Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2024
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 001-08399
WORTHINGTON ENTERPRISES, 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 West Old Wilson Bridge Road, Columbus, Ohio
43085
(Address of principal executive offices)
(Zip Code)
(614) 438-3210
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, Without Par Value
WOR
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
On September 30, 2024, the number of common shares, without par value, of the registrant issued and outstanding was 50,260,265.
TABLE OF CONTENTS
Commonly Used or Defined Terms
ii
Cautionary Note Regarding Forward-Looking Statements
iii
Use of Non-GAAP Financial Measures and Definitions
1
Part I. Financial Information
Item 1.
Financial Statements
Consolidated Balance Sheets – August 31, 2024 and May 31, 2024
3
Consolidated Statements of Earnings – Three months ended August 31, 2024 and 2023
4
Consolidated Statements of Comprehensive Income – Three months ended August 31, 2024 and 2023
5
Consolidated Statements of Cash Flows – Three months ended August 31, 2024 and 2023
6
Condensed Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
30
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
31
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
32
i
COMMONLY USED OR DEFINED TERMS
References in this Form 10-Q to “we,” “our,” “us” or the “Company” are collectively to Worthington Enterprises and its consolidated subsidiaries. In addition, the following terms, when used in this Form 10-Q, have the meanings set forth below:
Term
Definition
ABI
Architecture Billings Index
AOCI
Accumulated other comprehensive income (loss)
Board
Board of Directors of Worthington Enterprises, Inc.
CARES Act
Coronavirus Aid, Relief and Economic Security Act
ClarkDietrich
Clarkwestern Dietrich Building Systems LLC
CODM
Chief Operating Decision Maker
common shares
The common shares, no par value, of Worthington Enterprises
COVID-19
The novel coronavirus disease first known to originate in December 2019
Credit Facility
Our $500,000,000 unsecured revolving credit facility with a group of lenders
EPS
Earnings per common share
equity income
Equity in net income of unconsolidated affiliates
Exchange Act
Securities Exchange Act of 1934, as amended
Form 10-Q
Our Quarterly Report on Form 10-Q for the quarterly period ended August 31, 2024
fiscal 2024
Our fiscal year ended May 31, 2024
fiscal 2025
Our fiscal year ended May 31, 2025
first quarter of fiscal 2024
Our fiscal quarter ended August 31, 2023
first quarter of fiscal 2025
Our fiscal quarter ended August 31, 2024
GAAP
U.S. generally accepted accounting principles
GDP
Gross domestic product
Halo
WH Products, LLC
HMI
The National Association of Home Builders/Wells Fargo Housing Market Index
MD&A
New Senior Notes
Collectively, the senior unsecured note issued by Worthington Enterprises on August 23, 2019, in the principal amount of €36,700,000 that bears interest at a rate of 2.06% and is scheduled to be repaid on August 23, 2031, and the senior unsecured notes issued by Worthington Enterprises on August 23, 2019, in the principal amount of €55,000,000 that bear interest at a rate of 2.40% and are scheduled to be repaid on August 23, 2034.
OCI
Other comprehensive income (loss)
PSLRA
Private Securities Litigation Reform Act of 1995, as amended
Ragasco
Hexagon Ragasco AS
SEC
Securities and Exchange Commission
Separation
The separation of our former steel processing business, effective December 1, 2023
SG&A
Selling, general and administrative expenses
SOFR
Secured Overnight Financing Rate
U.S.
United States of America
WAVE
Worthington Armstrong Venture
Workhorse
Taxi Workhorse Holdings, LLC
Worthington Enterprises
Worthington Enterprises, Inc. (formerly known as Worthington Industries, Inc.)
Worthington Steel
Worthington Steel, Inc.
2024 Form 10-K
Our Annual Report on Form 10-K for fiscal 2024 as filed with the SEC on July 30, 2024
2024 Notes
The senior unsecured notes that we issued on August 10, 2012, in the principal amount of $150,000,000, which bore interest at a rate of 4.60%, were set to mature on August 10, 2024, and were paid in full on December 6, 2023.
2026 Notes
The senior unsecured notes that we issued on April 15, 2014, in the principal amount of $250,000,000, which bore interest at a rate of 4.55%, were scheduled to mature on April 15, 2026, and were paid in full on July 28, 2023.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Selected statements contained in this Form 10-Q, including, without limitation, in MD&A and in “Note E – Contingent Liabilities and Commitments,” constitute “forward-looking statements,” as that term is used in the PSLRA. We wish to take advantage of the safe harbor provisions included in the PSLRA. 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,” “should,” “would,” “intend,” “plan,” “will,” “likely,” “estimate,” “project,” “position,” “strategy,” “target,” “aim,” “seek,” “foresee,” and other similar words or phrases. These forward-looking statements include, without limitation, statements relating to:
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:
We note these risk factors for investors as contemplated by the PSLRA. Forward-looking statements should be construed in the light of such risks. It is impossible to predict or identify all potential risk factors. Consequently, readers should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. We do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law.
iv
USE OF NON-GAAP FINANCIAL MEASURES AND DEFINITIONS
(In thousands, except per common share amounts)
NON-GAAP FINANCIAL MEASURES. This Form 10-Q includes certain financial measures that are not calculated and presented in accordance with GAAP. Non-GAAP financial measures typically exclude items that management believes are not reflective of, and thus should not be included when evaluating the performance of our ongoing operations. Management uses the non-GAAP financial measures to evaluate our performance, engage in financial and operational planning, and determine incentive compensation. Management believes these non-GAAP financial measures provide useful supplemental information and additional perspective on the performance of our ongoing operations and should not be considered as an alternative to the comparable GAAP financial measure. Additionally, management believes these non-GAAP financial measures allow for meaningful comparisons and analysis of trends in our business and enables investors to evaluate our operations and future prospects in the same manner as management.
The following provides an explanation of each non-GAAP measure presented in this Form 10-Q:
Adjusted operating income (loss) is defined as operating income (loss) excluding the items listed below, to the extent naturally included in operating income (loss).
Adjusted earnings per diluted share from continuing operations is defined as adjusted net earnings from continuing operations divided by diluted weighted-average shares outstanding.
EBITDA from continuing operations is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA from continuing operations is further adjusted to exclude impairment and restructuring charges (gains) as well as other items that management believes are not reflective of, and thus should not be included when evaluating the performance of its ongoing operations, as outlined below. Adjusted EBITDA from continuing operations also excludes stock-based compensation due to its non-cash nature, which is consistent with how management assesses operating performance. At the segment level, adjusted EBITDA from continuing operations includes expense allocations for centralized corporate back-office functions that exist to support the day-to-day business operations. Public company and other governance costs are held at the corporate level.
Adjusted EBITDA from continuing operations margin is calculated by dividing adjusted EBITDA from continuing operations by net sales.
