Worthington Industries, Inc. — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: Three months ended August 31, 2020; comparable period ended August 31, 2019. Amounts are in U.S. dollars unless otherwise noted. The filing covers the Steel Processing and Pressure Cylinders segments and equity-method joint ventures. Results were materially affected by COVID-19, the deconsolidation of Engineered Cabs, and the public listing and subsequent valuation changes of Nikola Corporation.
Financial performance and key metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $702.9 million | $855.9 million | Down $153.0 million |
| Gross margin | $113.4 million; 16.1% | $117.3 million; 13.7% | Down $3.9 million; margin improved |
| Operating loss | $(30.1) million; (4.3%) | $(14.6) million; (1.7%) | Loss increased $15.5 million |
| Net earnings attributable to controlling interest | $616.7 million | $(4.8) million | Improved $621.5 million |
| Diluted earnings per share | $11.22 | $(0.09) | Improved $11.31 |
| Operating cash flow | $117.4 million | $64.4 million | Up $53.0 million |
| Capital expenditures | $32.9 million | $22.2 million | Up $10.7 million |
Reported net earnings were dominated by a $796.1 million pre-tax gain on the Nikola investment, comprising $508.5 million of realized gains and a $287.6 million unrealized mark-to-market gain. Related incremental operating expenses were $49.5 million, including $28.9 million of discretionary profit sharing and bonuses and a $20.7 million charitable contribution of Nikola shares. Income tax expense was $163.8 million, compared with a $0.2 million benefit in the prior-year quarter.
- Steel Processing: Sales declined to $431.0 million from $523.4 million, while operating income increased to $13.6 million from $6.2 million. Improved spreads and lower conversion costs more than offset lower direct automotive volume and lower selling prices.
- Pressure Cylinders: Sales declined to $270.9 million from $304.4 million and operating income fell to $8.6 million from $29.6 million. The prior period included a $12.8 million gross-margin benefit from early termination of a customer take-or-pay contract; current-period results also included $10.2 million of impairment and restructuring charges.
- Other: Sales fell to $1.0 million from $28.1 million following the November 2019 deconsolidation of substantially all of the Engineered Cabs business. The operating loss improved to $0.7 million from $45.2 million, primarily because the prior period included $40.6 million of impairment charges.
Balance sheet, cash flow, debt and liquidity
- Cash and cash equivalents were $650.1 million at August 31, 2020, compared with $147.2 million at May 31, 2020. The increase primarily reflected Nikola share-sale proceeds.
- Total assets were $3.13 billion and total equity was $1.53 billion at August 31, 2020. The Nikola investment was carried at $287.6 million for the remaining 7,048,020 shares.
- Total debt, including current maturities, was approximately $707.5 million, compared with $699.7 million at May 31, 2020. The filing reports a fair value of approximately $788.6 million.
- The $500.0 million revolving credit facility matures in February 2023. No borrowings or letters of credit were outstanding under the facility at quarter-end, leaving the full borrowing capacity available. The Company reported compliance with its debt covenants.
- Investing cash flow was $455.0 million, including $487.9 million of proceeds from Nikola share sales. Financing cash outflows were $69.5 million, including $54.3 million of share repurchases and $13.4 million of dividends.
- The Company repurchased 1,460,484 shares for $54.3 million at an average price of $37.18 per share. A total of 6,239,516 shares remained available under repurchase authorizations at August 31, 2020.
- The quarterly dividend was increased to $0.25 per share from $0.24 in the prior-year quarter. A $0.25 per-share dividend payable December 29, 2020 was declared after quarter-end.
Material changes, outlook and unusual items
- COVID-19 reduced automotive and other industrial demand and led to workforce reductions, restructuring charges and continuing uncertainty regarding facility operations, demand, costs and capital-market access.
- Steel Processing benefited from improved spreads and lower conversion costs, but automotive production remained below the prior-year level. North American auto production was down 8% and Detroit Three production was down 10% year over year.
- Pressure Cylinders was affected by weak oil and gas demand, unfavorable industrial product mix and the absence of the prior-year take-or-pay benefit. Consumer products demand improved during the pandemic.
- Current-quarter impairment charges totaled $9.9 million, primarily related to the cryogenics business and the discontinued alternative-fuel-cylinder manufacturing line. Restructuring expense was $1.8 million, principally related to severance.
- On October 13, 2020, after quarter-end, the Company sold its cryogenic trailer and hydrogen trailer business, including the Theodore, Alabama facility, for $10.0 million subject to post-closing adjustments. Management estimated an approximately $4.0 million loss, primarily related to goodwill allocation.
- The 7,048,020 Nikola shares retained at August 31, 2020 were subject to a lock-up restricting monetization until early December 2020. Future changes in Nikola’s stock price would affect earnings through unrealized gains or losses.
- The filing provides no formal quantitative earnings or revenue guidance. Management stated that cash, operating cash flow and available credit were adequate for normal operating needs, but continued to monitor discretionary spending, variable costs and liquidity in response to COVID-19.
Risks, contingencies and controls
- Principal risks include COVID-19 and related governmental actions, cyclical demand, automotive and construction conditions, steel and other raw-material prices, tariffs and trade restrictions, oil and gas exposure, supply-chain disruption, customer or supplier financial distress, and capital-market volatility.
- The Company had a $4.95 million reserve at August 31, 2020 for a voluntary replacement program involving certain composite hydrogen fuel tanks; actual costs may vary.
- Outstanding standby letters of credit totaled $15.1 million, with no amounts drawn. Management did not expect pending legal or environmental matters to materially affect financial position or results.
- The Company had a $101.9 million liability representing distributions from WAVE in excess of its investment balance. It will continue recording its share of WAVE earnings against that liability unless the excess distribution is considered unlikely to be returned.
- Disclosure controls and procedures were effective at a reasonable assurance level, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Reconcile reported earnings and cash generation to the Nikola transaction, including the realized gain, unrealized gain, taxes, related bonuses and charitable contribution.
- Monitor the market value, lock-up expiration and subsequent monetization of the remaining Nikola shares because valuation changes can materially affect earnings and equity.
- Assess sustainable operating profitability excluding Nikola-related items, including Steel Processing’s spread and volume trends and Pressure Cylinders’ recovery from impairments and lost contract benefits.
- Review the continuing effects of COVID-19 on automotive, industrial, oil and gas demand, facility utilization, workforce levels and restructuring costs.
- Verify the post-quarter-end sale of the cryogenic and hydrogen trailer business, final proceeds and actual loss compared with management’s approximately $4.0 million estimate.
- Review debt maturities, covenant compliance, available revolver capacity, share repurchases and dividend policy as operating conditions evolve.