Worthington Industries, Inc. — Q1 Fiscal 2017 Form 10-Q Summary
Reporting period: Three months ended August 31, 2016, compared with the three months ended August 31, 2015. The filing presents unaudited U.S. GAAP interim results. Worthington operated 29 manufacturing facilities and held equity interests in 12 active joint ventures as of August 31, 2016.
Business Context and Financial Performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $737.5 million | $758.1 million | Down $20.6 million |
| Gross margin | $147.3 million; 20.0% | $113.0 million; 14.9% | Up $34.3 million; margin up 510 basis points |
| Operating income | $64.9 million; 8.8% of sales | $31.0 million; 4.1% | Up $33.9 million |
| Net earnings | $68.5 million | $35.0 million | Up $33.5 million |
| Net earnings attributable to controlling interest | $65.6 million | $32.0 million | Up $33.6 million |
| Diluted EPS | $1.02 | $0.48 | Up $0.54 |
| Net cash from operating activities | $120.9 million | $138.6 million | Down $17.7 million |
Results benefited from higher steel prices, improved Steel Processing pricing spreads and strong automotive and construction demand. Lower volume, particularly in Pressure Cylinders and Engineered Cabs, reduced sales. Equity income from unconsolidated affiliates increased $7.9 million to $34.5 million, primarily because of improved results at ClarkDietrich, ArtiFlex and Serviacero.
Segment Results
- Steel Processing: Sales increased to $505.7 million from $490.8 million. Operating income rose to $54.8 million from $23.6 million, driven primarily by favorable pricing spreads and inventory holding gains. Tons shipped increased to 1.032 million from 866,000, partly reflecting consolidation of WSP.
- Pressure Cylinders: Sales declined to $205.2 million from $224.4 million and operating income declined to $14.1 million from $16.8 million. Weak oil and gas equipment and industrial demand continued to weigh on results.
- Engineered Cabs: Sales declined to $25.6 million from $38.6 million. The operating loss improved to $1.8 million from $9.3 million because of lower impairment and restructuring charges, improved gross margin and lower SG&A.
- Other: Operating loss increased to $2.1 million from $0.2 million, primarily due to a $1.5 million increase in accrued legal expense. The former Construction Services segment ceased operations.
Cash Flow, Balance Sheet, Debt and Liquidity
| Balance-sheet metric | August 31, 2016 | May 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $181.5 million | $84.2 million |
| Total assets | $2.182 billion | $2.061 billion |
| Total liabilities | $1.201 billion | $1.141 billion |
| Total equity | $981.1 million | $919.8 million |
| Long-term debt, including current maturities | $578.3 million carrying value | $578.4 million |
- Capital expenditures were $16.3 million, compared with $38.5 million in the prior-year quarter.
- Net cash used in financing was $7.4 million, including $11.9 million of dividends; the prior-year period included $27.6 million of share repurchases and substantially higher short-term debt repayments.
- The $500 million revolving credit facility matures in April 2020 and had no borrowings outstanding at quarter-end. The $100 million receivables securitization facility expires in January 2018 and had no receivables sold at quarter-end.
- Letters of credit totaled $15.4 million, with no amounts drawn. Management stated that liquidity was adequate for normal operations, capital expenditures, debt maturities, dividends and working capital needs.
- Inventories increased to $369.7 million from $319.3 million, while receivables declined to $416.5 million from $439.7 million. Higher inventory levels contributed to the year-over-year decline in operating cash flow.
Material Changes and Unusual Items
- WSP was consolidated effective March 1, 2016 after Worthington obtained effective control, affecting Steel Processing results and comparisons.
- No long-lived asset impairment was recorded in Q1 FY2017, compared with a $3.0 million Engineered Cabs impairment charge in Q1 FY2016.
- Restructuring and other expense declined to $1.3 million from $3.1 million. Current-period costs primarily related to the closures of Precision Specialty Metals and the Florence, South Carolina Engineered Cabs facility.
- SG&A increased $5.2 million, reflecting acquisitions, higher profit-sharing and bonus expense, and a $1.5 million increase in accrued legal expense.
- The Board declared a quarterly dividend of $0.20 per share, up from $0.19 per share in the comparable prior-year quarter. On September 28, 2016, it declared another $0.20 per share dividend payable December 29, 2016.
- The company adopted revised consolidation and debt issuance cost presentation guidance. The debt issuance cost change reclassified approximately $2.4 million from other assets as a reduction of long-term debt and did not materially affect results.
Outlook, Risks and Contingencies
Management highlighted favorable steel pricing, automotive production and construction demand, but noted continuing weakness in oil and gas equipment markets. The company is reducing costs in affected Pressure Cylinders operations and expects business conditions and cash flows to remain cyclical.
- Key risks include steel and other raw-material price volatility, product demand and pricing, automotive and construction cycles, oil and gas weakness, imports, customer and supplier financial distress, inventory levels, facility closures, acquisitions and joint ventures, foreign currency exposure, litigation, environmental matters, cyber security and regulatory changes.
- Management expects the restructuring liability of approximately $2.3 million at August 31, 2016 to be paid within the next twelve months.
- The company guaranteed an aircraft lease residual value of approximately $10.2 million; management considered payment unlikely and recorded no liability.
- Various legal actions are pending, but management does not expect them to materially affect financial position, results of operations or cash flows. A $1.5 million increase in accrued legal expense affected the quarter.
- Debt covenants were satisfied at quarter-end, and the filing states that the company had no material changes in its previously disclosed risk factors.
- No specific quantitative earnings or revenue guidance was provided in the filing. Management stated that current-quarter results are not necessarily indicative of the full fiscal year.
Investor Verification Checklist
- Verify whether the substantial Q1 margin improvement, particularly the Steel Processing pricing spread and inventory holding gains, is sustainable as steel prices change.
- Track Pressure Cylinders demand, especially oil and gas equipment and industrial products, and the effectiveness of related cost reductions.
- Assess the cash conversion impact of higher inventories and working-capital requirements.
- Review WSP consolidation effects and the performance and distribution policies of unconsolidated affiliates, including the $66.2 million distributions in excess of the WAVE investment balance.
- Monitor restructuring and facility-closure costs, including Precision Specialty Metals and Florence, South Carolina.
- Confirm continued compliance with debt covenants, availability under revolving facilities and the maturity of the receivables securitization facility.
- Evaluate exposure to litigation, the aircraft residual-value guarantee, commodity derivatives and the estimated $9.0 million of cash-flow-hedge losses expected to be reclassified into earnings within twelve months.