This is a summary of the second quarter fiscal 2008 earnings call conducted by Worthington Industries, Inc. (WOR) on December 20, 2007.
Management:
Director and IR: Allison M. Sanders
Chairman of the Board, CEO: John P. McConnell
President, CFO, Director: John S. Christie
COO, Executive VP: George P. Stoe
Key Investor Issues
- Profit declined to $14.7 million, or 18 cents per share, from $26.9 million, or 31 cents per share a year ago.
- Results include a $3.6 million restructuring charge and a $2.7 million charge tied to plant closures in the metal framing segment, which hurt earnings by 3 cents per share.
- Revenue for the quarter slid 2% to $713.7 million from $729.3 million last year.
- The company is cutting costs and restructuring to offset weakness in metal framing.
The company reported earnings per share of 18 cents.
- Excluding 3 cents per share in plant closure related restructuring charges, most of which were non-cash, earnings per share were 21 cents compared to last year’s 31 cents.
- Second quarter sales of $714 million were down 2% from the $729 million during the same period last year. The sales decrease was due to lower average selling prices in all three business segments, which more than offset volume increases in each.
The gross profit margin fell from 11.5% to 9.8% as a result of narrower spreads between raw material costs and selling prices in the three business segments.
- SG&A expense increased $1 million due to higher depreciation expense associated with the company’s new ERP system.
- As a percentage of sales, SG&A expense was 7.7% during the current quarter compared to 7.3% in the year-ago period.
- Despite the ongoing impact of higher depreciation expense, SG&A expense is down $10 million on a year-to-date basis and is expected to fall further in coming quarters as the cost reduction initiatives are implemented.
As a result of the lower gross margin, quarterly operating income declined from $31 million a year ago to $15 million, excluding the impact of restructuring charges.
Operating income does not include $15 million in equity income from what are now nine unconsolidated joint ventures. While the majority of total equity income comes from the WAVE joint venture, which had record second quarter earnings, equity income was relatively flat as earnings from the new Mexican joint venture were offset by a decline in earnings at TWB and start-up expenses at two other newer joint ventures.
As a group, the joint ventures generated $177 million in sales during the three months corresponding with the second quarter and paid the company $15 million in dividends, favorably impacting cash flow.
Miscellaneous expense increased $2 million, due primarily to the minority interest Worthington pays to its partner for the consolidated joint venture, Spartan Steel Coating. Spartan’s results were much better this year compared to last year when the volumes were reduced while the company increased capacity at the galvanizing facility.
Income tax expense fell $8 million to reduced earnings and a greater mix of foreign earnings, which are taxed at lower rates.
The estimated effective tax rate for the balance of fiscal 2008 is 28%, excluding audit resolutions that occur in the normal course of events.
Total net debt was $338 million and our debt-to-capitalization ratio was 27.9% at quarter end.
- Net debt was down over $110 million from the year-ago period, largely due to reduced working capital needs.
- Debt rose $62 million from year-end, primarily as a result of the investments in three new joint ventures during the quarter.
Although the company did not repurchase stock during the quarter, it has repurchased 4.2 million shares year-to-date. Worthington has an authorization to repurchase up to an additional 11.3 million shares and view repurchases as an attractive use of cash flow.
Inventory levels are reasonable at 64 days and range from 61 days in steel processing to 67 days in metal framing and pressure cylinders.
Inventories are down approximately 15% on both a dollars and unit basis from last year. Capital spending excluding acquisitions was $10 million compared to depreciation of $16 million. Despite lower capital expenditures this quarter, the management expects that CapEx, as well as depreciation and amortization expense, will approximate $60 million for the year.
Quarterly results for each of the three business segments:
Process steel represents 48% of revenues this quarter. Steel processing’s quarterly sales fell 8% to $344 million from $375 million in last year’s second quarter. Although volumes were up 6%, the tolling mix went from 45% last year to 52% this year. Tolling sales do not include steel raw material costs and thus are inherently much less than direct sales. This significant change in mix negatively impacted top line sales and the spread between selling prices and material cost.
Operating income for steel processing fell to $10 million from $18 million last year and the operating margin from 4.7% to 3%.
