Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended November 30, 2019, representing the second quarter of fiscal 2020. The company operates primarily through Steel Processing and Pressure Cylinders, with investments in consolidated and unconsolidated joint ventures. At November 30, 2019, it operated 28 manufacturing facilities and held interests in 10 joint ventures.
During the quarter, Worthington contributed substantially all of its Engineered Cabs assets to a new joint venture and retained a 20% interest. The former Engineered Cabs segment was thereafter reported within Other.
Financial Performance and Key Metrics
| Metric | Three Months Ended November 30 | Six Months Ended November 30 |
|---|---|---|
| Net sales | $827.6 million, versus $958.2 million | $1,683.5 million, versus $1,946.3 million |
| Gross margin | $120.6 million; 14.6% of sales | $237.9 million; 14.1% of sales |
| Operating income | $32.1 million; 3.9% of sales | $17.5 million; 1.0% of sales |
| Net earnings | $56.9 million | $54.5 million |
| Net earnings attributable to controlling interest | $52.1 million; diluted EPS $0.93 | $47.3 million; diluted EPS $0.84 |
| Net cash from operating activities | $104.2 million | $168.5 million |
- Quarterly SG&A was $88.5 million, or 10.7% of sales, compared with $84.7 million, or 8.8%, in the prior-year quarter.
- Equity income from unconsolidated affiliates was $47.3 million for the quarter and $72.1 million year to date, including a $23.1 million pre-tax gain from WAVE’s sale of its international operations.
- Cash and cash equivalents were $72.3 million at November 30, 2019, compared with $92.4 million at May 31, 2019.
- Total debt, including current maturities, was $698.8 million on a carrying-value basis. Long-term debt was $698.5 million and current maturities were $0.3 million.
- The company had no borrowings under its $500 million revolving credit facility; approximately $499.6 million remained available after letters of credit.
- Working capital declined as inventories fell to $379.8 million from $484.3 million and receivables fell to $477.2 million from $501.9 million.
- Capital expenditures were $50.6 million year to date, and $29.6 million was paid for the Heidtman acquisition.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined $130.6 million, or approximately 14%, primarily because of lower steel selling prices and lower direct volume in Steel Processing.
- Steel Processing quarterly sales declined $118.1 million and operating income declined $7.9 million to $17.2 million. Declining steel prices caused a $7.3 million swing from inventory holding gains to inventory holding losses.
- Pressure Cylinders sales declined $4.3 million, but operating income increased $0.9 million to $15.7 million. Higher consumer-product and oil-and-gas volumes offset weaker industrial-product demand.
- Year-to-date operating income declined $69.3 million, primarily because of a $40.6 million impairment charge related to Engineered Cabs and weaker Steel Processing results.
- Year-to-date controlling-interest earnings declined $41.6 million, despite higher quarterly earnings, because of the impairment charge, a $4.0 million debt-extinguishment loss, and other unusual items.
- Interest expense declined $2.2 million in the quarter and $2.4 million year to date due to lower average debt and refinancing at lower rates.
- Operating cash flow increased $93.4 million year to date, principally because declining steel prices and lower volumes reduced working-capital requirements.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management describes the business as cyclical and expects cash flows and working-capital needs to fluctuate with economic activity, steel prices and volumes. Management stated that available cash, operating cash flow and unused credit capacity should be adequate for normal operating needs, mandatory capital expenditures, debt redemptions, dividends and working capital.
- Steel Processing remains sensitive to automotive production, steel prices, direct spreads, inventory valuation and customer volumes. North American vehicle production declined 7% year over year, while Detroit Three production declined 14% in the quarter.
- Pressure Cylinders benefited year to date from an $11.5 million pre-tax benefit related to the early termination of a customer take-or-pay contract, which accelerated recognition of $14.2 million of future sales. This benefit is not necessarily recurring.
- Engineered Cabs impairment charges totaled $40.6 million, including a $35.2 million write-down of assets contributed to the new joint venture and $5.4 million of impairment related to retained assets.
- Worthington issued euro-denominated senior notes and used the proceeds to redeem $150.0 million of 6.50% notes due in 2020, generating a $4.0 million loss on extinguishment of debt.
- The company is evaluating options for its $50 million accounts-receivable securitization facility, which was scheduled to mature in January 2020. No receivable interests were sold under the facility at November 30, 2019.
- The company fully impaired its 10% Nisshin joint-venture investment by $4.2 million during the first quarter and finalized the transfer of related risks and rewards in December 2019.
- Management concluded that the $54.6 million ArtiFlex investment was not impaired, but warned that deteriorating markets or strategic alternatives could reduce projected cash flows and require a future impairment.
- The voluntary tank replacement program had an $8.3 million remaining liability at November 30, 2019; expected payments were within nine months, but actual costs could vary.
- Key risks include economic and automotive downturns, steel and commodity-price volatility, tariffs and trade restrictions, customer or supplier financial distress, facility disruptions, litigation, product liability, cybersecurity and foreign-exchange exposure.
- On December 31, 2019, Worthington contributed the Heidtman assets to the Samuel joint venture and increased its ownership to 63%, resulting in consolidation of Samuel. Purchase accounting was not complete as of the filing date.
Investor Verification Priorities
- Verify the sustainability of earnings excluding the WAVE gain, the take-or-pay contract benefit and other unusual items.
- Monitor Steel Processing direct spreads, inventory holding gains or losses, steel prices, automotive volumes and the impact of the Heidtman acquisition.
- Assess liquidity after dividends, share repurchases, capital expenditures, acquisitions and debt maturities, including the status of the accounts-receivable facility.
- Review the recoverability of the ArtiFlex investment and the performance of the retained Cabs-related assets.
- Confirm the accounting and operating impact of the Samuel transaction completed after quarter-end.
- Track the tank replacement liability, litigation and other product-liability contingencies for changes in estimated exposure.