Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2019, compared with the corresponding periods ended February 28, 2018. The filing was signed April 9, 2019. Worthington operates through Steel Processing, Pressure Cylinders and Engineered Cabs and holds interests in nine joint ventures.
Financial Performance and Position
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Net sales | $874.4 million | $841.7 million | $2,820.7 million | $2,561.2 million |
| Gross margin | $90.0 million; 10.3% | $127.1 million; 15.1% | $354.0 million; 12.6% | $399.9 million; 15.6% |
| Operating income | $26.0 million; 3.0% | $42.8 million; 5.1% | $112.8 million; 4.0% | $137.0 million; 5.3% |
| Net earnings attributable to controlling interest | $26.8 million | $79.1 million | $115.7 million | $164.0 million |
| Diluted EPS | $0.46 | $1.27 | $1.95 | $2.58 |
| Operating cash flow | $52.0 million | $99.9 million | $127.2 million | $202.7 million |
- Cash and cash equivalents were $113.1 million at February 28, 2019, versus $122.0 million at May 31, 2018.
- Total debt, including current maturities, was approximately $749.5 million; long-term debt was $748.3 million and current maturities were $1.2 million.
- The $500 million revolving credit facility matures in February 2023. No borrowings were outstanding, and approximately $498.1 million remained available after letters of credit.
- The $50 million receivables securitization facility was extended to January 2020; no receivables interests had been sold at quarter-end.
- Inventories increased to $486.1 million from $454.0 million at May 31, 2018, while receivables declined to $512.7 million from $572.7 million.
- Nine-month capital expenditures were $60.6 million. The Company received $48.3 million from asset sales and $56.7 million of excess distributions from WAVE.
Material Changes Versus Prior Comparable Period
- Q3 sales increased 4%, but gross margin declined $37.0 million and operating income declined $16.7 million, primarily because of steel inventory holding losses, lower direct spreads and the $13.0 million hydrogen-tank replacement charge.
- Nine-month sales rose $259.5 million, largely from higher Steel Processing selling prices, while gross margin fell $45.9 million because costs and tariffs outpaced pricing benefits.
- Steel Processing Q3 operating income fell $20.9 million to $10.2 million despite $37.8 million of additional sales. Tons shipped declined to 840,000 from 890,000.
- Pressure Cylinders Q3 sales declined $4.8 million, but operating income increased $1.4 million to $19.0 million, helped by an $11.2 million restructuring gain; results were reduced by the tank replacement charge and higher input costs.
- Engineered Cabs remained loss-making, with a Q3 operating loss of $3.8 million and a nine-month loss of $11.5 million.
- Equity income from unconsolidated affiliates increased to $20.8 million in Q3 and $71.9 million for nine months, aided by WAVE and ClarkDietrich.
- Income taxes shifted from a $24.0 million benefit in Q3 FY2018 to $8.4 million of expense in Q3 FY2019, reflecting the prior-year Tax Cuts and Jobs Act benefit. The estimated fiscal 2019 effective tax rate was 23.3%.
- The Company repurchased 800,000 shares for $28.6 million in Q3 and 3.1 million shares for $129.0 million during the first nine months.
Outlook, Commentary, Risks and Unusual Items
- Management stated that steel tariffs and fluctuating steel prices created short-term margin pressure. Falling steel prices caused inventory holding losses, lower direct spreads and customer order delays; management indicated margins were beginning to improve through price increases and cost mitigation.
- In February 2019, the Company recorded a $13.0 million cost-of-goods-sold charge for replacing certain composite hydrogen fuel tanks sold primarily from 2012 through 2015. The replacement program was expected to take approximately six months; $11.0 million remained accrued at February 28, 2019.
- The Company recorded $11.7 million of net restructuring and other income for the first nine months, primarily from sales of the solder business, brazing assets and oil and gas facilities.
- Worthington expects to receive approximately $45 million from the pending sale of WAVE’s international operations, subject to closing adjustments. Closing was expected by June 30, 2019. The transaction remained subject to regulatory approvals and other customary conditions.
- WAVE distributions exceeded Worthington’s investment balance, resulting in a $124.2 million liability at February 28, 2019. The Company continued to recognize its share of WAVE earnings.
- The Company stated that it had adequate resources for normal operations, capital expenditures, debt redemptions, dividends and working capital, while noting that cyclical activity, raw-material prices and financial-market volatility could affect liquidity.
- Key risks include economic and industry cyclicality, steel and other commodity prices, tariffs and potential trade restrictions, customer and supplier financial distress, demand and pricing changes, facility actions, international operations, litigation, environmental matters, cybersecurity and information security.
- The Company expects adoption of the new lease standard to materially increase balance-sheet assets and liabilities, but does not expect a material earnings impact. It did not expect the pending credit-loss and hedge-accounting standards to materially affect ongoing reporting.
- Management stated that pending legal proceedings and environmental matters were not expected to materially affect financial position, results or cash flows.
Most Important Facts to Verify
- Whether steel prices, tariffs, scrap spreads and inventory holding losses continue to pressure Steel Processing margins.
- The final cost and completion status of the hydrogen-tank replacement program relative to the $13.0 million estimate.
- Timing, proceeds and closing adjustments for the WAVE international-operations sale.
- Whether the $124.2 million negative WAVE investment balance creates future earnings or cash-flow exposure.
- Execution and profitability of Engineered Cabs and the Pressure Cylinders cost-mitigation initiatives.
- Capacity for continued share repurchases and quarterly dividends given lower operating cash flow and approximately $749.5 million of debt.
- The balance-sheet impact of the forthcoming lease-accounting adoption and the Company’s fiscal 2019 effective tax rate.