Worthington Industries, Inc. — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended May 31, 2020. The provided filing is an annual Form 10-K, not a standalone 2019 fourth-quarter filing; fourth-quarter information is included in the fiscal 2020 quarterly disclosures.
Business Context
Worthington is a diversified metals manufacturer with two reportable segments: Steel Processing and Pressure Cylinders. Steel Processing represented approximately 61% of consolidated sales and Pressure Cylinders approximately 37% in fiscal 2020. The Company operated 74 manufacturing facilities with consolidated and unconsolidated joint ventures across 22 states and seven countries. Automotive, construction, industrial, consumer, and oil and gas markets are significant end markets.
Financial Performance and Position
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3,059.1 million | $3,759.6 million | Down $700.5 million |
| Gross margin | $443.3 million; 14.5% | $480.0 million; 12.8% | Down $36.7 million; margin improved |
| Operating income | $22.5 million; 0.7% | $144.8 million; 3.9% | Down $122.3 million |
| Net earnings | $84.4 million | $163.3 million | Down $78.9 million |
| Net earnings attributable to controlling interest | $78.8 million | $153.5 million | Down $74.7 million |
| Diluted earnings per share | $1.41 | $2.61 | Down $1.20 |
| Cash flow from operations | $336.7 million | $197.9 million | Up $138.8 million |
| Capital expenditures | $95.5 million | $84.5 million | Up $11.0 million |
| Cash and cash equivalents | $147.2 million | $92.4 million | Up $54.8 million |
| Total debt, net | $699.7 million | $749.3 million | Down $49.6 million |
Working capital was $594.9 million at May 31, 2020, compared with $467.9 million at May 31, 2019. Total assets were $2.33 billion and controlling shareholders’ equity was $820.8 million. The Company had $500.0 million of committed revolving-credit capacity, with approximately $499.7 million available at May 31, 2020, and no borrowings outstanding under that facility.
Cash flow benefited primarily from lower receivables and inventories amid declining steel prices and lower volumes. Cash uses included $95.5 million of capital expenditures, $29.6 million for Heidtman assets, $51.0 million for share repurchases, and $53.3 million of common dividends.
Material Changes Versus the Prior Comparable Period
- Net sales declined 18.6%, primarily because of lower Steel Processing volumes, lower steel selling prices, COVID-19-related automotive shutdowns, the deconsolidation of Engineered Cabs, and other divestitures.
- Steel Processing sales declined $576.1 million and operating income declined $49.2 million. Declining steel prices produced estimated inventory holding losses of $20.3 million, an increase of $15.9 million from the prior year.
- Pressure Cylinders sales declined $59.4 million and operating income declined $31.0 million. Gross margin improved $15.5 million, partly because fiscal 2019 included a $13.0 million tank-replacement charge and fiscal 2020 included a $9.3 million benefit from early termination of a customer take-or-pay contract.
- Impairment of goodwill and long-lived assets increased to $82.7 million from $7.8 million. Major charges included $40.6 million related to former Engineered Cabs assets, $35.7 million related to oil and gas equipment assets, and $22.1 million of goodwill impairment for the oil and gas equipment reporting unit.
- Restructuring and other expense was $10.0 million, compared with $11.0 million of income in fiscal 2019. Fiscal 2020 charges included COVID-19 workforce reductions, facility closures, and oil and gas consolidation costs.
- Equity income from unconsolidated affiliates increased to $114.8 million from $97.0 million, primarily because of Worthington’s $23.1 million share of WAVE’s gain on the sale of its international operations. Excluding that gain, equity income declined.
- The Company acquired Heidtman’s Cleveland operating assets for $29.6 million and subsequently contributed them to Samuel, increasing its ownership in Samuel to 63% and resulting in consolidation from December 31, 2019.
- The Company contributed substantially all of Engineered Cabs to a new joint venture and retained a 20% interest. The remaining Stow, Ohio and Greensburg, Indiana assets were targeted for closure.
- The Company refinanced and redeemed $150.0 million of 6.50% senior notes using proceeds from euro-denominated senior notes and recorded a $4.0 million loss on extinguishment of debt.
Guidance, Outlook, Commentary, and Risks
Management did not provide specific fiscal 2021 earnings or revenue guidance in the filing. Management stated that the COVID-19 pandemic materially reduced demand, particularly in automotive markets, and responded with furloughs, permanent workforce reductions, hiring restrictions, reduced discretionary spending, and deferral of nonessential capital investments.
The filing identifies substantial uncertainty concerning the duration and severity of COVID-19, future demand, facility operations, supply-chain continuity, customer and supplier financial condition, and access to capital. The Company also expects the decline in fourth-quarter fiscal 2020 steel prices to produce inventory holding losses in the first quarter of fiscal 2021.
- Demand is cyclical and concentrated in automotive and construction markets; automotive represented approximately 32% of consolidated fiscal 2020 sales.
- Steel, zinc, aluminum, helium, energy, freight, and other input prices may adversely affect margins, particularly when costs cannot be passed through to customers.
- Customer concentration, industry consolidation, bankruptcies, and limited long-term customer contracts create volume and credit risks.
- Additional impairments may result from prolonged weakness in oil and gas, automotive, construction, or other markets.
- The Company self-insures significant portions of product liability, workers’ compensation, cyber, pollution, and other risks.
- Contractual obligations totaled approximately $977.2 million, including $703.1 million of long-term debt, $214.6 million of associated interest, and lease obligations.
- The Company had a $6.4 million aircraft residual-value guarantee and $15.3 million of standby letters of credit; management considered the likelihood of payment under the aircraft guarantee not probable.
- The Company’s investment in Nikola became publicly traded after fiscal year-end. In July 2020, Worthington sold five million shares for net proceeds of approximately $237.9 million, subject to tax, and retained 14.0 million shares, including 7.0 million subject to a lock-up.
- Effective September 1, 2020, B. Andrew Rose was scheduled to become CEO and John P. McConnell was scheduled to become Executive Chairman.
Most Important Facts to Verify
- Confirm the requested period: the filing covers fiscal 2020 ended May 31, 2020, while the request metadata refers to 2019 Q4.
- Reconcile reported earnings with the unusually high $82.7 million impairment charge and $10.0 million restructuring expense.
- Assess whether COVID-19-related volume declines, automotive shutdowns, workforce actions, and steel-price effects continued into fiscal 2021.
- Review liquidity after the July 2020 Nikola share sale, including taxes, lock-up restrictions, and the valuation volatility of the remaining investment.
- Review debt maturities, covenant compliance, the $500.0 million revolver, and the termination of the $10.0 million receivables securitization facility.
- Evaluate the sustainability of equity income, especially the nonrecurring WAVE gain and the Company’s exposure to unconsolidated joint ventures.
- Verify the status and remaining costs of facility closures, oil and gas consolidation, Engineered Cabs wind-down activities, and the tank-replacement program.
- Consider the sensitivity of goodwill, intangible assets, and equity-method investments to further deterioration in operating forecasts.