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 Form 10-Q, "Part I - Item 1A. - Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 and "PART II - Item 1A. - Risk Factors" of this Quarterly Report on Form 10-Q.
Introduction
The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position ofWorthington Industries, Inc. , together with its subsidiaries (collectively, "we," "our," "Worthington," or the "Company"), should be read in conjunction with our consolidated financial statements and notes thereto included in "Item 1. - Financial Statements" of this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 ("fiscal 2019") includes additional information about Worthington, our operations and our consolidated financial position and should be read in conjunction with this Quarterly Report on Form 10-Q. As ofNovember 30, 2019 , excluding our joint ventures, we operated 28 manufacturing facilities worldwide, principally in two operating segments, which correspond with our reportable business segments: Steel Processing and Pressure Cylinders. As ofNovember 30, 2019 , we held equity positions in ten joint ventures, which operated 48 manufacturing facilities worldwide, including 26 facilities which were operated by joint ventures in which we held a 50% or greater ownership interest. Three 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 portions of net earnings (loss) and other comprehensive income (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 seven of these joint ventures are accounted for using the equity method.
Overview
Operating income for the current quarter was down$3.8 million , or 11%. Results in Steel Processing continued to be negatively impacted by declining steel prices, which led to a$7.3 million swing from inventory holding gains to inventory holding losses from the second quarter of fiscal 2019 to the second quarter of fiscal 2020. Lower direct volume in Steel Processing and lower volumes in the industrial products business in Pressure Cylinders were partially offset by improved direct spreads and higher toll volume in Steel Processing and higher volumes in the consumer products business and overall improvement in the oil & gas equipment business in Pressure Cylinders. Equity in net income of unconsolidated affiliates ("equity income") for the current year second quarter increased$26.2 million over the comparable prior year quarter on a pre-tax gain of$23.1 million at WAVE related to the sale of its international operations. The remaining increase was primarily due to a$5.4 million increase in equity income from ClarkDietrich, driven by improved margins and increased volumes, partially offset by a lower contribution from Serviacero Worthington and a$1.5 million loss related to our retained interest in the newly-formed Cabs joint venture, which consisted primarily of transaction-related expenses incurred at the new company as further described under Recent Business Developments. We received cash distributions from unconsolidated joint ventures of$27.5 million during the second quarter of fiscal 2020.
Recent Business Developments
• During the first six months of fiscal 2020, the Company has repurchased a
total of 750,000 common shares for$29.6 million at an average price of$39.45 per share.
• On
BasInçlI Kaplar Sanayi ("Worthington Aritas"), its Turkish manufacturer
of cryogenic pressure vessels. The Company received cash proceeds, net of
transaction costs, of
of
• On
unsecured 1.56% Series A Senior Note due
and €55.0 million aggregate principal amount of unsecured 1.90% Series B
Senior Notes due
"Senior Notes"). The Senior Notes were issued in a private placement and
the proceeds thereof were used in the redemption of
aggregate principal amount of 6.50% senior notes. Refer to "Item 1. -
Financial Statements - Notes to Consolidated Financial Statements - NOTE I
- Debt and Receivables Securitization" for more information on these transactions. 25
--------------------------------------------------------------------------------
• On
sale of its international operations to
("Knauf"), as part of the broader transaction between Knauf and Armstrong
venture. Our portion of the net gain, subject to post-closing adjustments,
was
1. - Financial Statements - Notes to Consolidated Financial Statements -
NOTE
this transaction.
• OnOctober 7, 2019 , we acquired theCleveland, Ohio -based operating net assets, excluding working capital, ofHeidtman Steel Products, Inc. ("Heidtman") for cash consideration of$29.6 million , which expanded the
Company's pickling and slitting capabilities. The acquired business is being
managed as part of our Steel Processing operating segment. Refer to "Item 1.
- Financial Statements - Notes to Consolidated Financial Statements - NOTE P
- Acquisitions" for more information on this transaction.
