WORTHINGTON ENTERPRISES, INC. annual report, FY2019

Worthington Industries, Inc. — Fiscal 2019 Form 10-K

Reporting period: The provided filing is an annual report for the fiscal year ended May 31, 2019, filed July 30, 2019. The request metadata references “2018 Q4,” but the filing is a fiscal 2019 10-K; the comparable annual period is fiscal 2018. Worthington is a diversified metals manufacturer with three reportable segments: Steel Processing, Pressure Cylinders and Engineered Cabs.

Business Context

Operations included 31 wholly owned manufacturing facilities and nine joint ventures operating 46 additional facilities across 22 states and 11 countries.
Fiscal 2019 consolidated sales were concentrated in Steel Processing, which represented approximately 65% of sales; Pressure Cylinders represented 32%; and Engineered Cabs approximately 3%.
Automotive-related sales represented approximately 38% of consolidated sales. International operations contributed approximately 5% of sales and 6% of net earnings attributable to controlling interest.

Financial Performance and Key Metrics

Metric	Fiscal 2019	Fiscal 2018	Change
Net sales	$3,759.6 million	$3,581.6 million	+$178.0 million, 5.0%
Gross margin	$480.0 million; 12.8%	$562.9 million; 15.7%	-$82.9 million; down 290 basis points
Operating income	$144.8 million; 3.9%	$141.6 million; 4.0%	+$3.2 million, 2.2%
Net earnings attributable to controlling interest	$153.5 million	$194.8 million	-$41.3 million, 21.2%
Diluted EPS	$2.61	$3.09	-$0.48
Cash flow from operations	$197.9 million	$281.3 million	-$83.4 million
Capital expenditures	$84.5 million	$76.1 million	+$8.4 million
Total debt, net	$749.3 million	$750.4 million	-$1.1 million
Cash and cash equivalents	$92.4 million	$122.0 million	-$29.6 million

Fiscal 2019 net earnings included $97.0 million of equity income from unconsolidated affiliates, down from $103.1 million. The company declared $53.4 million of dividends, or $0.92 per common share, and repurchased 4.1 million shares for $168.1 million.

Segment Results

Steel Processing: Sales increased to $2,435.8 million from $2,252.8 million, but operating income declined to $89.8 million from $152.7 million. Tons shipped decreased to 3.715 million from 3.820 million. Margin pressure reflected lower direct spreads, lower volume, inventory holding losses and lower scrap prices relative to steel costs.
Pressure Cylinders: Sales were broadly flat at $1,207.8 million versus $1,206.2 million, while operating income increased to $69.9 million from $23.4 million. The improvement primarily reflected lower impairment charges and an $11.0 million net restructuring gain, partly offset by lower volumes, higher material costs and a $13.0 million tank replacement charge.
Engineered Cabs: Sales declined slightly to $115.9 million from $116.6 million. The operating loss widened to $14.7 million from $11.3 million due to lower volume and start-up costs for a fabricated products operation.

Material Changes Versus Prior Period

Steel prices rose sharply early in fiscal 2019 and then declined. The average hot-rolled steel price increased to $783 per ton from $687, but declining prices produced a $4.4 million inventory holding loss versus a $17.8 million gain in fiscal 2018.
Gross margin fell materially despite higher sales because steel tariffs and price volatility increased short-term margin pressure, while conversion costs and unfavorable scrap spreads increased.
SG&A declined to $338.4 million, or 9.0% of sales, from $367.5 million, or 10.3%, primarily due to lower profit-sharing and bonus costs, lower legal costs and divestitures.
Impairment charges declined to $7.8 million from $61.2 million. Fiscal 2019 charges included $2.4 million for Worthington Aritas, $2.2 million for the Salt Lake City CNG facility and $3.2 million for WSP assets.
The effective tax rate attributable to controlling interest increased to 22.0% from 4.0%. Fiscal 2018 benefited from Tax Cuts and Jobs Act deferred-tax remeasurement and other one-time tax items.
On June 1, 2018, the company adopted ASC Topic 606 using the modified retrospective method. The adoption increased retained earnings by $1.2 million and changed the timing of revenue recognition for toll processing and certain oil and gas contracts.
Worthington acquired Magna Industries for $13.5 million in May 2019 and sold its solder and brazing assets for proceeds of approximately $27.6 million, producing an $11.3 million pretax gain.

