# WORTHINGTON ENTERPRISES, INC. (WOR) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from WORTHINGTON ENTERPRISES, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/108516/000095017024087983/wor-20240531.htm
Accession: 0000950170-24-087983
Filing date: 2024-07-30
Report date: 2024-05-31
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/fy2023/ (FY 2023)
Next year: /company/WOR/mda/fy2025/ (FY 2025)

Item 7. — 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-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:

•
Business Overview;

•
Separation of the Steel Processing Business;

•
Other Business Developments;

•
Trends and Factors Impacting our Performance;

•
Results of Operations;

•
Liquidity and Capital Resources; and

•
Critical Accounting Estimates

Business Overview

Founded in 1955 as Worthington Industries, we are one of the leading designers and manufacturers of products sold to consumers, primarily through retail channels, in the tools, outdoor living and celebrations market categories as well as a wide array of highly specialized building products that primarily serve customers in the residential and non-residential construction markets, including ceiling suspension systems and light gauge metal framing products, respectively, through our unconsolidated joint ventures, WAVE and ClarkDietrich, as well as wholly-owned and consolidated operations that produce pressurized containment solutions for heating, cooking and cooling applications, among others. Our business strategy is rooted in our people first culture that values our relationships across the spectrum and revolves around products and services that empower people to live safer, healthier and more expressive lives. We were founded as a value-added steel processor domiciled under the laws of the State of Ohio and have since expanded our offerings to include manufactured metal products organized around attractive end market under two separate and distinct reportable operating segments: Consumer Products and Building Products.

Consumer Products: Our Consumer Products business serves retail customers and end consumers in the tools, outdoor living and celebrations categories under market-leading brands that include the following: Balloon Time®, Bernzomatic®, Coleman® (licensed), Garden-Weasel®, General®, Halo®, Hawkeye™, Level5®, Mag-Torch®, Pactool International®, and Worthington Pro Grade™. These include propane-filled cylinders for torches, camping stoves and other applications, handheld torches, helium-filled balloon kits, specialized hand tools and instruments, drywall tools and accessories and gas grills and pizza ovens sold primarily to mass merchandisers, retailers and distributors. This segment also includes our consolidated joint venture, Halo.

Building Products: Our Building Products business is a market-leading provider of pressurized containment solutions, providing critical components in essential categories, such as heating, cooking, cooling and water, and, through our unconsolidated joint ventures, WAVE and ClarkDietrich, ceiling suspension systems and light gauge metal framing products. Our pressurized containment solutions include 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, barbeque grills and recreational vehicle equipment, 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.

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Separation of the Steel Processing Business

On December 1, 2023, we completed the Separation of our former steel processing business into a separate public company in a transaction intended to qualify as tax free to our shareholders, which was accomplished via the Distribution. Worthington Steel is an independent public company trading under the symbol “WS” on the NYSE. Following the Separation, Worthington Industries, Inc. changed its name to Worthington Enterprises, Inc. and its common shares continue trading on the NYSE under the ticker symbol “WOR.” In connection with the Separation, we received a one-time cash dividend of $150.0 million from Worthington Steel, the proceeds of which were used to pay off in full the 2024 Notes. The dividend was funded by cash drawn on the Worthington Steel Credit Facility of $175.0 million immediately prior to the Distribution.

Other Business Developments

On May 29, 2024, we became a noncontrolling equity partner in a new unconsolidated joint venture with Hexagon, a leading global manufacturer of Type 4 composite cylinders used for storing gas under high-pressure, by selling 51% of the nominal share capital of our former sustainable energy solutions operating segment in Europe. Pursuant to the transaction, Hexagon acquired a 49% stake in the joint venture for approximately $11.5 million, after adjusting for closing cash and preliminary net working capital, with an additional 2% sold to members of the existing management team for an additional $0.5 million. Post-closing, we hold a 49%, noncontrolling interest in the joint venture, which is accounted for under the equity method due to our significant influence. The newly formed joint venture, which combines two of Europe’s market leaders in composite high-pressure storage technology, will focus on capitalizing on the global clean energy transition specific to the storage, transport and distribution of hydrogen and compressed natural gas.

Our 49% noncontrolling interest does not qualify as a standalone operating segment and therefore will be reported within Other along with unallocated corporate expenses, as discussed further in “Note P – Segment Data.” Additionally, upon closing, our sustainable energy solutions business, as historically operated, is no longer part of our management structure and therefore the financial position and results of operations of this business are presented within Other, on an historical basis, through May 29, 2024.