• On
our Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse
20% noncontrolling interest. Certain non-core assets of the Engineered Cabs
business, including the fabricated products facility in
steel packaging facility in
Engineered Cabs assets no longer qualify as a separate operating or
reportable segment. For additional information refer to "Item 1. - Financial
Statements - Notes to Consolidated Financial Statements - NOTE A - Basis of
Presentation" and "Item 1. - Financial Statements - Notes to Consolidated
Financial Statements - NOTE O - Segment Operations".
• On
(the "Worthington Industries Board") declared a quarterly dividend of
per share payable on
2020.
• On
risks and rewards related to its 10% minority ownership interest in the
joint venture in
1. - Financial Statements - Notes to Consolidated Financial Statements -
NOTE
this transaction.
• On
assets of Heidtman acquisition to the Samuel joint venture in exchange for
an incremental 31.75% ownership interest in the Samuel joint venture,
bringing our total ownership interest to 63%. Refer to "Item 1. - Financial
Statements - Notes to Consolidated Financial Statements - NOTE S -
Subsequent Events" for more information on this transaction.
Market & Industry Overview
We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of net sales by end market for the second quarter of each of fiscal 2020 and fiscal 2019 is illustrated in the following chart: [[Image Removed]] 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 58% of Steel Processing's net sales are to the automotive market. North American 26
-------------------------------------------------------------------------------- vehicle production, primarily byFord , General Motors andFCA 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 market. Approximately 17% of the net sales of our Steel Processing operating segment are to the construction market. The construction market is also the predominant end market for 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, includingU.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 25% of the net sales of our Steel Processing operating segment are to other markets such as consumer products, industrial products, 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 inU.S. GDP growth is a good economic indicator for analyzing these businesses. We use the following information to monitor costs and assess demand in our major end markets: Three Months Ended November Six Months Ended November 30, 30, 2019 2018 Inc / (Dec) 2019 2018 Inc / (Dec)U.S. GDP (% growth year-over-year) 1 2.1 % 3.4 % -1.3 % 2.3 % 3.0 % -0.7 % Hot-Rolled Steel ($ per ton) 2$ 526 $ 836 $ (310 ) $ 545 $ 868$ (323 ) Detroit Three Auto Build (000's vehicles) 3 1,895 2,191 (296 ) 3,978 4,286 (308 ) No. America Auto Build (000's vehicles) 3 4,098 4,417 (319 ) 8,216 8,543 (327 ) Zinc ($ per pound) 4$ 1.09 $ 1.16 $ (0.07 ) $ 1.11 $ 1.23$ (0.12 ) Natural Gas ($ per mcf) 5$ 2.50 $ 3.37 $ (0.87 ) $ 2.39 $ 3.13$ (0.74 ) On-Highway Diesel Fuel Prices ($ per gallon) 6$ 3.04 $ 3.31 $ (0.27 ) $ 3.05 $ 3.27$ (0.22 ) Crude Oil - WTI ($ per barrel) 6$ 55.47 $ 65.98 $ (10.51 ) $ 55.54 $ 67.50$ (11.96 )
1 2018 figures based on revised actuals 2 CRU Hot-Rolled Index; period average 3
IHS Global 4 LME Zinc; period average 5
average 6
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 inU.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasingU.S. GDP growth rates generally indicate a weaker economy. Changes inU.S. GDP growth rates can also signal changes in conversion costs related to production and in SG&A expense. The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs. The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2020 (first and second quarters), fiscal 2019 and fiscal 2018: Fiscal Year (dollars per ton 1 ) 2020 2019 2018 1st Quarter$ 564 $ 900 $ 604 2nd Quarter$ 526 $ 836 $ 608 3rd Quarter N/A$ 725 $ 674 4th Quarter N/A$ 672 $ 860 Annual Avg.$ 545 $ 783 $ 687 1 CRU Hot-Rolled Index, period average Sales to one Steel Processing customer in the automotive industry represented 13% of consolidated net sales during the second quarter of fiscal 2020. No single customer contributed more than 10% of consolidated net sales during the second quarter of fiscal 27
-------------------------------------------------------------------------------- 2019. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During the second quarter of fiscal 2020, vehicle production for the Detroit Three automakers was down 14% from fiscal 2019, while North American vehicle production as a whole was down 7%.
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 manufacturing operations and indirectly through transportation and freight expense.
© Edgar Online, source