# WORTHINGTON ENTERPRISES, INC. (WOR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WORTHINGTON ENTERPRISES, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/108516/000095017023035904/wor-20230531.htm
Accession: 0000950170-23-035904
Filing date: 2023-07-31
Report date: 2023-05-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WOR/
All MD&A years: /company/WOR/mda/
Previous year: /company/WOR/mda/fy2022/ (FY 2022)
Next year: /company/WOR/mda/fy2024/ (FY 2024)

Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected statements contained in this “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“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 “Safe Harbor Statement” in the beginning of this Form 10-K and “Part I - Item 1A. - Risk Factors” of this Form 10-K.

This MD&A should be read in conjunction with our consolidated financial statements and the related Notes in this Form 10-K. 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. This MD&A is divided into seven main sections:

•
Separation from the Steel Processing Business;

•
Business Overview;

•
Recent Business Developments;

•
Trends and Factors Impacting our Performance;

•
Results of Operations;

•
Liquidity and Capital Resources; and

•
Critical Accounting Estimates

Separation from the Steel Processing Business

On September 29, 2022, we announced our intention to complete the Separation, a spin-off of Worthington Steel, our existing Steel Processing business, into a stand-alone publicly traded company through a generally tax-free pro rata distribution of 100% of the common shares of Worthington Steel to Worthington Industries’ shareholders. New Worthington, the remaining company, is expected to be comprised of our Consumer Products, Building Products and Sustainable Energy Solutions operating segments. While we currently intend to effect the distribution, subject to satisfaction of certain conditions, we have no obligation to pursue or consummate any dispositions of our ownership interest in Worthington Steel, including through the completion of the distribution, by any specified date or at all. The distribution is subject to various conditions, including final approval by the Board; the transfer of assets and liabilities to Worthington Steel in accordance with the separation agreement; due execution and delivery of the agreements relating to the Separation; no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition in effect preventing the consummation of the Separation, the distribution or any of the related transactions; acceptance for listing on the NYSE of the common shares of Worthington Steel to be distributed, subject to official notice of distribution; completion of financing, and no other event or development having occurred or being in existence that, in the judgment of the Board, in its sole discretion, makes it inadvisable to effect the Separation, the distribution or the other related transactions.

Business Overview

We are an industrial manufacturing company focused on value-added steel processing and manufactured consumer, building, and sustainable mobility products. Our manufactured products include: pressure cylinders for LPG, CNG, hydrogen, oxygen, refrigerant and other industrial gas storage; water well tanks for commercial and residential uses; hand torches and filled hand torch cylinders; propane-filled camping cylinders; helium-filled balloon kits; specialized hand tools and instruments; and drywall tools and related accessories; and, through our joint ventures, complete ceiling grid solutions; laser welded blanks; light gauge steel framing for commercial and residential construction; and engineered cabs, operator stations and cab components.

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We own controlling interests in the following consolidated operating joint ventures: Spartan, Samuel and TWB. We also own a controlling interest in WSP, which became a non-operating joint venture on October 31, 2022, when we completed the sale of the remaining net assets of the WSP joint venture. The net assets and operating results of these four joint ventures are consolidated with the equity owned by the minority joint venture member shown as “noncontrolling interests” in our consolidated balance sheets, and the noncontrolling interest in net earnings and other comprehensive income (loss) (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. Our remaining joint ventures, ClarkDietrich, Serviacero Worthington, WAVE and Workhorse, are unconsolidated and accounted for using the equity method. Our noncontrolling investment in ArtiFlex is also accounted for under the equity method, on a historical basis, through its divestiture on August 3, 2022, as discussed further under Recent Business Developments.

Our operations are managed on a product and services basis and, in the case of our manufactured products, are organized around the key end markets. Our management structure consists of four reportable operating segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions. A discussion of each reportable segments is provided below:

[[GREPCENT_TABLE]]
[["Reportable Segments","Description"],["Steel Processing","This segment is a value-added processor of carbon flat-rolled steel, a producer of laser welded solutions, and a provider of electrical steel laminations. This segment provides a diversified range of products and services that span a variety of end markets. It serves its customers primarily by processing flat-rolled steel coils, which it sources primarily from various North American integrated steel mills and mini-mills, into the precise type, thickness, length, width, shape, and surface quality required by customer specifications. It can sell steel on a direct basis, whereby it is exposed to the risk and rewards of ownership of the material while in our possession. Alternatively, it can also toll process steel under a fee for service arrangement whereby it processes customer-owned material. Its manufacturing facilities further benefit from the flexibility to scale between direct versus tolling services based on demand dynamics throughout the year. Steel Processing includes the operations of our three consolidated operating joint ventures (Spartan, Samuel and TWB) as well as our unconsolidated operating joint venture (Serviacero Worthington)."],["Consumer Products","This segment consists of products in the tools, outdoor living and celebrations end markets with owned and licensed brands that include Coleman\u00ae, Bernzomatic\u00ae, Balloon Time\u00ae, Mag-Torch\u00ae, General\u00ae, Garden-Weasel\u00ae, Pactool International\u00ae, Hawkeye\u2122, Worthington Pro Grade\u2122 and Level5\u00ae. These include propane-filled cylinders for torches, camping stoves and other applications, certain LPG cylinders, handheld torches, helium-filled balloon kits, specialized hand tools and instruments, and drywall tools and accessories sold primarily to mass merchandisers, retailers and distributors. LPG cylinders, which hold fuel for barbeque grills and recreational vehicle equipment, are also sold through cylinder exchangers."],["Building Products","This segment sells refrigerant and LPG cylinders, well water and expansion tanks, and other specialty products which are generally sold to gas producers, and distributors. Refrigerant gas cylinders are used to hold refrigerant gases for commercial, residential, and automotive air conditioning and refrigeration systems. LPG cylinders hold fuel for residential and light commercial heating systems, industrial forklifts and commercial/residential cooking (the latter, generally outside North America). Well water tanks and expansion tanks are used primarily in the residential market with certain products also sold to commercial markets. Specialty products include a variety of fire suppression tanks, chemical tanks, and foam and adhesive tanks. Building Products also includes the results of two of our unconsolidated operating joint ventures (ClarkDietrich and WAVE)."],["Sustainable Energy Solutions","This segment, which is primarily based in Europe, sells onboard fueling systems and related services, as well as gas containment solutions and services for the storage, transport and distribution of industrial gases. Sustainable Energy Solutions operates three manufacturing facilities located in Austria, Germany, and Poland. This segment\u2019s products and services include high pressure and acetylene cylinders for life support systems and alternative fuel cylinders used to hold CNG and hydrogen for automobiles, buses, and light-duty trucks. Sustainable Energy Solutions has a number of foreign and domestic competitors in these markets."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Other","Certain income and expense items incurred at the corporate level but not allocated to our operating segments are included in the \u201cOther\u201d category and consist primarily of expenses and reserves associated with our self-insurance programs, including risks associated with product, cyber, environmental, workers\u2019 compensation, and healthcare liabilities. Other also includes the results of our unconsolidated engineered cabs operating joint venture (Workhorse) as well as the results of ArtiFlex, on a historical basis, through its divestiture on August 3, 2022. Divested businesses that are no longer included in our management structure are also included in the \u201cOther\u201d category, including the following (through the date of disposal): Structural Composites Industries, LLC (\u201cSCI\u201d) (March 2021); Oil & Gas Equipment (January 2021); and Cryogenic Storage and Cryo-Science (October 2020)."]]
[[/GREPCENT_TABLE]]