On February 1, 2024, we acquired an 80% ownership stake in Halo, an affiliate of HPG, an asset-light business with technology-enabled solutions in the outdoor cooking space. The total purchase price was approximately $9.6 million. Refer to “Note Q – Acquisitions” for additional information.

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 sell our products and services to a diverse customer base and a broad range of end markets. These end markets include residential construction, non-residential construction, and repair and remodel, which drives demand in our Building Products operating segment, including WAVE and ClarkDietrich, our unconsolidated joint ventures; and tools, outdoor living, and celebrations which drives demand in our Consumer Products operating segment, including Halo, our consolidated joint venture. 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 based on price, product quality, brand recognition, product innovation, and customer service. Sales to one customer within Consumer Products represented 12% of consolidated net sales during fiscal 2024.

General Economic and Market Conditions

U.S. GDP growth rate trends typically reflect the strength of demand and, in many cases, the pricing of our products. An increase in year-over-year U.S. GDP growth rates usually signifies a stronger economy, which often leads to higher demand and pricing for our products. Conversely, a decline in U.S. GDP growth rates generally indicates a weaker economy, resulting in lower demand and pricing for our products. Fluctuations in U.S. GDP growth rates can signal changes in conversion costs related to production and in SG&A.

There remains a high level of uncertainty in the current macroeconomic environment and geopolitical environments, and prolonged inflationary pressures continue to negatively impact the discretionary spending of many of our customers. In addition to inflation, consumer spending habits, including spending for products that we sell, are affected by, among other things, prevailing global economic conditions, the costs of basic necessities and other goods, levels of employment, salaries and wage rates, and prevailing interest rates. In addition, consumer purchasing patterns are generally influenced by consumers’ disposable income, credit availability and debt levels.

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We also actively monitor other publicly available macroeconomic trends that provide insight into the activity in our end markets, including, but 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.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","2024 vs.","","","2023 vs."],["($ and units in millions)","","2024","","","2023","","","2022","","","2023","","","2022"],["U.S. Residential Construction spend (1)","","$","930,464","","","$","872,594","","","$","990,265","","","$","57,870","","","$","(117,671",")"],["U.S. Non-residential Construction Spend (1)","","$","1,209,329","","","$","1,139,236","","","$","940,399","","","$","70,093","","","$","198,837"],["Hot-Rolled Steel ($ per ton) (2)","","$","866","","","$","889","","","$","1,588","","","$","(23",")","","$","(699",")"],["Existing Home Sales (units) (1)","","","4.1","","","","4.2","","","","5.4","","","","(0.1",")","","","(1.2",")"],["Authorized Housing Permits (units) (1)","","","1.3","","","","1.6","","","","1.5","","","","(0.3",")","","","0.1"],["U.S Private Housing Starts (units) (1)","","","1.4","","","","1.5","","","","2.0","","","","(0.1",")","","","(0.5",")"],["HMI","","","45.0","","","","50.0","","","","69.0","","","","(5.0",")","","","(19.0",")"],["ABI","","","42.4","","","","51.0","","","","53.5","","","","(8.6",")","","","(2.5",")"],["Dodge Momentum Index","","","179.0","","","","180.5","","","","173.6","","","","(1.5",")","","","6.9"],["30 Year Fixed mortgage rates (1)","","","7.03","%","","","6.57","%","","","5.10","%","","","0.46","%","","","1.47","%"]]
[[/GREPCENT_TABLE]]

(1)
Federal Reserve Bank of St. Louis

(2)
Period average of CRU Hot-Rolled Index

Residential Construction: The residential construction sector has demonstrated positive year-over-year growth, with an overall increase in spending during fiscal 2024. This growth is a significant recovery from the relative low in the spring of 2023. However, new housing starts have shown a downward trend, decreasing from 1.5 million units in fiscal 2023 to 1.4 million units in fiscal 2024. Additionally, the HMI of 45 for May 2024 represented its lowest level since December 2023. Persistently high mortgage rates are keeping many prospective buyers from entering the market. Home builders are also dealing with high interest rates for construction and development loans and chronic labor shortages.

Non-residential Construction: Non-residential construction spending has shown consistent year-over-year growth. However, the near-term outlook is mixed due to a rise in on-hold projects and delayed bids. Commercial real estate remains generally weak, with notable softness for office buildings, partially offset by strong demand for data centers and manufacturing facilities. The ABI continued to decline through May 2024, signaling slowing growth in the months ahead. The higher cost of capital has made it difficult for buyers and sellers to agree on terms and the shift to hybrid work has created additional headwinds for offices, especially central business district properties in major markets. Despite these challenges, the fundamentals in this sector remain strong and are expected to improve if the Federal Reserve reduces interest rates in the second half of 2024.