EXCLUSIONS FROM NON-GAAP FINANCIAL MEASURES
Management believes it is useful to exclude the following items from its non-GAAP measures for its own and investors’ assessment of the business for the reasons identified below:
A reconciliation of the following non-GAAP financial measures from their most comparable GAAP financial measure for the three months ended August 31, 2024 and August 31, 2023 is presented below.
Three Months Ended August 31, 2024
Net Earnings
Diluted
Earnings
Income
from
EPS -
Operating
Before
Tax
Continuing
Loss
Expense
Operations (1)
Operations
$
(4,699
)
30,790
6,782
24,253
0.48
Restructuring and other expense, net
1,158
(290
868
0.02
Non-GAAP
(3,541
31,948
7,072
25,121
0.50
Three Months Ended August 31, 2023
(7,324
35,791
8,960
26,831
0.54
Corporate costs eliminated at Separation
9,672
(2,271
7,401
0.15
Separation costs
2,410
(566
1,844
0.04
Loss on extinguishment of debt
-
1,534
(360
1,174
4,758
49,407
12,157
37,250
0.75
——————————————————
The following table presents a reconciliation from the GAAP financial measure of earnings before income taxes to the non-GAAP financial measure of adjusted EBITDA from continuing operations for the periods presented.
Three Months Ended
August 31,
2024
2023
Earnings before income taxes (GAAP)
Less: net loss attributable to noncontrolling interest
(245
Net earnings before income taxes attributable to controlling interest
31,035
Interest expense, net
489
1,074
EBIT (2)
31,524
36,865
Adjusted EBIT (2)
32,682
50,481
Depreciation and amortization
11,830
12,075
Stock-based compensation
3,925
3,359
Adjusted EBITDA from continuing operations (non-GAAP)
48,437
65,915
Earnings before income taxes margin (GAAP)
12.0
%
11.5
Adjusted EBITDA margin from continuing operations (non-GAAP)
18.8
21.1
2
PART I. FINANCIAL INFORMATION
Item 1. – Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
May 31,
Assets
Current assets:
Cash and cash equivalents
178,547
244,225
Receivables, less allowances of $508 and $343, respectively
168,497
199,798
Inventories:
Raw materials
77,577
66,040
Work in process
10,053
11,668
Finished products
99,669
86,907
Total inventories
187,299
164,615
Income taxes receivable
4,711
17,319
Prepaid expenses and other current assets
37,383
47,936
Total current assets
576,437
673,893
Investments in unconsolidated affiliates
140,467
144,863
Operating lease assets
27,109
18,667
Goodwill
373,375
331,595
Other intangible assets, net of accumulated amortization of $87,024 and $83,242, respectively
250,376
221,071
Other assets
21,611
21,342
Property, plant and equipment:
Land
8,676
8,657
Buildings and improvements
129,254
123,478
Machinery and equipment
344,250
321,836
Construction in progress
33,841
24,504
Total property, plant and equipment
516,021
478,475
Less: accumulated depreciation
260,125
251,269
Total property, plant and equipment, net
255,896
227,206
Total assets
1,645,271
1,638,637
Liabilities and equity
Current liabilities:
Accounts payable
82,768
91,605
Accrued compensation, contributions to employee benefit plans and related taxes
30,536
41,974
Dividends payable
9,443
9,038
Other accrued items
34,486
29,061
Current operating lease liabilities
7,353
6,228
Income taxes payable
1,652
470
Total current liabilities
166,238
178,376
Other liabilities
57,918
62,243
Distributions in excess of investment in unconsolidated affiliate
110,522
111,905
Long-term debt
300,009
298,133
Noncurrent operating lease liabilities
20,166
12,818
Deferred income taxes, net
87,177
84,150
Total liabilities
742,030
747,625
Shareholders’ equity - controlling interest
901,353
888,879
Noncontrolling interests
1,888
2,133
Total equity
903,241
891,012
Total liabilities and equity
See condensed notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
Net sales
257,308
311,918
Cost of goods sold
194,813
242,288
Gross profit
62,495
69,630
Selling, general and administrative expense
66,036
74,544
Operating loss
Other income (expense):
Miscellaneous income, net
486
299
(1,534
(489
(1,074
35,492
45,424
Earnings before income taxes
Income tax expense
Net earnings from continuing operations
24,008
Net earnings from discontinued operations
72,872
Net earnings
99,703
Net earnings (loss) attributable to noncontrolling interests
3,597
Net earnings attributable to controlling interest
96,106
Amounts attributable to controlling interest:
69,275
Earnings per share from continuing operations - basic
0.49
0.55
Earnings per share from discontinued operations - basic
1.42
Net earnings per share attributable to controlling interest - basic
1.97
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
1.39
Net earnings per share attributable to controlling interest - diluted
1.93
Weighted average common shares outstanding - basic
49,487
48,842
Weighted average common shares outstanding - diluted
50,365
49,886
Cash dividends declared per common share
0.17
0.32
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax
Foreign currency translation
541
1,444
Pension liability adjustment
(7
(3
Cash flow hedges
(50
(6,849
484
(5,408
Comprehensive income
24,492
94,295
Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income attributable to controlling interest
24,737
90,698
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
28,325
Impairment of long-lived assets
1,401
Benefit from deferred income taxes
(5,537
(5,453
Bad debt income
(8
(799
Equity in net income of unconsolidated affiliates, net of distributions
3,453
10,225
Net loss (gain) on sale of assets
(18
105
4,516
Changes in assets and liabilities, net of impact of acquisitions:
Receivables
28,166
(8,843
Inventories
(6,406
(64,327
(13,093
278
Accrued compensation and employee benefits
(11,445
(12,014
Other operating items, net
6,271
5,045
Net cash provided by operating activities
41,146
59,696
Investing activities:
Investment in property, plant and equipment
(9,629
(29,298
Acquisitions, net of cash acquired
(88,887
Proceeds from sale of assets, net of selling costs
11,769
51
Investment in non-marketable equity securities
(2,000
(40
Investment in note receivable
(15,000
Net cash used by investing activities
(88,747
(44,287
Financing activities:
Dividends paid
(8,116
(15,725
Repurchase of common shares
(6,803
Proceeds from issuance of common shares, net of tax withholdings
(3,158
(5,130
Net repayments of short-term borrowings
(2,813
Principal payments on long-term obligations
(243,757
Payments to noncontrolling interests
(1,921
Net cash used by financing activities
(18,077
(269,346
Decrease in cash and cash equivalents
(65,678
(253,937
Cash and cash equivalents at beginning of period
454,946
Cash and cash equivalents at end of period
201,009
The cash flows related to discontinued operations have not been segregated in our consolidated statements of cash flows. See “Note B – Discontinued Operations” for a summarization of significant non-cash items related to discontinued operations.
