Worthington Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the third quarter and first nine months of fiscal 2018 ended February 28, 2018, with comparisons to the corresponding fiscal 2017 periods. The company operates primarily through Steel Processing, Pressure Cylinders, and Engineered Cabs, with smaller operations reported in Other. The filing identifies the registrant as Worthington Industries, Inc.; the request metadata references Worthington Enterprises, Inc. and “2017 Q3,” which does not match the filing.
Financial performance and position
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Net sales | $841.7 million | $703.4 million | $2,561.2 million | $2,168.8 million |
| Gross margin | $127.1 million; 15.1% | $111.0 million; 15.8% | $399.9 million; 15.6% | $381.1 million; 17.6% |
| Operating income | $42.8 million; 5.1% | $34.3 million; 4.9% | $137.0 million; 5.3% | $142.3 million; 6.6% |
| Net earnings attributable to controlling interest | $79.1 million | $35.9 million | $164.0 million | $148.0 million |
| Diluted EPS | $1.27 | $0.55 | $2.58 | $2.29 |
| Cash flow from operations | $99.9 million | $102.7 million | $202.7 million | $254.9 million |
- Q3 net sales increased 20%, driven by the Amtrol acquisition, higher Steel Processing selling prices, and higher Pressure Cylinders volume.
- Q3 operating income increased 25%, although the gross margin rate declined 70 basis points because costs increased faster than sales.
- Q3 net earnings benefited materially from a $24.0 million income tax benefit, including a provisional $41.1 million deferred-tax remeasurement benefit under the Tax Cuts and Jobs Act, partly offset by a $6.8 million deemed repatriation tax expense.
- For the nine-month period, operating income declined 4% despite 18% sales growth. Steel Processing operating income fell $11.2 million, primarily because prior-year steel inventory holding gains did not recur; equity income from unconsolidated affiliates fell $20.9 million.
- Cash and cash equivalents were $147.4 million at February 28, 2018, down from $278.1 million at May 31, 2017. Inventories increased to $431.4 million from $353.9 million.
- Total debt, including current maturities, was $781.9 million at February 28, 2018, compared with $578.5 million at May 31, 2017. Long-term debt reported on the balance sheet was $768.1 million.
- The $500 million revolving credit facility had no borrowings outstanding and approximately $486.8 million of availability after letters of credit. The receivables securitization facility had $50 million of capacity, with no interests sold at quarter-end.
- During the nine months, the company spent $285.0 million on acquisitions, $55.3 million on capital expenditures, $159.9 million on share repurchases, and $38.8 million on common dividends.
Material changes versus the prior comparable period
- Worthington acquired Amtrol on June 2, 2017 for $291.9 million. Amtrol contributed $65.8 million of Q3 sales and $191.0 million of nine-month sales, and increased Pressure Cylinders operating results.
- The company issued $200 million of 4.30% senior unsecured notes due August 1, 2032, increasing interest expense by $2.1 million in Q3 and $5.4 million year to date.
- Pressure Cylinders Q3 sales increased $97.1 million and operating income increased $7.5 million, primarily due to Amtrol and higher legacy volumes. Results were partly reduced by $1.6 million of obsolete inventory charges and a $1.2 million legal settlement in oil and gas equipment.
- Steel Processing Q3 operating income increased $5.1 million, helped by favorable inventory holding gains. For the nine-month period, its operating income declined because the prior year included approximately $27.6 million more favorable steel-price spread effects.
- Engineered Cabs remained unprofitable, with a Q3 operating loss of $4.1 million and a nine-month loss of $6.0 million.
- The company recognized $8.3 million of impairment charges during the first nine months, including $7.3 million for WEI goodwill and intangible assets and $1.0 million for vacant land.
- Restructuring and other income was $7.4 million for the nine months, primarily reflecting a $10.6 million gain on the sale of former PSM real estate, partly offset by $2.3 million of Amtrol-related severance.
- The company repurchased 3.375 million shares for $159.9 million during the first nine months, including 1.0 million shares for $47.4 million in Q3. There were 7.5 million shares remaining under repurchase authorizations at February 28, 2018.
Outlook, commentary, risks, and unusual items
- Management cited strong demand in agricultural and heavy-truck markets, higher steel prices, and continuing contributions from Amtrol. It stated that recent steel-price increases were likely to produce significant inventory holding gains in the following two fiscal quarters.
- Management estimated an ongoing effective income tax rate of approximately 24% beginning in fiscal 2019. The fiscal 2018 results remain subject to finalization of the provisional TCJA accounting.
- WAVE agreed to sell its international operations to Knauf. Worthington expects approximately $45 million for its 50% share, subject to regulatory approvals and customary closing conditions, with an anticipated closing in the second half of calendar 2018. The company expects WAVE cost allocations to decline 20% to 30% after closing.
- On March 31, 2018, the company sold a majority of its WEI ownership and retained a 10% interest; the filing states the impact was immaterial.
- Key risks include cyclical demand, steel and other raw-material price volatility, tariffs and potential trade wars, automotive and construction market weakness, integration of Amtrol, execution of restructuring and transformation initiatives, joint-venture performance, international and foreign-currency exposure, cybersecurity, litigation, and uncertainty in the final TCJA tax measurement.
- Pending litigation was not expected by management to have a material adverse effect. The company had an aircraft residual-value guarantee with a maximum obligation of approximately $8.6 million and $14.6 million of standby letters of credit, none of which had been drawn.
- No formal quantitative revenue or earnings guidance is provided in the filing. The company states that it expects adequate resources for normal operations, capital expenditures, debt redemptions, dividends, and working-capital needs.
Most important facts for investors to verify
- Separate recurring operating performance from the substantial provisional TCJA tax benefit and other discrete tax items.
- Assess whether Amtrol’s revenue and earnings contribution can offset higher debt, interest expense, amortization, and integration costs.
- Monitor Steel Processing margins and the sustainability of steel inventory holding gains as pricing and spreads change.
- Verify the timing, proceeds, and final accounting for the WAVE international-business sale and the WEI ownership transaction.
- Review liquidity after share repurchases, acquisition spending, higher inventories, and debt maturities, including covenant compliance and revolver availability.
- Evaluate continued losses in Engineered Cabs and impairment or restructuring risks in WEI and other underperforming operations.
- Confirm the final tax accounting for the TCJA and the company’s effective tax rate after the measurement period concludes.