Worthington Industries, Inc. – Currently Listed as ‘WOR’ on the New York Stock Exchange

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Company Overview

Worthington Industries, Inc. (“WOR”) is an industrial manufacturing company founded in 1955, today serving a range of industries and providing a range of products and services. The Business is organized under the following operating segments:

  • Steel Processing – This segment is a value-added processor of carbon flat-rolled steel, a provider of electrical steel laminations and a producer of laser welded solutions. Coils of steel are sourced from both, integrated steel mills and mini-mills before being processed to the specifications of the customer’s request(s). End customers of this segment are located in many markets, including those of automotive, appliance construction, energy, hardware, and heavy-truck. Steel Processing also toll processes steel for steel mills, large end-users, service centers and other processors.
  • Consumer Products – This segment’s products serve the tools, outdoor living and celebrations end markets. Examples of their products would be: handheld torches, helium-filled balloon kits; propane-filled cylinders for torches, camping stoves and other applications; and LPG cylinders, which hold fuel for barbeque grills and recreational vehicle equipment.
  • Building Products – This segment sells: refrigerant cylinders which are used to hold refrigerant gases for commercial, residential, and automotive air conditioning and refrigeration systems; LPG cylinders, which hold fuel for residential and light commercial heating systems, industrial forklifts and commercial/residential cooking; well water and expansion tanks, which are both used in the residential market with the latter also being sold into commercial markets; and other specialty products such as, fire suppression, chemical tanks, foam and adhesives, which are generally sold to gas producers, and distributors.
  • Sustainable Energy Solutions – This segment sells onboard fueling systems and services, and gas containment solutions and services for the storage, transport and distribution of industrial gases. This includes high pressure and acetylene cylinders for life support systems and alternative fuel cylinders used to hold compressed natural gas (“CNG”) and hydrogen for automobiles, buses, and light-duty trucks.

This Security Issue came to our attention at the price of approximately 55.79 at around late-January 2023, with drafting of this Piece beginning soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and stability
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from WOR’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 2.27 in accordance with Table 2 – 3, and Table 2 – 4 above. The best, average and worst-case scenarios are 1.91, 1.72 and 1.50 respectively, all of which are above the minimum recommended figure of 1.5. The Issue also passes the acid test in all four instances.

The long-term debt value does not exceed 110% of the net current asset value in the stated case only, but does so in the best, average and worst-case scenarios.

The Company has not demonstrated any losses over the last decade but it is our opinion that the last two year’s final results have been a clear step up from the rest. We thus believe that out of the five- and 10-year averages, the former can more be taken as a reliable indication of the Issue’s previous earning power over the latter; both having some merit as opposed to being the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 1985.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have increase by approximately 424%.

The discernible tangible equity per share is 8.20 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -2.72, -9.63 and -14.17, respectively. The current price of 61.68 is greater than 120% of the positive value, with the following three being negative and thus rendering the 120%-price-paid-to-DTE metric invalid.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were eight main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following eight points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Principal Shareholder

Like several Issues we have covered Worthington Industries has a principal shareholder, this time coming in the form of WOR’s current Executive Chairman and former CEO, an individual by the name of John P. McConnell. The distribution of shares owned by the principal shareholder do not warranty WOR’s qualification as a “Controlled Company” but as you will shortly see their share ownership percentage has been on the incline and as it currently stands is enough to considerably influence a large number of shareholder voting matters. The percentage of shares beneficially owned by the principal individual has increased over the years as has the number owned by NEOs and Directors as a group, as shown in Table 4 – 1 below:

At first glance it may appear the principal shareholder has been increasing the number of shares beneficially owned (intentionally or not), but upon reviewing the raw numbers themselves this idea is disproven. Please see Table 4 – 2 below:

Evidently the number of shares owned by both the principal shareholder and the group (NEOs and Directors) overall have been decreasing with the margin between them remaining roughly consistent. This serves as a basis for us expressing our current disbelief of any clear intention by John P. McConnell to acquire as many shares as possible and ultimately render the Issue “controlled” as some suspicious readers may have suspected, although we cannot confirm this with absolute unwavering certainty. Regardless this current trend may deter prospective investors especially if there is a lack of trust in said principal shareholder for any reason they are able to conceptualize. Often we allude to the potential additional vested interest these situations offer for sentimental reasons and associated corporate proximity but it is not entirely clear if John P. McConnell’s ownership in such supernumerary shares is on account to being a fonder, co-founder or descendant/relative to such person(s), meaning the sentimental value may be absent. This can perhaps be queried with Management by Shareholders or investigated further off the reader’s own accord.

As an additional note for those interested to know, the increase in the percentages seems to be because of the current share repurchase plan under which repurchased shares are cancelled, a habit that has been constantly reducing the number of shares issued and outstanding as demonstrated in the consolidated financials.

Business Changes

This subsection will party serve as a foreword to the next couple of subsections but will harp on some of the business alterations irrespective of the affiliated fiscal impacts. Of course the two will come hand-in-hand in reality but we’ve segregated them for the sake of cohesiveness and clear comprehension. It is apparent Worthington Industries make many organizational changes, the first example we noted being related to the arrangement of the operating segments in June 2017, when the Company moved Worthington Steelpac Systems, LLC (“Packaging Solutions”), from the Steel Processing operating segment to the Engineered Cabs operating segment, a transition that naturally ignited our intrigue concerning the performance of WOR’s operating segments. We subsequently and organically observed operating losses pertaining to two segments at the time which we have not presented in the table below:

The Company typically maintained that the ‘Other’ category includes certain income and expense items not allocated to their operating segments, including costs associated with their captive insurance company (which they have not directly referenced since the 2019 10-K Filing), but it also included the former Worthington Energy Innovations operating segment and the former Construction Services operating segment on a historical basis, through May 31, 2016. On this basis we suspect there was an expectation of profit before operating income, a lacking materialization for both the Other and Engineered Cabs segments with the table above showing two operating losses for each segment we are referring to, albeit for different years. The Engineered Cabs segment was not affiliated with any left-field costs or operating expenses and was generally regarded as a fully-fledged operating segment, the results of which were evidently disappointing and the likely justification of its eventual deconsolidation into a joint venture, but before this there were clear attempts to facilitate a ‘revitalization’ if you will:

During the first quarter of fiscal 2016, management finalized its plan to close the Engineered Cabs facility in Florence, South Carolina and transfer the majority of the business to the Engineered Cabs facility in Greeneville, Tennessee.  Under the plan, certain machinery and equipment was transferred to the Greeneville facility to support higher volume requirements.  Management reevaluated the recoverability of the remaining assets and determined that long-lived assets with a carrying value of $4.1 million were impaired.  As a result, these long-lived assets were written down to their estimated fair value of $1.1 million resulting in an impairment charge of $3.0 million during the first quarter of fiscal 2016.  The Company ceased production at the Florence facility on September 30, 2015. [13]

As we have observed matters like this are common practice for this Business but there will be more mention of this later. It also appears that the efforts were not as successful as initially theorized because the 2020 10-K Filing then provided this following detail:

Deconsolidation of Engineered Cabs:  On November 1, 2019, we closed on an agreement with an affiliate of Angeles Equity Partners, LLC by which we contributed substantially all of the net assets of the Company’s Engineered Cabs business to a newly-formed joint venture, Taxi Workhorse Holdings, LLC (the “Cabs joint venture”), in which the Company retained a 20% noncontrolling interest.  Immediately following the contribution, the Cabs joint venture acquired the net assets of Crenlo Cab Products, LLC (“Crenlo”). [9]

In case you were wondering the joint venture is still operating. For the next year or so the operating segments ran as they were with no notable operating losses, even accounting for the restatement of previous years to conform for the then-current presentation. Then came the June 2021 announcement that effective at the start of fiscal year 2022, the Pressure Cylinders segment was being divided into three new reportable segments i.e., Consumer Products, Building Products and Sustainable Energy Solutions, all of this leaving WOR with the four operating segments currently in existence. On a related note, the equity income from Taxi Workhorse Holdings, LLC (“Workhorse”) has been negative for a number of years and we wonder if it is to be written down and/or disposed of. Another change we’ll include here is the following regarding a joint venture WOR had finalized in 2013 with Nisshin Steel Co., Ltd. (“Nisshin”) and Marubeni-Itochu Steel Inc. (“MISI”) to form Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd.:

During the fourth quarter of fiscal 2019, we determined our 10% ownership interest in our joint venture in China, Nisshin, was other than temporarily impaired due to current and projected operating losses.  As a result, an impairment charge of $4,017,000 was recognized within equity income in our consolidated statement of earnings to write down the investment to its estimated fair value of $3,700,000. [11]

These changes and the ones listed below have all contributed towards many charges and occasional gains which you would typically expect in a non-recurring fashion, but which oxymoronically end up being recurring nonrecurring items that seem somewhat reliable in nature all whilst contemporaneously appearing to not take away from the Company’s earning power, at least in a blatantly detrimental fashion.

The organizational alterations mean the employee bases has changed a bit and some changes have been made at the senior level, with those declared in the 2019 10-K Filing being the most significant from our observation and estimation:

During fiscal 2019, the Company announced the following personnel changes:

    • On August 22, 2018, B. Andrew ‘Andy’ Rose was named President and Geoffrey G. Gilmore was named Executive Vice President and Chief Operating Officer (“COO”). Mark Russell, President and COO, retired.
    • On September 10, 2018, John Lamprinakos, President of Steel Processing, retired.
    • On September 12, 2018, Catherine M. Lyttle was named Senior Vice President and Chief Human Resources Officer.
    • On November 1, 2018, Joseph B. Hayek was named Vice President and Chief Financial Officer (“CFO”).
    • On May 1, 2019, Eric M. Smolenski was named President of Pressure Cylinders and Jeff R. Klingler was named President of Steel Processing. [11]

We don’t like that which appears capricious. We like stability. And these changes and some of the others as it pertains to acquisitions, consolidation efforts, and other miscellaneous items sully the image of a stable enterprise. Going forward we shall relay the rest of the business changes over the next couple of subsections in relation to restructuring, consolidation efforts, write-offs, impairment charges, acquisitions, dispositions, mergers, other miscellaneous items, and their associated charges. It will be a lot, but that is because of the organization themselves.

Recurring Non-Recurring Items: Losses and Gains

As we stated above, WOR is forever changing their operations and whilst some may view these changes as a persistent attempt to do better and stive for perfection (thus ultimately deeming this a favourable proclivity), we on the other hand ultimately prefer inherent operational stability. On account of these modifications there have been millions of Shareholder dollars lost over the years owed to impairments and restructuring activities, the latter of which has earned a liabilities portion on the balance sheet to which charges are added and deducted from. Table 4 – 4 below is from the last 11 10-K Filings, and displays the collective impairments of ‘Goodwill and Long-Lived Assets’ and restructuring and other expenses:

The column on the right shows the odd instance where the often-random happenings result in a fiscal gain, but: i) the default position here is evidently a loss; and ii) in the aggregate, much more was lost to these charges than was gained. Following is a list of three phrases all prospective investors should search the latest several (at least) 10-K Filings for, with a little comment on us about their location:

  1. ‘Impairment of Long-Lived Assets’ – This is typically situated within a note in the 10-K Filings addressing goodwill and other long-lived assets.
  2. ‘Restructuring and Other Expense (Income), Net’ – This is typically the heading of a note within 10-K Filings addressing what the name suggests.
  3. ‘Non-Recurring Fair Value Measurements’ – This is typically in a note within the 10-K Filing addressing fair value measurements.

As an ancillary looking-place you may like to know that prior to the 2021 10-K Filing, the phrase ‘Critical Accounting Policies’ could also be used as a search-worthy phrase, as Item 7. sometimes provided examples of the impairments. That being said, between the three listed search options you will surely encounter everything wrong that this and the previous subsection is pointing towards and will likely explain our stance that the Issue’s capacity for additional charges seems indefatigable. Between the 10-K and DEF 14A Filings there seemed no expiation, and not a farthing of regret. It all came across business as usual. But then again, these are corporate filings so perhaps this is meant to be the case and we are being harsh with those last two sentences. Perhaps.