Recent Business Developments

•
On June 2, 2022, we acquired Level5, a leading provider of drywall tools and related accessories. The total purchase price was approximately $56.1 million, with a potential earnout payment based on performance through calendar year 2024. Refer to “Note Q – Acquisitions” for additional information.

•
On August 3, 2022, we sold our 50% noncontrolling equity interest in ArtiFlex to the unaffiliated joint venture member for net proceeds of approximately $41.8 million, after adjustments for closing debt and final net working capital. Approximately $6.0 million of the total cash proceeds were attributed to real property in Wooster, Ohio, with a net book value of $6.3 million. This real property was owned by us and leased to ArtiFlex prior to closing of the transaction. During fiscal 2023, we recognized a pre-tax loss of $16.1 million in equity income related to the sale.

•
On September 29, 2022, we announced that the Board approved a plan to pursue the Separation of our Steel Processing business which we expect to complete by early 2024. This plan is referred to as “Worthington 2024.” Worthington 2024 will result in two independent, publicly-traded companies that are more specialized and fit-for-purpose, with enhanced prospects for growth and value creation. We plan to effect the Separation via a pro rata distribution of the common shares of Worthington Steel, which is expected to be tax-free to Worthington Industries’ shareholders for U.S. federal income tax purposes. Refer to “Note A – Summary of Significant Accounting Policies” for additional information.

•
On October 31, 2022, our consolidated joint venture, WSP, sold its remaining manufacturing facility, located in Jackson, Michigan, for net proceeds of approximately $21.3 million, resulting in a pre-tax gain of $3.9 million within restructuring and other (income) expense, net. Refer to “Note F – Restructuring and Other (Income) Expense, Net” for additional information.

•
On January 5, 2023, we announced the implementation of a Board transition plan, pursuant to which John H. McConnell II was appointed as a member of the Board, effective on January 4, 2023. As previously disclosed on January 4, 2023, John P. McConnell, Executive Chairman of Worthington Industries, notified the Board that he intended to step down from the Board in June 2023. On June 28, 2023, John P. McConnell notified the Board that he intends to defer his retirement and will remain on the Board to continue providing leadership in preparation for the planned Separation. The effective date of John P. McConnell’s retirement has not been fixed.

•
On February 2, 2023, we announced the senior leadership teams for New Worthington and Worthington Steel which will be effective upon the completion of the planned Separation.

•
On June 28, 2023, the Board declared a quarterly dividend of $0.32 per common share payable on September 29, 2023, to shareholders of record on September 15, 2023.

•
On June 29, 2023, we terminated our revolving trade accounts receivable securitization facility allowing us to borrow up to $175.0 million (the “AR Facility”). See “Note I – Debt and Receivables Securitization” and “Note V – Subsequent Events” for additional information.

•
On July 28, 2023, we redeemed in full our $243.6 million aggregate principal amount of senior unsecured notes due April 15, 2026 (the “2026 Notes”). See “Note I – Debt and Receivables Securitization” and “Note V – Subsequent Events” for additional information.

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Trends and Factors Impacting our Performance

The industries in which we participate are fragmented and highly competitive. Given the broad base of products and services offered, specific competitors vary based on the target industry, product type, service type, size of program and geography. Competition is primarily on the basis of price, product quality and the ability to meet delivery requirements. Our products are priced competitively, primarily based on market factors, including, among other things, market pricing, the cost and availability of raw materials, transportation and shipping costs, and overall economic conditions in the U.S. and abroad.

General Economic and Market Conditions

We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for fiscal 2023 and fiscal 2022 is illustrated in the following chart:

The automotive industry is one of the largest consumers of flat-rolled steel, and thus the largest end market for our Steel Processing operating segment. Approximately 52% of Steel Processing’s net sales are to the automotive market. North American vehicle production, primarily by the Detroit Three automakers, has a considerable impact on the activity within the Steel Processing operating segment. The majority of the net sales of one of our unconsolidated joint ventures, Serviacero Worthington, is also to the automotive market.

Approximately 13% of the net sales in our Steel Processing operating segment are to the construction market. The construction market is also the predominant end market for our unconsolidated joint ventures within the Building Products operating segment, WAVE and ClarkDietrich. While the market price of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including the U.S. gross domestic product (“U.S. GDP”), the Dodge Index of construction contracts and, in the case of ClarkDietrich, trends in the relative prices of framing lumber and steel.