Repair and Remodel: Spending on home improvement is expected to decline in the near term, as existing home sales are at multi-decade lows and interest rates remain high; however, the long-term outlook remains strong, in part, due to the aging housing stock. The median age of owner-occupied homes in the U.S. is 40 years old. The majority of owner-occupied homes were built before 1980, with around 35% built before 1970. Additionally, homeowners have record levels of equity, which is expected to drive spending in the long-term.

Tools: Spending in the tools end market is largely driven by overall macroeconomic conditions. During fiscal 2024, our sales into this end market were negatively impacted by the persistently high inflationary environment which resulted in a general moderation of consumer spending on non-essential items, leading to lower overall demand from our DIY and professional customers. Customer destocking also continued into fiscal 2024, resulting in lower volumes. Despite short-term headwinds in this end market, 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 reaching a peak 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 strong, driven by diverse participation across different age groups, socio-economic classes, and geographic regions.

Celebrations: During fiscal 2024, the celebrations end market was affected by several macroeconomic trends. Consumer income and the ratio of debt-to-income showed a gradual recovery, approaching levels observed prior to COVID-19, as well as moderating inflation. Despite these positive signals, there remained uncertainty in the current macroeconomic environment and geopolitical environments. 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.

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Results of Operations

Fiscal 2024 Compared to Fiscal 2023

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

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions, except per common share amounts)","2024","","","2023","","","(Decrease)"],["Net sales","$","1,245.7","","","$","1,418.5","","","$","(172.8",")"],["Operating income (loss)","","(73.5",")","","","29.8","","","","(103.3",")"],["Adjusted operating income","","20.9","","","","77.9","","","","(57.0",")"],["Net earnings from continuing operations attributable to controlling interest","","35.2","","","","125.8","","","","(90.6",")"],["Adjusted EBITDA from continuing operations","","251.0","","","","306.0","","","","(55.0",")"],["Equity income","","167.7","","","","153.3","","","","14.4"],["EPS from continuing operations - diluted","","0.70","","","","2.55","","","","(1.85",")"],["Adjusted EPS from continuing operations - diluted","$","2.84","","","$","3.60","","","$","(0.76",")"]]
[[/GREPCENT_TABLE]]

Net Sales and Volume

The following table provides a breakdown of consolidated net sales by operating segment for the past two fiscal years.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","%"],["","","","","","","","","","","Increase/","","","Increase"],["(In millions)","","2024","","","2023","","","(Decrease)","","","(Decrease)"],["Consumer Products","$","495.3","","","$","555.3","","","$","(60.0",")","","","(10.8","%)"],["Building Products","","619.0","","","","717.1","","","","(98.1",")","","","(13.7","%)"],["Total reportable segments","","1,114.3","","","","1,272.4","","","","(158.1",")","","","(12.4","%)"],["Other","","","","","131.4","","","","146.1","","","","(14.7",")","","","(10.1","%)"],["Consolidated","","","","$","1,245.7","","","$","1,418.5","","","$","(172.8",")","","","(12.2","%)"]]
[[/GREPCENT_TABLE]]

The following table provides volume (in units) by reportable segment for the past two fiscal years.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","%"],["","","","","","","","","","","Increase/","","","Increase"],["","","2024","","","2023","","","(Decrease)","","","(Decrease)"],["Consumer Products","","66,632,148","","","","74,137,431","","","","(7,505,283",")","","","(10.1","%)"],["Building Products","","14,157,050","","","","14,629,590","","","","(472,540",")","","","(3.2","%)"],["Total reportable segments","","80,789,198","","","","88,767,021","","","","(7,977,823",")","","","(9.0","%)"],["Other","","523,169","","","","573,853","","","","(50,684",")","","","(8.8","%)"],["Consolidated","","81,312,367","","","","89,340,874","","","","(8,028,507",")","","","(9.0","%)"]]
[[/GREPCENT_TABLE]]

•
Consumer Products – Net sales totaled $495.3 million in fiscal 2024, down $60.0 million, or 10.8%, from the prior fiscal year, due primarily to lower volumes driven largely by continued destocking by some of our retail customers that continued into the first half of fiscal 2024 as well as the general moderation in consumer spending on non-essentials driven by the persistent inflationary environment.

•
Building Products – Net sales totaled $619.0 million in fiscal 2024, down $98.1 million, or 13.7%, from the prior fiscal year, due to an unfavorable shift in product mix, primarily in the large format heating tanks, and, to a lesser extent, lower volumes.

•
Other – Net sales, attributable to our former Sustainable Energy Solutions segment, totaled $131.4 million in fiscal 2024, down $14.7 million, or 10.1%, from the prior fiscal year on an unfavorable shift in product mix and lower volumes.