CONDENSED Notes to Consolidated Financial Statements (UNAUDITED)
(In thousands, except common share and per common share amounts)
Note A – Basis of Presentation
Basis of Presentation
These interim unaudited consolidated financial statements include the accounts of Worthington Enterprises and its consolidated subsidiaries. Significant intercompany accounts and transactions have been eliminated.
We own an 80% controlling interest in Halo, which was acquired on February 1, 2024. Halo is consolidated with the equity owned by the other joint venture members shown as “noncontrolling interests” in our consolidated balance sheets, and the other joint venture members’ portions of net earnings and OCI are shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.
Investments in unconsolidated affiliates that we do not control are accounted for using the equity method with our proportionate share of income or loss recognized within equity income in our consolidated statements of earnings. See further discussion of our unconsolidated affiliates in “Note C – Investments in Unconsolidated Affiliates.”
These interim unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and notes required by 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 Form 10-Q, necessary for a fair presentation of the consolidated financial statements for these interim periods, have been included. Operating results for the first quarter of fiscal 2025 are not necessarily indicative of the results that may be expected for the full fiscal year. For further information, refer to the consolidated financial statements and notes thereto included in the 2024 Form 10-K.
The preparation of consolidated financial statements in conformity with 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 materially from those estimates.
Separation of the Steel Processing Business
On December 1, 2023, we completed the spin-off of our former steel processing business into an independent publicly traded company, Worthington Steel, on a tax-free basis. Accordingly, the operating results of the former steel processing business are reported as discontinued operations for all periods presented, as discussed in further detail in “Note B – Discontinued Operations.” All discussion within this Form 10-Q, including amounts, percentages and disclosures for all periods presented, reflect only our continuing operations unless otherwise noted.
In connection with the Separation, we entered into several agreements with Worthington Steel that govern our ongoing relationships, the most significant of which is the long-term Steel Supply Agreement. Other agreements include a long-term Steel Supply Agreement, a Trademark License Agreement, and Transition Services Agreement. Amounts under the Trademark License Agreement and Transition Services Agreement were not significant during the first quarter of fiscal 2025.
Pursuant to the long-term Steel Supply Agreement, Worthington Steel manufactures and supplies to us, at reasonable market rates, certain flat rolled steel products, and will provide us with certain related support services such as design, engineering/technical services, price risk management, scrap management, steel purchasing, supply chain optimization and product rework services, and other services at our request that are ancillary to the supply of the flat rolled steel products. Purchases from Worthington Steel under this agreement for the first quarter of fiscal 2025, totaled $28,431, of which $7,424 was payable at August 31, 2024.
Revenue Recognition
We recognize all revenue at the point in time the performance obligation is satisfied and control of the product is transferred to the customer upon shipment or delivery.
Note B – Discontinued Operations
The following table summarizes the financial results from the discontinued operations of Worthington Steel for the three months ended August 31, 2023.
881,338
753,479
127,859
37,802
3,626
Operating income
85,030
710
(2,009
Equity in net income of unconsolidated affiliate
8,957
92,688
19,816
Net earnings attributable to noncontrolling interest
As permitted under GAAP, the cash flows related to discontinued operations have not been segregated in our consolidated statements of cash flows. Accordingly, the consolidated statement of cash flows for the three months ended August 31, 2023 include the results from both continuing and discontinued operations and amounts for certain captions will not agree with respective data in the consolidated balance sheet.
The following table summarizes significant non-cash operating items and capital expenditures of discontinued operations included in the consolidated statement of cash flows for the three months ended August 31, 2023.
Significant non-cash operating items:
16,250
Equity in income of unconsolidated affiliate
(8,957
1,157
Significant investing activities:
(19,775
Note C – Investments in Unconsolidated Affiliates
Investments in joint ventures that we do not control, either through majority ownership or otherwise, are unconsolidated and accounted for using the equity method. At August 31, 2024, we held investments in the following unconsolidated joint ventures: ClarkDietrich (25%); Sustainable Energy Solutions (49%); WAVE (50%); and Workhorse (20%).
We received distributions from unconsolidated affiliates totaling $38,945 during the three months ended August 31, 2024. We have received cumulative distributions from WAVE in excess of our investment balance, which resulted in a negative asset balance of $110,522 and $111,905 at August 31, 2024 and May 31, 2024, respectively. In accordance with the applicable accounting guidance, we have reclassified the negative balances to distributions in excess of investment in unconsolidated affiliate within our consolidated balance sheets. 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 sheets. If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will immediately recognize any balance classified as a liability as income.
We use the cumulative earnings approach to determine the 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 exceed our share of the cumulative equity in the net earnings of the joint venture. In such cases, the excess distributions are considered returns of investment and are classified as investing activities in our consolidated statements of cash flows. No distributions exceeded our share in any of our unconsolidated joint ventures during the first quarter of fiscal 2025.
8
The following tables summarize combined financial information for our unconsolidated affiliates included in continuing operations as of the dates, and for the periods presented:
43,939
36,163
Other current assets
566,270
605,043
Noncurrent assets
368,543
360,261
978,752
1,001,467
Current liabilities
216,817
264,963
Current maturities of long-term debt
6,583
13,450
356,485
349,431
Other noncurrent liabilities
146,754
146,984
Equity
252,113
226,639
515,673
568,584
134,335
173,017
94,346
131,447
8,006
7,576
Interest expense
5,739
645
909
90,682
125,653
Note D – Restructuring and Other Expense, Net
We consider restructuring activities to be programs whereby we fundamentally change our operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions).
A progression of the liabilities associated with our restructuring activities, combined with a reconciliation to the restructuring and other income, net financial statement caption in our consolidated statement of earnings for the three months ended August 31, 2024 is summarized below:
Balance at
May 31, 2024
Payments
August 31, 2024
Early retirement and severance
188
435
(423
200
Loss on sale of assets
723
The total liability associated with our restructuring activities as of August 31, 2024 is expected to be paid in the next 12 months.
9
Note E – 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 affect our consolidated financial position or future results of operations. We also believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.
Note F – 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, at August 31, 2024, we were party to an operating lease for an aircraft in which we guaranteed a residual value at the termination of the lease on March 30, 2028. The maximum obligation under the terms of this guarantee was approximately $15,095 at August 31, 2024. 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.
At August 31, 2024, we also had in place $10,500 of outstanding stand-by letters of credit issued to third-party service providers. The fair value of these guaranteed instruments, based on premiums paid, was not material and no amounts were drawn against them at August 31, 2024.