Our remaining net sales are to other markets such as agricultural, appliance, container, energy, heavy-truck, HVAC, and, with the fiscal 2022 addition of Tempel, the industrial electric motor, generator, and transformer industries. Given the many different products that make up these remaining net sales and the wide variety of end markets, it is very difficult to detail the key market indicators that drive this portion of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing the demand of these end markets.

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U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is generally indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, declining U.S. GDP growth rates generally indicate a weaker economy, which generally decreases demand and pricing for our products. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general, and administrative expense (“SG&A”).

Inflation has accelerated and government deficits and debt levels remain at high levels in many major markets. In the U.S., inflation rose at an annual rate of 4.0% in May 2023, down from 8.6% in May 2022. Inflationary pressures have been felt across our business in the form of higher input and conversion costs as well as higher overall SG&A expense. The U.S. Federal Reserve Board has pushed interest rates to the highest level in more than 15 years in an attempt to slow growth and reduce inflation. Rising interest rates could cause a significant economic downturn and impact various of the end markets that we serve as well as overall domestic steel demand. Despite the economic headwinds presented by a rising interest rate environment, demand remains steady in most of our end markets.

We use the following information from the past three fiscal years to monitor our costs and demand in our major end markets:

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["U.S. GDP (% growth year-over-year) (1)","","","1.7","%","","","5.4","%","","","2.8","%","","","(3.7","%)","","","2.6","%"],["Hot-Rolled Steel ($ per ton) (2)","","$","889","","","$","1,588","","","$","869","","","$","(699",")","","$","719"],["Detroit Three Auto Build (000's vehicles) (3)","","","6,906","","","","6,164","","","","6,808","","","","742","","","","(644",")"],["No. America Auto Build (000's vehicles) (3)","","","14,910","","","","13,225","","","","14,813","","","","1,685","","","","(1,588",")"],["Zinc ($ per pound) (4)","","$","1.40","","","$","1.56","","","$","1.15","","","$","(0.16",")","","$","0.41"],["Natural Gas ($ per mcf) (5)","","$","5.22","","","$","4.92","","","$","2.49","","","$","0.30","","","$","2.43"],["On-Highway Diesel Fuel Prices ($ per gallon) (6)","","$","4.80","","","$","3.99","","","$","3.17","","","$","0.81","","","$","0.82"]]
[[/GREPCENT_TABLE]]

(1)
2022 and 2021 figures based on revised actuals

(2)
CRU Hot-Rolled Index; period average

(3)
IHS Global (S&P)

(4)
LME Zinc; period average

(5)
NYMEX Henry Hub Natural Gas; period average

(6)
Energy Information Administration; period average

Sales to one Steel Processing customer in the automotive industry represented 11.9% and 13.2% of our consolidated net sales during fiscal 2023 and fiscal 2022, respectively. 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 fiscal 2023, vehicle production for the Detroit Three automakers was up 12%, while overall North American vehicle production was up 13%.

Impact of Raw Material Prices

The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. The steel industry as a whole has been cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. This volatility can significantly affect our steel costs. In an environment of increasing prices for steel and other raw materials, competitive conditions or contractual obligations may impact how much of the price increases we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, our financial results could be adversely affected. Also, if steel prices decrease, in general, competitive conditions or contractual obligations may impact how quickly we must reduce our prices to our customers, and we could be forced to use higher-priced raw materials in our inventories to complete orders for which the selling prices have decreased. Declining steel prices could also require us to write-down the value of our inventories to reflect current market pricing. Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and consolidation may continue. Accordingly, if delivery from a major steel supplier is disrupted, it may be more difficult to obtain an alternative supply than in the past.

The market price of our products is closely related to the price of Hot Rolled Coil (“HRC”). The benchmark price for HRC is primarily affected by the demand for steel and the cost of raw materials. Over the past three years, steel prices have increased significantly due to supplier consolidation, tight mill orders due to the COVID-19 pandemic, the war in Ukraine and tariffs on foreign steel. More recently, steel prices rapidly decreased before increasing again.

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To manage our exposure to market risk, we attempt to negotiate the best prices for steel and to competitively price products and services to reflect the fluctuations in market prices. We have used derivative financial instruments to manage a portion of our exposure to fluctuations in the cost of certain steel. These derivative financial instruments covered periods commensurate with known or expected exposures throughout fiscal 2023. The derivative financial instruments were executed with highly rated financial institutions.

The following table presents the average quarterly market price per ton of hot-rolled steel during each of the past three fiscal years.

[[GREPCENT_TABLE]]
[["(Dollars per ton) (1)","","2023","","","2022","","","2021"],["1st Quarter","","$","978","","","$","1,762","","","$","475"],["2nd Quarter","","$","742","","","$","1,888","","","$","625"],["3rd Quarter","","$","720","","","$","1,421","","","$","1,016"],["4th Quarter","","$","1,116","","","$","1,280","","","$","1,358"],["Annual Avg.","","$","889","","","$","1,588","","","$","869"]]
[[/GREPCENT_TABLE]]

(1)
CRU Hot-Rolled Index

No matter how efficient, our operations, which use steel as a raw material, create some amount of scrap. The expected price of scrap compared to the price of the steel raw material is factored into pricing. Generally, as the price of steel increases, the price of scrap increases by a similar amount. When increases in scrap prices do not keep pace with the increases in the price of the steel raw material, it can have a negative impact on our margins.

Certain other commodities, such as copper, zinc, natural gas, helium and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plant operations and indirectly through transportation and freight expense.

Results of Operations

Fiscal 2023 Compared to Fiscal 2022

The tables throughout this section present, on a comparative basis, our consolidated results of operations for the past two fiscal years.

