Worthington Industries, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended February 28, 2022; fiscal year ending May 31, 2022. The filing is unaudited and reports four operating segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions. Prior-period segment information was recast following the June 1, 2021 reorganization of the pressure cylinders business.
Financial Performance and Position
| Metric | Three Months 2022 | Three Months 2021 | Nine Months 2022 | Nine Months 2021 |
|---|---|---|---|---|
| Net sales | $1,378.2 million | $759.1 million | $3,721.9 million | $2,193.1 million |
| Gross margin | $143.1 million; 10.4% | $164.1 million; 21.6% | $547.1 million; 14.7% | $412.9 million; 18.8% |
| Operating income | $37.6 million | $49.8 million | $263.9 million | $57.0 million |
| Net earnings attributable to controlling interest | $56.3 million | $67.6 million | $299.1 million | $610.2 million |
| Diluted EPS | $1.11 | $1.27 | $5.83 | $11.28 |
| Cash flow from operating activities | $74.2 million | $9.3 million | $(94.7) million | $234.1 million |
- Third-quarter sales increased 82%, primarily from higher steel and other selling prices, acquisitions, and improved Consumer Products and Building Products activity. Nine-month sales increased 70%.
- Third-quarter gross margin declined $21.0 million because Steel Processing experienced an estimated $24.9 million inventory holding loss, including a $15.7 million lower-of-cost-or-net-realizable-value inventory charge. The prior-year quarter had an estimated $31.1 million inventory holding gain.
- Third-quarter equity income from unconsolidated affiliates increased to $47.5 million from $31.7 million. Nine-month equity income increased to $160.6 million from $80.9 million, led by ClarkDietrich, WAVE, and Serviacero Worthington.
- Nine-month adjusted EBIT, a non-GAAP measure, increased to $405.5 million from $231.2 million. Third-quarter adjusted EBIT decreased to $84.6 million from $104.4 million, primarily because of Steel Processing inventory losses.
- Cash and cash equivalents were $44.3 million at February 28, 2022, versus $640.3 million at May 31, 2021. The decline primarily reflected acquisitions, working-capital investment, share repurchases, and dividends.
- Receivables increased to $856.7 million and inventories increased to $869.2 million from $640.0 million and $564.8 million, respectively, at May 31, 2021. Management attributed much of the working-capital increase to higher steel prices.
- Total debt included $111.9 million of short-term borrowings, $700.7 million of long-term debt, and $0.3 million of current maturities. The $500 million revolving credit facility had $104.0 million drawn and $396.0 million available at quarter-end.
- Capital expenditures were $71.8 million for the nine months. The company spent $377.3 million on acquisitions, repurchased $127.8 million of common shares, and paid $43.4 million of dividends.
Material Changes Versus the Prior Comparable Period
- Steel Processing third-quarter sales rose to $1,052.6 million from $504.5 million, but segment adjusted EBIT fell to $7.1 million from $61.8 million because of inventory holding losses and the steel inventory write-down. Steel Processing volume declined modestly to 998,590 tons from 1,014,873 tons.
- Consumer Products sales increased 41% to $161.7 million and adjusted EBIT increased to $26.7 million from $14.6 million, supported by pricing, volume, and the full-quarter contribution from General Tools & Instruments.
- Building Products sales increased 38% to $132.9 million and adjusted EBIT increased to $49.6 million from $27.3 million, primarily reflecting higher pricing and increased ClarkDietrich equity income.
- Sustainable Energy Solutions sales declined 3% to $31.0 million, and adjusted EBIT moved to a $2.8 million loss from $0.1 million of income, due to lower volume, unfavorable mix, higher production costs, semiconductor shortages, and the Poland LPG divestiture.
- On June 8, 2021, the company acquired Shiloh’s U.S. BlankLight business for approximately $104.8 million. On December 1, 2021, it acquired Tempel Steel Company, a manufacturer of electrical-steel laminations, in a transaction funded primarily with cash and revolving-credit borrowings.
- Prior-year nine-month results included a $655.1 million gain on the sale and contribution of Nikola shares and $53.3 million of related incremental expenses. These nonrecurring items explain much of the decline in reported nine-month net earnings and EPS in 2022 despite stronger operating performance.
- Restructuring and other income was $14.8 million for the nine months, primarily from gains on asset sales and a lease buyout, compared with $37.7 million of expense in the prior-year period. Current-period impairment charges were $3.1 million versus $13.7 million previously.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that the recent decline in steel prices is expected to produce meaningful inventory holding losses in the fourth quarter of fiscal 2022.
- Key operating risks include steel, zinc, natural gas, transportation and other input-price volatility; automotive production weakness; semiconductor shortages; supply-chain disruption; labor shortages; inflation; rising interest rates; tariffs and trade restrictions; foreign-exchange exposure; and COVID-19-related disruptions.
- The company expects cyclical working-capital needs to remain significant and relies on cash and short-term borrowings during periods of increased activity or rising raw-material prices. Management believes existing cash, operating cash flow, and available revolver capacity are sufficient for normal requirements, although access to additional capital could be affected by market conditions.
- The company maintains an estimated $4.9 million reserve for a voluntary composite hydrogen-tank replacement program, expected to be paid within twelve months. Various legal proceedings are pending, but management does not expect them to materially affect financial position, results, or cash flows.
- Outstanding standby letters of credit totaled $16.8 million, with no draws at February 28, 2022. The maximum aircraft residual-value guarantee was approximately $18.5 million.
- Cash-flow hedge losses of approximately $13.0 million, net of tax, were expected to be reclassified from accumulated other comprehensive income into earnings within the following twelve months.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter. Risk factors were not materially changed from the fiscal 2021 Form 10-K.
Important Facts for Investors to Verify
- Assess the sustainability of earnings excluding steel inventory holding gains and losses, acquisition accounting effects, restructuring gains, and the prior-year Nikola gain.
- Monitor fourth-quarter steel pricing, inventory levels, realized spreads, and the expected inventory holding losses highlighted by management.
- Reconcile the sharp decline in cash to acquisition spending, working-capital investment, share repurchases, dividends, and new revolver borrowings.
- Evaluate integration, valuation, and pension-related obligations associated with the Shiloh and Tempel acquisitions. The filing presents differing Tempel purchase-price figures: approximately $289.6 million in Note Q and approximately $272.5 million after adjustments in MD&A.
- Track leverage, revolver utilization, debt maturities, covenant compliance, and the company’s ability to fund dividends, repurchases, capital expenditures, and working capital.
- Review exposure to automotive production, semiconductor availability, commodity prices, supply-chain constraints, labor availability, and sustainable-energy demand.