Worthington Industries, Inc. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: Quarterly and six-month periods ended November 30, 2017, compared with the corresponding periods ended November 30, 2016. The filing was signed January 9, 2018. The filing identifies the registrant as Worthington Industries, Inc.
Business Context and Reporting Period
Worthington operated through Steel Processing, Pressure Cylinders, Engineered Cabs and the “Other” category, which included Worthington Energy Innovations and unallocated corporate items. The company also held interests in 11 joint ventures, including consolidated and equity-method affiliates.
- Second-quarter sales growth reflected the June 2, 2017 acquisition of Amtrol, higher Pressure Cylinders volumes and higher Steel Processing selling prices.
- Results were affected by lower Steel Processing toll volumes, reduced equity income from unconsolidated affiliates and weaker automotive production.
- North American vehicle production declined 9% year over year in the quarter, while average hot-rolled steel prices increased to $608 per ton from $544.
Financial Performance and Liquidity
| Metric | Three months ended November 30 | Six months ended November 30 |
|---|---|---|
| Net sales | $871.3 million vs. $727.8 million | $1,719.5 million vs. $1,465.3 million |
| Gross margin | $140.1 million; 16.1% vs. 16.9% | $272.9 million; 15.9% vs. 18.4% |
| Operating income | $52.1 million; 6.0% vs. 5.9% | $94.3 million; 5.5% vs. 7.4% |
| Net earnings attributable to controlling interest | $39.4 million vs. $46.6 million | $84.9 million vs. $112.1 million |
| Diluted EPS | $0.62 vs. $0.72 | $1.33 vs. $1.74 |
| Cash flow from operating activities | $19.4 million vs. $31.3 million | $102.7 million vs. $152.2 million |
- Six-month net sales increased 17%; however, gross margin declined 250 basis points and diluted EPS declined 24%.
- Cash and cash equivalents were $122.2 million at November 30, 2017, down from $278.1 million at May 31, 2017.
- Six-month investing cash outflow was $310.0 million, including $285.0 million for the Amtrol acquisition and $41.7 million of capital expenditures.
- Six-month financing cash flow was $51.4 million, including $200.0 million of senior-note proceeds, partially offset by $112.5 million of share repurchases and $26.0 million of dividends.
- Total debt, including current maturities, was $779.9 million at November 30, 2017, compared with $578.5 million at May 31, 2017. Long-term debt was $766.7 million, and current maturities were $13.2 million.
- The company had no borrowings under its $500.0 million revolving credit facility; $485.5 million remained available after letters of credit. Its $100.0 million receivables securitization facility had no interests sold at quarter-end and was being renewed before its January 2018 expiration.
- The company reported compliance with its debt covenants and stated that available cash, operating cash flow and unused credit capacity were adequate for current needs.
Material Changes Versus Prior Comparable Period
- Amtrol acquisition: Purchased for $291.9 million, funded primarily with cash. Amtrol contributed $67.9 million of second-quarter sales and $6.4 million of operating income; six-month contributions were $125.3 million of sales and $3.8 million of operating income.
- Pressure Cylinders: Second-quarter sales increased $106.2 million and operating income increased $13.3 million, primarily from Amtrol and higher legacy volumes. Six-month operating income increased $9.7 million.
- Steel Processing: Second-quarter operating income increased $5.6 million, helped by a $10.6 million gain on the sale of former stainless-steel-business real estate. Six-month operating income declined $16.2 million because spreads were approximately $28.7 million lower than the prior year, when rising steel prices generated significant inventory holding gains.
- Joint ventures: Equity income declined $10.7 million in the quarter and $17.9 million year to date. The principal contributors were lower results at WAVE, ClarkDietrich and ArtiFlex.
- Share repurchases and dividends: The company repurchased 2.375 million shares for $112.5 million during the first six months, including 1.5 million shares for $67.4 million in the second quarter. The quarterly dividend increased to $0.21 per share from $0.20.
Guidance, Outlook, Risks and Unusual Items
- Tax outlook: Following enactment of the Tax Cuts and Jobs Act on December 22, 2017, management estimated an ongoing effective tax rate of approximately 24% beginning in fiscal 2019. It expected a non-cash deferred-tax benefit of approximately $30 million to $40 million in the third quarter of fiscal 2018. The one-time tax on previously deferred foreign earnings was expected to be immaterial.
- WAVE sale: WAVE agreed to sell its Europe, Middle East, Africa and Asia operations to Knauf. Worthington expected approximately $45 million of proceeds for its 50% share. Closing was subject to regulatory and customary conditions and was anticipated in mid-2018. Management expected WAVE allocated costs to decline 40% to 50% after closing.
- Impairments: The company recorded an $8.3 million second-quarter impairment charge, including $7.3 million for WEI goodwill and intangible assets and $1.0 million for vacant land at the Bremen, Ohio oil and gas equipment facility.
- Restructuring and asset-sale items: Six-month restructuring and other income was $7.4 million, primarily reflecting the $10.6 million real-estate sale gain, partly offset by $2.3 million of Amtrol-related severance.
- Contingencies: Ordinary-course legal proceedings were not expected to have a material adverse effect. The company had an aircraft residual-value guarantee with a maximum obligation of approximately $8.8 million and $15.9 million of standby letters of credit; no amounts had been drawn.
- Key operating risks: Management highlighted cyclicality, steel and other raw-material prices, customer demand, automotive and construction conditions, oil and gas activity, joint-venture performance, acquisition integration, foreign exchange, facility disruptions, litigation, regulation, taxes and cybersecurity.
- The filing did not provide formal earnings or revenue guidance beyond the tax-rate and WAVE transaction expectations described above.
Important Facts for Investors to Verify
- Whether Amtrol integration, synergies and operating performance offset higher debt, amortization, SG&A and acquisition-related costs.
- Whether Steel Processing spreads recover and whether lower automotive production and toll volumes persist.
- The timing, regulatory approval and proceeds from the planned WAVE international-business sale.
- The final deferred-tax remeasurement benefit and the longer-term effective tax rate following the Tax Cuts and Jobs Act.
- The renewal and availability terms of the $100 million receivables securitization facility.
- The sustainability of cash generation after acquisitions, capital expenditures, dividends and share repurchases.
- The impact of the $8.3 million impairment and whether further WEI or other asset impairments may be required.