[[GREPCENT_TABLE]]
[["(In millions, except per common share amounts)","","2023","","","2022","","","Increase/ (Decrease)"],["Net sales","","$","4,916.4","","","$","5,242.2","","","$","(325.8",")"],["Operating income","","","212.4","","","","329.3","","","","(116.9",")"],["Equity income","","","161.0","","","","213.6","","","","(52.6",")"],["Net earnings attributable to controlling interest","","","256.5","","","","379.4","","","","(122.9",")"],["Earnings per diluted common share attributable to controlling interest","","","5.19","","","","7.44","","","","(2.25",")"]]
[[/GREPCENT_TABLE]]

Net Sales and Volume

The following table provides a breakdown of consolidated net sales by operating segment, along with the respective percentage of the total of each, for the past two fiscal years.

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2023","","","Net sales","","","2022","","","Net sales","","","(Decrease)"],["Steel Processing","","$","3,497.9","","","","71.1","%","","$","3,933.0","","","","75.0","%","","$","(435.1",")"],["Consumer Products","","","686.3","","","","14.0","%","","","636.5","","","","12.1","%","","","49.8"],["Building Products","","","586.1","","","","11.9","%","","","541.8","","","","10.4","%","","","44.3"],["Sustainable Energy Solutions","","","146.1","","","","3.0","%","","","130.9","","","","2.5","%","","","15.2"],["Consolidated Net Sales","","$","4,916.4","","","","100.0","%","","$","5,242.2","","","","100.0","%","","$","(325.8",")"]]
[[/GREPCENT_TABLE]]

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The following table provides volume by operating segment for the past two fiscal years.

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase/"],["","","2023","","","2022","","","(Decrease)"],["Steel Processing (Tons)","","","3,842,828","","","","4,170,931","","","","(328,103",")"],["Consumer Products (Units)","","","78,234,587","","","","82,393,013","","","","(4,158,426",")"],["Building Products (Units)","","","10,532,434","","","","11,707,258","","","","(1,174,824",")"],["Sustainable Energy Solutions (Units)","","","573,853","","","","610,811","","","","(36,958",")"]]
[[/GREPCENT_TABLE]]

•
Steel Processing – Net sales decreased $435.1 million from fiscal 2022 to $3.5 billion in fiscal 2023, as the impact of lower average selling prices more than offset the impact of the Tempel acquisition and a favorable shift in mix from toll tons to direct tons shipped. The mix of direct tons versus toll tons processed was 56% to 44% in fiscal 2023, compared to 51% to 49% in fiscal 2022. The shift in mix towards direct tons was driven primarily by lower tolling volume with our mill customers and the sale of WSP’s remaining manufacturing facility on October 31, 2022.

•
Consumer Products – Net sales increased 7.8%, or $49.8 million, over fiscal 2022 to $686.3 million in fiscal 2023. The increase was driven by higher average selling prices, and, to a lesser extent, contributions from the June 2, 2022 acquisition of Level5. Excluding Level5 units shipped in fiscal 2023, overall volumes were down 7.1% from fiscal 2022, as retail customers reduced inventory levels resulting in lower customer orders.

•
Building Products – Net sales increased 8.2%, or $44.3 million, over fiscal 2022 to $586.1 million in fiscal 2023. The increase was driven by higher average selling prices and a favorable shift in product mix, partially offset by lower volume.

•
Sustainable Energy Solutions – Net sales totaled $146.1 million in fiscal 2023, up 11.6%, or $15.2 million, over fiscal 2022, primarily due to higher average selling prices, partially offset by an unfavorable change in product mix.

Gross Margin

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2023","","","Net sales","","","2022","","","Net sales","","","(Decrease)"],["Gross Margin","","$","663.3","","","","13.5","%","","$","714.8","","","","13.6","%","","$","(51.5",")"]]
[[/GREPCENT_TABLE]]

•
Gross margin decreased $51.5 million from fiscal 2022 to $663.3 million in fiscal 2023, as the impact of lower overall volumes and higher manufacturing expenses more than offset the favorable impact of higher average selling prices at Consumer Products and Building Products and the impact of acquisitions. Excluding the impact of acquisitions and divestitures, overall volumes were down across all of our operating segments while manufacturing expenses were up on continued inflationary pressures and higher fixed cost absorption.

Selling, General and Administrative Expense

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2023","","","Net sales","","","2022","","","Net sales","","","(Decrease)"],["Selling, general and administrative expense","","$","428.9","","","","8.7","%","","$","399.6","","","","7.6","%","","$","29.3"]]
[[/GREPCENT_TABLE]]

•
SG&A expense increased $29.3 million over fiscal 2022 due primarily to the impact of acquisitions and higher wages and benefits driven by continued inflationary pressures, partially offset by lower profit sharing and bonus expense to correspond with the decreases in operating income and equity income from fiscal 2022.

Other Operating Items

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase/"],["(In millions)","","2023","","","2022","","","(Decrease)"],["Impairment of long-lived assets","","$","2.6","","","$","3.1","","","$","(0.5",")"],["Restructuring and other income, net","","","(4.6",")","","","(17.1",")","","","12.5"],["Separation costs","","","24.0","","","","-","","","","24.0"]]
[[/GREPCENT_TABLE]]

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•
Impairment of long-lived assets in fiscal 2023 related primarily to a $1.8 million charge to write down production equipment at our Steel Processing facility in Taylor, Michigan to its estimated fair market value less costs to sell; $0.5 million related to changes in the intended use of certain fixed assets at our Building Products facility in Jefferson, Ohio; and $0.3 million related to our commitment to a plan to sell certain fixed assets at our Samuel toll processing facility in Cleveland, Ohio that were written down to fair value less costs to sell. Impairment charges in fiscal 2022 related to the write-down of certain production equipment at our Samuel facility in Twinsburg, Ohio that was determined to be below fair market value. Refer to “Note E – Goodwill and Other Long-Lived Assets” for additional information.

•
Restructuring and other income, net in fiscal 2023 was driven by gains realized from the sale of long-lived assets, including a $3.9 million gain realized from the sale of WSP’s former manufacturing facility in Jackson, Michigan. Restructuring activity in fiscal 2022 resulted primarily from pre-tax gains from asset disposals with Steel Processing totaling $14.9 million. Refer to “Note F – Restructuring and Other (Income) Expense, Net” for additional information.