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Gross profit

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2024","","","Net sales","","","2023","","","Net sales","","","(Decrease)"],["Gross profit","","$","285.0","","","","22.9","%","","$","323.6","","","","22.8","%","","$","(38.6",")"]]
[[/GREPCENT_TABLE]]

•
Gross profit was $285.0 million in fiscal 2024, a decrease of $38.6 million compared to the prior fiscal year, driven primarily by the impact of lower overall volume and an unfavorable shift in product mix.

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2024","","","Net sales","","","2023","","","Net sales","","","(Decrease)"],["Selling, general and administrative expense","","$","283.5","","","","22.8","%","","$","287.1","","","","20.2","%","","$","(3.6",")"]]
[[/GREPCENT_TABLE]]

•
SG&A was $283.5 million in fiscal 2024, down $3.6 million, or 1.3%, from the prior fiscal year. Excluding the impact of corporate costs of $19.3 million in fiscal 2024 and $41.5 million in fiscal 2023 that were eliminated post-Separation, SG&A was up $18.6 million, primarily due to higher healthcare and other benefit related costs, and to a lesser extent, higher wages.

Other operating items

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2024","","","2023","","","(Decrease)"],["Impairment of goodwill and long-lived assets","$","33.0","","","$","0.5","","","$","32.5"],["Restructuring and other expense (income), net","","29.3","","","","(0.4",")","","","29.7"],["Separation costs","","12.7","","","","6.5","","","","6.2"]]
[[/GREPCENT_TABLE]]

•
Impairment of goodwill and long-lived assets in fiscal 2024 was primarily due to the deconsolidation of our Sustainable Energy Solutions business. Impairment activity in the prior fiscal year was driven by changes in the intended use of certain fixed assets at our Building Products facility in Jefferson, Ohio. Refer to “Note E – Goodwill and Other Long-Lived Assets” for additional information.

•
Restructuring activity during fiscal 2024 is related primarily to the deconsolidation of our Sustainable Energy Solutions business. Restructuring activity in the prior fiscal year was related primarily to a reduction in workforce at our Columbus, Ohio facility, organizational realignment within Building Products and a pretax gain of $1.2 million from the sale of real property in Tulsa, Oklahoma.

•
Separation costs reflect direct and incremental costs incurred in connection with the Separation.

Miscellaneous expense, net

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2024","","","2023","","","(Decrease)"],["Miscellaneous expense, net","$","17.1","","","$","4.5","","","$","12.6"]]
[[/GREPCENT_TABLE]]

•
Miscellaneous expense in fiscal 2024 was primarily driven by the following: (1) the annuitization of the remaining projected benefit obligation of the inactive Gerstenslager Plan, which resulted in a pre-tax charge of $8.0 million and (2) the write-down of an investment in notes receivable that was determined to be other than temporarily impaired, resulting in a pre-tax charge of $11.2 million. Miscellaneous expense in the prior fiscal year was due to the annuitization of a portion of the total projected benefit obligation of the Gerstenslager Plan, which resulted in a pre-tax non-cash settlement charge of $4.8 million to accelerate a portion of the overall deferred costs out of AOCI.

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Loss on extinguishment of debt

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2024","","","2023","","","(Decrease)"],["Loss on extinguishment of debt","$","1.5","","","$","-","","","$","1.5"]]
[[/GREPCENT_TABLE]]

•
Loss on extinguishment of debt of $1.5 million resulted from the July 28, 2023, early redemption of the 2026 Notes and consisted primarily of unamortized debt issuance costs and the remaining loss deferred in AOCI associated with an interest rate swap executed prior to the issuance of the 2026 Notes.

Interest expense, net

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2024","","","2023","","","(Decrease)"],["Interest expense, net","$","1.6","","","$","18.3","","","$","(16.7",")"]]
[[/GREPCENT_TABLE]]

•
Interest expense, net of $1.6 million in fiscal 2024 was favorable compared to the prior fiscal year by $16.7 million, driven primarily by lower average debt levels as a result of the redemption of the 2024 Notes and 2026 Notes in fiscal 2024 and, to a lesser extent, higher interest income. Refer to “Note I – Debt” for additional information.

