Worthington Industries, Inc. — Fiscal 2019 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2018, compared with the corresponding periods ended November 30, 2017. The company operates primarily through Steel Processing, Pressure Cylinders and Engineered Cabs, with interests in nine joint ventures.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $958.2 million | $871.3 million | $1,946.3 million | $1,719.5 million |
| Gross margin | $120.9 million | $140.1 million | $263.9 million | $272.9 million |
| Gross margin percentage | 12.6% | 16.1% | 13.6% | 15.9% |
| Operating income | $35.9 million | $52.1 million | $86.8 million | $94.3 million |
| Net earnings | $37.8 million | $41.6 million | $94.8 million | $89.7 million |
| Net earnings attributable to controlling interest | $34.0 million | $39.4 million | $88.9 million | $84.9 million |
| Diluted EPS | $0.57 | $0.62 | $1.48 | $1.33 |
| Operating cash flow | $44.7 million | $19.4 million | $75.1 million | $102.7 million |
Balance sheet and liquidity at November 30, 2018: Cash and cash equivalents were $93.0 million, total assets were $2.56 billion, and total equity was $986.3 million. Long-term debt, including current maturities, was $749.8 million. The company had no borrowings under its $500 million revolving credit facility, with approximately $499.6 million available after letters of credit. No receivables had been sold under the $50 million accounts receivable securitization facility.
Cash uses and capital allocation: Six-month capital expenditures were $41.2 million, dividends paid were $26.3 million, and share repurchases totaled $100.4 million for 2.3 million shares. The quarterly dividend was increased to $0.23 per share from $0.21 in the prior-year quarter. Management stated that available cash, operating cash flow and credit facilities were adequate for normal operating needs, capital expenditures, debt obligations and dividends.
Material changes versus the prior comparable period
- Q2 sales increased 10%, primarily from higher average direct selling prices in Steel Processing. Six-month sales increased 13%, supported by higher prices and direct volume in Steel Processing.
- Q2 operating income declined 31% and the operating margin fell to 3.7% from 6.0%. Lower direct spreads in Steel Processing and unfavorable product mix, higher conversion costs and lower volumes in Pressure Cylinders reduced profitability.
- Steel Processing Q2 sales rose $96.6 million, but operating income declined $16.1 million to $25.0 million. Ongoing steel tariffs contributed to higher conversion costs and lower scrap prices relative to steel prices, pressuring spreads.
- Pressure Cylinders Q2 sales declined $6.5 million and operating income declined $9.8 million. Consumer-product volumes fell following hurricane-related demand in the prior year; unfavorable mix, conversion costs and lower volumes reduced margins.
- Engineered Cabs reported a $3.4 million Q2 operating loss versus a $1.5 million loss in the prior year, reflecting lower volume and start-up costs.
- Equity income from unconsolidated affiliates increased $4.7 million in Q2 and $7.3 million year to date, primarily due to higher WAVE contributions and, year to date, higher ClarkDietrich contributions.
- Lower income taxes partly offset operating pressure. The estimated annual effective tax rate was 23.4%, compared with 30.0% in the prior-year period, reflecting the Tax Cuts and Jobs Act and related tax-rate changes.
- Operating cash flow decreased year to date because of working-capital changes, although Q2 operating cash flow increased to $44.7 million from $19.4 million.
Outlook, unusual items and risks
- Management did not provide a specific quantitative earnings or sales guidance range in the filing. It stated that results are affected by cyclical economic conditions, raw-material prices, demand and working-capital requirements.
- During the six months, the company received $110.5 million of distributions from unconsolidated affiliates, including $60.0 million of one-time special WAVE distributions. WAVE distributions exceeded the company’s investment balance, resulting in a $122.8 million liability at November 30, 2018.
- The company expects approximately $45 million of total proceeds from the pending sale of WAVE’s international operations; regulatory approvals and other customary closing conditions remained relevant.
- A $2.4 million impairment charge was recorded in Q1 FY2019 for the planned sale of Worthington Aritas, the cryogenics business in Turkey. The company was exploring strategic alternatives for the broader cryoscience business; its carrying amount was approximately $34 million, and management noted that future changes in estimated cash flows could result in another impairment.
- The company adopted the new revenue-recognition standard, Topic 606, on June 1, 2018. The filing indicates that the adoption reduced reported six-month controlling-interest earnings by approximately $0.6 million versus amounts under the previous guidance.
- The company expected the new lease standard to materially increase reported right-of-use assets and lease liabilities, although the ultimate effect had not yet been determined.
- Key risks include steel and other commodity-price volatility, tariffs and potential trade restrictions, economic and automotive cycles, customer and supplier financial difficulties, foreign-currency exposure, facility disruptions, litigation, environmental matters, cybersecurity and the possibility of further impairment charges.
- Legal proceedings were described as ordinary-course matters not expected to materially affect financial position, results or cash flows. The company had $13.1 million of standby letters of credit outstanding and an aircraft residual-value guarantee of approximately $7.9 million; no amounts were drawn or accrued for the guarantee.
- On December 31, 2018, after quarter-end, the company sold solder-business assets and real property for approximately $26.5 million and expected to recognize a net gain. A related brazing-asset sale was expected to close February 1, 2019.
Important facts for investors to verify
- Whether steel tariffs, scrap prices and conversion costs continue to compress Steel Processing spreads.
- The sustainability of earnings and cash distributions from WAVE and other unconsolidated affiliates, including the significance of the negative WAVE investment balance.
- Progress and final proceeds from the WAVE international-operations sale and the post-quarter-end solder and brazing asset transactions.
- Whether the cryoscience business requires additional impairment charges or strategic restructuring.
- The renewal and terms of the $50 million accounts receivable securitization facility, which matured in January 2019.
- The effect of the new lease standard on reported assets, liabilities, leverage and covenants.
- Future operating performance of Pressure Cylinders and Engineered Cabs, where volume, product mix and start-up costs weakened margins.