•
Separation costs of $24.0 million reflect direct and incremental costs incurred in connection with the planned Separation, including audit, advisory, and legal costs. Refer to “Note A - Summary of Significant Accounting Policies” for additional information.

Miscellaneous Income (Expense), Net

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase/"],["(In millions)","","2023","","","2022","","","(Decrease)"],["Miscellaneous income (expense), net","","$","(1.2",")","","$","2.7","","","$","(3.9",")"]]
[[/GREPCENT_TABLE]]

•
Miscellaneous expense in fiscal 2023 was driven primarily by the annuitization of a portion of the total projected benefit obligation of the inactive Gerstenslager Company Bargaining Unit Employees’ Pension Plan, as of the purchase date of the annuity contract, which resulted in a pre-tax, non-cash settlement charge of $4.8 million in the first quarter of fiscal 2023 to accelerate a portion of the overall deferred pension cost.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase/"],["(In millions)","","2023","","","2022","","","(Decrease)"],["Interest expense, net","","$","26.8","","","$","31.3","","","$","(4.5",")"]]
[[/GREPCENT_TABLE]]

•
Interest expense was $26.8 million in fiscal 2023, down $4.5 million from fiscal 2022 due to higher interest income, and to a lesser extent, the impact of lower average debt levels associated with short-term borrowings.

Equity Income

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase/"],["(In millions)","","2023","","","2022","","","(Decrease)"],["WAVE","","$","85.9","","","$","87.4","","","$","(1.5",")"],["ClarkDietrich","","","80.5","","","","89.1","","","","(8.6",")"],["Serviacero Worthington","","","7.7","","","","29.8","","","","(22.1",")"],["ArtiFlex (1)","","","(13.7",")","","","7.6","","","","(21.3",")"],["Workhorse","","","0.5","","","","(0.3",")","","","0.8"],["Total Equity Income","","$","160.9","","","$","213.6","","","$","(52.7",")"]]
[[/GREPCENT_TABLE]]

(1)
On August 3, 2022, we sold our 50% noncontrolling equity interest in ArtiFlex. Activity for fiscal 2023 includes a $16.1 million pre-tax loss related to the sale.

•
Equity income from unconsolidated joint ventures decreased $52.7 million from fiscal 2022 to $160.9 million due to a $16.1 million pre-tax loss related to the sale of our noncontrolling equity interest in ArtiFlex and lower contributions from WAVE, ClarkDietrich, and Serviacero. The lower contribution from Serviacero Worthington was primarily the result of reduced spreads driven by falling steel prices. We received cash distributions of $240.9 million from our unconsolidated joint ventures during fiscal 2023.

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Income Taxes

[[GREPCENT_TABLE]]
[["","","","","","Effective","","","","","","Effective","","","Increase/"],["(In millions)","","2023","","","Tax Rate","","","2022","","","Tax Rate","","","(Decrease)"],["Income tax expense","","$","76.2","","","","22.9","%","","$","115.0","","","","23.3","%","","$","(38.8",")"]]
[[/GREPCENT_TABLE]]

•
Income tax expense decreased $38.8 million from fiscal 2022 due to lower pre-tax earnings. Fiscal 2023 tax expense reflected an estimated annual effective income tax rate of 22.9% versus 23.3% in fiscal 2022. For additional information regarding our income taxes, refer to “Note N – Income Taxes.”

Adjusted EBIT

We evaluate operating performance on the basis of adjusted earnings before interest and taxes (“adjusted EBIT”). EBIT, a non-GAAP financial measure, is calculated by adding interest expense and income tax expense to net earnings attributable to controlling interest. Adjusted EBIT excludes impairment and restructuring expense (income), but may also exclude other items, as described below, that management believes are not reflective of, and thus should not be included when evaluating the performance of our ongoing operations. Adjusted EBIT is a non-GAAP financial measure and is used by management to evaluate operating performance, engage in financial and operational planning and determine incentive compensation because we believe that this financial measure provides additional perspective on the performance of our ongoing operations. Additionally, management believes these non-GAAP financial measures provide useful information to investors because they allow for meaningful comparisons and analysis of trends in our businesses and enable investors to evaluate operations and future prospects in the same manner as management.

The following table provides a reconciliation of net earnings attributable to controlling interest to adjusted EBIT:

[[GREPCENT_TABLE]]
[["(In millions)","","2023","","","2022"],["Net earnings attributable to controlling interest","","$","256.5","","","$","379.4"],["Interest expense, net","","","26.8","","","","31.3"],["Income tax expense","","","76.2","","","","115.0"],["EBIT","","","359.5","","","","525.7"],["Impairment of long-lived assets (1)","","","2.5","","","","2.0"],["Restructuring and other income, net (2)","","","(2.7",")","","","(11.2",")"],["Separation costs (3)","","","24.0","","","","-"],["Pension settlement charge (4)","","","4.8","","","","-"],["Loss on sale of investment in ArtiFlex (5)","","","16.1","","","","-"],["Sale-leaseback gain in equity income (6)","","","(2.1",")"],["Adjusted EBIT","","$","402.1","","","$","516.5"]]
[[/GREPCENT_TABLE]]

(1)
Impairment charges are excluded because they do not occur in the ordinary course of our ongoing business operations, are inherently unpredictable in timing and amount, and are non-cash, so their exclusion facilitates the comparison of historical, current and forecasted financial results. Excludes the impact of the noncontrolling interests.

(2)
Restructuring activities consist of established programs that are not part of our ongoing 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). Excludes the impact of the noncontrolling interests.

(3)
Reflects direct and incremental costs incurred in connection with the anticipated tax-free spin-off of our Steel Processing business, including audit, advisory, and legal costs and one-time costs to stand-up separate corporate functions.

(4)
During the first quarter of fiscal 2023, we completed the pension lift-out transaction to transfer a portion of the total projected benefit obligation of The Gerstenslager Company Bargaining Unit Employees’ Pension Plan to a third-party insurance company, resulting in a non-cash settlement charge of $4.8 million to accelerate a portion of the overall deferred pension cost.