Equity income

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2024","","","2023","","","(Decrease)"],["WAVE","$","103.3","","","$","85.9","","","$","17.4"],["ClarkDietrich","","59.8","","","","80.5","","","","(20.7",")"],["Workhorse","","4.6","","","","0.5","","","","4.1"],["ArtiFlex","","-","","","","(13.7",")","","","13.7"],["Total equity income","$","167.7","","","$","153.2","","","$","14.5"]]
[[/GREPCENT_TABLE]]

•
Equity income increased $14.5 million over the prior fiscal year, as fiscal 2023 included a $16.1 million pre-tax loss from the sale of our noncontrolling interest in ArtiFlex. Additionally, higher contributions from WAVE in fiscal 2024 were partially offset by a decline at ClarkDietrich, which was down $20.7 million from the near-record equity earnings contributed in the prior year.

Income taxes

[[GREPCENT_TABLE]]
[["","","","","","Effective","","","","","","Effective","","","Increase/"],["(In millions)","","2024","","","Tax Rate","","","2023","","","Tax Rate","","","(Decrease)"],["Income tax expense","","$","39.0","","","","52.6","%","","$","34.5","","","","21.5","%","","$","4.5"]]
[[/GREPCENT_TABLE]]

•
Income tax expense was $39.0 million in fiscal 2024 compared to income tax expense of $34.5 million in the prior fiscal year. The increase was primarily driven by one-time discrete tax charges related to the Separation and the deconsolidation of our Sustainable Energy Solutions business. Income tax expense in fiscal 2024 reflected an annual effective rate of 52.6% up from 21.5% in the prior year due the impact of discrete items. On an adjusted basis, the annual effective tax rate was 23.5% compared to 21.9% in the prior fiscal year. Refer to “Note N - Income Taxes” for additional information.

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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-K 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 P – Segment Data.”

[[GREPCENT_TABLE]]
[["","","","","","Adjusted EBITDA","","","","","","Adjusted EBITDA","","","Increase/"],["(In millions)","","2024","","","Margin","","","2023","","","Margin","","","(Decrease)"],["Consumer Products","","$","69.6","","","","14.1","%","","$","97.4","","","","17.5","%","","$","(27.8",")"],["Building Products","","","210.1","","","","33.9","%","","","222.2","","","","31.0","%","","","(12.1",")"],["Total reportable segments","","","279.7","","","","25.1","%","","","319.6","","","","25.1","%","","","(39.9",")"],["Unallocated Corporate and Other","","","(28.7",")","","n/a","","","","(13.6",")","","n/a","","","","(15.1",")"],["Consolidated","","$","251.0","","","","20.1","%","","$","306.0","","","","21.6","%","","$","(55.0",")"]]
[[/GREPCENT_TABLE]]

•
Consumer Products – Adjusted EBITDA from continuing operations was down $27.8 million from the prior fiscal year to $69.6 million, primarily on lower volume, driven by destocking at certain large retail customers that continued into the second half of fiscal 2024 and ongoing moderation in non-essential consumer spending as well as non-cash charges totaling $4.6 million to write-down inventory associated with the two voluntary recalls further discussed in “Note C – Inventory.”

•
Building Products – Adjusted EBITDA from continuing operations was $210.1 million in the current fiscal year, a decrease of $12.1 million from the prior fiscal year on the combined impact of lower equity income from WAVE and ClarkDietrich, down $3.3 million, and lower gross profit, driven by an unfavorable product mix, primarily in the large format heating end market, and, to a lesser extent lower volumes driven by destocking at certain distributors.

•
Unallocated Corporate and Other – Adjusted EBITDA from continuing operations was down $15.1 million from the prior fiscal year, driven by losses in our former Sustainable Energy Solutions business, unfavorable to the prior year by $12.4 million. Sustainable Energy Solutions is now an unconsolidated joint venture.

Fiscal 2023 Compared to Fiscal 2022

The tables throughout this section present, on a comparative basis, our consolidated results of operations for fiscal 2022 and fiscal 2023.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions, except per common share amounts)","2023","","","2022","","","(Decrease)"],["Net sales","$","1,418.5","","","$","1,309.2","","","$","109.3"],["Operating income","","29.8","","","","48.8","","","","(19.0",")"],["Adjusted operating income","","","","","","","77.9","","","","94.2","","","","(16.3",")"],["Net earnings from continuing operations attributable to controlling interest","","125.8","","","","157.9","","","","(32.1",")"],["Adjusted EBITDA from continuing operations","","306.0","","","","335.0","","","","(29.0",")"],["Equity income","","153.3","","","","183.9","","","","(30.6",")"],["EPS from continuing operations - diluted","","2.55","","","","3.10","","","","(0.55",")"],["Adjusted EPS from continuing operations - diluted","$","3.60","","","$","3.78","","","$","(0.18",")"]]
[[/GREPCENT_TABLE]]

