Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended February 29, 2016, representing fiscal 2016 third quarter and year-to-date results. The request metadata states “2015 Q3,” but the filing reports fiscal 2016 Q3. Financial statements are unaudited and presented under U.S. GAAP.
Business context
Worthington operated 32 manufacturing facilities worldwide in Steel Processing, Pressure Cylinders, Engineered Cabs and Other businesses, and held interests in 12 joint ventures. The company reported continued weakness in oil and gas equipment and agricultural markets, lower steel prices, and improved performance in Steel Processing and certain Industrial Products businesses.
Key financial metrics
| Metric | Three months ended Feb. 29, 2016 | Three months ended Feb. 28, 2015 | Nine months ended Feb. 29, 2016 | Nine months ended Feb. 28, 2015 |
|---|---|---|---|---|
| Net sales | $647.1 million | $804.8 million | $2,105.0 million | $2,538.2 million |
| Gross margin | $95.9 million; 14.8% | $98.5 million; 12.2% | $318.1 million; 15.1% | $353.2 million; 13.9% |
| Operating income | $25.1 million; 3.9% | $(52.1) million; (6.5%) | $68.0 million; 3.2% | $33.3 million; 1.3% |
| Net earnings attributable to controlling interest | $29.6 million | $(25.7) million | $84.2 million | $47.9 million |
| Diluted EPS | $0.46 | $(0.39) | $1.30 | $0.69 |
| Net cash from operating activities | $105.8 million | $82.9 million | $294.2 million | $139.7 million |
Balance sheet and liquidity at February 29, 2016: Cash and cash equivalents were $25.4 million; current assets were $847.7 million versus current liabilities of $427.6 million. Long-term debt was $579.5 million, current maturities were $0.9 million, and short-term borrowings were $30.8 million. Total debt, including short-term borrowings and current maturities, was approximately $611.1 million. Shareholders’ equity was $719.8 million and total equity was $813.8 million.
The company had a $500.0 million revolving credit facility maturing in April 2020, with $22.7 million outstanding and $477.3 million available. A $100.0 million receivables securitization facility was also available; $5.0 million had been sold as of February 29, 2016. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Third-quarter sales declined 19.6%, primarily because of lower steel prices and lower volumes in Pressure Cylinders and Engineered Cabs. Nine-month sales declined 17.1%.
- Third-quarter operating income improved by $77.2 million because the prior-year period included $81.6 million of Engineered Cabs impairment charges. Nine-month operating income increased $34.7 million.
- Gross margin percentage improved to 14.8% from 12.2% in the quarter, despite lower absolute gross margin. Management cited improved pricing spreads and lower manufacturing costs.
- Steel Processing quarterly operating income increased to $21.3 million from $16.4 million, helped by inventory management, pricing spreads and hedge results. Nine-month operating income declined to $71.6 million because of lower volume and inventory holding losses.
- Pressure Cylinders quarterly operating income declined to $9.0 million from $18.6 million. Oil and Gas Equipment sales fell 71% year over year in the quarter, and the business recorded a $23.0 million long-lived asset impairment for the nine-month period.
- Engineered Cabs quarterly operating loss narrowed to $4.1 million from $85.8 million, primarily because the prior-year period included major impairment charges. The Florence, South Carolina facility ceased production on September 30, 2015.
- Equity income from unconsolidated affiliates increased 31% in the quarter to $25.0 million and 17% year to date to $80.8 million, driven primarily by WAVE, Serviacero and ClarkDietrich.
- Cash from operations more than doubled year to date, largely because lower steel prices reduced receivables and inventory requirements. Financing cash outflows increased because of share repurchases, debt repayments and dividends.
Investing, capital allocation and unusual items
- Capital expenditures were $75.5 million year to date. Acquisitions totaled $34.2 million, including Taylor Wharton CryoScience for approximately $30.3 million and NetBraze for approximately $3.4 million.
- The company repurchased 3.5 million common shares for $99.8 million during the first nine months, including 1.0 million shares for $28.4 million during the quarter. Approximately 4.0 million shares remained authorized for repurchase at February 29, 2016.
- Dividends paid were $35.5 million year to date. The board declared a quarterly dividend of $0.19 per share payable June 29, 2016.
- Restructuring and other expense was $5.3 million year to date, partly offset by gains on asset and business disposals. Activities included the closure of Precision Specialty Metals, workforce reductions, the Florence facility closure and the sale of Worthington Nitin Cylinders.
- As of March 1, 2016, Worthington obtained effective control of the WSP joint venture with U.S. Steel and began consolidating it in the fourth quarter. The transaction was expected to produce a one-time, non-cash fair-value gain, with U.S. Steel’s 49% interest recorded as noncontrolling interest.
Outlook, management commentary and risks
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that it expected to have adequate resources for normal operating needs, mandatory capital expenditures, debt redemptions, dividends and working capital, while noting that capital-market volatility could affect access to financing and its terms.
- Key risks include continued low oil prices and reduced Oil and Gas Equipment demand, steel-price volatility, inventory holding losses, cyclical end markets and economic weakness.
- Other material risks include raw-material availability and pricing, customer and supplier financial difficulties, facility closures and consolidation, execution of cost reductions and transformation initiatives, acquisitions and joint ventures, foreign currency exposure, litigation, environmental matters and regulatory changes.
- The company used derivatives to manage commodity, interest-rate and foreign-exchange exposure. Derivative liabilities had a fair value of $15.5 million at February 29, 2016, and $9.4 million of net losses in accumulated other comprehensive income were expected to be reclassified into earnings within the succeeding 12 months.
- The company disclosed an aircraft residual-value guarantee with a maximum obligation of approximately $10.8 million and a guarantee of an ArtiFlex term loan with $0.4 million outstanding; estimated fair values of the obligations were not material.
- Pending legal actions were not expected by management to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether low oil prices and weak Oil and Gas Equipment demand lead to additional impairments or restructuring costs.
- Whether Steel Processing can sustain improved pricing spreads and control inventory holding losses during continued steel-price volatility.
- The fourth-quarter accounting impact, including the one-time fair-value gain and ongoing earnings contribution, from consolidating WSP.
- Cash generation after share repurchases, dividends, acquisitions and capital expenditures, as well as the company’s remaining borrowing capacity.
- The sustainability of equity income from unconsolidated affiliates, which represented a significant portion of reported earnings.
- The effect of the Florence, Precision Specialty Metals and Construction Services exits on future revenue, costs and cash requirements.
- Potential changes in fair-value estimates for impaired assets, derivatives and contingent consideration.