Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 29, 2020, compared with the corresponding periods ended February 28, 2019. Although the request identifies “2019 Q3,” the filing is for fiscal 2020 third quarter. The company operates primarily through Steel Processing and Pressure Cylinders, with significant joint-venture investments.
Financial Performance and Position
| Metric | Three Months Ended Feb. 29, 2020 | Three Months Ended Feb. 28, 2019 | Nine Months Ended Feb. 29, 2020 | Nine Months Ended Feb. 28, 2019 |
|---|---|---|---|---|
| Net sales | $764.0 million | $874.4 million | $2,447.5 million | $2,820.7 million |
| Gross margin | $115.5 million; 15.1% | $90.0 million; 10.3% | $353.4 million; 14.4% | $354.0 million; 12.6% |
| Operating income (loss) | $(1.4) million; (0.2%) | $26.0 million; 3.0% | $16.1 million; 0.7% | $112.8 million; 4.0% |
| Net earnings | $18.9 million | $29.5 million | $73.4 million | $124.3 million |
| Net earnings attributable to controlling interest | $15.3 million | $26.8 million | $62.6 million | $115.7 million |
| Diluted EPS | $0.27 | $0.46 | $1.11 | $1.95 |
| Operating cash flow | $87.3 million | $52.0 million | $255.9 million | $127.2 million |
- Balance sheet: February 29, 2020 cash and cash equivalents were $103.4 million, compared with $92.4 million at May 31, 2019. Total assets were $2.43 billion and total liabilities were $1.46 billion.
- Liquidity: The company had a $500 million revolving credit facility maturing in February 2023, with no borrowings outstanding and approximately $499.6 million available after letters of credit. Including other committed lines, management reported $509.6 million of available borrowing capacity as of April 9, 2020.
- Debt: Carrying value of long-term debt, including current maturities, was $698.8 million at February 29, 2020, versus $749.3 million at May 31, 2019. The company issued euro-denominated senior notes and redeemed $150 million of 6.50% notes due in 2020; the refinancing generated a $4.0 million loss on extinguishment.
- Capital allocation: Nine-month capital expenditures were $71.8 million, share repurchases were $50.9 million, and dividends paid were $40.2 million. The quarterly dividend increased to $0.24 per share from $0.23.
- Working capital: Inventories declined to $376.9 million from $484.3 million at May 31, 2019, contributing to improved operating cash flow. Accounts receivable declined to $472.7 million from $501.9 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined $110.4 million, primarily because of lower steel selling prices, the Engineered Cabs deconsolidation, and lower Pressure Cylinders volumes.
- Third-quarter gross margin increased $25.6 million, reflecting improved Steel Processing spreads and toll volume, as well as the absence of the prior-year $13.0 million tank replacement charge.
- Third-quarter operating results were reduced by $34.6 million of goodwill and long-lived-asset impairment and $1.4 million of restructuring expense. The prior-year period included an $11.2 million net restructuring gain.
- Steel Processing third-quarter operating income improved to $19.0 million from $10.2 million despite lower sales, supported by higher direct spreads, higher toll volume, and lower inventory holding losses.
- Pressure Cylinders reported a third-quarter operating loss of $19.9 million versus income of $19.0 million, principally due to $33.4 million of impairment charges and restructuring activity.
- Nine-month operating income fell $96.6 million. Major factors included $75.2 million of impairment charges, lower Steel Processing spreads and volumes, and the prior-year restructuring gain.
- Equity income from unconsolidated affiliates increased $25.7 million year to date, driven mainly by a $23.1 million gain from WAVE’s sale of international operations and stronger contributions from ClarkDietrich and ArtiFlex.
Transactions, Unusual Items, and Restructuring
- On November 1, 2019, the company contributed substantially all of Engineered Cabs to a new joint venture and retained a 20% interest. The transaction resulted in a $35.2 million first-quarter impairment charge and a $50,000 net deconsolidation gain. Former Engineered Cabs activity is now included in “Other.”
- On December 31, 2019, the company contributed Heidtman’s Cleveland operating assets to the Samuel joint venture and increased its ownership to 63%, resulting in consolidation of Samuel and a $6.1 million pretax remeasurement gain.
- The company fully impaired its Nisshin investment, recording a $4.2 million charge in equity income, and transferred its 10% interest to the other partners.
- The company announced consolidation of oil and gas equipment operations from Wooster, Ohio, into Bremen, Ohio. Third-quarter charges included $22.1 million of goodwill impairment, $4.7 million of fixed-asset impairment, and $580,000 of severance expense.
- WSP committed to close and sell its Canton, Michigan facility, resulting in a $1.3 million impairment charge and $310,000 of severance expense during the quarter. Additional restructuring charges were expected through fiscal year-end.
- The company retained a $5.0 million liability for its composite hydrogen-tank replacement program at February 29, 2020. Management believes the reserve is sufficient, but actual costs may differ.
Outlook, Management Commentary, and Risks
- Management stated that COVID-19 had negatively affected several served markets, particularly North American automotive, which halted production in mid-March 2020. Some facilities were operating as essential businesses, while others had reduced or suspended operations and shifts.
- The company furloughed employees and reduced variable costs in response to curtailed operations. Management expected to recall furloughed workers only if demand and operating conditions normalized.
- The duration and severity of COVID-19’s effects were considered too uncertain to estimate. Management expected negative effects on operating results, cash flows, and financial position and noted potential difficulty accessing capital markets.
- Key market exposures include automotive and construction demand, steel prices and spreads, raw-material availability and pricing, commodity costs, tariffs and trade restrictions, customer and supplier financial health, facility closures, and foreign-currency movements.
- Management believed existing cash, operating cash flow, and committed credit facilities were adequate for normal operating needs, mandatory capital expenditures, debt obligations, dividends, and working capital. This assessment was subject to evolving COVID-19 conditions.
- Legal proceedings were described as ordinary-course matters and were not expected to materially affect financial position, results, or cash flows. The company reported no material off-balance-sheet financing arrangements.
- Disclosure controls and procedures were assessed as effective as of February 29, 2020, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Assess the duration, operational impact, and financial consequences of COVID-19, including facility shutdowns, furloughs, automotive demand, and liquidity usage after February 29, 2020.
- Separate recurring operating performance from the $75.2 million of year-to-date impairment charges, restructuring activity, the WAVE gain, the Heidtman/Samuel remeasurement gain, and the take-or-pay contract benefit.
- Evaluate whether Steel Processing spreads, inventory holding losses, steel prices, and toll-processing volumes are sustainable.
- Monitor Pressure Cylinders demand, oil and gas exposure, facility consolidation costs, and the recoverability of remaining goodwill and long-lived assets.
- Verify the financial performance and cash distributions of unconsolidated affiliates, including WAVE, ClarkDietrich, ArtiFlex, and the newly formed Cabs joint venture.
- Review debt maturities, covenant compliance, revolver availability, the reduced accounts-receivable securitization capacity, and potential effects of market volatility on refinancing access.
- Confirm the adequacy of the tank replacement reserve, aircraft residual-value guarantee, letters of credit, and expected restructuring payments.