(5)
On August 3, 2022, we sold our 50% noncontrolling equity investment in ArtiFlex, resulting in a pre-tax loss of $16.1 million in equity income related to the sale.

(6)
During the three months ended May 31, 2023, our unconsolidated engineered cabs joint venture, Workhorse, recognized a pre-tax gain of $10.3 million related to a sale-leaseback transaction. Our portion of this gain, which is recorded in equity income, was $2.1 million.

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The following table provides a summary of adjusted EBIT by reportable segment, along with the respective percentage of the total of each reportable segment.

[[GREPCENT_TABLE]]
[["","","","","","% of Adjusted","","","","","","% of Adjusted","","","Increase/"],["(In millions)","","2023","","","EBIT","","","2022","","","EBIT","","","(Decrease)"],["Steel Processing","","","121.7","","","","30.3","%","","","203.3","","","","39.4","%","","$","(81.6",")"],["Consumer Products","","","78.0","","","","19.4","%","","","94.3","","","","18.3","%","","","(16.3",")"],["Building Products","","","204.6","","","","50.9","%","","","216.6","","","","41.9","%","","","(12.0",")"],["Sustainable Energy Solutions","","","0.9","","","","0.2","%","","","(6.3",")","","","(1.2","%)","","","7.2"],["Other","","","(3.1",")","","","(0.8","%)","","","8.6","","","","1.7","%","","","(11.7",")"],["Total Adjusted EBIT","","","402.1","","","","100.0","%","","$","516.5","","","","100.0","%","","$","(114.4",")"]]
[[/GREPCENT_TABLE]]

•
Steel Processing – Adjusted EBIT was down $81.6 million from fiscal 2022 to $121.7 million in fiscal 2023, due to a $75.4 million decline in operating income and a $22.1 million decline in equity income from Serviacero Worthington, as lower average steel prices reduced spreads. Excluding impairment and restructuring activity, operating income was down $66.1 million from fiscal 2022 driven primarily by higher manufacturing expenses and the impact of lower overall volume, which reduced operating income by a combined $61.6 million. Direct spreads were down $5.9 million and include an estimated $70.5 million unfavorable swing related to estimated inventory holding losses of $48.7 million in fiscal 2023 compared to estimated inventory holding gains of $21.9 million in fiscal 2022.

•
Consumer Products – Adjusted EBIT was down $16.3 million from fiscal 2022 to $78.0 million in fiscal 2023, as the favorable impact of higher average selling prices was more than offset by lower volumes and higher input and production costs, including $2.7 million of incremental material cost related to Level5 inventory that was written-up to fair value at acquisition. Adjusted EBIT was also negatively impacted by $4.4 million of higher SG&A, excluding the impact of the Level5 acquisition, primarily due to inflationary pressure on wages and benefits and higher advertising expense.

•
Building Products – Adjusted EBIT decreased $12.0 million from fiscal 2022 to $204.6 million in fiscal 2023, primarily due to a $10.1 million decline in equity income, driven by lower volumes at ClarkDietrich that yielded an $8.6 million lower contribution compared to fiscal 2022.

•
Sustainable Energy Solutions – Adjusted EBIT was $0.9 million in fiscal 2023, favorable by $7.2 million to fiscal 2022, driven by higher average selling prices, partially offset by higher input and production costs.

Fiscal 2022 Compared to Fiscal 2021

For a comparison of our results of operations for fiscal 2022 and fiscal 2021, see “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Fiscal 2022 Compared to Fiscal 2021” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022, filed with the SEC on August 1, 2022.

Liquidity and Capital Resources

During fiscal 2023, we generated $625.4 million of cash from operating activities, invested $86.4 million in property, plant and equipment, spent $56.1 million to acquire Level5, and generated net cash proceeds of $35.7 million from the sale of assets, as well as $35.8 million from the sale of our 50% noncontrolling equity interest in ArtiFlex. Additionally, we repaid $45.2 million of short-term borrowings and paid dividends of $59.2 million on the common shares. The following table summarizes our consolidated cash flows for each of the prior three fiscal years.

[[GREPCENT_TABLE]]
[["(In millions)","","2023","","","2022","","","2021"],["Net cash provided by operating activities","","$","625.4","","","$","70.1","","","$","274.4"],["Net cash provided (used) by investing activities","","","(71.8",")","","","(438.2",")","","","468.5"],["Net cash used by financing activities","","","(133.1",")","","","(237.7",")","","","(249.8",")"],["Increase (decrease) in cash and cash equivalents","","","420.5","","","","(605.8",")","","","493.1"],["Cash and cash equivalents at beginning of period","","","34.5","","","","640.3","","","","147.2"],["Cash and cash equivalents at end of period","","$","455.0","","","$","34.5","","","$","640.3"]]
[[/GREPCENT_TABLE]]

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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. These committed lines of credit had a total of $500 million of borrowing capacity available to be drawn as of May 31, 2023.

Although we do not currently anticipate a need, we believe that we could access the financial markets to be in a position to sell long-term debt or equity securities. However, the continuation of soft economic conditions and an uncertain 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. During fiscal 2023, the financial markets experienced disruption due to certain bank failures. Given the diversification and credit profile of our exposure to bank counterparties, we do not foresee any material financial impact from this disruption. We will continue to monitor the economic environment and its impact on our operations and liquidity needs.

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. We are also in the process of evaluating our post-Separation 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. The amounts involved in any such transaction may or may not be material. On June 29, 2023, we redeemed in full our 2026 Notes. The redemption price approximated the par value of debt of $243.6 million plus accrued interest. See “Note V – Subsequent Events” for additional information.

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 rise 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. Falling steel prices during fiscal 2023 led to a $152.8 million decrease in operating working capital (accounts receivable, inventory and accounts payable) at May 31, 2023.

