Worthington Industries, Inc. — Form 10-K Summary
Business context and reporting period
This filing covers the fiscal year ended May 31, 2018. The request references “2017 Q4,” but the provided filing is the fiscal 2018 Form 10-K, including quarterly data for the quarter ended May 31, 2018. Worthington is a diversified metals manufacturer operating primarily through Steel Processing, Pressure Cylinders and Engineered Cabs, with consolidated and unconsolidated joint ventures.
- Approximately 85 manufacturing facilities, including joint-venture facilities, across 25 states and 11 countries.
- Fiscal 2018 revenue mix: Steel Processing approximately 63%, Pressure Cylinders 34% and Engineered Cabs 3%.
- Automotive represented approximately 37% of consolidated net sales; international operations represented approximately 9% of sales.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $3,581.6 million | $3,014.1 million | +$567.5 million, approximately 19% |
| Gross margin | $562.9 million, 15.7% | $535.9 million, 17.8% | +$27.0 million; margin down 210 basis points |
| Operating income | $141.6 million, 4.0% | $213.1 million, 7.1% | -$71.5 million |
| Net earnings | $200.9 million, 5.6% | $217.9 million, 7.2% | -$17.0 million |
| Net earnings attributable to controlling interest | $194.8 million | $204.5 million | -$9.7 million |
| Diluted EPS | $3.09 | $3.15 | Down $0.06 |
| Cash flow from operations | $281.3 million | $335.7 million | -$54.4 million |
| Capital expenditures | $76.1 million | $68.4 million | +$7.7 million |
| Cash and cash equivalents | $122.0 million | $278.1 million | -$156.1 million |
| Total debt, net | $750.4 million | $578.6 million | +$171.8 million |
Fiscal 2018 tax expense was $8.2 million versus $79.2 million in fiscal 2017. The effective tax rate attributable to controlling interest was approximately 4.0%, compared with 27.9% in fiscal 2017, primarily due to the Tax Cuts and Jobs Act, including a $38.2 million deferred-tax remeasurement benefit and a $6.9 million deemed-repatriation tax expense.
- Working capital was $594.2 million at May 31, 2018, compared with $670.2 million at May 31, 2017.
- Total shareholders’ equity attributable to controlling interest was $918.8 million.
- The Company paid $51.4 million of dividends and repurchased 4.375 million shares for $204.3 million.
- Quarterly dividends increased from $0.20 per share in fiscal 2017 to $0.21 per share in fiscal 2018. A $0.23 per-share dividend was declared for the first quarter of fiscal 2019.
Segment performance and material changes
| Segment | Fiscal 2018 sales | Fiscal 2018 operating income/(loss) | Key change versus fiscal 2017 |
|---|---|---|---|
| Steel Processing | $2,252.8 million | $152.7 million | Sales increased $178.0 million, but operating income declined $17.8 million due to lower direct spreads, lower tolling volume and unfavorable mix. |
| Pressure Cylinders | $1,206.2 million | $23.4 million | Sales increased $376.4 million, including $265.2 million from AMTROL; operating income declined $30.7 million after $53.9 million of impairment charges. |
| Engineered Cabs | $116.6 million | $(11.3) million | Sales increased $15.2 million, but the operating loss widened by $3.6 million because of higher labor and conversion costs and unfavorable margins. |
- AMTROL was acquired on June 2, 2017 for approximately $291.9 million and contributed $265.2 million of fiscal 2018 sales and $18.9 million of operating income.
- The Company issued $200 million of 4.30% senior unsecured notes due August 1, 2032, contributing to higher interest expense.
- Packaging Solutions was moved from Steel Processing to Engineered Cabs effective June 1, 2017.
- Worthington sold a controlling interest in Worthington Energy Innovations and retained a 10% passive interest.
- The Company acquired the remaining 25% of Worthington Aritas and committed to sell the business. It also planned to sell certain underperforming oil and gas equipment assets.
- WAVE agreed to sell its European and Asian operations to Knauf. Worthington expected approximately $45 million of proceeds for its 50% share, subject to approvals and closing conditions.
Liquidity, debt and cash flow
Operating cash flow remained positive but declined because of higher working capital requirements associated with higher steel prices and lower distributions from unconsolidated affiliates. Fiscal 2018 investing cash outflows were $337.4 million, primarily reflecting the AMTROL acquisition and capital expenditures. Financing cash outflows were $100.1 million, driven by share repurchases, dividends and debt repayments.
- The Company maintained a $500 million revolving credit facility maturing in February 2023; no borrowings were outstanding at May 31, 2018.
- Approximately $486.8 million remained available under the revolving credit facility after letters of credit.
- The accounts receivable securitization facility was reduced from $100 million to $50 million and extended to January 2019; no receivable interests were sold at year-end.
- Contractual cash obligations totaled approximately $1.07 billion, including $754.7 million of long-term debt, $263.8 million of associated interest, $43.4 million of operating leases and $10.0 million of royalty obligations.
- Management stated that available cash, operating cash flow and committed credit facilities were adequate for normal operating needs, capital expenditures, debt repayments, dividends and existing-business working capital.
Outlook, commentary, risks and unusual items
- Management expected continued inventory holding gains in the first quarter of fiscal 2019 because of the rapid rise in steel prices at the end of fiscal 2018.
- Management estimated an ongoing effective income tax rate of approximately 24% beginning in fiscal 2019, although the filing cautions that the final impact of the Tax Cuts and Jobs Act remained subject to further analysis and guidance.
- Fiscal 2018 included $61.2 million of impairment charges, including $42.4 million for Worthington Aritas, $10.5 million for oil and gas equipment assets and $7.3 million related to Worthington Energy Innovations.
- Restructuring and other income was $7.4 million, primarily reflecting a $10.6 million gain on the sale of former Precision Specialty Metals real estate, partly offset by AMTROL severance costs.
- Steel prices, tariffs and trade restrictions, raw-material availability, freight and energy costs may materially affect margins and working capital.
- Demand is cyclical and concentrated in automotive, construction, industrial, oil and gas, retail and heavy mobile equipment markets. North American auto production declined approximately 7% in fiscal 2018.
- Joint ventures are important to results: equity income from unconsolidated affiliates was $103.1 million, including $77.5 million from WAVE. WAVE and other affiliates may be affected by steel prices, cost-sharing arrangements and the planned international divestiture.
- Other risks include customer financial distress, supplier disruption, material substitution, foreign operations and currency, cyber and information-security events, environmental and product-liability claims, self-insurance exposure, impairment risk and changes in tax or environmental regulation.
- The filing reports no unresolved SEC staff comments and states that pending legal proceedings are not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting, although AMTROL was excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether AMTROL’s integration and expected synergies offset acquisition-related amortization, financing costs and operating risks.
- The sustainability of Steel Processing margins after fiscal 2018 spread compression and the effect of subsequent steel-price movements.
- The timing, proceeds and accounting consequences of the planned sales of Worthington Aritas, oil and gas assets and WAVE’s international operations.
- The Company’s ability to refinance or repay the approximately $151.1 million of debt maturing in fiscal 2020 and maintain access to its credit facilities.
- Whether the approximately 24% expected ongoing tax rate is achieved and whether additional TCJA measurement-period adjustments arise.
- The effect of automotive production, tariffs, trade restrictions and raw-material pricing on demand, pricing power, margins and working capital.
- Future impairment exposure in Pressure Cylinders, Engineered Cabs, oil and gas assets, goodwill and acquired intangible assets.
- Actual cash generation after dividends, share repurchases, capital expenditures and potential acquisitions.