There are further matters not accounted for in Table 4 – 4 above which we will now list. Some are more positive leaning and some are more negative leaning, possibly induce ambivalence. Take from the list what you will:

  • “Operating income continued to be impacted by fluctuating steel prices which (i) led to inventory holding losses in fiscal 2019 of $4.4 million compared to significant inventory holding gains in fiscal 2018 of $17.8 million, (ii) created short-term margin pressure and (iii) contributed to lower direct shipments in the second half of fiscal 2019 as customers appeared to delay orders” [11].
  • “In February 2019, our former Structural Composites Industries, LLC subsidiary (‘SCI’) agreed to participate in a tank replacement program…In connection with this matter, we recorded a $13,000,000 charge to cost of goods sold during the third quarter of fiscal 2019 to reflect our estimated costs of the replacement program. During the third quarter of fiscal 2020, a favorable adjustment of $2,265,000 was recorded related to lower than expected freight costs” [7].
  • “Upon pricing of the 2032 Notes, the derivative instrument was settled resulting in a gain of approximately $3.1 million, which was reflected in accumulated other comprehensive loss in our consolidated statements of equity and will be recognized in earnings, as a decrease to interest expense, over the life of the related 2032 Notes” [11].
  • “In addition, Pressure Cylinders’ results were helped by the early termination of a customer take-or-pay contract which resulted in a $9.3 million benefit to gross margin in fiscal 2020” [9].
  • “Inventory holding gains were estimated to be $75.0 million in fiscal 2021 compared to inventory holding losses of $20.3 million in fiscal 2020” [7].
  • “On June 3, 2020, Nikola Corporation (‘Nikola’) became a public company through a reverse merger with a subsidiary of VectoIQ Acquisition Corporation, a NASDAQ listed publicly-traded company. The Company owned 19,048,020 shares of Nikola common stock following the reverse merger and subsequently sold all of the Company’s shares, resulting in pre-tax gains of $655.1 million, which was comprised of $634.4 million in cash proceeds and $20.7 million in value from Nikola shares contributed to the Worthington Industries Foundation” [7].
  • “We previously held an investment in the common stock of Nikola Corporation (‘Nikola’). Incremental expenses related to Nikola gains of $50.6 million in fiscal 2021 consisted of $30.0 million of increased profit sharing and bonus expenses related to the Nikola investment gains and $20.7 million for the contribution of 500,000 shares of Nikola common stock to the Worthington Industries Foundation in the first quarter of fiscal 2021” [5].
  • “The 2020 Notes were redeemed in full on August 30, 2019. In connection with the early redemption, we recognized a loss on extinguishment of debt of $4,034,000, which was presented separately in our consolidated statement of earnings for fiscal 2020” [5].

In particular there were two items from a previously owned Worthington Armstrong Venture (“WAVE”):

  • “In October 2018, the Company received a $25.0 million one-time special cash distribution from WAVE in connection with a financing transaction completed by WAVE in October 2018” [11].
  • “In September 2018, the Company received a one-time special cash distribution of $35.0 million from WAVE representing the primary portion of its share of the proceeds received by Armstrong World Industries, Inc. (“AWI”) in connection with the pending sale of the combined international operations of WAVE and AWI. The Company expects to receive total proceeds of up to $45.0 million (including the $35.0 million received to date) in connection with the sale transaction, subject to certain closing adjustments provided in the purchase agreement, which is anticipated to close before the end of calendar 2019” [11].

We’ll admit these types are at times to be expected but in conjunction with the long list of items you should review (by using the three search suggestions we provided earlier) for context regarding this subsection’s existence, it is collectively disappointing. It should also be commented that the two items related to Nikola in particular were noteworthy with the June 2020’s $655.1 million pre-tax largely distorting the Company’s income and perceived earning power so some may wish to either redact this and re-calculate things, not put much stock into that year’s earnings, and/or average out the years as we do. Here we’ll remind readers of Chapter 12 from ‘The Intelligent Investor’ (which should be reviewed in full), but we’ll highlight the opening words:

This chapter will begin with two pieces of advice to the investor that cannot avoid being contradictory in their implications. The first is: Don’t take a single year’s earnings seriously. The second is: If you do pay attention to short-term earnings, look out for booby traps in the per-share figures. If our first warning were followed strictly the second would be unnecessary. But it is too much to expect that most shareholders can relate all their common-stock decisions to the long-term record and the long-term prospects. [2]

Interestingly the Company did not elucidate upon the provenance of the links to Nikola, an inclusion we suspect would have been very helpful for all investors and something to maybe be queried with Management. Tangentially related to the ‘Nikola’ matters, please be cognizant that the consolidated statements of income perpetually display ‘miscellaneous income, net’ as a line below the operating income and upon further examination the nature of the income has primarily comprised of foreign exchange contracts and re-measurement gains in ownership interests.

Acquisition Trend

As mentioned in the previous two subsections, WOR often acquires smaller companies. We will list these but in fragmented separate lists, demarcated by wholly-owned acquisitions and those that were not, all from 2017. Here is the list of consolidated acquisitions:

  • “On June 2, 2017, the Company acquired AMTROL, a leading manufacturer of pressure cylinders and water system tanks with operations in the U.S. and Europe. The total purchase price was $291,921,000, after adjusting for excess working capital, and was funded primarily with cash on hand.  The net assets became part of the Pressure Cylinders operating segment at closing, with the well water and expansion tank operations aligning under the consumer products business and the refrigerant, liquid propane and industrial and specialty gas operations aligning under the industrial products business.  Total acquisition-related expenses were $3,568,000, of which $1,568,000 were incurred during fiscal 2018” [9, 11].
  • “On May 1, 2019, the Company acquired the net assets of Magna Industries, Inc., a Cleveland-based manufacturer of Mag-Torch® hand-held torches and Superior Tool® plumbing tools. The total purchase price was $13,500,000, including contingent consideration with an estimated fair value of $2,000,000 related to an earn-out provision tied to future performance” [7, 9, 11].
  • “On October 7, 2019, we acquired the operating net assets related to Heidtman’s Cleveland facility, excluding working capital, for cash consideration of $29,593,000. The acquired net assets were managed and reported as a component of our Steel Processing operating segment until their contribution to the Samuel joint venture on December 31, 2019” [7, 9].
  • “On January 4, 2021, we acquired PTEC, a leading independent designer and manufacturer of valves and components for high pressure hydrogen and compressed natural gas storage, transport and onboard fueling systems. The PTEC business is being operated as part of the industrial products business within our Sustainable Energy Solutions segment.  The total purchase price was $10,784,000.  In connection with this acquisition, we recognized total intangible assets of $9,247,000, including goodwill of $3,785,000” [5].
  • “On January 29, 2021, we acquired GTI, a provider of feature-rich, specialized tools in various categories including environmental health & safety, precision measurement & layout, home repair & remodel, lawn & garden and specific purpose tools, in a stock deal for cash consideration of $120,388,000, after adjustment for final working capital. The GTI business is being operated as part of the Consumer Products segment and GTI’s operating results have been included in our consolidated statements of earnings since the date of acquisition.  We incurred total acquisition-related costs of $660,000 in fiscal 2021 related to the transaction” [5].
  • “On June 8, 2021, Steel Processing, along with our 55% consolidated joint venture TWB, acquired certain assets of Shiloh’s U.S. BlankLight® business. The purchase price for the acquisition was cash consideration of approximately $104,506,000, after closing adjustments. The Shiloh business is being primarily operated by TWB and is part of the Steel Processing segment and the operating results of the Shiloh business have been included in our consolidated statement of earnings since the date of acquisition.  Proforma results of the Shiloh business, including the acquired business since the beginning of fiscal 2021, would not be materially different than the reported results” [5].
  • “On December 1, 2021, we acquired all of the issued and outstanding capital stock of Tempel, a leading global manufacturer of precision motor and transformer laminations for the electrical steel market. The purchase price consisted of cash consideration of approximately $272.2 million, net of cash acquired, plus the assumption of certain long-term liabilities. Tempel, which operates as part of our Steel Processing business segment, employs approximately 1,500 people, and is headquartered in Chicago, Illinois, with additional manufacturing locations in Burlington, Canada, Changzhou, China, Chennai, India and Monterrey, Mexico” [5].
  • “On June 2, 2022, we acquired Level5 Tools, LLC (‘Level5 Tools’), a leading provider of drywall tools and related accessories. The purchase price was approximately $55.0 million, subject to post-closing adjustments, with a potential earnout payment of up to $25.0 million based on performance through 2024” [5].