Net Sales and Volume

The following table provides a breakdown of consolidated net sales by operating segment for fiscal 2023 and fiscal 2022.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","%"],["","","","","","","","","","","Increase/","","","Increase"],["(In millions)","","2023","","","2022","","","(Decrease)","","","(Decrease)"],["Consumer Products","","","","$","555.3","","","$","504.9","","","$","50.4","","","","10.0","%"],["Building Products","","","","","717.1","","","","673.3","","","","43.8","","","","6.5","%"],["Total reportable segments","","","","","1,272.4","","","","1,178.2","","","","94.2","","","","8.0","%"],["Other","","","","","146.1","","","","131.0","","","","15.1","","","","11.5","%"],["Consolidated","","","","$","1,418.5","","","$","1,309.2","","","$","109.3","","","","8.3","%"]]
[[/GREPCENT_TABLE]]

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The following table provides volume (in units) by reportable segment for fiscal 2023 and fiscal 2022.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","%"],["","","","","","","","","","","Increase/","","","Increase"],["","","2023","","","2022","","","(Decrease)","","","(Decrease)"],["Consumer Products","","74,137,431","","","","77,976,662","","","","(3,839,231",")","","","(4.9","%)"],["Building Products","","14,629,590","","","","16,123,609","","","","(1,494,019",")","","","(9.3","%)"],["Total reportable segments","","88,767,021","","","","94,100,271","","","","(5,333,250",")","","","(5.7","%)"],["Other","","573,853","","","","610,811","","","","(36,958",")","","","(6.1","%)"],["Consolidated","","89,340,874","","","","94,711,082","","","","(5,370,208",")","","","(5.7","%)"]]
[[/GREPCENT_TABLE]]

•
Consumer Products – Net sales increased 10.0%, or $50.4 million, over fiscal 2022 to $555.3 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 6.5%, or $43.8 million, over fiscal 2022 to $717.1 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.

•
Other – Net sales, attributable to our former consolidated Sustainable Energy Solutions business, totaled $146.1 million in fiscal 2023, up 11.5%, or $15.1 million, over fiscal 2022, primarily due to higher average selling prices, partially offset by an unfavorable change in product mix.

Gross profit

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2023","","","Net sales","","","2022","","","Net sales","","","(Decrease)"],["Gross profit","","$","323.6","","","","22.8","%","","$","327.6","","","","25.0","%","","$","(4.0",")"]]
[[/GREPCENT_TABLE]]

•
Gross profit decreased $4.0 million from fiscal 2022 to $323.6 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 the Level5 acquisition.

Selling, general and administrative expense

[[GREPCENT_TABLE]]
[["","","","","","% of","","","","","","% of","","","Increase/"],["(In millions)","","2023","","","Net sales","","","2022","","","Net sales","","","(Decrease)"],["Selling, general and administrative expense","","$","287.1","","","","20.2","%","","$","281.4","","","","21.5","%","","$","5.7"]]
[[/GREPCENT_TABLE]]

•
SG&A increased $5.7 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 expenses 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","$","0.5","","","$","-","","","$","0.5"],["Restructuring and other income, net","","(0.4",")","","","(2.6",")","","","2.2"],["Separation costs","","6.5","","","","-","","","","6.5"]]
[[/GREPCENT_TABLE]]

•
Impairment of long-lived assets in fiscal 2023 related primarily to changes in the intended use of certain fixed assets at our Building Products facility in Jefferson, Ohio.

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•
Restructuring and other income, net in fiscal 2023 was driven by a pre-tax gain of $1.2 million related to the sale of real property in Tulsa, Oklahoma, partially offset by severance related payments within Consumer Products and Building Products. Restructuring and other income, net in the prior fiscal year was primarily due to the buyout of an operating lease in Stow, Ohio associated with our former Engineered Cabs business.

•
Separation costs reflect direct and incremental costs incurred in connection with the Separation.

Miscellaneous income (expense), net

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","Increase/"],["(In millions)","2023","","","2022","","","(Decrease)"],["Miscellaneous expense (income), net","$","4.5","","","$","(1.9",")","","$","6.4"]]
[[/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 Plan, 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","$","18.3","","","$","23.9","","","$","(5.6",")"]]
[[/GREPCENT_TABLE]]

•
Interest expense was $18.3 million in fiscal 2023, down $5.6 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","","","$","(1.5",")"],["ClarkDietrich","","80.5","","","","89.1","","","","(8.6",")"],["Workhorse","","0.5","","","","(0.2",")","","","0.7"],["ArtiFlex","","(13.7",")","","","7.6","","","","(21.3",")"],["Total equity income","$","153.2","","","$","183.9","","","$","(30.7",")"]]
[[/GREPCENT_TABLE]]

•
Equity income from unconsolidated joint ventures decreased $30.7 million from fiscal 2022 to $153.2 million in fiscal 2023 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 and ClarkDietrich. We received cash distributions of $228.4 million from our unconsolidated joint ventures during fiscal 2023.

