Business Context and Reporting Period
Worthington Industries, Inc. is a diversified metals manufacturer focused on value-added steel processing, pressure cylinders and engineered cabs, with additional construction and energy-services operations and multiple joint ventures. This Form 10-K covers the fiscal year ended May 31, 2014; the filing is not a quarterly report, despite the request metadata referencing 2013 Q4.
The Company operated 80 production facilities, including joint-venture facilities, in 25 states and 10 countries. Reportable segments were Steel Processing, Pressure Cylinders and Engineered Cabs. Fiscal fourth-quarter sales are typically seasonally strongest.
Financial Performance and Position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $3.126 billion | $2.612 billion | +$514.2 million |
| Gross margin | $492.5 million; 15.8% | $396.6 million; 15.2% | +$95.9 million; +60 bps |
| Operating income | $135.8 million; 4.3% | $129.1 million; 4.9% | +$6.7 million |
| Net earnings | $160.2 million | $136.8 million | +$23.4 million |
| Net earnings attributable to controlling interest | $151.3 million | $136.4 million | +$14.9 million |
| Diluted EPS | $2.11 | $1.91 | +$0.20 |
| Cash flow from operations | $229.0 million | $273.0 million | -$44.0 million |
| Capital expenditures | $71.3 million | $44.6 million | +$26.7 million |
| Cash and equivalents | $190.1 million | $51.4 million | +$138.7 million |
| Total debt | $666.3 million | $521.1 million | +$145.3 million |
| Working capital | $609.3 million | $418.0 million | +$191.3 million |
Fiscal 2014 quarterly net sales were $692.3 million, $769.9 million, $773.2 million and $891.0 million, respectively. Fourth-quarter net earnings attributable to controlling interest were $33.2 million, or $0.47 diluted EPS.
Steel Processing generated $1.936 billion of sales and $119.0 million of operating income, compared with $1.463 billion and $68.2 million in fiscal 2013. Pressure Cylinders generated $928.4 million of sales and $55.0 million of operating income, compared with $859.3 million and $66.4 million. Engineered Cabs generated $200.5 million of sales and an operating loss of $26.5 million, compared with $226.0 million of sales and $4.2 million of operating income. Other operations generated an operating loss of $11.8 million.
Liquidity increased materially following the April 2014 issuance of $250.0 million of 4.55% senior unsecured notes due 2026. Proceeds were used partly to repay revolving-credit and receivables-securitization borrowings. No borrowings were outstanding under the $425.0 million revolving credit facility at year-end, and $413.3 million remained available. The $100.0 million floating-rate notes due December 2014 were expected to be repaid using cash on hand.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher volumes, including the consolidation of TWB, with volume contributing $532.7 million and lower average selling prices reducing sales by $18.5 million.
- Steel Processing volumes increased 23%, or 12% excluding TWB, supported by stronger automotive, construction and agriculture demand. Operating margin improved to 6.1% from 4.7%.
- Pressure Cylinders volumes increased 3% and sales increased 8%, aided by product mix and acquisitions, but operating income declined because of higher impairments and SG&A.
- Engineered Cabs weakened substantially, with sales down $25.5 million and a $26.5 million operating loss, reflecting lower volumes, unfavorable product mix and higher manufacturing and SG&A costs.
- TWB became a 55%-owned consolidated subsidiary on July 31, 2013. The step acquisition produced an $11.0 million non-cash pretax gain and changed the presentation of TWB earnings from equity income to consolidated results.
- Fiscal 2014 included $58.2 million of long-lived-asset impairments, including $30.7 million for discontinued trade names, $19.0 million for Worthington Nitin Cylinders, $7.1 million for Precision Specialty Metals and $1.4 million for an aluminum-cylinder business.
- Restructuring and other activity produced $2.9 million of income, primarily from gains on asset sales, partly offset by severance and facility-exit costs.
- The Company repurchased 3.38 million shares for $128.2 million during fiscal 2014, including 1.0 million shares for $37.1 million in the fourth quarter.
Outlook, Commentary, Risks and Unusual Items
Management described fiscal 2014 as a record earnings year, with record diluted EPS, but did not provide specific quantitative fiscal 2015 revenue, earnings or margin guidance in the filing. Management said Transformation initiatives remained ongoing in Pressure Cylinders and Engineered Cabs and continued to support margin improvement.
- Management committed to plans to sell Worthington Nitin Cylinders and Precision Specialty Metals; both were classified as held for sale at May 31, 2014.
- The Baltimore steel facility ceased operations in May 2014, with full exit expected by the end of the first quarter of fiscal 2015. Construction Services also closed its mid-rise construction business.
- Worthington acquired a 75% interest in Worthington Aritas for approximately $35.3 million and the Steffes tank manufacturing division for approximately $28.9 million.
- An Austrian cylinders-facility fire generated $9.3 million of insurance proceeds, including a $5.5 million gain on damaged property. The filing states the event did not materially affect results.
- A supplier legal settlement related to the prior pressure-cylinder recall generated a $4.0 million pretax gain in SG&A. The Company had incurred $12.2 million of recall costs in fiscal 2012 and 2013.
- Key risks include cyclical automotive and construction demand, steel and other raw-material price and supply volatility, customer concentration and credit risk, competitive pressure, foreign operations, joint-venture performance, acquisitions, self-insured claims, environmental matters and potential asset impairments.
- Engineered Cabs goodwill totaled $44.9 million and its estimated fair value exceeded carrying value by less than 10%; a 100-basis-point decline in the projected long-term growth rate could result in impairment under the current model.
- Total contractual cash obligations were $1.005 billion, including $656.5 million of long-term debt, $284.8 million of long-term-debt interest, $41.2 million of operating leases and $12.0 million of royalty obligations.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and KPMG excluded TWB from the fiscal 2014 internal-control assessment; TWB represented 7.8% of consolidated assets and 10.2% of consolidated sales.
Important Facts for Investors to Verify
- Reconcile fiscal 2014 earnings and cash flow excluding the $58.2 million of impairments, the $11.0 million TWB remeasurement gain, insurance proceeds and other unusual items.
- Assess whether Steel Processing volume and margin gains are sustainable without further consolidation-related benefits from TWB.
- Monitor the turnaround, impairment sensitivity and customer concentration of Engineered Cabs.
- Track the timing and proceeds of the planned sales of Worthington Nitin Cylinders and Precision Specialty Metals.
- Verify repayment or refinancing of the $100.0 million notes due December 2014 and the expiration or renewal of the $100.0 million receivables facility in January 2015.
- Evaluate working-capital requirements, particularly receivables and inventories, given the $44.0 million year-over-year decline in operating cash flow.
- Review exposure to steel, zinc, helium, energy and freight prices and the extent to which cost increases can be passed through to customers.
- Consider the effect of joint-venture distributions and equity income, particularly the concentration of contributions from WAVE and other unconsolidated affiliates.