Note G – Debt
Our multi-year revolving Credit Facility is scheduled to mature on September 27, 2028. Borrowings under the Credit Facility have maturities of up to one year. We have the option to borrow at rates equal to an applicable margin over the Overnight Bank Funding Rate, the Prime Rate of PNC Bank, National Association or the Adjusted Daily Simple SOFR. The applicable margin is determined by our total leverage ratio. There were no borrowings outstanding under the Credit Facility at August 31, 2024 or May 31, 2024, leaving $500,000 available for use.
Note H – Other Comprehensive Income (Loss)
The following table summarizes the tax effects on each component of OCI for the periods presented:
Before-Tax
Net-of-Tax
(12
553
1,326
118
(65
15
(8,811
1,962
(84
568
(7,485
2,077
10
Note I – Changes in Equity
The following tables summarize the changes in equity by component and in total for the periods presented:
Controlling Interest
Additional
Paid-in
AOCI,
Retained
Noncontrolling
Capital
Net of Tax
Subtotal
Interests
Total
Balance at May 31, 2024
299,033
454
589,392
Net earnings (loss)
Other comprehensive income
Common shares issued, net of withholding tax
Common shares in non-qualified plans
6,216
Purchases and retirement of common shares
(884
(5,919
Cash dividends declared
(8,550
Balance at August 31, 2024
301,239
938
599,176
Balance at May 31, 2023
290,799
(23,179
1,428,391
1,696,011
125,617
1,821,628
Other comprehensive loss
130
8,995
(16,081
Dividends to noncontrolling interests
Balance at August 31, 2023
294,794
(28,587
1,508,416
1,774,623
127,293
1,901,916
The following table summarizes the changes in AOCI for the periods presented:
Foreign
Pension
Currency
Liability
Cash Flow
Translation
Adjustment
Hedges
(669
(441
1,564
OCI before reclassifications
(398
(417
Reclassification adjustments to net earnings (a)
333
Income tax effect
(128
(448
1,514
(22,123
(1,730
674
(2,038
(712
(6,773
(20,679
(1,733
(6,175
11
Common Shares: On March 20, 2019, the Board authorized the repurchase of up to 6,600,000 of the common shares. On March 24, 2021, the Board authorized the repurchase of up to an additional 5,618,464 of the common shares, increasing the total number of common shares then authorized for repurchase to 10,000,000. The total number of common shares available for repurchase under these authorizations at August 31, 2024 was 5,915,000. These common shares may be repurchased 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.
Note J – Stock-Based Compensation
Non-Qualified Stock Options
During the three months ended August 31, 2024, we granted non-qualified stock options covering a total of 31,200 common shares under our stock-based compensation plans. For each grant, the exercise price of $47.00 was equal to the closing market price of the underlying common shares at the grant date. The weighted average fair value of these non-qualified stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $17.57 per share. The calculated pre-tax stock-based compensation expense for these non-qualified stock options was $548 and will be recognized on a straight-line basis over the three-year vesting period, net of any forfeitures. The weighted average fair value of stock options granted during the three months ended August 31, 2024 was based on the following assumptions:
Dividend yield
1.35
Expected volatility
36.90
Risk-free interest rate
4.28
Expected term (years)
6.0
Due to the Separation, we use a comparable peer group to determine the expected volatility of the common shares. The risk-free interest rate is based on the U.S. Treasury strip rate for the expected term of the non-qualified stock options. The expected term was developed using historical exercise experience.
Service-Based Restricted Common Shares
During the three months ended August 31, 2024, we granted an aggregate of 82,930 service-based restricted common shares under our stock-based compensation plans, which cliff vest three years from the grant date. The fair value of these restricted common shares was equal to the weighted average closing market price of the underlying common shares on the grant date, or $47.04 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares of $3,901 will be recognized on a straight-line basis over the three-year vesting period, net of any forfeitures.
Performance Share Awards
We have awarded performance shares to certain key employees under our stock-based compensation plans. Outstanding performance share awards may be earned based on the level of achievement of corporate targets for cumulative corporate economic value added and EPS growth and, in the case of business unit executives, a business unit adjusted EBITDA from continuing operations target, in each case for the three-year periods ending May 31, 2025, 2026 and 2027. These performance share awards will be paid, to the extent earned, in common shares in the fiscal quarter following the end of the applicable three-year performance period. The fair values of our performance shares are determined by the closing market prices of the underlying common shares at the respective grant dates of the performance shares and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. The ultimate pre-tax stock-based compensation expense to be recognized over the three-year performance period on all tranches will vary based on our periodic assessment of the probability of the targets being achieved. During the three months ended August 31, 2024, we granted performance share awards covering an aggregate of 24,100 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $1,133 (at target levels). The ultimate pre-tax stock-based compensation expense to be recognized over the three-year performance period on all tranches will vary based on our periodic assessment of the probability of the targets being achieved.
12
Note K – Income Taxes
Income tax expense for the three months ended August 31, 2024 and August 31, 2023 reflected estimated annual effective income tax rates of 24.5% and 25.1%, respectively. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2025 could be materially different from the forecasted rate as of August 31, 2024.
Note L – Earnings per Share
The following table sets forth the computation of basic and diluted EPS attributable to controlling interest for the periods presented:
Numerator (basic & diluted):
Net earnings from continuing operations attributable to controlling interest
Denominator (shares in thousands):
Basic EPS from continuing operations - weighted average common shares
Effect of dilutive securities
878
1,044
Diluted EPS from continuing operations - weighted average common shares
Basic EPS from continuing operations
Diluted EPS from continuing operations
Stock options covering an aggregate of 77,837 and 26,296 common shares for the three months ended August 31, 2024 and August 31, 2023, respectively, have been excluded from the computation of diluted EPS because the effect would have been anti-dilutive for those periods.
Note M – Segment Operations
Our operating segments reflect the way in which internally-reported financial information is regularly reviewed by the CODM to analyze performance, make decisions and allocate resources. We have identified our Chief Executive Officer as our CODM. Factors used to identify operating segments include the nature of the products provided by each business, the management reporting structure, similarity of economic characteristics and certain quantitative measures, as prescribed by GAAP. Our operations are organized under two operating segments: Consumer Products and Building Products. Our former Sustainable Energy Solutions operating segment is presented within Unallocated Corporate and Other in periods prior to its deconsolidation on May 29, 2024. Unallocated Corporate and Other also includes certain assets and liabilities (e.g. public debt) held at the corporate level as well as general corporate expenses that are not directly attributable to our business operations and are administrative in nature, such as public company and other governance-related costs that benefit the organization as a whole.
The following tables present summarized financial information for our reportable segments and Unallocated Corporate and Other for the periods indicated. A reconciliation from the GAAP financial measure of earnings before income taxes to the non-GAAP financial measure of adjusted EBITDA from continuing operations is provided directly following the summarized information below.