And then there were some other purchases which altered equity owned, but not to make it 100%, e.g.:

  • “On May 23, 2018, the Company acquired the minority ownership interest in Turkey-based Worthington Arıtaş Basınçlı Kaplar Sanayi (‘Worthington Aritas’) from the noncontrolling joint venture members in a non-cash transaction. The difference between the fair value of the noncontrolling interest and its carrying value was recorded as an increase to additional paid-in-capital in the amount of $924,000” [9].
  • “On October 7, 2019, we acquired the operating net assets, excluding working capital, related to Heidtman Steel Products, Inc.’s Cleveland facility (‘Heidtman’), for cash consideration of $29.6 million, which expanded the Company’s pickling and slitting capabilities” [9].
  • “On December 31, 2019, the Company contributed the then recently acquired operating net assets of Heidtman’s Cleveland facility to the Samuel joint venture, in exchange for an incremental 31.75% interest in the joint venture, increasing the Company’s ownership to a 63% controlling interest. The Heidtman assets were contributed at their net book value of $30,061,000, of which $11,123,000 has been attributed to the noncontrolling interest.  The transaction was accounted for as a step acquisition, which required the re-measurement of our previously held 31.25% ownership interest in the joint venture to fair value resulting a non-cash, net pre-tax gain of $6,055,000 within miscellaneous income, net in our consolidated statement of earnings for the third quarter of fiscal 2020.  The acquired net assets became part of our Steel Processing operating segment upon closing.  In connection with the acquisition, the name of the joint venture was changed to Worthington Samuel Coil Processing LLC” [7].
  • “On August 3, 2022, the Company sold its 50% noncontrolling equity interest in ArtiFlex Manufacturing, LLC (‘ArtiFlex’) to the unaffiliated joint venture member for approximately $42.1 million after adjustments for closing debt and final net working capital. Approximately $6.0 million of the total cash proceeds were attributed to real property in Wooster, Ohio, with a net book value of $6.3 million. This real property was owned by Worthington and leased to ArtiFlex prior to closing of the transaction. The Company recognized a pre-tax loss of approximately $15.8 million in equity income related to the sale of its 50% noncontrolling equity interest portion of the transaction” [3].
  • “On October 31, 2022, the Company’s consolidated joint venture, WSP, sold its remaining manufacturing facility, located in Jackson, Michigan, for net proceeds of approximately $21.3 million, resulting in a pre-tax gain of $3.9 million within restructuring and other income, net” [3].

All of this to showcase the habits of buying more companies. There is not an ‘organic net sales reconciliation’ portion like with Central Garden & Pet Company, which could be a useful inclusion but we would not say they have been relying on acquisitions for growth, as they do not appear all that significant relative to the earnings. Fair amounts of goodwill were often acquired and the acquisitions seemed fairly related to WOR’s operations but considering it’s diversified state it was a little harder to objectively come to a solid conclusion on that front. How the acquisitions were funded was also not clear, as usually it was not said whether they were funded with cash on hand, via borrowings or from the proceeds of the notes etc. When addressing the Tempel acquisition, WOR said the acquisition was funded primarily with cash on hand and some borrowings under their Credit Facility, but not all acquisitions had this outlined detail.

On a related note, the unconsolidated ventures mean there are extra assets on the balance sheet we have not accounted for, which you may wish to investigate further. Every 10-K Filing has shown that the ‘equity in net income of unconsolidated affiliates’ line on the income statements (below the ‘operating income’, just like the ‘miscellaneous income, net’ earlier mentioned) has been positive as far as we are able to observe using our sampled 10K Filings, and in conjunction with statements from the Company like the following two, the unconsolidated ventures can likely be esteemed from a profitability standpoint:

  • “We received distributions from unconsolidated affiliates totaling $100,058,000, $91,007,000, and $122,953,000 in fiscal 2022, fiscal 2021 and fiscal 2020, respectively” [5].
  • “We received distributions from unconsolidated affiliates totaling $161,079,000, $89,787,000, and $102,015,000 in fiscal 2019, fiscal 2018 and fiscal 2017, respectively” [11].

Then there is the following accounting matter you may like to familiarise yourself with:

We have received cumulative distributions from WAVE in excess of our investment balance amounting to $91,643,000, which is shown as a separate liability on our consolidated balance sheet at November 30, 2022.  In accordance with the applicable accounting guidance, we have reclassified the negative investment balance to the liabilities section of our consolidated balance sheets.  We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if the investment balance becomes positive, it will again be shown as an asset on our consolidated balance sheets.  If it becomes probable that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any negative investment balance classified as a liability as income immediately. [3]

Below is a list of the most recent and notable divestures also. If we display the acquisitions it makes sense to show the opposites:

  • “On March 31, 2018, we sold a 65% stake in Worthington Energy Innovations, LLC (‘WEI’) to its founder, Tom Kiser, who already owned 20% of the business. We now hold a 10% equity interest and will have a passive role in the business” [13].
  • “In connection with the closure of the Company’s stainless steel business, Precision Specialty Metals, Inc. (“PSM”), the Company recognized facility exit costs of $560,000 and a net gain on disposal of assets of $10,595,000 for the sale of the real estate of this business. Net proceeds were $15,874,000” [13].
  • “On July 26, 2019, the Company completed the sale of Worthington Aritas Basınçlı Kaplar Sanayi (‘Worthington Aritas’), its Turkish manufacturer of cryogenic pressure vessels. The Company received cash proceeds, net of transaction costs, of $8.3 million resulting in a pre-tax restructuring loss in the current fiscal year of $481,000” [9].
  • “On September 30, 2019, Worthington Armstrong Venture (‘WAVE’) completed the sale of its international operations to Knauf Ceilings and Holding GmbH (‘Knauf’), as part of the broader transaction between Knauf and Armstrong World Industries, Inc., our partner in the WAVE joint venture. Our portion of the net gain, subject to post-closing adjustments, was $23.1 million and was recognized in equity income” [9].
  • “In connection with the sale of the operating assets and real property related to the solder business and certain brazing assets within the Pressure Cylinders business, the Company recognized net proceeds of $27,577,000, severance expense of $89,000 and a net gain on disposal of $11,458,000” [9, 11].
  • “In October 2020, our legacy Pressure Cylinders segment completed the sale of its cryogenic and hydrogen trailer business, including the Theodore, Alabama manufacturing site, and the cryo-science and microbulk storage unit business. In connection with these transactions, we realized net cash proceeds of $21,275,000 after working capital adjustments, which generated a pre-tax loss of $7,064,000, primarily related to allocated goodwill” [5].
  • “On January 29, 2021, our legacy Pressure Cylinders segment sold its oil & gas equipment business to an affiliate of Ten Oaks Group for deferred proceeds in the form of contingent consideration that entitles us to up to 15% of future sales proceeds upon the exit of the business by the acquirer, subject to limitations and certain adjustments. Due to then current and forecasted losses of the business combined with uncertain market conditions, we did not assign any value to the contingent consideration arrangement. As a result, we recognized a loss of $27,671,000 within restructuring and other expense, net during fiscal 2021” [5].
  • “On March 12, 2021, we sold the SCI business located in Pomona, California to Luxfer Holdings PLC. We received net proceeds of $19,059,000 resulting in a pre-tax loss of $7,219,000 within restructuring and other expense, net” [5].
  • “On May 31, 2021, our legacy Pressure Cylinders business (now the Sustainable Energy Solutions business) sold its LPG fuel storage business, located in Poland, to Westport Fuel Systems, Inc. We received total consideration of approximately $6,000,000, resulting in a pre-tax loss of $11,034,000 within restructuring and other expense, net” [5].
  • “On June 9, 2021, the Company’s consolidated joint venture, WSP, sold the remaining assets of its Canton, Michigan, facility for cash proceeds of approximately $20.0 million. The Company will recognize a gain of approximately $12.0 million in the first quarter of the fiscal year ending May 31, 2022 (‘fiscal 2022’) related to the divestiture. WSP continues to operate locations in Jackson and Taylor, Michigan” [7].

Principles of Consolidation

WOR’s principles of consolidation account for ventures not wholly-owned and as of the latest 10-Q Filing’s date these entities were self-proclaimed as follows:

We own controlling interests in the following three operating joint ventures: Spartan Steel Coating, L.L.C. (“Spartan”) (52%); TWB Company, L.L.C. (“TWB”) (55%); and Worthington Samuel Coil Processing LLC (“Samuel” or “Samuel joint venture”) (63%).  The last remaining manufacturing facility of our Worthington Specialty Processing (“WSP”) joint venture was sold in the second quarter of fiscal 2022. [3]

All of these exist in the ‘Steel Processing’ segment, the Company’s largest segment which represented 57.16% and 40.31% of the Company’s total assets as of the 2022 and 2021 10-K Filing dates respectively. Considering that all of these non-wholly owned ventures exist here, perhaps some consideration should be given toward the stated and liquidating values and the fact that Shareholders may not theoretically be assigned any of those calculated portions (or the Shareholder’s own calculated portions) of the Company’s assets. This could perhaps be extended to the DTE value we use, as it would theoretically be lower than calculated if we take the stand of an interest for WOR shareholders exclusively. But we don’t know “who owns what” and to be honest such recalculation here would not serve that much benefit as the qualitative factors have already not served the Issue too well in our eyes, and the P/BV ratio is already high enough without making this alteration which would push it even higher. That being said however, it would be nice if the Company declared which assets were attributable to the ventures they do not fully own but perhaps this could be queried with Management.

Note’s Investment Merit

Worthington Industries, Inc. has a few tranches of notes available and as of the 2022 10-K Filing’s date the following notes and nominal amounts were outstanding: i) $150,000,000 of 4.60% senior notes due August 10, 2024; ii) $250,000,000 of 4.55% senior notes due April 15, 2026; iii) $200,000,000 of 4.30% senior notes due August 1, 2032; iv) $39,382,000 of 1.56% Series A senior note due August 23, 2031; and v) $59,019,000 of 1.90% Series B senior notes due August 23, 2034. The question we always ask is are these investment worthy, and as usual we have checked the fixed charge coverage as recommended in ‘The Intelligent Investor’ showcasing the results in Table 4 – 5 directly below:

As evidenced by the table above, trying to ascertain a fixed charge coverage is not so simple in this instance. Like we mentioned in the subsections above there are many items on the income statement below the operating income which served to render the net income larger than the operating income. To account for this it could be suggested the items be removed, the tax provision re-calculated and the analysis repeated, but we don’t consider this necessary for one primary reason i.e., the consistency with which the net income exceeds the operating income. Whilst all of the items are disruptive relative to this check, they are also consistently prevalent and such persistence contextually speaking is perhaps ironically advantageous here. That is our subjective take which some may disagree with, but based on the foregoing matters the notes issued appear to be worthy of consideration towards a given investment portfolio given they are not above par value.

Regarding the debt’s provenance and usage, WOR has longitudinally re-iterated they “typically use the net proceeds from long-term debt for acquisitions, refinancing of outstanding debt, capital expenditures and general corporate purposes” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23]. More concise explanations have been offered at times e.g., the following excerpt which also alludes towards a tendency to roll over the debt:

Additionally, we used cash and $101.5 million of net proceeds from the issuance of long-term debt to redeem $150.0 million of senior unsecured notes, repurchased 1,300,000 of our common shares for $51.0 million, and paid $53.3 million of dividends on our common shares. [9]

Whether the notes are secured or not can be taken from the latest 10-K Filing which referred to the long-term debt as “senior unsecured long-term debt” [3], and we know the Company’s long-term debt is still the notes because the latest 10-Q Filing says in several places there were no outstanding borrowings under the revolving credit facility, although it would be ideal if they clarified their secured or unsecured status in the 10-K and 10-Q Filings. It would also be ideal if Worthington Industries, Inc. did however state in all 10-Q Filings how much of the notes were currently outstanding and expounded a little on their details and provenance, as opposed to waiting until the next 10-K Filing.

