Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the three months ended August 31, 2018, the first quarter of fiscal 2019. The Company operated through Steel Processing, Pressure Cylinders and Engineered Cabs, and held interests in nine joint ventures, including consolidated and equity-method affiliates.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $988.1 million | $848.2 million | +$139.9 million, 16% |
| Gross margin | $143.0 million; 14.5% | $132.8 million; 15.6% | +$10.3 million; margin down 110 bps |
| Operating income | $50.9 million; 5.2% | $42.2 million; 5.0% | +$8.7 million, 21% |
| Net earnings | $57.0 million | $48.1 million | +$8.9 million, 18% |
| Net earnings attributable to controlling interest | $54.9 million | $45.5 million | +$9.4 million, 21% |
| Diluted EPS | $0.91 | $0.70 | +$0.21, 30% |
| Cash flow from operations | $30.4 million | $83.4 million | Down $52.9 million |
- Equity income from unconsolidated affiliates was $30.0 million, up $2.7 million, primarily due to higher ClarkDietrich earnings. Affiliates distributed $20.0 million to the Company during the quarter.
- Cash and cash equivalents were $96.8 million at August 31, 2018, down from $122.0 million at May 31, 2018.
- Total debt, including current maturities, was approximately $750.1 million. Long-term debt was $748.7 million, and current maturities were $1.3 million.
- The Company had no borrowings under its $500 million revolving credit facility and reported $487.2 million of remaining availability after letters of credit. Its $50 million receivables securitization facility had no interests sold at quarter-end and matured in January 2019.
- Capital expenditures were $19.4 million, dividends paid were $12.7 million, and share repurchases totaled $36.9 million for 800,000 shares. The quarterly dividend increased to $0.23 per share from $0.21.
Material Changes Versus the Prior Comparable Period
- Steel Processing sales increased $117.0 million and operating income increased $6.8 million, supported by higher selling prices, modestly higher tons shipped and favorable pricing spreads. Rising steel prices and tariffs contributed to inventory holding gains.
- Pressure Cylinders sales increased $30.6 million and operating income increased $4.2 million, driven by higher volume, pricing and product mix. Results benefited from the absence of prior-year AMTROL acquisition costs, but included a $2.4 million impairment charge.
- Engineered Cabs sales declined $4.6 million and the operating loss widened to $4.3 million from $0.4 million, primarily because of lower volume, the exit of lower-margin business and start-up costs for a new fabricated-products operation.
- SG&A increased $2.4 million because of higher wages, profit-sharing and bonus expense, although SG&A declined to 9.2% of sales from 10.4%.
- Interest expense increased $0.9 million, primarily due to the $200 million senior unsecured notes issued in July 2017.
- Operating cash flow declined mainly because of working-capital investment, including a $43.3 million increase in inventories. The prior-year period also included a $284.5 million AMTROL acquisition outflow.
- The Company adopted ASC Topic 606 on June 1, 2018 using the modified retrospective method. The first-quarter adoption effect reduced reported net earnings by $0.3 million versus the prior revenue-recognition method and changed the timing of recognition for toll processing and oil and gas equipment revenue.
Outlook, Commentary, Risks and Unusual Items
- Management stated that it had adequate resources for normal operations, capital expenditures, debt obligations, dividends and working-capital needs through cash, operating cash flow and available credit. No quantitative earnings or revenue guidance was provided.
- The Company recorded a $2.4 million impairment charge related to Worthington Aritas, its cryogenics business in Turkey, after reducing estimated fair value less costs to sell to $7.0 million.
- Restructuring and other income was $0.9 million, including a $2.0 million net gain from selling two oil and gas manufacturing facilities, partly offset by Portugal consolidation costs.
- WAVE’s international operations were being sold to Knauf. Worthington’s expected share of proceeds was approximately $90 million; a $70 million receivable recorded at WAVE at quarter-end was received and distributed in September 2018.
- The Company’s estimated annual effective tax rate was 23.2%, compared with 30.5% in the prior-year quarter, reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act and other discrete items.
- Key risks include steel and other raw-material pricing and availability, tariffs and potential trade restrictions or trade wars, cyclical demand, automotive and construction exposure, customer and supplier financial difficulty, foreign currency movements, execution of restructuring and transformation initiatives, litigation, cybersecurity and the successful sale of assets.
- Pending legal proceedings were not expected by management to have a material adverse effect. The Company also had an aircraft residual-value guarantee of approximately $8.1 million and $13.9 million of standby letters of credit; no amounts had been drawn.
Important Facts for Investors to Verify
- Whether steel-price increases, tariff effects and inventory holding gains are sustainable or create subsequent margin pressure.
- Inventory growth, working-capital requirements and the reduced conversion of earnings into operating cash flow.
- Execution and valuation of the Worthington Aritas sale, the completed oil and gas facility divestitures and the WAVE international transaction.
- Pressure Cylinders and Engineered Cabs operating trends, including the impact of restructuring, business exits and start-up costs.
- Debt maturities, interest expense, credit-facility availability and renewal or refinancing of the receivables securitization facility.
- Effects of tariffs, trade-policy changes and exposure to automotive, construction, oil and gas and other cyclical end markets.
- Future accounting effects of ASC 606 and pending lease and hedge-accounting standards.