Cash Flow, Debt and Liquidity

Operating cash flow was $197.9 million, reduced by higher working capital needs associated with higher steel prices and lower earnings.
Cash provided by investing activities was $11.5 million, including $49.7 million of asset-sale proceeds and $56.7 million of excess distributions from WAVE, partly offset by $84.5 million of capital expenditures and $10.4 million for acquisitions.
The company maintained a $500.0 million revolving credit facility maturing in February 2023. No borrowings were outstanding at May 31, 2019, and approximately $498.0 million remained available after letters of credit.
The $50.0 million accounts receivable securitization facility matured in January 2020; no interests in the receivables pool had been sold at year-end.
Debt maturities included $150.9 million due in fiscal 2020, with approximately $600.0 million due thereafter. Management reported compliance with applicable debt covenants.
Contractual cash obligations totaled $1.034 billion, including $753.1 million of long-term debt, $235.8 million of related interest, $33.4 million of operating leases and $12.0 million of royalty obligations.

Outlook, Unusual Items and Risks

Management expected declining steel prices to continue producing inventory holding losses in the first and second quarters of fiscal 2020. It also reported that Pressure Cylinders margins had begun improving after selling-price increases and cost-mitigation actions.
The company recorded a $13.0 million charge for a voluntary replacement program covering certain composite hydrogen fuel tanks sold primarily to one customer. The remaining liability was $8.5 million at May 31, 2019, with completion expected within approximately six months; actual costs could differ from the estimate.
WAVE received proceeds related to the pending sale of its international operations. Worthington received $35.0 million in fiscal 2019 and expected total proceeds of approximately $45.0 million, subject to closing adjustments and regulatory approvals. Closing was anticipated by the end of calendar 2019.
Worthington Aritas was classified as held for sale and subsequently sold on July 24, 2019 for approximately $8.3 million net of transaction costs.
The oil and gas equipment reporting unit had $22.0 million of goodwill and only an approximately 13% estimated fair-value cushion at year-end. Management stated that a 100-basis-point increase in the discount rate or decrease in the long-term growth rate could result in impairment under the forecast model.
Principal risks include cyclical automotive, construction and oil and gas demand; steel, zinc, helium, energy and freight price volatility; tariffs and trade restrictions; customer and supplier financial difficulties; competition and material substitution; joint venture performance; product liability and recall exposure; cybersecurity; foreign operations; environmental obligations; and access to capital markets.
The company was largely self-insured for product recall, cyber, pollution, workers’ compensation and other liabilities. It also had $15.8 million of standby letters of credit and a $7.4 million aircraft residual-value guarantee, for which no liability was recognized because payment was not considered probable.

Most Important Facts for Investors to Verify

Whether steel prices, inventory holding losses and scrap spreads improve or further compress consolidated and Steel Processing margins.
The remaining cash cost and final outcome of the $13.0 million hydrogen-tank replacement program.
The closing, final proceeds and ongoing earnings impact of the WAVE international-operations sale.
Fiscal 2020 maturity and refinancing plans for the $150.9 million of debt due in fiscal 2020.
Whether the oil and gas equipment reporting unit experiences further weakness that triggers goodwill impairment.
Progress toward restoring profitability in Engineered Cabs and stabilizing Pressure Cylinders volumes.
The sustainability of cash distributions from unconsolidated affiliates, particularly WAVE, and their contribution to liquidity.
The effect of tariffs, trade restrictions, automotive production and broader economic conditions on customer demand and pricing.