Depreciation & Amortization

Yet another instance we’ve encountered whereby the location of the depreciation and amortization charges on the income statements are enshrouded in mystery. They were not delineated on the income statement and there was no remark pertaining to their inclusion in either WOR’s ‘cost of goods sold’ or ‘selling, general and administrative expense’ items. The consolidated statements of cash flows showcase D&A charges the same order of magnitude as the net income, with the former trumping the later in fiscal 2020 meaning that if these charges are not sufficiently accounted for earnings could be drastically overstated.

As far as the depreciation methodology is concerned, WOR says “property, plant and equipment are carried at cost and depreciated using the straight-line method.  Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment over 3 to 20 years” [5, 7, 9, 11, 13], something which has been consistent throughout our sampled 10-K Filing checks. We prefer concise estimated useful lifetimes as they facilitate maximum transparency which could get muddy if a range is given and any alteration of an estimated useful lifetime may be not fully disclosed. We wonder why the lower aspect of the range for ‘buildings and improvements’ is so low, and why the upper aspect of the range for ‘machinery and equipment’ is so high. Perhaps the types of each category should be separated out for clarification and assigned the appropriate concise estimated useful lifetime going forward.

Important Points to Note from the Most Recent 10-Q Filing

Open the latest 10-Q Filing and search for the phrase ‘Recent Business Developments’. This gives a few examples of business changes some of which we have already actually included throughout this Piece, but the most notable change in this Filing comes in the following form:

On September 29, 2022, the Company announced that the Board of Directors of Worthington Industries, Inc. approved a plan to pursue a separation into two independent, publicly-traded companies – one company is expected to be comprised of the Company’s Steel Processing operating segment, and the other company is expected to be comprised of the Company’s Consumer Products, Building Products and Sustainable Energy Solutions operating segments.  The Company plans to effect the separation via a distribution of stock of the Steel Processing business, which is expected to be tax-free to shareholders for U.S. federal income tax purposes.  The Separation transaction is expected to be completed by early 2024, but is subject to certain conditions, including, among other things, general market conditions, finalization of the capital structure of the two companies, completion of steps necessary to qualify the Separation as a tax-free transaction, receipt of regulatory approvals and final approval from the Board of Directors of Worthington Industries, Inc.  Direct and incremental costs incurred in connection with the anticipated Separation, including audit, advisory, and legal costs, are presented separately in our consolidated statements of earnings as “Separation costs”. Separation costs totaled $9,246,000 during the three and six months ended November 30, 2022. [3]

We don’t have a comment on this last excerpt by this point. The Company does a lot and it shows. Too much by our expectation. That’s all we’ll say. Come to your own conclusion, as always, however.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. Concerning the economic downturn of 2008 – 2009, the Company lost money during fiscal 2009 but not 2008 [25].
  2. The Company may have just completed a business cycle expansion.
  3. WOR does not have any customer risk concentration. The 2022 10-K Filing said that “sales to one Steel Processing customer in the automotive industry represented 13.0% of our consolidated net sales during fiscal 2022” [5], the highest percentage reported in this regard over the decade. There is also no supplier risk concentration.
  4. The Company is not overly conservatively capitalized so may make for a relatively interesting speculative purchase.
  5. The Company did not consistently report a range or precise value for an item they anticipated for the following fiscal year such as for the capital expenditures, so we are not able to comment on the accuracy of Management’s predictions in this sense as we typically would. They did have a description concerning the amount of the defined benefit plan that will be amortized from accumulated other comprehensive income (“AOCI”) into net periodic pension cost during the following financial year and these were typically very accurate although there were a couple of instances when they referenced an estimated “net gain” as opposed to a “net loss” e.g., “the estimated net gain for the defined benefit plan that will be amortized from AOCI into net periodic pension cost over the fiscal year ending May 31, 2014 is $290,000” [23], and “the estimated net gain for the defined benefit plan that will be amortized from AOCI into net periodic pension cost over the fiscal year ending May 31, 2015 is $327,208” [21]. There was also 2021’s prediction which said “the estimated net loss for the defined benefit plan that will be amortized from AOCI into net periodic pension cost during fiscal 2021 is $545,609” [7], something we have assumed was meant to read “cost during fiscal 2022 is $545,609”, but confirmation of this and the “net gain” statements can be sought with Management.
  6. We do not here suspect any corporate pyramiding.
  7. The Company makes use of both the Black-Scholes and Monte Carlo models when determining share price fair-values.
  8. Net income and comprehensive income typically do not deviate too far from each other.
  9. Six out of the last 10 fiscal years have seen increases in cash and cash equivalents and out of those six, five were not because of cash increases owed to debt.
  10. The inventories have been valued at the lower of cost or net realizable value since 2018’s 10-K Filing, prior to which they were valued at lower of cost or market, the change being on account of recently adopted accounting standards. Throughout the changes however they were consistently determined using the first-in, first-out method for all inventories.
  11. WOR’s latest balance sheet (on the latest 10-Q Filing) had both ‘prepaid expenses and other current assets’ and ‘other assets’ listed but the details of these were not elucidated so we have not included them in our valuations.
  12. Prior to the recent changing of the corporate tax rates, WOR’s effective tax rates were consistently below the official rates. Since the change they have been closer to the new rates but have remained so in a fairly stable fashion. And with regards to carryforwards etc., the latest 10-K Filing had the following to say – “At May 31, 2022, we had tax benefits for federal net operating loss carry forwards of $1,636,000 with no expiration date, tax benefits for state net operating loss carry forwards of $5,051,000 that expire from fiscal 2023 to the fiscal year ending May 31, 2042, and tax benefits for non-U.S. net operating loss carryforwards of $1,491,000 with no expiration date. The valuation allowance for deferred tax assets of $5,878,000 on May 31, 2022, is associated primarily with the state net operating loss carry forwards and relates to our former Steel Processing facility in Decatur, Alabama, and our former Engineered Cabs facility in Tennessee” [5].
  13. To our knowledge there are no large payments due in a year so and in relation to this, the Company has removed the previous table under the ‘Contractual Cash Obligations and Other Commercial Commitments’ header which used to clearly show the upcoming commitments. It is not clear why they removed such clarification.
  14. There has not been a recent consistently decline in the value of total or current assets, although from fiscal 2019 to fiscal 2020 there was a drop in all assets and liabilities. We don’t believe this to be a pattern and suspect it is because of the divestures mentioned earlier.
  15. The Company is a ‘large accelerated filer’ in Rule 12b-2 of the Exchange Act and has been in all of our sampled 10-K Filings.
  16. Every year the Company has said that their primary raw material is steel so there is an intrinsic link to commodity prices suggesting an eye may have to be kept on these for all prospective investors of this Security Issue.
  17. Every 10-K Filing has a table presenting property, plant and equipment, net, by geographic region and has been showing that the amount of international said assets has been increasing as a growing percentage of the Company’s total in recent years.
  18. The last two 10-K Filing’s critical audit matters have both related to intangibles, i.e., ‘fair value of customer relationships intangible asset in the acquisition of Tempel Steel Company’ and ‘fair value of customer relationships and certain trade name indefinite lived intangible assets in the acquisition of General Tools & Instruments Company LLC’ for fiscal years 2022 and 2021 respectively.

