Worthington Industries, Inc. 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three months ended August 31, 2014, the first quarter of fiscal 2015, with comparisons to the three months ended August 31, 2013. Worthington is a diversified metals manufacturer operating primarily through Steel Processing, Pressure Cylinders and Engineered Cabs, with additional activities reported in Other. The company operated 35 manufacturing facilities and held interests in 12 joint ventures at quarter-end.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $862.4 million | $692.3 million | +$170.1 million |
| Gross margin | $129.5 million; 15.0% | $111.0 million; 16.0% | +$18.5 million; margin down 1.0 point |
| Operating income | $52.2 million; 6.1% | $38.6 million; 5.6% | +$13.6 million |
| Net earnings | $48.8 million; 5.7% | $56.4 million; 8.1% | -$7.6 million |
| Net earnings attributable to controlling interest | $44.2 million | $54.6 million | -$10.4 million |
| Diluted EPS | $0.63 | $0.76 | -$0.13 |
| Cash flow from operations | $54.5 million | $94.5 million | -$40.0 million |
Operating income improved despite a lower gross margin percentage. Net earnings and controlling-interest EPS declined primarily because the prior-year quarter included an $11.0 million non-cash gain related to the acquisition of an additional interest in TWB, a favorable prior-year tax adjustment, and higher current-period interest and tax expense.
- Steel Processing sales increased to $552.3 million from $402.4 million, and operating income increased to $35.9 million from $22.7 million. Volumes increased 26% overall and 16% excluding the effect of TWB consolidation.
- Pressure Cylinders sales increased to $249.0 million from $216.9 million, while operating income was broadly unchanged at $19.6 million versus $19.5 million. Units shipped declined slightly, but product mix and acquisitions increased sales.
- Engineered Cabs sales rose to $49.6 million from $48.5 million, but the operating loss widened to $2.1 million from $0.3 million because of higher conversion and startup costs.
- Equity income from unconsolidated affiliates increased to $27.9 million from $27.0 million. The company received $20.9 million of distributions from these affiliates.
- The estimated annual effective tax rate was 32.8%, compared with 28.9% in the prior-year quarter.
Cash flow, balance sheet, debt and liquidity
| Balance-sheet item | August 31, 2014 | May 31, 2014 |
|---|---|---|
| Cash and cash equivalents | $146.9 million | $190.1 million |
| Total assets | $2.355 billion | $2.296 billion |
| Total debt, including current maturities | $666.6 million | $666.3 million |
| Total liabilities | $1.396 billion | $1.351 billion |
| Total equity | $958.7 million | $944.9 million |
- Operating cash flow was $54.5 million. Investing cash flow was negative $69.0 million, including $36.6 million for acquisitions and $23.9 million of capital expenditures. Financing cash flow was negative $28.7 million, including $20.1 million of share repurchases and $10.1 million of dividends.
- Inventory increased to $467.6 million from $410.0 million, contributing significantly to the decline in operating cash flow.
- The $425.0 million revolving credit facility had no borrowings outstanding; $413.3 million remained available after letters of credit. The facility matures in May 2017.
- The $100.0 million receivables securitization facility expires in January 2015. No receivable interests had been sold under the facility at quarter-end.
- Short-term borrowings were $11.0 million, and long-term debt was $554.5 million. The company stated that it was in compliance with debt covenants.
- The Board declared a quarterly dividend of $0.18 per share, up from $0.15 in the prior-year quarter, and authorized an additional 10 million shares for repurchase. A total of 490,800 shares were repurchased for $20.1 million during the quarter.
Material changes versus the prior comparable period
- Sales growth was driven by higher volumes, acquisitions, the consolidation of TWB, stronger automotive demand and higher steel-related selling prices.
- Operating income benefited from volume growth and higher inventory holding gains, while SG&A increased by $3.7 million, primarily because of acquisitions.
- Interest expense increased by $3.3 million to $9.5 million because of higher average debt and greater use of long-term debt.
- Miscellaneous income fell by $10.6 million because the prior-year period included the $11.0 million TWB acquisition gain.
- Current-period income tax expense increased by $8.2 million, partly because the prior year included an approximately $7.2 million favorable TWB-related tax impact.
- Operating cash flow declined by $40.0 million, principally because of working-capital requirements, including a $51.2 million use of cash for inventories.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that the company performed well in the quarter, led by Steel Processing, and expects ongoing benefits from its Transformation efforts in Pressure Cylinders and Engineered Cabs. Management believes available cash, operating cash flow and unused credit facilities are adequate for normal operating needs, capital expenditures, debt redemptions, dividends and working capital.
- On August 1, 2014, the company acquired Midstream Equipment Fabrication for $35.2 million in cash. On July 31, 2014, it acquired James Russell Engineering Works for $1.6 million. Both acquisitions were added to Pressure Cylinders.
- Pressure Cylinders operating income included approximately $1.1 million of acquisition-related and purchase-accounting inventory costs and $0.9 million of out-of-stock penalties.
- Precision Specialty Metals was classified as held for sale, and the company recorded an additional $1.95 million impairment charge after reassessing fair value.
- A prior-year fire at the Austrian Pressure Cylinders facility continued to generate business interruption and property insurance recoveries. Total proceeds received since the fire were $10.1 million, including $0.9 million recorded as a reduction of manufacturing expense in the current quarter. The company expected the damaged massing process to be operational during the second quarter of fiscal 2015.
- Restructuring liabilities totaled $4.4 million at quarter-end, of which approximately $3.9 million was expected to be paid within twelve months.
- Material risks include cyclical demand, automotive and construction exposure, steel and other commodity price volatility, raw-material availability, customer and supplier financial difficulties, foreign exchange exposure, facility disruptions, litigation, environmental matters, execution of acquisitions and Transformation initiatives, and the planned sale of PSM.
- The company had an aircraft residual-value guarantee with a maximum obligation of approximately $12.7 million, a $2.9 million guarantee of an ArtiFlex term loan, and $13.7 million of standby letters of credit. Management considered the expected fair value of these obligations immaterial.
- On September 26, 2014, Worthington Aritas entered a $32.3 million five-year Euro-denominated term facility and initially borrowed $17.1 million.
Most important facts for investors to verify
- Whether Steel Processing volume and automotive-market strength can offset potentially lower steel prices or inventory holding gains.
- Whether Pressure Cylinders acquisitions and operational issues produce sustainable earnings improvements after one-time costs and penalties.
- The timing and proceeds of the PSM sale, including the possibility of additional impairment charges.
- Inventory levels, working-capital requirements and the resulting conversion of earnings into operating cash flow.
- Debt maturities, renewal of the receivables securitization facility, interest-rate exposure and available borrowing capacity.
- The sustainability of the $0.18 quarterly dividend and ongoing share repurchases relative to cash generation.
- Execution of the Austrian facility recovery and the company’s ability to maintain insurance coverage and recoveries.
- Potential effects of commodity prices, foreign currency movements, joint-venture performance and economic conditions on margins.