Unallocated
Consumer
Building
Reportable
Corporate and
Products
Segments
Other
117,596
139,712
289
869
17
242
259
227
Equity income
36,645
(1,153
Adjusted EBITDA from continuing operations
17,775
39,729
57,504
(9,067
13
117,353
165,928
283,281
28,637
25
63
88
211
45,043
381
14,275
59,692
73,967
(8,052
The following table presents a reconciliation from earnings before income taxes to adjusted EBITDA from continuing operations for the periods presented:
EBIT (1)
Adjusted EBIT (1)
Total assets for each of our reportable segments at the dates indicated were as follows:
Consumer Products
564,744
557,826
Building Products
777,749
672,723
Total reportable segments
1,342,493
1,230,549
Unallocated Corporate and Other
302,778
408,088
Total assets of continuing operations
14
Note N – Acquisitions
On June 3, 2024, we acquired Ragasco, a leading global manufacturer of composite propane cylinders based in Norway. The total purchase price consisted of cash consideration of $102,156, of which $11,343 was on deposit at May 31, 2024, and contingent consideration in the form of an earnout agreement with an estimated acquisition date fair value of $7,000. The earnout agreement provides for additional cash consideration of up to $14,000 should certain earnings targets be met through calendar year 2024. Ragasco operates as part of the Building Products operating segment and its results have been included in our consolidated statements of earnings since the date of acquisition. Pro forma results, including the acquired business since the beginning of fiscal 2023, would not be materially different from reported results.
The information included herein is based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets acquired is fully evaluated by us, including but not limited to, the fair value accounting.
The assets acquired and liabilities assumed were recognized at their estimated acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired. 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 strategic and synergistic benefits (i.e., investment value) specific to us, which resulted in a purchase price in excess of the fair value of the identifiable net assets. This additional investment value resulted in goodwill, which is not expected to be deductible for income tax purposes.
The assets acquired and liabilities assumed were recognized at their estimated 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 of Ragasco, we identified and valued the following intangible assets:
Useful Life
Category
Amount
(Years)
Trade name
5,520
Technological know-how
14,660
Customer relationships
12,660
Total acquired identifiable intangible assets
32,840
The following table summarizes the consideration transferred and the estimated fair value assigned to the assets acquired and liabilities assumed at the acquisition date. These amounts reflect various preliminary fair value estimates and assumptions, including preliminary work performed by a third-party valuation specialist, and are subject to change within the measurement period as the valuation is finalized. The primary areas of preliminary purchase price allocation subject to change relate to the valuation of acquired tangible assets and liabilities, identification and valuation of residual goodwill and tax effects of acquired assets and assumed liabilities.
Preliminary
Valuation
1,925
Accounts receivable
8,554
Inventory
16,403
990
Property, plant and equipment
27,325
8,834
Intangible assets
Total identifiable assets
96,871
(4,885
Current operating lease liability
(980
Accrued expenses
(6,344
Noncurrent operating lease liability
(7,886
Deferred income taxes
(8,861
(100
Net identifiable assets
67,815
41,480
Total purchase price
109,295
Less: Fair value of earnout
7,139
Cash purchase price
102,156
Note O – Derivative Financial Instruments and Hedging Activities
We utilize derivative financial instruments to primarily manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative financial instruments include interest rate risk, foreign currency exchange risk and commodity price risk. While certain of our derivative financial instruments are designated as hedging instruments, we also enter into derivative financial 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 financial 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 Exchange Rate Risk Management - We conduct business in several major international currencies and are, therefore, subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable foreign currency exchange rate fluctuations. The translation of foreign currencies into U.S. dollars also subjects us to exposure related to fluctuating foreign currency exchange rates; however, derivative financial 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, copper, zinc, aluminum 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 financial instruments to manage the associated price risk.
16
We are exposed to counterparty credit risk on all of our derivative financial instruments. Accordingly, we have established and maintain strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty and management believes the risk of loss is remote and, in any event, would not be material.
Refer to “Note P – Fair Value Measurements” for additional information regarding the accounting treatment for our derivative financial instruments, as well as how fair value is determined. The following table summarizes the fair value of our derivative financial instruments and the respective lines in which they were recorded in the consolidated balance sheet at August 31, 2024 and May 31, 2024:
Fair Value of Assets
Fair Value of Liabilities
Balance
Sheet
Location
Derivatives designated as hedging instruments:
Commodity contracts
917
601
263
83
104
Derivatives not designated as hedging instruments:
58
319
239
69
Foreign currency exchange contracts
1,248
439
1,317
Total derivative financial instruments
975
920
702
1,421
The amounts in the table above reflect the fair value of our derivative financial instruments on a net basis where allowed under master netting arrangements. Had these amounts been recognized on a gross basis, the impact would have been an increase in receivables with a corresponding increase in accounts payable of $682 and $391 at August 31, 2024 and May 31, 2024, respectively.
Cash Flow Hedges
We enter into derivative financial instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative financial instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on each of these derivative financial instruments is reported as a component of OCI and reclassified into earnings in the same line associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings.
The following table summarizes our cash flow hedges outstanding at August 31, 2024:
Notional
Maturity Date(s)
3,407
September 2024 - December 2025
The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from AOCI into net earnings for derivative financial instruments designated as cash flow hedges for the periods presented:
Location of
Gain (Loss)
Reclassified
Recognized
Reclassified from AOCI
from AOCI
in OCI
into Net Earnings
For the three months ended August 31, 2024:
(385
Interest rate contracts
52
(333
For the three months ended August 31, 2023:
(411
(641
23
53
(388
(1,226
The estimated amount of the net gains recognized in AOCI at August 31, 2024, expected to be reclassified into net earnings within the succeeding 12 months is $437 (net of tax of $143). This amount was computed using the fair value of the cash flow hedges at August 31, 2024, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2025 and May 31, 2026.
Net Investment Hedges
We have designated our Euro-denominated debt held in the U.S. with a principal €91,700 as a non-derivative net investment hedge of our foreign operations in Portugal. Accordingly, the foreign currency effects resulting from the remeasurement of this debt have been deferred in AOCI as an offset to the translation of our net investment in Portugal. A remeasurement loss of $1,835 was deferred in AOCI during the three months ended August 31, 2024.
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 financial instruments are adjusted to current market value at the end of each period through gain (loss) recognized in earnings.
The following table summarizes our economic (non-designated) derivative financial instruments outstanding at August 31, 2024:
1,364
September 2024 - June 2025
66,039
November 2024
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:
Gain
Recognized in Earnings
Location of Gain
87
843
1,047
1,134
18
Note P – Fair Value Measurements
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 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability and that are significant to the fair value of the assets and liabilities (i.e., allowing for situations in which there is little or no market activity for the asset or liability at the measurement date).
