Worthington Industries, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2020, compared with the corresponding periods ended November 30, 2019. The company operates primarily through Steel Processing and Pressure Cylinders and held equity interests in nine joint ventures.
Financial Results and Key Metrics
| Metric | Three months ended Nov. 30, 2020 | Three months ended Nov. 30, 2019 | Six months ended Nov. 30, 2020 | Six months ended Nov. 30, 2019 |
|---|---|---|---|---|
| Net sales | $731.1 million | $827.6 million | $1,434.0 million | $1,683.5 million |
| Gross margin | $135.5 million; 18.5% | $120.6 million; 14.6% | $248.8 million; 17.4% | $237.9 million; 14.1% |
| Operating income | $37.4 million; 5.1% | $32.1 million; 3.9% | $7.2 million; 0.5% | $17.5 million; 1.0% |
| Net earnings attributable to controlling interest | $(74.0) million | $52.1 million | $542.6 million | $47.3 million |
| Diluted earnings per share | $(1.40) | $0.93 | $9.97 | $0.84 |
| Cash flow from operating activities | $107.4 million | $104.2 million | $224.8 million | $168.5 million |
Liquidity and capital structure: Cash and cash equivalents were $713.1 million at November 30, 2020, compared with $147.2 million at May 31, 2020. Long-term debt, including current maturities, was $707.5 million, producing cash in excess of reported debt by approximately $5.6 million before considering other obligations. The company had a fully available $500.0 million revolving credit facility maturing in February 2023, with no borrowings or letters of credit outstanding under the facility. Management reported compliance with debt covenants.
Capital expenditures were $48.9 million during the first six months. The company paid $26.8 million of dividends and repurchased 2.3 million shares for $92.9 million. The quarterly dividend increased to $0.25 per share from $0.24 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Sales declined: Second-quarter sales decreased $96.5 million, or approximately 11.7%; six-month sales decreased $249.5 million, or approximately 14.8%. Drivers included lower steel selling prices, reduced direct volumes, COVID-19-related weakness in oil and gas equipment, and the prior-year deconsolidation of Engineered Cabs.
- Margins improved: Gross margin increased $14.9 million in the quarter and $11.0 million year to date. Steel Processing benefited from improved spreads, arbitrage gains, lower inventory holding losses and workforce-related cost reductions.
- Segment divergence: Second-quarter Steel Processing operating income rose to $37.8 million from $17.1 million, while Pressure Cylinders operating income fell to $3.3 million from $15.7 million. Pressure Cylinders was affected by lower oil and gas demand, impairment charges and restructuring costs.
- Operating income was affected by special items: Second-quarter results included $3.8 million of long-lived-asset impairment, $7.6 million of restructuring and other expense, and $4.6 million of bonus expense related to Nikola gains. Year-to-date incremental Nikola-related expenses totaled $54.1 million.
- Net income was dominated by Nikola valuation changes: The company recorded a $143.8 million unrealized loss in the second quarter as Nikola’s share price declined from $40.81 at August 31, 2020 to $20.41 at November 30, 2020. Six-month results included $652.4 million of cumulative realized and unrealized pre-tax gains on the investment.
- Cash generation strengthened: Six-month operating cash flow increased $56.3 million, while investing cash flow benefited primarily from $487.9 million of proceeds from Nikola share sales.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide quantified full-year revenue or earnings guidance in the filing. It expects approximately $4.0 million of additional Nikola-related bonus expense during the remainder of fiscal 2021.
- COVID-19 continues to affect demand, facility operations, workforce levels, costs and access to capital markets. Oil and gas equipment demand was particularly weak.
- In October 2020, the company sold its cryogenic and hydrogen trailer businesses and related operations for net cash proceeds of approximately $21.2 million, recognizing a $7.1 million pre-tax loss, primarily related to allocated goodwill.
- The company recorded $13.7 million of six-month impairment charges, including write-downs associated with cryogenics, alternative-fuel cylinders and oil and gas equipment. The second-quarter oil and gas impairment was attributed to COVID-19-related market softness.
- A $4.9 million reserve remained for a voluntary replacement program involving specified composite hydrogen fuel tanks; the related costs were expected to be paid within six months.
- WAVE distributions exceeded the company’s investment balance, resulting in a $108.0 million liability at November 30, 2020. The company received $47.1 million of distributions from unconsolidated affiliates during the first six months.
- Key market risks include steel and other raw-material pricing, product demand, automotive and construction cycles, oil and gas exposure, tariffs and trade restrictions, commodity and foreign-exchange volatility, cybersecurity, litigation, environmental matters and counterparty or joint-venture risks.
- Management stated that pending litigation and environmental matters were not expected to have a material adverse effect. Disclosure controls and procedures were deemed effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Reconcile reported earnings with and without the highly volatile Nikola investment gains and losses, including the remaining 7,048,020 shares valued at $143.9 million at quarter end.
- Assess the sustainability of Steel Processing’s improved spreads and whether workforce reductions and other cost savings can offset lower volumes or unfavorable steel-price movements.
- Monitor Pressure Cylinders, particularly oil and gas demand, impairment risk, restructuring execution and the effect of the completed business disposals.
- Verify liquidity after share repurchases, dividends, capital expenditures, debt maturities and any additional Nikola-related compensation payments.
- Review the $108.0 million negative investment balance related to WAVE and the potential accounting or cash consequences if future distributions or joint-venture results change.
- Consider the sensitivity of results to COVID-19 developments, automotive production, construction activity, commodity prices and financial-market access.