Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended November 30, 2021, representing the second quarter and first half of fiscal 2022. The filing identifies the registrant as Worthington Industries, Inc., not Worthington Enterprises, Inc. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
The company operates through Steel Processing, Consumer Products, Building Products and Sustainable Energy Solutions. Effective June 1, 2021, the former Pressure Cylinders business was reorganized into the three latter reportable segments. Prior-period segment information was revised for comparability.
Key Financial Metrics
| Metric | Three months ended Nov. 30, 2021 | Six months ended Nov. 30, 2021 |
|---|---|---|
| Net sales | $1,232.9 million | $2,343.7 million |
| Gross margin | $184.6 million; 15.0% | $404.0 million; 17.2% |
| Operating income | $90.5 million; approximately 7.3% margin | $226.3 million; approximately 9.7% margin |
| Net earnings attributable to controlling interest | $110.3 million | $242.8 million |
| Diluted EPS | $2.15 | $4.71 |
| Equity income from unconsolidated affiliates | $60.2 million | $113.1 million |
| Net cash provided by operating activities | $(119.1) million | $(168.9) million |
Cash and cash equivalents were $225.2 million at November 30, 2021, compared with $640.3 million at May 31, 2021. Receivables were $736.7 million and inventories were $839.6 million, with inventories up substantially from $564.8 million at fiscal year-end, primarily reflecting higher steel prices and working-capital requirements.
Total debt, including current maturities, was $702.2 million carrying value. Long-term debt was $701.9 million and current maturities were $0.3 million. The company had no borrowings or letters of credit outstanding under its $500 million revolving credit facility, which was amended in August 2021 to extend maturity to August 20, 2026. The company reported compliance with debt covenants.
Capital expenditures were $48.2 million for the six months. The company repurchased 1.235 million shares for $73.6 million and paid $29.3 million in dividends. The quarterly dividend was increased to $0.28 per share.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased $501.7 million, or approximately 68.6%, to $1,232.9 million. Six-month sales increased $909.7 million, or approximately 63.4%, to $2,343.7 million.
- Second-quarter operating income increased $53.1 million to $90.5 million, while six-month operating income increased $219.0 million to $226.3 million.
- Second-quarter controlling-interest earnings improved from a $74.0 million loss to $110.3 million of earnings. The prior-year quarter included a $143.8 million pre-tax loss on the Nikola investment.
- Six-month controlling-interest earnings declined from $542.6 million to $242.8 million because the prior-year period included $652.4 million of Nikola investment gains. The current period had no Nikola gains or related incremental expenses.
- Steel Processing sales increased to $937.8 million in the quarter and $1,760.7 million year to date, primarily from higher average selling prices, improved spreads and the Shiloh BlankLight acquisition.
- Building Products benefited from higher prices, volume and stronger equity earnings from ClarkDietrich and WAVE. Sustainable Energy Solutions declined because of lower volume, the Poland LPG divestiture and semiconductor shortages.
- Gross margin percentage declined in the quarter to 15.0% from 18.5%, but was broadly stable year to date at 17.2% versus 17.4%. SG&A increased, primarily due to higher profit-sharing and bonus expense.
- Operating cash flow shifted from $224.8 million provided in the prior-year six-month period to $168.9 million used, principally because operating working capital requirements increased by approximately $490.4 million, driven mainly by higher steel prices.
Guidance, Outlook, Risks and Unusual Items
- Management expected meaningful inventory holding losses in the third quarter of fiscal 2022 because hot-rolled steel prices had recently declined.
- Second-quarter Steel Processing adjusted EBIT benefited from estimated inventory holding gains of $42.1 million; the six-month benefit was estimated at $89.1 million. These gains may not be recurring.
- On December 1, 2021, after the reporting date, the company acquired Tempel Steel Company for approximately $275 million plus assumed long-term liabilities. The transaction was funded primarily with cash and some borrowing and will be included in Steel Processing.
- The company acquired Shiloh’s U.S. BlankLight business for approximately $104.8 million on June 8, 2021. The preliminary allocation included $24.9 million of goodwill and $36.1 million of identifiable intangible assets.
- Restructuring and other income was $14.3 million for the six months, primarily from gains on the sale of a WSP facility and the buyout of a Stow, Ohio lease. The remaining restructuring liability was $0.2 million and expected to be paid within twelve months.
- The company maintained a $4.9 million reserve for a voluntary replacement program involving certain composite hydrogen fuel tanks; actual costs may vary.
- Principal risks include steel, zinc, natural gas and transportation cost volatility; demand and pricing cycles; automotive production and semiconductor shortages; supply-chain disruptions and labor shortages; COVID-19 and variants; inventory management; customer and supplier financial distress; tariffs and trade restrictions; currency and commodity exposures; environmental regulation; litigation; cybersecurity; and execution of acquisitions and transformation initiatives.
- Cash-flow hedge liabilities and assets were $15.1 million and $9.6 million, respectively, at November 30, 2021. The company had $16.8 million of standby letters of credit outstanding, with no draws, and an aircraft residual-value guarantee with a maximum obligation of approximately $18.9 million.
- Management stated that pending legal proceedings and environmental matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were identified.
Most Important Facts for Investors to Verify
- Confirm the correct issuer and ticker: the supplied metadata names Worthington Enterprises, while the filing is for Worthington Industries, Inc. and common shares trading under WOR.
- Assess how much current profitability depends on elevated steel prices, inventory holding gains and equity-method joint ventures.
- Monitor the expected third-quarter inventory holding losses following the decline in steel prices.
- Evaluate liquidity after the $275 million Tempel acquisition, including the extent of new borrowing and the reduction in cash.
- Review working-capital trends, particularly inventory and receivables, which drove significant operating cash outflows.
- Separate recurring operating performance from prior-year Nikola gains, current restructuring gains and other unusual items.
- Review integration and valuation risks associated with the Shiloh and Tempel acquisitions, as well as ongoing semiconductor, supply-chain and labor constraints.