Recurring Fair Value Measurements
At August 31, 2024, our assets and liabilities measured at fair value on a recurring basis were as follows:
(Level 1)
(Level 2)
(Level 3)
Totals
Assets (1)
Derivative financial instruments
Liabilities (1)
At May 31, 2024, our assets and liabilities measured at fair value on a recurring basis were as follows:
19
Non-Recurring Fair Value Measurements
At August 31, 2024, there were no assets measured at fair value on a non-recurring basis on our consolidated balance sheet.
At May 31, 2024, our assets measured at fair value on a non-recurring basis were as follows:
Investment in note receivable (1)
5,000
Investment in unconsolidated affiliate (2)
31,367
36,367
The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, income taxes receivable, other assets, accounts payable, accrued compensation, contributions to employee benefit plans and related taxes, 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 $266,478 and $257,866 at August 31, 2024 and May 31, 2024, respectively. The carrying amount of long-term debt, including current maturities, was $300,009 and $298,133 at August 31, 2024 and May 31, 2024, respectively.
20
Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected statements contained in this MD&A constitute “forward-looking statements” as that term is used in the PSLRA. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Form 10-Q and “Part I – Item 1A. – Risk Factors” of the 2024 Form 10-K.
Unless otherwise indicated, all Note references contained in this MD&A refer to the Condensed Notes to Consolidated Financial Statements included in “Part I – Item 1. – Financial Statements” of this Form 10-Q. All amounts are presented in millions except common share and per common share amounts.
Introduction
The following discussion and analysis of market and industry trends, business developments, and the results of our operations and financial position, should be read in conjunction with our consolidated financial statements and notes thereto included in “Part I – Item 1. – Financial Statements” of this Form 10-Q. The 2024 Form 10-K includes additional information about our business, operations and consolidated financial position and should be read in conjunction with this Form 10-Q. This MD&A is designed to provide a reader with material information relevant to an assessment of our financial condition and results of operations and to allow investors to view the Company from the perspective of management. The results of operations contained in this MD&A include all of our operations, including our former steel processing business. Our historical results have been restated to reflect the operations of Worthington Steel as a discontinued operation in periods prior to the December 1, 2023 Separation as discussed in “Note A – Basis of Presentation.” This MD&A is divided into five main sections:
Recent Business Developments
Trends and Factors Impacting our Performance
The following trends and factors have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results.
End Markets and Competition
We offer a wide range of products and services to a diverse customer base across various end markets. These markets include residential construction, non-residential construction, and repair and remodeling, which drive demand in our Building Products operating segment, including our unconsolidated joint ventures, WAVE and ClarkDietrich. Additionally, tools, outdoor living, and celebrations drive demand in our Consumer Products operating segment, including our consolidated joint venture, Halo. Given the extensive range of products and services we provide, our competitors vary by industry, product type, service type, program size, and geography. Competition is primarily based on price, product quality, brand recognition, product innovation, and customer service. Sales to one customer in the Consumer Products operating segment accounted for 13% of our consolidated net sales in the first quarter of fiscal 2025. Trends and factors impacting each of our end markets are described in additional detail below.
General Economic and Market Conditions
U.S. GDP growth rate trends typically reflect the strength of demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates generally signals a stronger economy and higher demand and pricing for our products. Conversely, declining U.S. GDP growth rates usually indicate a weaker economy and reduced demand and pricing our products. Fluctuations in U.S. GDP growth rates can affect conversion costs related to production and SG&A.
The macroeconomic and geopolitical outlook has been complex and evolving. Although the U.S. economy continues to grow at a modest pace, prolonged inflationary pressures continue to negatively impact the discretionary spending of many of our customers. The recent 0.50% rate cut by the Federal Reserve is expected to alleviate some of this pressure in the near-term as borrowing becomes cheaper, stimulating spending in our residential construction, non-residential construction, and repair and remodel end markets. Besides inflation, consumer spending habits for our products are influenced by prevailing global economic conditions, the costs of basic necessities and other goods, employment levels, salaries and wage rates, and prevailing interest rates. Additionally, consumer purchasing patterns are generally affected by consumers’ disposable income, credit availability, and debt levels.
We also actively monitor other publicly available macroeconomic trends that provide insight into the activity in our end markets. These trends include, but are not limited to, the ABI, the Dodge Momentum Index, the HMI, steel prices, retail sales, state and local government spending, interest rate environment and inflation metrics. Current macro-economic trends within our end markets are described in additional detail below, as well as selected key indicators for the periods presented.
Increase/
($ and units in millions)
(Decrease)
U.S. Residential Construction spend (1)(3)
911,429
887,564
23,865
U.S. Non-residential Construction Spend (1)(3)
1,220,507
1,159,850
60,657
Hot-Rolled Steel ($ per ton) (2)
690
879
(189
Existing Home Sales (units) (1)(3)
3.9
4.0
(0.1
Authorized Housing Permits (units) (1)(3)
1.5
1.6
U.S Private Housing Starts (units) (1)(3)
1.4
1.3
0.1
39.0
50.0
(11.0
45.7
48.1
(2.4
Dodge Momentum Index
220.4
178.0
42.4
30 Year Fixed mortgage rates (1)
6.35
7.18
(0.8
%)
22
Residential Construction: The near-term outlook for U.S. residential construction spending remains cautiously optimistic, with spending increasing by approximately 7.4% between August 2024 and August 2023. While construction data continues to show positive year-over-year growth, housing starts and authorized permits remain flat, reflecting a cautious approach by both builders and potential home buyers. The HMI also fell to 39.0 in August 2024, indicating persistent challenges such as high mortgage rates and elevated home prices. Builders continue to grapple with high interest rates for construction loans and ongoing labor shortages, which are impacting their ability to meet demand. Additionally, rising material costs add further pressure on the end market. However, we are optimistic that recent interest rate cuts could spur new construction activity in the near term and we remain well-positioned to meet the anticipated demand. More broadly, the solid underlying fundamentals of the housing market, including favorable demographics and a chronic undersupply of homes, provide strong support for this end market in the long-term.
Non-residential Construction: The near-term outlook for U.S. non-residential construction is mixed. The ABI fell to 45.7 in August 2024 from 48.1 in August 2023, indicating a continued decline in demand for architectural services. This marks the nineteenth consecutive month of declining billings, reflecting ongoing challenges in converting project inquiries into actual contracts. However, the Dodge Momentum Index offers a more optimistic view, rising to 220.4 in August 2024 from 178.0 in August 2023, driven by gains in both commercial and institutional planning. This suggests that while current billings are down, there is a pipeline of projects that could bolster future construction activity. Overall, the sector faces headwinds but also holds potential for growth as economic conditions stabilize and interest rates are expected to decrease.
