Worthington Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended August 31, 2015, the first quarter of fiscal 2016. Worthington operated 33 manufacturing facilities and held interests in 13 joint ventures. Reportable segments were Steel Processing, Pressure Cylinders, Engineered Cabs and Other.
Management described market conditions as challenging because of declining steel and oil prices. Demand was generally steady except in oil and gas equipment, construction and agriculture. The Company was exiting Construction Services and was closing its Engineered Cabs facility in Florence, South Carolina.
Financial performance and key metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $758.1 million | $862.4 million | Down $104.3 million |
| Gross margin | $113.0 million; 14.9% | $129.5 million; 15.0% | Down $16.5 million |
| Operating income | $31.0 million; 4.1% | $52.2 million; 6.1% | Down $21.2 million |
| Net earnings | $34.4 million; 4.5% | $48.8 million; 5.7% | Down $14.4 million |
| Net earnings attributable to controlling interest | $31.4 million | $44.2 million | Down $12.8 million |
| Diluted EPS | $0.48 | $0.63 | Down $0.15 |
| Equity income from unconsolidated affiliates | $26.6 million | $27.9 million | Down $1.3 million |
| Cash dividends declared per share | $0.19 | $0.18 | Increased $0.01 |
Cash flow from operating activities was $137.8 million, compared with $54.5 million in the prior-year quarter. Capital expenditures were $38.5 million, and cash used in investing activities was $40.1 million. Financing activities used $110.0 million, including $68.5 million of short-term debt repayments, $27.6 million of share repurchases and $11.6 million of dividends paid.
Cash and cash equivalents were $18.8 million at August 31, 2015, compared with $31.1 million at May 31, 2015. Total assets were $2.046 billion and total liabilities were $1.207 billion. Long-term debt, including current maturities, totaled $581.7 million at carrying value. The Company had $18.7 million outstanding under its $500 million revolving credit facility, leaving $481.3 million available. Its $100 million receivables securitization facility had no interests sold at quarter-end.
The Company stated that it was in compliance with debt covenants and believed it had adequate resources for normal operating needs, capital expenditures, debt redemptions, dividends and working capital.
Material changes versus the prior comparable period
- Sales declined primarily because of lower volume across all segments and lower Steel Processing selling prices. Lower volume reduced sales by approximately $79.4 million.
- Steel Processing sales decreased $61.5 million and operating income decreased $12.3 million, reflecting lower steel prices, lower tolling volume and inventory holding losses compared with gains in the prior year.
- Pressure Cylinders sales decreased $24.6 million and operating income decreased $2.8 million. Oil and gas equipment sales fell $24.4 million, partly offset by improved industrial gas and consumer product operations.
- Engineered Cabs sales decreased $11.0 million, and the operating loss increased to $9.3 million from $2.1 million. The segment recorded $3.0 million of impairment and $1.9 million of restructuring expense.
- SG&A increased slightly to $75.9 million, while interest expense decreased $1.6 million to $7.9 million because of lower average debt levels.
- Equity income declined 5%, including $1.7 million of product development expenses related to the alternative-fuels business and lower earnings at Serviacero. Record earnings at WAVE and higher contributions from several other affiliates partially offset the decline.
- The Company repurchased 1,000,000 shares for $27.6 million during the quarter, leaving 6,546,145 shares available under the repurchase authorization.
Outlook, commentary, risks and unusual items
The filing does not provide specific earnings, sales or margin guidance. Management stated that it was taking actions to reduce costs at facilities serving weaker markets and expected those operations to remain cash-flow positive. The Florence facility ceased production on September 30, 2015, with most business being transferred to Greeneville, Tennessee.
- Restructuring expense was $3.1 million, primarily related to Florence severance of $1.9 million and $690,000 of workforce reductions in the oil and gas equipment business. The related liability was expected to be paid within twelve months.
- The Company recorded a $3.0 million impairment charge after writing down Florence long-lived assets from $4.1 million to an estimated fair value of $1.1 million.
- Long-lived assets at the Garden City, Kansas, oil and gas facility had a carrying value of $36.7 million, with estimated undiscounted cash flows less than 5% above book value; further deterioration could require an impairment.
- Unconsolidated affiliates distributed $21.1 million during the quarter. Distributions in excess of the Company’s investment in WAVE totaled $58.7 million and were classified as a liability.
- Worthington Nitin Cylinders had $2.1 million outstanding under a credit facility that was in default; the lender had not called the note, and the Company had settled its portion of the obligation.
- Guarantees included an aircraft residual-value obligation of approximately $11.4 million, a guarantee of an ArtiFlex term loan with $1.3 million outstanding, and $16.2 million of letters of credit with no amounts drawn.
- Key risks include cyclical demand, steel and other raw-material price volatility, oil and gas weakness, customer and supplier financial difficulties, facility closures, execution of cost reductions, joint-venture performance, foreign currency exposure, impairment risk and broader economic conditions.
- Management stated that pending legal and environmental matters were not expected to materially affect financial condition or results, although litigation outcomes were not clearly determinable.
- The Company was evaluating newly issued revenue-recognition and inventory-measurement standards and had not yet determined their effect.
Important facts for investors to verify
- Whether the Florence closure and business transfer proceed as planned and whether additional restructuring or impairment charges arise.
- Whether continued weakness in oil and gas, construction and agriculture offsets strength in automotive, industrial gas and consumer products.
- The sustainability of unusually strong operating cash flow, which benefited from lower working-capital requirements associated with declining steel prices.
- Future steel-price movements and their effect on selling prices, inventory holding gains or losses and margins.
- The status of the Nitin Cylinders debt default and any effect on consolidated liquidity or obligations.
- Cash availability after share repurchases, dividends, capital expenditures and debt repayments, including the Company’s low period-end cash balance.
- Potential impairment at the Garden City facility and any additional costs associated with oil and gas workforce reductions.
- The Company’s ability to maintain dividends and execute the remaining share-repurchase authorization.