Worthington Industries, Inc. 10-Q Summary
Reporting period: Quarterly and six-month periods ended November 30, 2016, representing the second quarter and first half of fiscal 2017. The filing identifies the registrant as Worthington Industries, Inc. Financial statements are unaudited and prepared under U.S. GAAP.
Business context
The Company operated 29 manufacturing facilities in its Steel Processing, Pressure Cylinders, Engineered Cabs and Other segments and held interests in 12 joint ventures operating 50 facilities. Steel Processing benefited from higher steel prices and the consolidation of Worthington Specialty Processing effective March 1, 2016. Pressure Cylinders remained affected by weak oil and gas equipment demand.
Key financial metrics
| Metric | Three months ended Nov. 30, 2016 | Three months ended Nov. 30, 2015 | Six months ended Nov. 30, 2016 | Six months ended Nov. 30, 2015 |
|---|---|---|---|---|
| Net sales | $727.8 million | $699.8 million | $1,465.3 million | $1,458.0 million |
| Gross margin | $122.8 million; 16.9% | $109.2 million; 15.6% | $270.1 million; 18.4% | $222.2 million; 15.2% |
| Operating income | $43.0 million; 5.9% | $12.0 million; 1.7% | $107.9 million; 7.4% | $43.0 million; 2.9% |
| Net earnings | $49.9 million | $25.8 million | $118.4 million | $60.8 million |
| Net earnings attributable to controlling interest | $46.6 million | $23.4 million | $112.1 million | $55.3 million |
| Diluted EPS | $0.72 | $0.36 | $1.74 | $0.85 |
| Operating cash flow | $31.3 million | $51.0 million | $152.2 million | $189.7 million |
Balance sheet, debt and liquidity
- Cash and cash equivalents were $175.2 million at November 30, 2016, compared with $84.2 million at May 31, 2016.
- Total assets were $2.143 billion and total equity was $1.011 billion at November 30, 2016.
- Long-term debt, including current maturities, had a carrying amount of $576.9 million and a fair value of $593.8 million. Total debt declined modestly from the May 31 carrying amount of $578.4 million.
- The Company had no borrowings outstanding under its $500 million revolving credit facility, which matures in April 2020. Letters of credit totaled $15.3 million, leaving $486.4 million available under the facility.
- No ownership interests had been sold under the $100 million accounts receivable securitization facility, which expires in January 2018.
- Management stated that available cash, operating cash flow and unused credit capacity were adequate for normal operating needs, capital expenditures, debt maturities, dividends and working capital. Debt covenants were in compliance.
Material changes versus the prior comparable periods
- Second-quarter sales increased $27.9 million, or approximately 4%, primarily from higher Steel Processing selling prices and additional tolling volume from the consolidated WSP joint venture.
- Six-month sales increased only $7.3 million because higher Steel Processing prices and WSP-related volume were largely offset by lower Pressure Cylinders and Engineered Cabs volume.
- Gross margin improved by $13.6 million in the quarter and $47.9 million year to date, principally due to favorable steel pricing spreads.
- Operating income increased $31.0 million in the quarter and $64.9 million year to date. The prior-year periods included $23.0 million of Pressure Cylinders impairment charges in the quarter and $26.0 million for the six-month period; no impairment charges were recorded in fiscal 2017.
- Net earnings attributable to controlling interest nearly doubled in the quarter and increased $56.8 million year to date. Results benefited from operating improvements and lower impairment charges.
- Steel Processing second-quarter sales increased $41.0 million and operating income increased $8.9 million. Six-month operating income increased $39.9 million to $90.2 million.
- Pressure Cylinders second-quarter sales declined $6.5 million, while operating income improved to $11.3 million from a $10.3 million loss, largely because of the absence of prior-year impairment. Six-month oil and gas equipment sales declined 56%, or $32.2 million.
- Engineered Cabs sales declined $6.2 million in the quarter and $19.3 million year to date. Operating losses improved through cost reductions and lower charges but remained $3.4 million in the quarter and $5.2 million year to date.
- Equity income from unconsolidated affiliates decreased $2.1 million in the quarter but increased $5.9 million year to date. The prior year included $4.0 million of ClarkDietrich litigation gains.
Cash flow, capital allocation and unusual items
- First-half operating cash flow was $152.2 million, down from $189.7 million, primarily because higher steel prices increased working capital requirements.
- Capital expenditures were $31.0 million, compared with $60.5 million in the prior-year period. The filing states that future investment activity could be reduced if economic conditions warrant.
- The Company paid $24.7 million in common dividends during the first half and declared a quarterly dividend of $0.20 per share payable March 29, 2017.
- No shares were repurchased under the authorization during the first half. At November 30, 2016, 4.046 million shares remained available for repurchase; employee share withholding resulted in 112,380 shares being surrendered during the quarter.
- Restructuring and other expense totaled $4.6 million year to date, including severance, facility exit costs, closures of Precision Specialty Metals and the Florence, South Carolina facility, and other asset disposal losses. The remaining restructuring liability was expected to be paid within 12 months.
- The Company received $62.7 million of distributions from unconsolidated affiliates during the first half. Distributions from WAVE exceeded the investment balance by $67.5 million and were recorded as a liability.
Outlook, commentary and risks
- Management highlighted near-record Steel Processing earnings, favorable coated-product pricing spreads, strength in consumer products and improvement in alternative fuels.
- Management continued to reduce costs and align capacity with demand in the oil and gas equipment business while retaining capacity for a potential market recovery. No formal earnings or revenue guidance was provided.
- The cryogenics business was consolidated into the Industrial Products business unit, and the Turkish cryogenics facility consolidation was expected to be completed in the second half of fiscal 2017.
- Key risks include cyclical demand, steel and other raw-material price volatility, product pricing and mix, automotive and construction conditions, continued weakness in oil and gas markets, customer or supplier financial distress, facility closures, execution of cost-reduction and Transformation initiatives, foreign currency exposure, litigation, environmental matters, cyber risks and regulatory changes.
- An aircraft operating lease included a residual-value guarantee with a maximum obligation of approximately $9.9 million. Management considered payment not probable, so no liability was recorded.
- Pending legal matters were described as arising in the ordinary course and were not expected to have a material adverse effect. The filing states that risk factors had not changed significantly from the fiscal 2016 Form 10-K.
- Disclosure controls and procedures were determined to be effective at a reasonable assurance level, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether favorable Steel Processing pricing spreads and higher steel prices persist or reverse.
- The pace of recovery, if any, in Pressure Cylinders oil and gas equipment demand and the effect of ongoing cost reductions.
- The sustainability of earnings excluding the benefit from the absence of prior-year impairment charges.
- Working-capital requirements and operating cash conversion as steel prices and inventory levels change.
- Cash distributions, profitability and leverage at unconsolidated affiliates, particularly WAVE and ClarkDietrich.
- Progress and final costs associated with facility closures, restructuring programs, Turkish cryogenics consolidation and new production-line start-up costs.
- Future dividend and share-repurchase decisions, including the Board’s discretionary dividend policy.
- The potential impact of pending litigation, the aircraft residual-value guarantee and other contingencies.