Worthington Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the first quarter of fiscal 2020, the three months ended August 31, 2019, compared with the three months ended August 31, 2018. Worthington operated through Steel Processing, Pressure Cylinders and Engineered Cabs, with 29 manufacturing facilities and interests in nine joint ventures worldwide.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $855.9 million | $988.1 million | Down $132.2 million |
| Gross margin | $117.3 million; 13.7% | $143.0 million; 14.5% | Down $25.7 million |
| Operating income (loss) | $(14.6) million; (1.7%) | $50.9 million; 5.2% | Down $65.5 million |
| Net earnings (loss) | $(2.5) million | $57.0 million | Down $59.5 million |
| Net earnings (loss) attributable to controlling interest | $(4.8) million | $54.9 million | Down $59.7 million |
| Diluted earnings (loss) per share | $(0.09) | $0.91 | Down $1.00 |
| Cash flow from operations | $64.4 million | $30.4 million | Up $33.9 million |
Operating results were pressured by declining steel prices, compressed Steel Processing spreads, lower direct shipments and softer automotive, agriculture and international markets. Steel Processing sales fell 20.8% and operating income fell to $6.2 million from $39.7 million. Pressure Cylinders sales increased to $304.4 million and operating income increased to $29.6 million, aided by a $12.8 million benefit from the early termination of a customer take-or-pay contract. Engineered Cabs recorded a $45.1 million operating loss, including $40.6 million of impairment charges.
Cash and cash equivalents were $45.6 million at August 31, 2019, compared with $92.4 million at May 31, 2019. Current assets were $1.03 billion and current liabilities were $482.7 million. Total debt, including current maturities, was $699.2 million, compared with $749.3 million at May 31, 2019. The Company had no borrowings under its $500 million revolving credit facility, with $498.1 million available after letters of credit. Its $50 million receivables securitization facility had no receivables sold at quarter-end and matures in January 2020.
Investing cash outflows were $13.0 million, including $22.2 million of capital expenditures and $9.2 million of asset-sale proceeds. Financing cash outflows were $98.2 million, including $154.0 million for debt redemption, $29.6 million for share repurchases and $13.0 million of dividends.
Material Changes Versus the Prior Comparable Period
- Sales decreased primarily because of lower Steel Processing volumes and selling prices.
- Steel Processing experienced an $8.4 million inventory holding loss versus a $14.0 million holding gain in the prior-year quarter.
- Gross margin declined 80 basis points to 13.7%, while SG&A increased slightly to $90.8 million and rose to 10.6% of sales from 9.2%.
- The Company recorded $40.6 million of long-lived asset impairment charges, primarily related to plans to sell substantially all of Engineered Cabs, excluding specified facilities.
- Equity income from unconsolidated affiliates declined to $24.8 million from $30.0 million, including a $4.2 million impairment of the Company’s Nisshin investment.
- The Company issued euro-denominated senior notes totaling €91.7 million at rates of 1.56% and 1.90%, and used the proceeds to redeem $150.0 million of 6.50% senior notes due in 2020. The refinancing generated a $4.0 million loss on debt extinguishment.
- The Company repurchased 750,000 shares for $29.6 million and declared a quarterly dividend of $0.24 per share, compared with $0.23 per share in the prior-year quarter.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that operating results are not necessarily indicative of full-year fiscal 2020 results and that it believes liquidity is adequate for normal operations, capital expenditures, debt obligations, dividends and working capital.
- Management identified continuing risks from steel-price volatility, tariffs, trade restrictions, compressed spreads, raw-material availability and changing customer demand.
- The Company reported emerging softness in automotive, agriculture and international markets. One customer represented 11% of consolidated sales in the quarter.
- Engineered Cabs assets classified as held for sale were recorded at estimated fair value less costs to sell of $12.9 million, producing a $35.2 million impairment. Additional fabricated-products assets were written off, contributing to the total $40.6 million charge.
- A tank replacement liability related to composite hydrogen fuel tanks was $8.4 million at quarter-end; remaining direct costs were expected to be paid within six months, although actual costs may vary.
- The Company had an aircraft residual-value guarantee with a maximum obligation of approximately $7.2 million and $12.8 million of outstanding standby letters of credit; no letter of credit had been drawn.
- WAVE sold its international operations on September 30, 2019. A pretax gain of approximately $45 million to $50 million was expected, with half attributable to Worthington, subject to post-closing adjustments.
- On October 7, 2019, the Steel Processing segment acquired Cleveland, Ohio operating assets of Heidtman Steel Products for approximately $30 million, subject to closing adjustments.
- The Company adopted the new lease standard on June 1, 2019, recognizing operating lease assets and liabilities; management stated that the adoption did not materially affect earnings or cash flow.
Important Facts for Investors to Verify
- Whether the Engineered Cabs sale and related impairment charges lead to additional write-downs, restructuring costs or proceeds below estimates.
- Whether Steel Processing margins recover as steel prices, inventories, volumes and tariffs change.
- The sustainability of Pressure Cylinders’ earnings after the one-time $12.8 million take-or-pay contract benefit.
- The timing and final amount of the WAVE transaction gain and the effect on future equity income and distributions.
- Debt maturities, refinancing needs and the January 2020 expiration of the receivables securitization facility.
- Remaining costs under the hydrogen-tank replacement program and any developments in legal, environmental or product-liability matters.
- Execution and purchase accounting for the Heidtman asset acquisition.