Income Taxes

[[GREPCENT_TABLE]]
[["","","","","","Effective","","","","","","Effective","","","Increase/"],["(In millions)","","2023","","","Tax Rate","","","2022","","","Tax Rate","","","(Decrease)"],["Income tax expense","","$","34.5","","","","21.5","%","","$","52.7","","","","25.0","%","","$","(18.2",")"]]
[[/GREPCENT_TABLE]]

•
Income tax expense decreased $18.2 million from fiscal 2022 due to lower pre-tax earnings. Fiscal 2023 tax expense reflected an annual effective income tax rate of 21.5% versus 25.0% in fiscal 2022. For additional information regarding our income taxes, refer to “Note N – Income Taxes.”

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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-K 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 P – Segment Data.”

[[GREPCENT_TABLE]]
[["","","","","","Adjusted EBITDA","","","","","","Adjusted EBITDA","","","Increase/"],["(In millions)","","2023","","","Margin","","","2022","","","Margin","","","(Decrease)"],["Consumer Products","","$","97.4","","","","17.5","%","","$","109.4","","","","21.7","%","","$","(12.0",")"],["Building Products","","","222.2","","","","31.0","%","","","238.8","","","","35.5","%","","","(16.6",")"],["Total reportable segments","","","319.6","","","","25.1","%","","","348.2","","","","29.6","%","","","(28.6",")"],["Unallocated Corporate and Other","","","(13.6",")","","n/a","","","","(13.2",")","","n/a","","","","(0.4",")"],["Consolidated","","$","306.0","","","","21.6","%","","$","335.0","","","","25.6","%","","$","(29.0",")"]]
[[/GREPCENT_TABLE]]

•
Consumer Products – Adjusted EBITDA from continuing operations was down $12.0 million from fiscal 2022 to $97.4 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.

•
Building Products – Adjusted EBITDA from continuing operations decreased $16.6 million from fiscal 2022 to $222.2 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.

•
Unallocated Corporate and Other – Adjusted EBITDA from continuing operations was down $0.4 million from fiscal 2022 as lower contributions of equity income from ArtiFlex prior to its divestiture on August 3, 2022 were partially offset by improved results in our former Sustainable Energy Solutions business, up $6.9 million over fiscal 2022.

Liquidity and Capital Resources

During fiscal 2024, we generated $290.0 million of cash from operating activities, invested $83.5 million in property, plant and equipment, and spent $42.0 million on acquisitions, which included Worthington Steel’s purchase of Voestalpine for $21.0 million prior to the Separation. In connection with the Separation, we distributed $68.0 million to Worthington Steel, net of the $150.0 million one-time special dividend received from Worthington Steel at Separation that was funded by the Worthington Steel Credit Facility. Additionally, we redeemed, in full, the 2024 Notes and the 2026 Notes for an aggregate of $393.9 million and paid dividends of $56.8 million on the common shares.

[[GREPCENT_TABLE]]
[["(In millions)","","2024","","","2023","","","2022"],["Net cash provided by operating activities","","$","290.0","","","$","625.4","","","$","70.1"],["Net cash used by investing activities","","","(140.8",")","","","(71.8",")","","","(438.2",")"],["Net cash used by financing activities","","","(359.9",")","","","(133.1",")","","","(237.8",")"],["Increase (decrease) in cash and cash equivalents","","","(210.7",")","","","420.5","","","","(605.9",")"],["Cash and cash equivalents at beginning of period","","","454.9","","","","34.5","","","","640.3"],["Cash and cash equivalents at end of period","","$","244.2","","","$","455.0","","","$","34.4"]]
[[/GREPCENT_TABLE]]

The cash flows related to discontinued operations have not been segregated. Accordingly, the consolidated statements of cash flows include the results of discontinued operations. 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. The Credit Facility had a total of $500.0 million of borrowing capacity available to be drawn as of May 31, 2024.

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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 and 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. The amounts involved in any such transaction may or may not be material. To facilitate our post-Separation capital structure, during the first quarter of fiscal 2024, we redeemed in full our 2026 Notes for $243.6 million followed by the early redemption of the 2024 Notes for $150.0 million on December 6, 2023, as further discussed in “Note I – Debt.”

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.