Points we feel may be considered negative

  1. We would not say the operations of the Company are the easiest for the layman to comprehend, especially considering the unconsolidated ventures and the persistent internal alterations.
  2. A very large number of shares have been authorized, allowing room for much possible equity dilution.
  3. There have been two stock splits [26] but we did not observe any equity dilution.
  4. In every 10-K Filing for the last several years the Business has said they “are defendants in certain legal actions” [5, 7, 9, 11, 13, 15, 17, 19]. They never expound on such matters, however.
  5. The Business has often engaged in hedging activities.
  6. There is a high institutional ownership percentage of the common shares outstanding (53.45% [27]).
  7. The length of the DEF 14A Forms was unnecessary and in a few instances page enumeration numbers rivalled that of the 10-K Forms. Many of the tables supplementary footnotes were of vast length and there seemed to be some pleonasm. This is all excessive, and sometimes indicative of a need for great simplification. We will not suggest that this has been intentionally to bury information as some cynics may, but we will say it makes it easier to do so whilst simultaneously being again, unnecessary.
  8. There were a number of observations concerning both the NEOs and the Directors, the nature of which we collectively deemed negative. They are as follows:
    1. Since 2014 the Annual Meeting of Shareholders have been virtual and the Company has not facilitated the option of in-person attendance.
    2. Directors serve staggered three-year terms.
    3. There does not appear to be an upper age limit up until Directors can serve the Board.
    4. Concerning director cash compensation, the annual retainer figure has more than doubled from the value it was 12 DEF 14A Forms ago.
    5. We’ve witnessed a lot of shared previous employment history between named individuals, named places including the likes of ‘OhioHealth Corporation’, ‘Duke University’, ‘The Columbus Foundation’, and ‘Ohio State University’.
    6. Executive pay-outs are predominantly determined by non-GAAP measures and some awards are linked to the Company’s share price i.e., – “In recent years, the Compensation Committee has granted special performance-based/time-vested restricted common share awards to select NEOs, with vesting tied to the price of the common shares attaining certain levels for a ninety consecutive day period during the term of the award” [4].
    7. From fiscal 2017 to fiscal 2020 the Company suffered repeated year-over-year decreases in net income, although in spite of this there were constant six-figure awards to NEOs etc.
    8. The Company has said “the Compensation Committee annually reviews certain market compensation information with the assistance of its independent compensation consultant, Willis Towers Watson, who is directly engaged by the Compensation Committee to prepare the information” [4, 6, 8, 10, 12, 14, 16]. The last two DEF 14A’s have then gone on to say that this compensation includes information regarding compensation paid to officers with similar responsibilities from a broad-based group of more than 700 companies. We wonder if such a wide range of comparator companies can offer as much utility as a smaller group of similar companies.
    9. With the exception of the latest one (2022’s), every DEF 14A Form since 2012 has detailed delinquent Section 16(a) Reports.
    10. There are detailed related part transactions every year and for the last several years they have consistently been fed back as follows: i) Fees are paid for the rental of an aircraft to and from JMAC, which is owned by Mr. McConnell and members of his family, and JMAC’s subsidiary, JMAC Air, LLC (“JMAC Air”) the purposes of these being “primarily for business travel” [4, 6, 8], and “for security and safety reasons” [4, 6, 8]; ii) Fees are paid to Double Eagle Club, a private golf club owned by the McConnell family (the “Club”) which is typically utilized for entertainment purposes; and iii) Fees are paid to the Columbus Blue Jackets, a National Hockey League team of which Mr. McConnell is the majority owner and this is again typically for entertainment purposes.

Points we feel may be considered positive

  1. The Business has been around since the 1950s thus has stood the test of time although considering the proclivity for internal changes we are not sure it existed back then as it did back now, so perhaps it could be a ‘newer’ organization than it appears to be.
  2. This is a relatively large company in terms of consolidated financials.
  3. The total number of shares issued and outstanding has been on the decline over the years, a perhaps good point to note.

Possible Questions for WOR’s Approximate 6,389 Stockholders to Consider, Investigate and/or Raise with Management

