Worthington Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2021. The supplied metadata references “2020 Q4,” but the filing is an annual Form 10-K for fiscal 2021, filed July 30, 2021.
Business context
Worthington is an industrial manufacturing company focused on value-added steel processing and manufactured metal products. Its fiscal 2021 reportable segments were Steel Processing and Pressure Cylinders. The Company operated, together with its joint ventures, 68 manufacturing facilities in 22 states and eight countries and served approximately 760 Steel Processing customers and 4,400 Pressure Cylinders customers.
- Steel Processing represented approximately 65% of consolidated sales and includes Worthington Steel and consolidated joint ventures involved in coating, pickling, laser-welded blanks and toll processing.
- Pressure Cylinders represented approximately 35% of consolidated sales and includes industrial and consumer cylinders, tanks, torches and tools.
- International operations represented approximately 7% of consolidated net sales. One automotive customer represented 11.2% of consolidated sales.
Financial performance and position
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $3,171.4 million | $3,059.1 million | +$112.3 million |
| Gross margin | $639.1 million; 20.1% | $443.3 million; 14.5% | +$195.7 million |
| Operating income | $167.5 million; 5.3% | $22.5 million; 0.7% | +$145.0 million |
| Net earnings attributable to controlling interest | $723.8 million; 22.8% of sales | $78.8 million; 2.6% of sales | +$645.0 million |
| Diluted EPS | $13.42 | $1.41 | +$12.01 |
| Cash flow from operations | $274.4 million | $336.7 million | -$62.3 million |
| Capital expenditures | $82.2 million | $95.5 million | -$13.3 million |
| Cash and cash equivalents | $640.3 million | $147.2 million | +$493.1 million |
| Total debt, net | $710.5 million | $699.7 million | +$10.8 million |
Fiscal 2021 earnings were dominated by a $655.1 million pretax gain on the sale and contribution of the Company’s Nikola investment. Related incremental operating expenses were $50.6 million, including profit-sharing and bonus expense and a charitable contribution of Nikola shares.
- Steel Processing: Sales increased to $2,059.4 million from $1,859.7 million, while operating income increased to $208.6 million from $40.6 million. Higher steel prices, volume and direct spreads were key drivers. Estimated inventory holding gains were $75.0 million, compared with estimated holding losses of $20.3 million in fiscal 2020.
- Pressure Cylinders: Sales declined to $1,111.0 million from $1,148.4 million, and operating income declined to $9.3 million from $38.9 million. The decrease reflected the divestiture of the oil and gas equipment business and higher restructuring charges, partly offset by higher consumer-product volumes and acquisitions.
- Equity income: Income from unconsolidated affiliates increased to $123.3 million from $114.8 million, primarily due to stronger results at ClarkDietrich and Serviacero, partly offset by lower WAVE income.
Liquidity, debt and capital allocation
- Cash increased to $640.3 million, supported primarily by $634.4 million of cash proceeds from the Nikola share sale.
- The Company generated $274.4 million of operating cash flow, invested $82.2 million in property, plant and equipment, and spent $129.6 million on the acquisitions of GTI and PTEC.
- The Company repurchased 4,018,464 common shares for $192.1 million and paid $53.0 million of dividends during fiscal 2021.
- A $500.0 million revolving credit facility matures in February 2023; no borrowings were outstanding at May 31, 2021, leaving the full facility available. The Company reported compliance with its debt covenants.
- Long-term debt consisted primarily of senior notes due from 2024 through 2034. Total contractual cash obligations were $959.7 million, including $713.5 million of principal debt obligations.
Material changes and unusual items
- The Company realized the Nikola investment gain following Nikola’s June 2020 public listing and subsequent sale or contribution of all shares.
- Worthington acquired PTEC for approximately $10.8 million and GTI for approximately $120.4 million.
- Worthington divested its cryogenic and hydrogen trailer businesses, oil and gas equipment business, Structural Composites Industries business and Poland LPG fuel storage business. These transactions generated aggregate losses within restructuring and other expense, net.
- Restructuring and other expense increased to $56.1 million from $10.0 million, primarily due to losses on Pressure Cylinders divestitures. Goodwill and long-lived asset impairment declined to $13.7 million from $82.7 million.
- Effective fiscal 2022, Pressure Cylinders was reorganized into Consumer Products, Building Products and Sustainable Energy Solutions, in addition to the Steel Processing segment.
- After year-end, the Company acquired the Shiloh Industries U.S. BlankLight business for approximately $105.0 million and recognized an approximately $12.0 million gain from WSP’s sale of its Canton, Michigan facility.
Outlook, risks and contingencies
Management stated that demand remained strong through fiscal 2021 and that rising steel prices were expected to produce significant inventory holding gains in the first quarter of fiscal 2022. The filing does not provide formal quantitative revenue or earnings guidance.
- Results are sensitive to steel, zinc, aluminum, energy and freight prices, raw-material availability and the Company’s ability to pass cost increases to customers.
- Automotive and construction markets are cyclical and significant portions of sales depend on automotive customers. The ten largest customers represented approximately 34% of fiscal 2021 consolidated sales.
- COVID-19 could continue to affect demand, manufacturing operations, supply chains, labor availability, customer credit quality and commodity prices.
- The Company self-insures significant portions of product liability, workers’ compensation, cyber, pollution, general liability and medical claims.
- A voluntary tank replacement program had a remaining reserve of $4.9 million at May 31, 2021, expected to be paid within twelve months.
- The Company had a $19.6 million aircraft residual-value guarantee and $17.4 million of standby letters of credit; management considered the likelihood of payment under the guarantee not probable.
- Legal proceedings and environmental matters arise in the ordinary course; management did not believe they would have a material adverse effect, but outcomes of certain matters were not clearly determinable.
- Management and KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The assessment excluded GTI and PTEC, which together represented $149.5 million of assets and $24.3 million of fiscal 2021 sales.
Investor verification items
- Separate recurring operating performance from the $655.1 million Nikola gain and the $50.6 million of related incremental expenses.
- Assess the sustainability of Steel Processing margins and the $75.0 million inventory holding gain in a changing steel-price environment.
- Review Pressure Cylinders’ post-divestiture earnings profile and the integration and performance of GTI and PTEC.
- Reconcile cash generation after excluding Nikola proceeds, including working-capital requirements and planned acquisitions or capital expenditures.
- Monitor customer concentration, automotive and construction exposure, raw-material availability, pricing pass-through and COVID-19-related supply-chain effects.
- Review debt maturities, the February 2023 revolver maturity, lease obligations, guarantees, tank replacement liabilities and other contractual commitments.
- Verify the impact of the fiscal 2022 segment reorganization and subsequent Shiloh acquisition on comparability of future results.