Fiscal 2024 vs. Fiscal 2023

Net cash provided by operating activities was $290.0 million during fiscal 2024, compared to $625.4 million during fiscal 2023. This change was primarily due to lower net earnings from core operations, a $104.5 million increase in net operating working capital (accounts receivable, inventories, and accounts payable) requirements over the prior year period, of which $88.3 million is related to the former steel processing business, and a decrease in dividends received from our unconsolidated affiliates, down $53.6 million on lower contributions of $44.4 million from WAVE and ClarkDietrich.

Fiscal 2023 vs. Fiscal 2022

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, of which $318.5 million is related to our former steel processing business. The remaining increase over fiscal 2022 was driven by higher cash dividends from WAVE and ClarkDietrich, up $138.9 million over the prior fiscal year.

Investing Activities

Fiscal 2024 vs. Fiscal 2023

Net cash used by investing activities was $140.8 million during fiscal 2024, compared to $71.8 million during fiscal 2023. Net cash used by investing activities in fiscal 2024 resulted primarily from capital expenditures of $83.5 million, investment in notes receivable of $14.9 million, a deposit of $11.4 million for the June 3, 2024 acquisition of Ragasco, and the acquisitions of Halo and Voestalpine for net cash consideration of $9.6 million and $21.0 million, respectively. Net cash used by investing activities in the prior year resulted from the purchase of the Level5 business on June 2, 2022, for $56.1 million, 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 the remaining net assets of our former WSP Jackson, Michigan facility and other long-lived assets.

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Fiscal 2023 vs. Fiscal 2022

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 former 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’ U.S. BlankLight ® business on June 8, 2021, for $104.5 million and Tempel Steel Company on December 1, 2021 for $272.2 million, and capital expenditures of $94.6 million.

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

Fiscal 2024 vs. Fiscal 2023

Net cash used by financing activities was $359.9 million in fiscal 2024 compared to $133.1 million in fiscal 2023. The change was primarily due to activity related to the Separation transaction including the net distribution of $68.0 million to Worthington Steel and net proceeds of $172.2 million under Worthington Steel’s short-term credit facilities, which were assumed by Worthington Steel. To facilitate our post-Separation capital structure, we redeemed in full our 2026 Notes for $243.6 million and our 2024 Notes for $150.0 million, as further discussed in “Note I - Debt.”

Fiscal 2023 vs. Fiscal 2022

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 – 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, 2024, 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, 2024, we were in compliance with the covenants in our short-term debt agreements.

We maintain the $500.0 million Credit Facility that matures 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 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, 2024.

As discussed in “Note H – Guarantees,” we had in place $12.1 million in outstanding letters of credit for third-party beneficiaries as of May 31, 2024. No amounts were drawn against these outstanding letters of credit at May 31, 2024, and the fair value of these guaranteed instruments, based on premiums paid, was not material.

Common shares – During fiscal 2024, we declared dividends totaling $0.96 per common share, which consisted of three quarters of declared dividends under our pre-Separation capital structure and one quarter as a standalone company. During fiscal 2023, we declared dividends totaling $1.24 per common share. Dividends paid on our common shares totaled $56.8 million in fiscal 2024 compared to $59.2 million during fiscal 2023. On June 25, 2024, the Board declared a quarterly dividend of $0.17 per common share for the first quarter of fiscal 2025, a $0.01 per share increase from the previous quarterly rate. The dividend is payable on September 27, 2024 to shareholders of record at the close of business on September 13, 2024.

On March 20, 2019, the Board authorized the repurchase of up to 6.6 million of the common shares. 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, 2024 was 6.1 million.

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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 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.

Recently Adopted Accounting Standards

Refer to “Note A – Summary of Significant Accounting Policies” for further information.

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 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 estimates 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.

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. 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.

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.

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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 fair value, both at the individual asset and enterprise level, 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. We were able to qualitatively conclude that all of our indefinite-lived intangibles and the goodwill of our Consumer Products and Building Products reporting units were not impaired during fiscal 2024. However, the deconsolidation of our former Sustainable Energy Solutions reporting unit triggered an impairment review of this asset group as an asset held for sale in the fourth quarter of fiscal 2024. This analysis determined that the fair value of the Sustainable Energy Solutions reporting unit exceeded its book value resulting in the full impairment of goodwill, which totaled $14.2 million.

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.

As the long-lived assets of our former Sustainable Energy Solutions operating segment/reporting unit both met the criteria for held for sale accounting and were sold during the fourth quarter of fiscal 2024, they were assessed for impairment immediately prior to the sale transaction resulting in the impairment of definite-lived long-lived assets, primarily tangible personal property and unamortized know-how, totaling $18.0 million.

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.

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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.

Assumptions and judgments: 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.