Repair and Remodel: Spending on home improvement is expected to continue declining in the near term as existing home sales remain at multi-decade lows. Although the average 30-year fixed mortgage rate decreased to 6.35% at August 31, 2024, from 7.18% at August 31, 2023, this decline isn’t significant enough to entice most buyers to enter the market or leave their existing lower fixed rate mortgages. Despite these challenges, the long-term outlook remains strong as interest rates are expected to decline further and the aging housing stock will drive the need for renovations. As economic conditions stabilize, we expect homeowners to access their record levels of equity and drive spending in the long-term.
Tools: Spending in the tools end market is predominantly influenced by macroeconomic conditions. Recently, the market has experienced positive tailwinds as inflation has eased, with the annual inflation rate dropping to 2.5% in August 2024, a significant decrease from its peak in 2022. Despite moderating inflation, overall demand in this sector continued to be adversely affected by a general moderation in consumer spending on non-essential items, resulting in lower overall demand from both DIY and professional customers. Notwithstanding these short-term headwinds, we believe that the outlook remains positive as we continue to grow market share with our well-known brands and innovation of new products.
Outdoor Living: Participation in outdoor recreation is beginning to normalize to pre-pandemic levels. This trend is evident in the number of new U.S. camping households, a key metric that measures the influx of first-time campers. After peaking in 2020, driven by the desire for safe, socially-distanced activities during the height of the pandemic, the number has steadily declined. However, the long-term fundamentals in the outdoor living category remain positive, driven by diverse participation across different age groups, socio-economic classes, and geographic regions.
Celebrations: The celebrations end market has shown a gradual recovery, propelled by the increasing demand for personalized and unique event experiences. Consumer income and the debt-to-income ratio have gradually recovered, approaching levels observed prior to COVID-19, alongside moderating inflation. Despite these positive indicators, inflation and interest rates continue to influence disposable income and spending power. It is anticipated that consumer spending on non-essential items will remain constrained, primarily due to a larger share of income being allocated towards essential purchases and mortgage payments.
Seasonality
Historically, sales tend to be stronger in the third and fourth quarters of our fiscal year for our Consumer Products operating segment when our facilities perform at seasonal peaks, matching consumer demand. Sales in our Building Products operating segment are generally stronger in the first and fourth quarters of our fiscal year due to weather conditions, customer business cycles, and the timing of renovation and new construction projects. Demand in our Building Products operating segment during the first quarter of fiscal 2025 was not reflective of the cyclical strength we typically see in in the first quarter of our fiscal year due to continued destocking at certain distributors as well as unfavorable weather patterns.
Results of Operations
First Quarter – Fiscal 2025 Compared to Fiscal 2024
The following discussion provides a review of results for the three months ended August 31, 2024 and August 31, 2023:
(In millions, except per common share amounts)
257.3
311.9
(54.6
(4.7
(7.3
2.6
Adjusted operating income (loss) (1)
(3.5
4.8
(8.3
24.3
26.8
(2.5
Adjusted EBITDA from continuing operations (1)
48.4
65.9
(17.5
35.5
45.4
(9.9
EPS from continuing operations - diluted
(0.06
Adjusted EPS from continuing operations - diluted (1)
(0.25
Net Sales and Volume
The following table provides a breakdown of our consolidated net sales by operating segment for the periods indicated:
Increase
(Dollars in millions)
117.6
117.4
0.2
139.7
165.9
(26.2
(15.8
283.3
(26.0
(9.2
28.6
(28.6
(100.0
Consolidated
The following table provides volume by operating segment for the periods presented (in units):
16,170,556
16,031,583
138,973
0.9
3,094,117
3,808,820
(714,703
(18.8
19,264,673
19,840,403
(575,730
(2.9
106,306
(106,306
19,946,709
(682,036
(3.4
24
Gross Profit
Gross
Margin
62.5
69.6
22.3
(7.1
Selling, General and Administrative Expense
% of
Net Sales
66.0
25.7
74.5
23.9
(8.5
Other Operating Items
1.2
2.4
Interest Expense, Net
0.5
1.1
(0.6
Equity Income
WAVE (1)
27.9
28.3
(0.4
ClarkDietrich (1)
8.7
16.7
(8.0
Other (2)
(1.1
0.4
(1.5
Income Taxes
Estimated
Effective
Tax Rate
6.8
24.5
9.0
25.1
(2.2
Adjusted EBITDA from Continuing Operations
The following table provides a summary of adjusted EBITDA from continuing operations by reportable segment, a non-GAAP financial measure, along with the respective percentage of the total of each reportable segment. See the “Use of Non-GAAP Financial Measures” section preceding Part I, Item 1 of this Form 10-Q for additional information regarding our use of non-GAAP financial measures. A reconciliation from earnings before income taxes to adjusted EBITDA from continuing operations is provided in “Note M – Segment Operations.”
% of Net Sales
August 31, 2023
Increase/(Decrease)
% Increase (Decrease)
17.8
15.1
14.3
12.2
3.5
39.7
28.4
59.7
36.0
(20.0
(33.5
57.5
74.0
26.1
(16.5
(22.3
(9.1
n/a
(8.1
(1.0
12.3
(26.6
26
Liquidity and Capital Resources
During the three months ended August 31, 2024, we generated $41.1 million of cash from operating activities, invested $9.6 million in property, plant and equipment, spent $88.9 million to acquire Ragasco, and received $11.8 million for the sale of 51% of our former Sustainable Energy Solutions operating segment. Additionally, we paid $6.8 million to repurchase 150,000 common shares and paid dividends of $8.1 million on the common shares in the first quarter of fiscal 2025.
The following table summarizes our consolidated cash flows for the periods presented:
(In millions)
41.1
(88.7
(44.3
(18.1
(269.3
(65.7
(253.9
244.2
454.9
178.5
201.0
Activity related to our discontinued operations has not been segregated in our consolidated statements of cash flows. See “Note B – Discontinued Operations” for a summarization of significant non-cash items related to discontinued operations.
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, to the extent not funded by cash provided by operating activities, for at least 12 months and for the foreseeable future thereafter. These resources include cash and cash equivalents and unused committed lines of credit under our Credit Facility, which had a total of $500.0 million of borrowing capacity available to be drawn as of August 31, 2024.
Although we do not currently anticipate a need, we believe that we could access the financial markets to sell long-term debt or equity securities. However, the continuation of uncertain economic conditions, including those caused by a high interest rate environment, could create volatility in the financial markets, which may impact our ability to access capital and the terms under which we can do so.
We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. Should we seek additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs. We may also from time to time seek to retire or repurchase our outstanding debt through cash purchases, in open-market purchases, privately-negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Operating Activities
Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally arise during periods of increased economic activity or increasing raw material prices, requiring higher levels of inventory and accounts receivable. During economic slowdowns or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.
Net cash provided by operating activities was $41.1 million during the first quarter of fiscal 2025, down from $59.7 million in the first quarter of fiscal 2024. The decrease was primarily due to lower net earnings from core operations and a $25.7 million decrease in dividends from unconsolidated joint ventures.
