Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended February 28, 2015, fiscal 2015. The provided metadata labels this “2014 Q3,” but the filing is for the third quarter of fiscal 2015 and was filed April 9, 2015.
Business Context
Worthington is a diversified metals manufacturer with three principal reportable segments: Steel Processing, Pressure Cylinders and Engineered Cabs. As of February 28, 2015, the Company operated 34 manufacturing facilities and held equity interests in 13 active joint ventures. The Company reported that demand remained strong in most key markets, but oil and gas equipment and agricultural markets weakened materially.
Key Financial Metrics
| Metric | Three Months Ended February 28, 2015 | Three Months Ended February 28, 2014 | Nine Months Ended February 28, 2015 | Nine Months Ended February 28, 2014 |
|---|---|---|---|---|
| Net sales | $804.8 million | $773.2 million | $2,538.2 million | $2,235.4 million |
| Gross margin | $98.5 million; 12.2% | $122.5 million; 15.8% | $353.2 million; 13.9% | $361.7 million; 16.2% |
| Operating income (loss) | $(52.1) million; (6.5%) | $45.3 million; 5.9% | $33.3 million; 1.3% | $103.4 million; 4.6% |
| Net earnings (loss) | $(23.2) million | $44.2 million | $57.0 million | $128.9 million |
| Net earnings (loss) attributable to controlling interest | $(25.7) million | $40.6 million | $47.9 million | $118.1 million |
| Diluted EPS | $(0.39) | $0.57 | $0.69 | $1.64 |
| Cash dividends declared per share | $0.18 | $0.15 | $0.54 | $0.45 |
Cash flow from operating activities was $82.9 million in the quarter and $139.7 million year to date, compared with $96.8 million and $220.6 million, respectively, in the comparable periods. Year-to-date investing cash outflows were $190.5 million, including $105.5 million for acquisitions and $73.3 million for capital expenditures. Financing cash outflows were $96.8 million, including $98.3 million of share repurchases and $34.8 million of dividends.
At February 28, 2015, cash and cash equivalents were $42.5 million, compared with $190.1 million at May 31, 2014. Total debt, including current maturities, was approximately $699.0 million, consisting of $123.1 million of short-term borrowings, $0.8 million of current maturities and $576.0 million of long-term debt. The Company had $391.2 million available under its $425.0 million revolving credit facility and $20.0 million of unused capacity under its $100.0 million receivables securitization facility. Management stated that the Company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased 4.1%, and nine-month sales increased 13.5%, primarily from higher volumes and acquisitions, including the consolidation of TWB and acquisitions in Steel Processing and Pressure Cylinders.
- Gross margin declined by $24.0 million in the quarter and $8.5 million year to date. Rapidly falling steel prices caused inventory holding losses and a $5.1 million lower-of-cost-or-market inventory adjustment.
- Third-quarter operating results included $81.6 million of impairment charges in Engineered Cabs. The charges included a $44.9 million goodwill write-off, a $22.4 million customer-relationship intangible impairment and a $14.3 million property, plant and equipment impairment.
- Engineered Cabs reported a third-quarter operating loss of $85.8 million, compared with a $1.1 million loss in the prior-year quarter. Excluding impairment charges, the loss increased by $3.1 million due to lower selling prices and higher operating costs at the Florence, South Carolina facility.
- Pressure Cylinders sales increased 6.3% in the quarter, but operating income decreased to $18.6 million from $21.3 million. The Company announced workforce reductions and recorded approximately $2.3 million of related severance expense in response to weaker oil and gas demand.
- Steel Processing sales increased 4.7%, while operating income decreased to $16.4 million from $28.3 million because of steel-price-related inventory losses and higher manufacturing costs.
- Interest expense increased to $8.4 million in the quarter and $27.6 million year to date, primarily due to higher average debt following the April 2014 issuance of $250.0 million of 4.55% unsecured senior notes.
- Equity income from unconsolidated affiliates decreased to $18.8 million in the quarter from $21.2 million, primarily due to lower results at Serviacero and ClarkDietrich.
- The Company repurchased 3.1 million shares for $98.3 million during the first nine months, including 2.0 million shares for $56.6 million during the quarter. A further 8.6 million shares remained authorized for repurchase at February 28, 2015.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that it expects adequate resources to fund normal operating costs, capital expenditures, debt redemptions, dividends and working capital through cash flows, cash balances and available credit facilities, while noting that capital-market access and financing terms could change.
- Management closed the Florence, South Carolina Engineered Cabs facility because of continued weakness in mining and agricultural end markets and higher-than-expected manufacturing costs. Approximately $3.0 million of future severance expense is expected to be recognized over the applicable service period.
- Oil and gas equipment demand is a heightened risk. The Company identified lower or volatile oil and natural gas prices as factors that could reduce drilling and production spending and adversely affect demand.
- Steel prices declined sharply, with third-quarter average hot-rolled steel prices of $578 per ton versus $669 per ton in the prior-year quarter. Further commodity-price volatility could affect selling prices, inventory valuations and margins.
- Worthington Nitin Cylinders’ $5.9 million credit facility was in default as of February 28, 2015, although the lender had not called the note.
- The Company had an aircraft residual-value guarantee with a maximum obligation of approximately $12.0 million, a $2.1 million guarantee of an ArtiFlex term loan and $14.1 million of standby letters of credit. Management considered the expected fair value of these obligations immaterial.
- The Company held $12.1 million of cash outside the United States that it intended to reinvest indefinitely; repatriation could create additional tax obligations.
- Unconsolidated affiliates generated $61.2 million of distributions during the nine months. Distributions from WAVE exceeded the Company’s investment balance by $63.9 million and were recorded as a liability.
- The Company’s disclosure controls and procedures were assessed as effective at a reasonable assurance level, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether the Engineered Cabs facility closure and goodwill and long-lived asset impairments represent the full expected financial impact or whether additional restructuring or impairment charges will occur.
- The sustainability of cash generation given the decline in operating cash flow, reduced cash balances, substantial share repurchases, acquisitions and capital expenditures.
- Debt maturities, revolver amendments, interest costs and the status of the defaulted Worthington Nitin Cylinders borrowing.
- Exposure to further steel-price declines, inventory holding losses and commodity-hedging losses.
- Demand trends in oil and gas, agriculture, mining and industrial markets, including the effect of continued low oil and natural gas prices.
- Performance and distributions from unconsolidated affiliates, particularly Serviacero, ClarkDietrich and WAVE.
- The Company’s ability to realize expected benefits from the Rome Strip Steel, MEF, dHybrid and JRE acquisitions and integrate the related operations.