Worthington Industries, Inc. — Fiscal 2022 First-Quarter Form 10-Q
Reporting period: Three months ended August 31, 2021; comparative period ended August 31, 2020. Balance-sheet comparisons are to May 31, 2021. The company reorganized its former Pressure Cylinders business into Consumer Products, Building Products and Sustainable Energy Solutions, with prior-period segment information revised for comparability.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1,110.8 million | $702.9 million | +$407.9 million |
| Gross margin | $219.4 million; 19.8% | $113.4 million; 16.1% | +$106.0 million; +3.7 pts |
| Operating income (loss) | $135.8 million; 12.2% of sales | $(30.1) million | +$165.9 million |
| Equity income | $52.9 million | $23.6 million | +$29.3 million |
| Net earnings attributable to controlling interest | $132.5 million | $616.7 million | $(484.2) million |
| Diluted EPS | $2.55 | $11.22 | $(8.67) |
| Net cash from operating activities | $(49.8) million | $117.4 million | $(167.2) million |
| Capital expenditures | $23.9 million | $32.9 million | $(8.9) million |
| Cash and cash equivalents | $399.2 million | $650.1 million | $(250.8) million year over year |
Net earnings in the prior-year quarter included a $796.1 million pre-tax gain on the company’s investment in Nikola. Excluding specified unusual items, adjusted EBIT increased to $174.0 million from $53.1 million.
Revenue and Segment Performance
- Steel Processing: Sales increased to $822.8 million from $431.0 million, driven primarily by higher average selling prices and somewhat higher volume. Adjusted EBIT rose to $107.7 million from $14.2 million, aided by estimated $47.1 million of inventory holding gains versus a $6.8 million loss in the prior-year quarter.
- Consumer Products: Sales increased to $147.8 million from $133.6 million, primarily reflecting the General Tools acquisition. Adjusted EBIT declined to $20.6 million from $23.9 million because of higher allocated bonus expense and input-cost pressure.
- Building Products: Sales increased to $114.7 million from $88.1 million. Adjusted EBIT increased to $48.7 million from $23.4 million, supported by higher volume, favorable product mix and stronger equity earnings from WAVE and ClarkDietrich.
- Sustainable Energy Solutions: Sales declined to $25.5 million from $27.9 million. Adjusted EBIT was a loss of $2.6 million compared with a loss of $0.6 million, reflecting lower volume, unfavorable mix and semiconductor shortages affecting European operations.
Cash Flow, Debt and Liquidity
- Operating cash flow was negative $49.8 million, primarily because higher steel prices increased receivables and inventories. Inventories increased to $742.4 million from $564.8 million at May 31, 2021.
- Investing cash outflow was $102.0 million, including the $104.8 million acquisition of the Shiloh Industries U.S. BlankLight business and $23.9 million of capital expenditures. The prior-year period included $487.9 million of proceeds from Nikola share sales.
- Financing cash outflow was $89.3 million, including $60.9 million for repurchases of 1.0 million common shares and $14.7 million of dividends.
- Total debt, including current maturities, was $706.4 million at August 31, 2021, compared with $710.5 million at May 31, 2021. The fair value of debt was $793.3 million.
- The amended $500.0 million revolving credit facility now matures August 20, 2026. No borrowings or letters of credit were outstanding under the facility at August 31, 2021, leaving the full $500.0 million available. The company stated that it was in compliance with debt covenants.
- Management believes available cash and committed credit resources are adequate for normal operating needs, capital expenditures, debt obligations, dividends and working capital. Liquidity could be affected by COVID-19-related economic and financial-market volatility.
Material Changes and Unusual Items
- On June 8, 2021, the company acquired the Shiloh BlankLight assets for approximately $104.8 million. Preliminary purchase accounting included $26.7 million of goodwill and $34.3 million of identifiable intangible assets.
- On June 9, 2021, the WSP joint venture sold remaining assets of its Canton, Michigan facility for approximately $20 million, generating a $12.1 million pre-tax gain included in restructuring and other income.
- The company repurchased 1.0 million shares for $60.9 million during the quarter. Approximately 8.3 million shares remained authorized for repurchase at August 31, 2021.
- The quarterly dividend was increased to $0.28 per share. A subsequent board declaration on September 29, 2021 provided for payment on December 29, 2021.
- The company received $19.7 million of distributions from unconsolidated affiliates and recorded $52.9 million of equity income. Distributions from WAVE exceeded the company’s investment balance, resulting in a $92.9 million liability.
- No long-lived asset impairment charges were recorded in the current quarter, compared with $9.9 million in the prior-year quarter.
Outlook, Commentary and Risks
- Management expected inventory holding gains in the second quarter of fiscal 2022 based on prevailing steel prices. Steel prices, raw-material availability, product demand, automotive production and customer inventories remain significant earnings drivers.
- Management highlighted that automotive production declined year over year, while higher steel prices benefited current-quarter spreads and joint-venture earnings. Sustainable Energy Solutions remained pressured by semiconductor shortages and Europe’s slower recovery from COVID-19 impacts.
- The company does not provide a formal earnings or revenue forecast in the supplied filing text. It states that quarterly results are not necessarily indicative of full-year results.
- Key risks include COVID-19 and variants, steel and other commodity-price volatility, tariffs and trade restrictions, automotive and construction demand, supply-chain and labor disruptions, customer or supplier financial difficulties, foreign-currency exposure, environmental and regulatory matters, cybersecurity, litigation and the ability to realize acquisition and cost-reduction benefits.
- The company maintained a $4.9 million reserve for a voluntary hydrogen-tank replacement program, expected to be paid within twelve months. Management did not expect pending legal or environmental matters to materially affect financial position or results.
- Disclosure controls and procedures were effective at a reasonable assurance level, and no material changes to internal control over financial reporting were reported.
Investor Verification Points
- Verify the sustainability of Steel Processing margins and the extent to which results depend on temporary inventory holding gains and unusually high steel prices.
- Assess working-capital requirements, particularly the substantial increase in inventories and the return to negative operating cash flow.
- Review the preliminary purchase accounting, integration progress and expected returns for the Shiloh acquisition.
- Monitor automotive production, semiconductor availability and demand trends affecting Steel Processing and Sustainable Energy Solutions.
- Reconcile adjusted EBIT and other non-GAAP measures to GAAP results, including the treatment of restructuring gains, inventory effects and prior-year Nikola-related items.
- Evaluate liquidity after share repurchases, dividends and acquisitions, notwithstanding the $500.0 million undrawn revolving facility.
- Review the $92.9 million liability related to excess WAVE distributions, the $4.9 million tank-replacement reserve and other contingent obligations.