 20162017 Form10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, consolidated financial condition and/or future results.
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases made by, or on behalf of, Worthington Industries, Inc. or any “affiliated purchaser” (as defined in Rule10b-18(a) (3) under the Securities Exchange Act of 1934, as amended) of common shares of Worthington Industries, Inc. during each month of the fiscal quarter ended November 30, 2016:August 31, 2017:
Total Number of | ||||||||||||||||
Common Shares | ||||||||||||||||
Purchased as | Maximum Number of | |||||||||||||||
Total Number | Average Price | Part of Publicly | Common Shares that | |||||||||||||
of Common | Paid per | Announced | May Yet Be | |||||||||||||
Shares | Common | Plans or | Purchased Under the | |||||||||||||
Period | Purchased | Share | Programs | Plans or Programs (1) | ||||||||||||
September 1-30, 2016 (2) | 14,321 | $ | 46.92 | - | 4,046,145 | |||||||||||
October 1-31, 2016 (2) | 10,762 | $ | 48.21 | - | 4,046,145 | |||||||||||
November 1-30, 2016 (2) | 87,297 | $ | 57.24 | - | 4,046,145 | |||||||||||
|
|
|
|
|
| |||||||||||
Total | 112,380 | $ | 55.06 | - | ||||||||||||
|
|
|
|
|
|
Total Number of | ||||||||||||||||
Common Shares | ||||||||||||||||
Purchased as | Maximum Number of | |||||||||||||||
Total Number | Average Price | Part of Publicly | Common Shares that | |||||||||||||
of Common | Paid per | Announced | May Yet Be | |||||||||||||
Shares | Common | Plans or | Purchased Under the | |||||||||||||
Period | Purchased | Share | Programs | Plans or Programs (1) | ||||||||||||
June1-30, 2017 (2) | 143,527 | $ | 49.99 | 75,000 | 3,971,145 | |||||||||||
July1-31, 2017 | 800,000 | $ | 51.64 | 800,000 | 3,171,145 | |||||||||||
August1-31, 2017 | - | $ | - | - | 3,171,145 | |||||||||||
|
|
|
|
|
| |||||||||||
Total | 943,527 | $ | 51.39 | 875,000 | ||||||||||||
|
|
|
|
|
|
(1) | The number shown represents, as of the end of each period, the maximum number of common shares that could be purchased under the publicly announced repurchase authorization then in effect. On June 26, 2014, Worthington Industries, Inc. announced that on June 25, 2014, the Board of Directors of Worthington Industries had authorized the repurchase of up to 10,000,000 of Worthington Industries’ outstanding common shares. A total of |
The common shares available for repurchase under this authorizationthese authorizations may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other appropriate factors. Repurchases may be made on the open market or through privately negotiated transactions.
(2) | Includes an aggregate of |
Item 3. – Defaults Upon Senior Securities
Not applicableapplicable.
Item 4. – Mine Safety Disclosures
Not applicableapplicable.
Not applicableapplicable.
† | The Disclosure Schedules and Exhibits referenced in the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. Worthington Industries, Inc. hereby undertakes to furnish a copy of any of the omitted Disclosure Schedules and Exhibits to the Securities and Exchange Commission upon request. |
* | Filed herewith. |
** | Furnished herewith. |
# | Attached as Exhibit 101 to this Quarterly Report on Form10-Q of Worthington Industries, Inc. are the following documents formatted in XBRL (Extensible Business Reporting Language): |
(i) | Consolidated Balance Sheets at |
(ii) | Consolidated Statements of Earnings for the three |
(iii) | Consolidated Statements of Comprehensive Income for the three |
(iv) | Consolidated Statements of Cash Flows for the three |
(v) | Notes to Consolidated Financial Statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WORTHINGTON INDUSTRIES, INC. | ||||||
Date: | By: | /s/ B. Andrew Rose | ||||
B. Andrew Rose, | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(On behalf of the Registrant and as Principal | ||||||
Financial Officer) |
37
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
|
|
|
|
|
44