Net cash provided by operating activities was $625.4 million during fiscal 2023 compared to $70.1 million in fiscal 2022, an increase of $555.3 million. The increase was primarily due to a $410.4 million change in operating working capital requirements in fiscal 2023, as compared to fiscal 2022, mainly driven by fluctuations in steel prices, which rose in 2022, then decreased in 2023. The remaining increase over fiscal 2022 was driven by higher cash dividends from our unconsolidated joint ventures, which were up $140.8 million.

Investing Activities

Net cash used by investing activities was $71.8 million during fiscal 2023 compared to net cash used by investing activities of $438.2 million in fiscal 2022. Net cash used by investing activities in fiscal 2023 resulted from the purchase of the Level5 business on June 2, 2022, for $56.1 million, net of cash acquired, and capital expenditures of $86.4 million, partially offset by combined cash proceeds of $71.3 million from the sale of our 50% noncontrolling equity investment in ArtiFlex, and the sale of our WSP Jackson, Michigan facility and other long-lived assets. Net cash used by investing activities in fiscal 2022 resulted primarily from cash used to acquire certain assets of the Shiloh Industries’ (“Shiloh”) U.S. BlankLight ® business on June 8, 2021, for $104.5 million and Tempel on December 1, 2021 for $272.2 million, and capital expenditures of $94.6 million.

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Capital expenditures reflect cash used for investment in property, plant and equipment and is presented below by reportable segment (this information excludes cash flows related to acquisition and divestiture activity) for each of the prior three fiscal years:

[[GREPCENT_TABLE]]
[["(In millions)","","2023","","","2022","","","2021"],["Steel Processing","","$","45.1","","","$","35.9","","","$","28.3"],["Consumer Products","","","13.6","","","","13.4","","","","13.3"],["Building Products","","","17.8","","","","31.1","","","","22.7"],["Sustainable Energy Solutions","","","6.5","","","","6.4","","","","8.7"],["Other","","","3.4","","","","7.8","","","","9.2"],["Total Capital Expenditures","","$","86.4","","","$","94.6","","","$","82.2"]]
[[/GREPCENT_TABLE]]

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 $133.1 million in fiscal 2023 compared to $237.7 million in fiscal 2022. The change was primarily due to $45.2 million of net repayments of short-term borrowings in fiscal 2023 and the repurchase of 3.2 million of common shares at a cost of $180.2 million in fiscal 2022.

Long-term debt – Our senior unsecured long-term debt is rated “investment grade” by both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Group. We typically use the net proceeds from long-term debt for acquisitions, refinancing of outstanding debt, capital expenditures and general corporate purposes. As of May 31, 2023, we were in compliance with the covenants in our long-term debt agreements. Our long-term debt agreements do not include ratings triggers or material adverse change provisions.

Short-term borrowings – Our short-term debt agreements do not include ratings triggers or material adverse change provisions. As of May 31, 2023, we were in compliance with the covenants in our short-term debt agreements.

We maintain a $500.0 million multi-year revolving credit facility (the “Credit Facility”) with a group of lenders that matures in August 2026. 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 Simple SOFR, the Prime Rate of PNC Bank, National Association, or the Overnight Bank Funding Rate. The applicable margin is determined by our credit rating. There were no borrowings outstanding under the Credit Facility at May 31, 2023.

As discussed in “Note H – Guarantees,” we had in place $14.1 million in outstanding letters of credit for third-party beneficiaries as of May 31, 2023. No amounts were drawn against these outstanding letters of credit at May 31, 2023, and the fair value of these guarantee instruments, based on premiums paid, was not material.

On May 19, 2022, we entered into the AR Facility allowing us to borrow up to $175.0 million. Pursuant to the terms of the AR Facility, certain of our subsidiaries were to sell or contribute all of their eligible accounts receivable and other related assets without recourse, on a revolving basis, to Worthington Receivables Company (“WRC”), a wholly-owned, consolidated, bankruptcy-remote indirect subsidiary. In turn, WRC was to sell, on a revolving basis, up to $175.0 million of undivided ownership interests in this pool of accounts receivable to a third-party bank. We were to retain an undivided interest in this pool and were to be subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold was to exclude receivables more than 120 days past due, receivables offset by an allowance for doubtful accounts due to bankruptcy or other cause, concentrations over certain limits with specific customers and certain reserve amounts, we believed additional risk of loss would be minimal. As of May 31, 2023, there were no borrowings outstanding under the AR Facility, leaving $175.0 million then available for use. On June 29, 2023, we terminated the AR Facility as it was no longer needed. No early termination or other similar fees or penalties were paid in connection with the termination of the AR Facility.

Common shares – During fiscal 2023, we declared dividends totaling $1.24 per common share at a quarterly rate of $0.31 per common share. During fiscal 2022, we declared dividends totaling $1.12 per common share at a quarterly rate of $0.28 per common share. Dividends paid on the common shares totaled $59.2 million in fiscal 2023 compared to $57.2 million during fiscal 2022. On June 28, 2023, the Board declared a quarterly dividend of $0.32 per common share for the first quarter of fiscal 2024. The dividend is payable on September 29, 2023 to shareholders of record on September 15, 2023.

On March 20, 2019, the Board authorized the repurchase of up to 6.6 million of the common shares.

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On March 24, 2021, the Board authorized the repurchase of up to an additional 5.6 million of the common shares, increasing the total number of common shares then authorized for repurchase to 10.0 million. The total number of common shares available for repurchase under these authorizations at May 31, 2023 was 6.1 million.

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.

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 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.

Recently Adopted Accounting Standards

In June 2016, amended accounting guidance was issued related to the measurement of credit losses on financial instruments. The amended accounting guidance changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets held. The amended accounting guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Our adoption of this new accounting standard update in fiscal 2021 did not have a material impact on our consolidated financial position, results of operations, or cash flows. Additionally, there have been no changes to our significant accounting policies as disclosed in this Form 10-K as a result of the adoption of this new accounting guidance.

