Worthington Industries, Inc. — Q1 Fiscal 2014 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended August 31, 2013, compared with the three months ended August 31, 2012. 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 equity interests in 12 joint ventures as of August 31, 2013. Financial statements are unaudited and prepared under U.S. GAAP.
During the quarter, Worthington acquired an additional 10% of TWB Company, L.L.C., increasing ownership to 55% and resulting in consolidation of TWB beginning August 1, 2013.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $692.3 million | $666.0 million | +3.9% |
| Gross margin | $111.0 million; 16.0% | $93.7 million; 14.1% | +$17.4 million; +190 bps |
| Operating income | $38.6 million; 5.6% | $33.4 million; 5.0% | +$5.2 million; +60 bps |
| Net earnings | $56.4 million | $34.9 million | +61.6% |
| Net earnings attributable to controlling interest | $54.6 million | $34.0 million | +60.7% |
| Diluted EPS | $0.76 | $0.49 | +$0.27 |
| Equity income from unconsolidated affiliates | $27.0 million | $22.6 million | +19% |
| Cash flow from operations | $94.5 million | $71.0 million | +$23.5 million |
| Capital expenditures | $13.4 million | $16.7 million | -$3.4 million |
Pressure Cylinders benefited from acquisitions and a more favorable product mix. Steel Processing benefited from higher volumes, including TWB, and lower inventory holding losses. Engineered Cabs experienced materially lower demand from key customers.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $121.0 million at August 31, 2013, compared with $51.4 million at May 31, 2013. Approximately $41.0 million was held by foreign subsidiaries and intended to remain indefinitely reinvested.
- Total assets were $2.09 billion and total equity was $970.4 million at quarter-end.
- Short-term borrowings were $62.2 million, current maturities of long-term debt were $1.1 million and long-term debt was $405.9 million. Total reported debt was approximately $469.2 million.
- The $425 million revolving credit facility matures in May 2017. Borrowings were $18.0 million, and approximately $395.3 million remained available after considering outstanding standby letters of credit.
- The accounts receivable securitization facility permits up to $100 million of sales; $40 million had been sold as of August 31, 2013.
- Financing cash outflows were $77.6 million, including $51.5 million of short-term debt repayments and $30.5 million for repurchases of 880,500 common shares at an average price of $34.66.
- The Board declared a quarterly dividend of $0.15 per share, compared with $0.13 in the prior-year quarter. The dividend was paid on September 27, 2013.
Material changes versus the prior comparable period
- Sales increased $26.3 million, driven by $55.1 million of higher volume and acquisitions, partly offset by $28.8 million of lower average selling prices.
- Gross margin expanded due to acquisitions, improved Pressure Cylinders mix and lower Steel Processing inventory holding losses.
- SG&A increased $12.2 million, primarily from acquisitions, higher profit-sharing and bonus expense, and a $2.0 million legal accrual.
- Steel Processing sales increased to $402.4 million from $385.0 million and operating income increased to $22.7 million from $16.7 million.
- Pressure Cylinders sales increased to $216.9 million from $194.2 million and operating income increased to $19.5 million from $15.0 million, despite units shipped declining approximately 3%.
- Engineered Cabs sales fell to $48.5 million from $64.5 million, and the segment moved to a $0.3 million operating loss from $4.7 million of operating income.
- Operating results include a $4.7 million impairment charge for certain non-core Steel Processing assets and $4.0 million of restructuring and other income, primarily from a $4.8 million gain on the sale of the Integrated Terminals warehouse.
Outlook, commentary, risks and unusual items
Management described the quarter as strong, supported by Steel Processing, Pressure Cylinders and joint venture earnings. No specific quantitative earnings or revenue guidance was provided. Management stated that Engineered Cabs demand remained soft and that it was adjusting costs without sacrificing production capacity. Transformation initiatives continued in Pressure Cylinders and Engineered Cabs.
- The TWB step acquisition generated an $11.0 million non-cash pretax gain on remeasurement of the previously held interest. The transaction also produced a favorable tax adjustment of approximately $4.5 million.
- The estimated annual effective tax rate was 28.9%, compared with 32.6% in the prior-year quarter, reflecting tax credits, production-activity deductions and discrete tax adjustments.
- A fire at the Kienberg, Austria Pressure Cylinders facility damaged the massing building on August 19, 2013. The company recorded a $0.4 million asset impairment and expects additional business-interruption costs, with insurance recovery considered probable.
- A wrongful-death claim involving a MAPP gas cylinder was tendered to and accepted by the excess loss carrier; the company recorded a $2.0 million legal charge and stated that its exposure is limited to $2.0 million.
- Key risks include cyclical demand, automotive and construction exposure, steel and other raw-material price volatility, energy and transportation costs, customer and supplier financial difficulties, international operations, facility disruptions, litigation, restructuring execution and impairment risk.
- The company reported compliance with its debt covenants and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Determine the recurring earnings impact excluding the $11.0 million TWB remeasurement gain, related tax benefits and the $4.8 million asset-sale gain.
- Assess whether Engineered Cabs demand weakness and the planned cost actions are temporary or structural.
- Verify the earnings, cash-flow and balance-sheet effects of consolidating TWB, including minority interest and acquired intangible assets.
- Monitor the Austrian facility fire, insurance reimbursement and any future business-interruption costs.
- Evaluate exposure to steel prices, automotive production, construction activity, raw-material costs and working-capital swings.
- Review debt maturities, the November 2013 WNCL credit facility renewal, receivables securitization availability and remaining share-repurchase authorization.
- Consider the $61.7 million liability representing distributions in excess of the company’s investment in WAVE and the financial condition of unconsolidated affiliates.