Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the three months ended August 31, 2017, the first quarter of fiscal 2018. The company operates primarily through Steel Processing, Pressure Cylinders and Engineered Cabs, with additional activities reported in Other. The filing identifies the registrant as Worthington Industries, Inc., although the request metadata refers to Worthington Enterprises, Inc.
The quarter included the June 2, 2017 acquisition of Amtrol, a manufacturer of pressure cylinders and water-system tanks with U.S. and European operations.
Financial Performance and Key Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $848.2 million | $737.5 million | +$110.7 million, or approximately 15% |
| Gross margin | $132.8 million; 15.6% | $147.3 million; 20.0% | -$14.5 million; margin down 4.4 percentage points |
| Operating income | $42.2 million; 5.0% | $64.9 million; 8.8% | -$22.7 million |
| Net earnings | $48.1 million; 5.7% | $68.5 million; 9.3% | -$20.5 million |
| Net earnings attributable to controlling interest | $45.5 million | $65.6 million | -$20.1 million |
| Diluted EPS | $0.70 | $1.02 | Down $0.32 |
| Operating cash flow | $83.4 million | $120.9 million | -$37.5 million |
- Steel Processing sales rose to $543.5 million from $505.7 million, but operating income fell to $32.9 million from $54.8 million. Lower steel spreads and small inventory holding losses replaced the significant gains produced by rising steel prices in the prior-year quarter.
- Pressure Cylinders sales increased to $269.8 million from $205.2 million, principally from Amtrol and higher oil and gas equipment volumes. Operating income declined to $10.5 million from $14.1 million, reflecting acquisition-related costs, inventory fair-value adjustments, severance and weaker alternative-fuels activity.
- Engineered Cabs sales increased to $31.9 million from $25.6 million, and its operating loss improved to $0.4 million from $1.8 million.
- Equity income from unconsolidated affiliates declined to $27.3 million from $34.5 million, primarily because ClarkDietrich contributed $7.9 million less than in the prior-year quarter. The company received $19.6 million of distributions from unconsolidated affiliates.
- Estimated effective income tax rates were 30.5% in the current quarter and 31.2% in the prior-year quarter. Current-quarter discrete items reduced tax expense by $6.2 million, including a $3.8 million benefit related to Amtrol.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $195.9 million at August 31, 2017, compared with $278.1 million at May 31, 2017.
- Operating cash flow was $83.4 million. Investing cash outflow was $302.1 million, including $284.5 million for acquisitions and $18.0 million of capital expenditures.
- Financing cash inflow was $136.5 million, primarily from issuing $200.0 million of senior unsecured notes, partly offset by $45.1 million of share repurchases, $12.8 million of dividends and debt payments.
- Total long-term debt, including current maturities, had a carrying amount of $780.2 million at quarter-end, versus $578.5 million at May 31, 2017. Its estimated fair value was $835.4 million.
- The company issued 4.30% senior unsecured notes due August 1, 2032. No borrowings were outstanding under the $500.0 million revolving credit facility; $485.95 million remained available after letters of credit.
- No receivable interests had been sold under the $100.0 million revolving trade accounts receivable securitization facility, which matures in January 2018.
- Management stated that available cash, operating cash flow and unused credit lines were adequate for normal operating needs, mandatory capital expenditures, debt redemptions, dividends and working capital. The company was in compliance with its debt covenants at August 31, 2017.
Material Changes, Outlook and Risks
- Amtrol was acquired for a purchase price of $291.9 million, funded primarily with cash. Amtrol contributed $57.3 million of sales and an operating loss of $2.6 million during the period after acquisition. The purchase price allocation remained preliminary and included $166.0 million of identifiable intangible assets and $102.9 million of goodwill.
- Amtrol-related costs included $2.6 million of inventory fair-value step-up expense, $1.6 million of acquisition-related SG&A and $1.9 million of severance expense. Total acquisition-related expenses were $3.6 million, of which $1.6 million was incurred in the quarter.
- Restructuring and other expense was $2.3 million, primarily Amtrol severance and facility-exit costs related to the closure of the Precision Specialty Metals business. The remaining restructuring liability was expected to be paid within twelve months.
- The company repurchased 875,000 shares for $45.1 million during the quarter and declared a quarterly dividend of $0.21 per share. On September 27, 2017, the Board authorized additional repurchases, increasing available authorization to 10.0 million shares.
- Management did not provide specific earnings or revenue guidance in the filing. It noted that the business is cyclical, operating results are affected by steel and other commodity prices, and quarterly results are not necessarily indicative of the full fiscal year.
- Key risks include economic and end-market conditions, automotive and construction demand, steel and other raw-material pricing and availability, pricing spreads, imports, customer and supplier financial difficulties, facility closures, acquisition integration, foreign currency exposure, litigation, environmental matters, cyber risks and access to capital markets.
- The company had an aircraft lease residual-value guarantee with a maximum obligation of approximately $9.0 million; management considered payment not probable and recorded no liability. It also had $15.7 million of outstanding standby letters of credit, none of which had been drawn.
- Pending legal actions were described as ordinary-course matters not expected to have a material adverse effect. Management stated that its disclosure controls were effective as of August 31, 2017 and that no material changes occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether Amtrol achieves the expected operating benefits and offsets its acquisition-related costs, inventory step-up expense and severance charges.
- The sustainability of Steel Processing spreads and the sensitivity of earnings to stable or declining steel prices.
- Post-acquisition leverage, debt maturities, interest expense and remaining liquidity under the revolving credit facility.
- Whether reduced equity income, particularly from ClarkDietrich, persists and affects consolidated earnings and cash distributions.
- The status of the receivables securitization facility at its January 2018 maturity and the company’s future refinancing needs.
- The effect of share repurchases and the $0.21 quarterly dividend on cash resources and capital allocation.
- Final purchase-accounting adjustments for Amtrol, including goodwill, intangible assets, deferred taxes and contingent consideration.