Environmental

We do not believe that compliance with environmental laws has or will have a material effect on our capital expenditures, future results of operations or financial position or competitive position.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. 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, as discussed below, 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. The following accounting estimates are considered to be the most critical to us, as these are the primary areas where financial information is subject to our estimates, assumptions and judgment in the preparation of our consolidated financial statements.

See “Note A – Summary of Significant Accounting Policies” to our consolidated financial statements for further information on our significant accounting policies.

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Impairment of Indefinite-Lived Long-Lived Assets:

Critical estimate: Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimation of the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. With the exception of Steel Processing, we test goodwill at the operating segment level as we have determined that the characteristics of the reporting units within each operating segment are similar and allow for their aggregation in accordance with the applicable accounting guidance. Steel Processing is comprised of three reporting units: Flat Rolled Steel Processing, Electrical Steel and Laser Welding.

For goodwill and indefinite lived intangible assets, we test for impairment by first evaluating qualitative factors including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. If there are no concerns raised from this evaluation, no further testing is performed. If, however, our qualitative analysis indicates it is more likely than not that the fair value is less than the carrying amount, a quantitative analysis is performed. The quantitative analysis compares the fair value of each reporting unit or indefinite-lived intangible asset to the respective carrying amount, and an impairment loss is recognized in our consolidated statements of earnings equivalent to the excess of the carrying amount over the fair value.

Assumptions and judgments: When performing a qualitative assessment, judgment is required when considering relevant events and circumstances that could affect the fair value of the indefinite lived intangible asset or reporting unit to which goodwill is assigned. Management considers whether events and circumstances such as a change in strategic direction and changes in business climate would impact the fair value of the indefinite lived intangible asset or reporting unit to which goodwill is assigned. If a quantitative analysis is required, assumptions are required to estimate the fair value to compare against the carrying value. Significant assumptions that form the basis of fair value can include discount rates, underlying forecast assumptions, and royalty rates. These assumptions are forward looking and can be affected by future economic and market conditions. Our qualitative review for fiscal 2023 did not indicate any impairment.

Impairment of Definite-Lived Long-Lived Assets:

Critical estimate: We review the carrying value of our long-lived assets, including intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its respective carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, if any, to be recognized. An impairment loss is recognized to the extent that the carrying amount of the asset or asset group exceeds its fair value.

Assumptions and judgments: When performing the comparison of the sum of the undiscounted cash flows of the asset or asset group to its respective carrying amount, judgment is required when forming the basis for underlying cash flow forecast assumptions. If the second step of the impairment test is required, assumptions are required to estimate the fair value to compare against the carrying value. Significant assumptions that form the basis of fair value can include discount rates, underlying forecast assumptions, and royalty rates. These assumptions are forward looking and can be affected by future economic and market conditions.

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Income Taxes

Critical estimate: In accordance with the authoritative accounting guidance, we account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and deferred tax liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We evaluate the deferred tax assets to determine whether it is more likely than not that some, or a portion, of the deferred tax assets will not be realized, and provide a valuation allowance as appropriate. Changes in existing tax laws or rates could significantly impact the estimate of our tax liabilities.

Assumptions and judgments: Significant judgment is required in determining our tax expense and in evaluating our tax positions. In accordance with accounting literature related to uncertainty in income taxes, tax benefits from uncertain tax positions that are recognized in our consolidated financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We have reserves for income taxes and associated interest and penalties that may become payable in future years as a result of audits by taxing authorities. It is our policy to record these in income tax expense. While we believe the positions taken on previously filed tax returns are appropriate, we have established the tax and interest reserves in recognition that various taxing authorities may challenge our positions. These reserves are analyzed periodically, and adjustments are made as events occur to warrant adjustment to the reserves, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, and release of administrative guidance or court decisions affecting a particular tax issue. We have provided for the amounts we believe will ultimately result from these changes; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Such differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. See “Note N – Income Taxes” for further information.

Employee Pension Plans:

Critical estimate: Defined benefit pension and other post-employment benefit (“OPEB”) plan obligations are remeasured at least annually as of May 31 based on the present value of projected future benefit payments for all participants for services rendered to date. The measurement of projected future benefits is dependent on the provisions of each specific plan, demographics of the group covered by the plan, and other key measurement assumptions. The funded status of these benefit plans, which represents the difference between the benefit obligation and the fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each fiscal year. Net periodic benefit cost is included in other income (expense) in our consolidated statements of earnings, except for the service cost component, which is recorded in SG&A expense.

Assumptions and judgements: Certain key actuarial assumptions critical to the pension and post-retirement accounting estimates include expected long-term rate of return on plan assets, discount rates, projected health care cost trend rates, cost of living adjustments, and mortality rates. In developing future long-term return expectations for our benefit plans’ assets, we formulate views on the future economic environment. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields, and spreads. We also consider expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Net periodic benefit costs, including service cost, interest cost, and expected return on assets, are determined using assumptions regarding the benefit obligation and the fair value of plan assets as of the beginning of each fiscal year.

Holding all other factors constant, a decrease in the discount rate by 0.25 percentage points would have increased the projected benefit obligation at May 31, 2023 by approximately $2.7 million. Also, holding all other factors constant, a decrease in the expected long-term rate of return on plan assets by 0.25 percentage points would have increased fiscal 2023 pension expense by approximately $0.2 million.

Business Combinations:

Critical estimate: We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires significant judgments and estimates and the use of valuation techniques when market value is not readily available. For the valuation of intangible assets acquired in a business combination, we typically use an income approach. The purchase price allocated to the intangible assets is based on unobservable assumptions, inputs and estimates, including but not limited to, forecasted revenue growth rates, projected expenses, discount rates, customer attrition rates, royalty rates, and useful lives, among others.

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Assumptions and judgements: Significant assumptions, which vary by the class of asset or liability are forward looking and could be affected by future economic and market conditions. We engage third-party valuation specialists who review our critical assumptions and prepare the calculation of the fair value of acquired intangible assets in connection with significant business combinations. The excess of the purchase price over the fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.