Worthington Industries, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended February 28, 2021, compared with the corresponding periods ended February 29, 2020. The filing is unaudited and covers the Steel Processing and Pressure Cylinders segments, along with equity-method and consolidated joint ventures.
Financial performance and position
| Metric | Three months ended Feb. 28, 2021 | Prior comparable period | Nine months ended Feb. 28, 2021 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $759.1 million | $764.0 million | $2,193.1 million | $2,447.5 million |
| Gross margin | $164.1 million; 21.6% | $115.5 million; 15.1% | $412.9 million; 18.8% | $353.4 million; 14.4% |
| Operating income | $49.8 million; 6.6% of sales | $(1.4) million | $57.0 million; 2.6% of sales | $16.1 million; 0.7% of sales |
| Net earnings | $72.7 million | $18.9 million | $622.9 million | $73.4 million |
| Net earnings attributable to controlling interest | $67.6 million | $15.3 million | $610.2 million | $62.6 million |
| Diluted EPS | $1.27 | $0.27 | $11.28 | $1.11 |
| Operating cash flow | $9.3 million | $87.3 million | $234.1 million | $255.8 million |
- Steel Processing third-quarter sales increased to $504.5 million and operating income rose to $62.9 million from $19.0 million, primarily because of higher steel prices, improved direct spreads and estimated inventory holding gains.
- Pressure Cylinders third-quarter sales declined to $254.6 million, while the segment reported a $15.6 million operating loss. Consumer and industrial products improved, but oil and gas equipment weakness and divestiture-related charges weighed on results.
- At February 28, 2021, cash and cash equivalents were $649.5 million, compared with $147.2 million at May 31, 2020. Total debt, including current maturities, was $709.0 million, with a fair value of $796.6 million.
- The Company had no borrowings or letters of credit outstanding under its $500.0 million revolving credit facility, which matures in February 2023. The Company reported compliance with its debt covenants.
- Total assets were $3.14 billion and total equity was $1.46 billion at February 28, 2021. The Company reported $17.4 million of outstanding standby letters of credit, with no draws.
Material changes versus the prior comparable periods
- Third-quarter sales were broadly flat, but gross margin increased $48.5 million. Steel Processing benefited from estimated inventory holding gains of $31.1 million versus a $6.0 million holding loss in the prior-year quarter.
- Third-quarter operating income improved by $51.1 million, despite $6.0 million higher SG&A expense, principally from higher profit-sharing and bonus costs.
- Nine-month sales decreased $254.4 million, reflecting lower steel-processing prices and volumes, oil and gas market weakness, the prior deconsolidation of Engineered Cabs, and the absence of a prior-year customer take-or-pay benefit.
- Nine-month gross margin increased $59.4 million, primarily from improved Steel Processing spreads, estimated inventory holding gains and lower manufacturing costs. Operating income increased $40.9 million despite $53.3 million of incremental expenses related to Nikola gains.
- Operating cash flow declined $21.7 million for the nine-month period. Third-quarter operating cash flow was particularly weak at $9.3 million, driven in part by increases in receivables and inventories.
- Nine-month cash flow benefited from $634.4 million of proceeds from selling Nikola shares. The Company used $129.8 million for acquisitions, $65.3 million for capital expenditures, $145.3 million for share repurchases and $40.0 million for dividends.
Guidance, outlook, commentary, risks and unusual items
- Management expected significant inventory holding gains in the fourth quarter of fiscal 2021 based on steel prices at the filing date. Such gains are sensitive to steel prices and may not recur.
- The Company expected approximately $1.1 million of additional short-term incentive-plan bonus expense related to the Nikola gains in the fourth quarter.
- During the first nine months, the Company recognized $655.1 million of pre-tax gains from its Nikola investment, offset by $53.3 million of related expenses, including profit sharing, bonuses and a charitable contribution.
- The remaining 7.0 million Nikola shares were sold during the third quarter for $146.6 million of proceeds and a $2.7 million pre-tax gain.
- The Company acquired PTEC for $10.8 million and General Tools & Instruments Company for $120.6 million in January 2021. Preliminary purchase accounting for GTI included $68.4 million of identifiable intangible assets and $33.7 million of goodwill.
- The Company sold its cryogenic and hydrogen trailer businesses for net proceeds of $21.3 million and recorded a $7.1 million pre-tax loss. It also sold its oil and gas equipment business for contingent consideration with no value assigned at closing and recorded a $27.7 million pre-tax loss.
- Subsequent to quarter-end, the Company sold its Structural Composites Industries facility for approximately $20.0 million and expected to record an approximately $7.0 million fourth-quarter loss, primarily related to goodwill. It also entered into a seven-year aircraft lease with a maximum residual-value guarantee of approximately $19.8 million.
- Key risks include COVID-19 effects, cyclical demand, automotive and construction activity, steel and other commodity prices, inventory levels, customer and supplier financial condition, tariffs and trade restrictions, oil and gas weakness, execution of acquisitions and restructuring, impairment risk, derivative and counterparty exposure, cybersecurity, litigation and environmental matters.
- The Company maintained a $4.9 million reserve for a voluntary composite hydrogen-tank replacement program, with payments expected within six months. Management did not expect pending legal or environmental matters to have a material effect, but actual costs may differ from estimates.
- The Board declared a quarterly dividend of $0.28 per share payable June 29, 2021 and authorized an additional 5.6 million share repurchase capacity, bringing total available authorization to 10.0 million shares.
Most important facts for investors to verify
- Whether Steel Processing earnings remain strong after the temporary benefit from inventory holding gains and rapidly rising steel prices.
- Whether Pressure Cylinders can recover profitability following the oil and gas divestiture, restructuring charges and impairment activity.
- The sustainability of earnings excluding the nonrecurring $655.1 million Nikola gains and related $53.3 million expenses.
- Working-capital requirements and the conversion of reported earnings into operating cash flow.
- Final purchase accounting and post-acquisition performance for GTI and PTEC.
- Fourth-quarter effects of the expected SCI loss, additional Nikola-related incentive expense and aircraft lease guarantee.
- Future capital allocation among dividends, share repurchases, acquisitions, capital expenditures and debt reduction.