  1. Can any assurance be provided that the current principal shareholder will not eventually render the Business “Controlled”?
  2. Can the Company explain the origins of their affiliation with Nikola Corporation?
  3. The portion of the Company’s property, plant and equipment located internationally has been increasing. Is the Company doing this intentionally and is the goal to have most, if not all of these assets located internationally?
  4. Going forward can the Company state what portion of the acquisitions are funded by cash on hand, and what portion is funded by the proceeds from loans or the issuance of debt?
  5. How much of the consolidated assets are attributable to the noncontrolling interests and how much are directly owned by WOR?
  6. Considering that the equity income from Taxi Workhorse Holdings, LLC (“Workhorse”) has been negative for a number of years, is this to be impaired and/or disposed of?
  7. Every year the Company says their primary raw material is steel. What percentage of their primary raw materials does steel constitute and what percentage of their inventories are comprised of steel?
  8. Going forward can a full compressive breakdown of all ‘other’ assets (current and non-current) be provided in all 10-K and 10-Q Filings? In this instance specifically that would refer to the ‘prepaid expenses and other current assets’ and ‘other assets’ so can their full nature be thoroughly explained?
  9. Where are the depreciation and amortization accounted for in the income statement and going forward can they be clearly delineated?
  10. Can the property, plant and equipment be broken down into their constituents and can each component be provided with an exact estimated useful lifetime?
  11. Does Management not think the lower range on the estimated useful life of ‘buildings and improvements’ is rather low?
  12. Going forward can all 10-Q and 10-K Filings explain the provenance of the outstanding debt and how much of each debt type is outstanding as of the Filing’s date?
  13. Why did the Company remove the region in the 10-K Filings addressing the off-balance sheet arrangements?
  14. Why did the Company recently remove the table under ‘Contractual Cash Obligations and Other Commercial Commitments’ header which outlined their upcoming payment obligations?
  15. In every 10-K Filing for the last several years the Business has said they “are defendants in certain legal actions” [5, 7, 9, 11, 13, 15, 17, 19]. Can further details on these please be provided?
  16. The 2021 10-K filing said “the estimated net loss for the defined benefit plan that will be amortized from AOCI into net periodic pension cost during fiscal 2021 is $545,609” [7]. Was this referring to the wrong year?
  17. There were a couple of instances when the estimation for the defined benefit plan was referenced as a “net gain” as opposed to a “net loss” e.g., “the estimated net gain for the defined benefit plan that will be amortized from AOCI into net periodic pension cost over the fiscal year ending May 31, 2014 is $290,000” [23], and “the estimated net gain for the defined benefit plan that will be amortized from AOCI into net periodic pension cost over the fiscal year ending May 31, 2015 is $327,208” [21]. Was this intentional?
  18. Why have such a large number of shares been authorized? Can any reassurance be provided that this will not eventually dilute current and near-future Shareholder equity?
  19. The Company makes use of both the Black-Scholes and Monte Carlo models when determining share price fair-values. What are the factors determining when either model is used?
  20. Why is it that since 2014 the Annual Meeting of Shareholders have been virtual and the option of attending in person is never facilitated?
  21. The Company has said that “the Compensation Committee annually reviews certain market compensation information with the assistance of its independent compensation consultant, Willis Towers Watson, who is directly engaged by the Compensation Committee to prepare the information” [4, 6, 8, 10, 12, 14, 16]. The last two DEF 14A’s have then gone on to say that this compensation includes information regarding compensation paid to officers with similar responsibilities from a broad-based group of more than 700 companies. Does such a wide range of comparator companies offer as much utility as a smaller group of similar companies?
  22. From fiscal 2017 to fiscal 2020 the Company suffered repeated year-over-year decreases in net income, although in spite of this there were constant six-figure awards to NEOs etc. Was this fair on Shareholders?
  23. Given the shared employment history with several named parties say at ‘OhioHealth Corporation’, ‘Duke University’, ‘The Columbus Foundation’, ‘Ohio State University’; how would the Company respond to claims of nepotism?
  24. A lot of related party transactions are linked to John P. McConnell. Why is this constantly the case?
  25. In 2012 the Company took out a $5,880,000 seven-year term loan, the proceeds of which it used to purchase an aircraft. Why was this so important?
  26. Is there an upper age limit for which Directors can serve the Board before they have to leave or retire?
  27. It appears that since 2012 every DEF 14A Form (with the exception of 2022’s) has detailed delinquent Section 16(a) Reports. Can a handle be kept on this going forward so that accurate filings are made on time and equity numbers are not potentially misreported?
  28. Was any Director or EO a founder or co-founder of the Company, or a descendant/relative of such a person?
  29. Why are the DEF 14A Forms so incessantly long?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 61.68. Using our most recent three-year average of the diluted EPS (7.12) as opposed to the most recent EPS figure (7.15) increased the P/E ratio from 8.62 to 8.67; and using our discernible tangible equity value per share (8.20) as opposed to the stated book value per share (30.90, in accordance with Table 2 – 2) has increased the P/BV ratio from 2.00 to 7.53. With that in mind and considering current federal interest rates (4.5% at the time of writing), the current price does appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 7.12 for diluted EPS and our stated discernible tangible equity value per share of 8.20, and multiplying the corresponding P/E and P/BV ratios of 8.67 and 7.53 respectively, we get a figure of 65.24, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 36.22).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – still valid
  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – still valid
  • The Company’s previous earnings consistency and stability – valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing. We also believe this Security Issue demonstrates the possible flaws in only using numerical metrics and ratios when search for suitable investments, especially from 3rd party screeners.

Our Valuation: Dust

This Issue faired okay in our ‘Initial Discussions Regarding the Company’s Financials’ section but not particularly well overall in that regard. Regardless however, the qualitative factors were exceptionally unappealing with the constant business changes and company division mentioned in the latest 10-Q Filing being abhorrent. There is currently no pricing point at which we would assign this Issue a valuation of ‘Gold’ or higher.

At this point in time and all matters here considered, this is a stock pick we would most definitely neither follow nor add to a stock portfolio irrespective of the price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. WOR’s 2nd 2023 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/108516/000095017023000486/wor-20221130.htm
  4. WOR’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000156459022029449/wor-def14a_20220815.htm
  5. WOR’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000095017022013641/wor-20220531.htm
  6. WOR’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000156459021044538/wor-def14a_20210816.htm
  7. WOR’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000156459021039550/wor-10k_20210531.htm
  8. WOR’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000156459020039713/wor-def14a_20200812.htm
  9. WOR’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000156459020034955/wor-10k_20200531.htm
  10. WOR’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000156459019032050/wor-def14a_20190925.htm
  11. WOR’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000156459019027053/wor-10k_20190531.htm
  12. WOR’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000114036118036349/bp12150x2_def14a.htm
  13. WOR’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000156459018017896/wor-10k_20180531.htm
  14. WOR’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000162612917000486/wor-def14a_092717.htm
  15. WOR’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312517234020/d410625d10k.htm
  16. WOR’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000162612916000781/wor-def14a_092916.htm
  17. WOR’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312516666636/d174336d10k.htm
  18. WOR’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000119312515287641/d59485ddef14a.htm
  19. WOR’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312515271107/d943911d10k.htm
  20. WOR’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000119312514310059/d760408ddef14a.htm
  21. WOR’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312514287164/d745471d10k.htm
  22. WOR’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000119312513337399/d567096ddef14a.htm
  23. WOR’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312513310489/d548609d10k.htm
  24. WOR’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/108516/000119312512358349/d375026ddef14a.htm
  25. WOR’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/108516/000119312512322427/d353906d10k.htm
  26. https://www.stocksplithistory.com/?symbol=wor
  27. https://www.gurufocus.com/stock/WOR/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of May, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended May 2019. The Filings are usually published a few months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Filing/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2019 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the following or the same calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V