27
Investing Activities
Net cash used by investing activities was $88.7 million during the first quarter of fiscal 2025, compared to $44.3 million during the first quarter of fiscal 2024. Net cash used by investing activities in the first quarter of fiscal 2025 was driven primarily by the acquisition of Ragasco and capital expenditures partially offset by proceeds from the sale of 51% of the nominal share capital of our former Sustainable Energy Solutions operating segment on May 29, 2024.
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 any such opportunities may require additional financing. However, there can be no assurance that any such opportunities will arise, that any such acquisition opportunities will be consummated, or that any needed additional financing will be available on satisfactory terms if required.
Financing Activities
Net cash used by financing activities was $18.1 million during the first quarter of fiscal 2025, compared to $269.3 million in the first quarter of fiscal 2024. During the first quarter of fiscal 2025, we paid $6.8 million to repurchase 150,000 common shares and paid dividends of $8.1 million on the common shares. During the first quarter of fiscal 2024, we paid dividends of $15.7 million on the common shares and repaid $243.8 million of long-term debt associated with the redemption of the 2026 Notes.
Common shares – On September 24, 2024, the Board declared a quarterly dividend of $0.17 per common share payable on December 27, 2024, to shareholders of record at the close of business on December 13, 2024. During the first quarter of fiscal 2024, we declared dividends totaling $0.32 per common share under our pre-Separation capital structure.
On March 20, 2019, the Board authorized the repurchase of up to 6,600,000 common shares.
On March 24, 2021, the Board authorized the repurchase of up to an additional 5,618,464 common shares, increasing the total number of common shares then authorized for repurchase to 10,000,000. As of August 31, 2024, 5,915,000 common shares remained available for repurchase under these two authorizations.
The common shares may be repurchased under these authorizations from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately negotiated transactions.
Long-term debt and short-term borrowings – As of August 31, 2024, we were in compliance with the financial covenants of our short-term and long-term debt agreements. Our debt agreements do not include credit rating triggers or material adverse change provisions. There were no outstanding borrowings drawn against the Credit Facility at August 31, 2024, leaving the full borrowing capacity of $500.0 million available for future use.
28
Dividend Policy
We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments of dividends will continue in the future.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, inventories, intangible assets, accrued liabilities, income and other tax accruals, contingencies and litigation, and business combinations. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that reflect our significant judgments and uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our consolidated financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such policies. Our critical accounting policies have not significantly changed from those discussed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of the 2024 Form 10-K.
Item 3. – Quantitative and Qualitative Disclosures About Market Risk
Market risks have not materially changed from those disclosed in “Part II – Item 7A. – Quantitative and Qualitative Disclosures About Market Risk” of the 2024 Form 10-K.
Item 4. – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that Worthington Enterprises files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including Worthington Enterprises’ principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision of and with the participation of Worthington Enterprises’ principal executive officer and principal financial officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q (the quarterly period ended August 31, 2024). Based on that evaluation, Worthington Enterprises’ principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were designed at the reasonable assurance level and were effective at a reasonable assurance level as of the end of the quarterly period covered by this Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes that occurred during the period covered by this Form 10-Q (the quarterly period ended August 31, 2024) in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. – Legal Proceedings
We are involved in various judicial and administrative proceedings, as both plaintiff and defendant, arising in the ordinary course of business. We do not believe that any such proceedings, individually and in the aggregate, will have a material adverse effect on our business, financial position, results of operation or cash flows.
Item 1A. – Risk Factors
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 2024 Form 10-K, we included a detailed discussion of our risk factors. Our risk factors have not changed significantly from those disclosed in the 2024 Form 10-K. Those risk factors should be read carefully in connection with evaluating our business and investments in the common shares and in connection with the forward-looking statements and other information contained in this Form 10-Q. Any of the risks described in the 2024 Form 10-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 the 2024 Form 10-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
Unregistered Sales of Equity Securities
There were no equity securities of Worthington Enterprises sold by Worthington Enterprises during the three months ended August 31, 2024 that were not registered under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
Common shares withheld to cover tax withholding obligations in connection with the vesting of restricted common shares are treated as common share purchases for purposes of the following table. However, those withheld common shares are not considered common share repurchases under an authorized common share repurchase plan or program. The total number of common shares purchased, as indicated in the table below, include (1) common shares withheld from our employees to satisfy minimum statutory tax withholding obligations arising from the vesting of restricted common shares and (2) common shares repurchased as part of publicly announced plans or programs.
Maximum Number of
Total Number of Common
Common Shares that
Total Number of
Shares Purchased as Part
May Yet Be
Common Shares
Average Price Paid
of Publicly Announced
Purchased Under the
Period
Purchased
per Common Share
Plans or Programs
Plans or Programs (1)
June 1-30, 2024
68,044
48.65
30,000
6,035,000
July 1-31, 2024
152,248
45.50
120,000
5,915,000
August 1-31, 2024
203
45.45
220,495
46.53
150,000
Item 3. – Defaults Upon Senior Securities
Not applicable.
Item 4. – Mine Safety Disclosures
Item 5. – Other Information
During the quarter ended August 31, 2024, no director or officer (as defined under Rule 16a-1 of the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangements or any non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
Item 6. – Exhibits
Incorporated by Reference
Exhibit No.
Exhibit Description
Form
Exhibit
Filing Date
10.1
Worthington Enterprises, Inc. 2024 Long-Term Incentive Plan†
8-K
9/30/2024
31.1
Rule 13a - 14(a)/15d - 14(a) Certifications (Principal Executive Officer)*
31.2
Rule 13a - 14(a)/15d - 14(a) Certifications (Principal Financial Officer)*
32.1
Section 1350 Certification of Principal Executive Officer**
32.2
Section 1350 Certification of Principal Financial Officer**
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at August 31, 2024 and May 31, 2024; (ii) Consolidated Statements of Earnings for the three months ended August 31, 2024 and August 31, 2023; (iii) Consolidated Statements of Comprehensive Income for the three months ended August 31, 2024 and August 31, 2023; (iv) Consolidated Statements of Cash Flows for the three months ended August 31, 2024 and August 31, 2023 and (v) Condensed Notes to Consolidated Financial Statements.*
The cover page from this Quarterly Report on Form 10-Q for the quarter ended August 31, 2024, formatted in Inline XBRL and included in Exhibit 101.*
* Filed herewith.
** Furnished herewith.
† Indicates a management contract or compensatory plan or arrangement.
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.
Date: October 7, 2024
By:
/s/ Joseph B. Hayek
Joseph B. Hayek,
Executive Vice President and Chief Financial and Operations Officer
(On behalf of the registrant as Duly Authorized Officer and as Principal Financial Officer)