Worthington Industries, Inc. — Fiscal 2014 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended February 28, 2014; comparable periods ended February 28, 2013. The filing was dated April 7, 2014. Worthington is a diversified metals manufacturer operating primarily in Steel Processing, Pressure Cylinders and Engineered Cabs, with additional businesses and joint ventures.
Financial overview
| Metric | Three months ended Feb. 28, 2014 | Three months ended Feb. 28, 2013 | Nine months ended Feb. 28, 2014 | Nine months ended Feb. 28, 2013 |
|---|---|---|---|---|
| Net sales | $773.2 million | $619.5 million | $2,235.4 million | $1,908.2 million |
| Gross margin | $122.5 million; 15.8% | $97.0 million; 15.7% | $361.7 million; 16.2% | $285.5 million; 15.0% |
| Operating income | $45.3 million; 5.9% | $33.4 million; 5.4% | $103.4 million; 4.6% | $95.6 million; 5.0% |
| Net earnings | $44.2 million | $37.3 million | $128.9 million | $104.8 million |
| Net earnings attributable to controlling interest | $40.6 million | $37.1 million | $118.1 million | $102.9 million |
| Diluted EPS | $0.57 | $0.52 | $1.64 | $1.46 |
| Cash flow from operations | $96.8 million | $36.3 million | $220.6 million | $195.7 million |
Balance sheet and liquidity
- Cash and cash equivalents were $52.9 million at February 28, 2014, compared with $51.4 million at May 31, 2013.
- Total assets were $2.126 billion, including $441.3 million of inventories and $467.9 million of receivables.
- Total debt, including current maturities, was approximately $441.8 million, consisting of $35.4 million of short-term borrowings, $101.1 million of current maturities of long-term debt and $305.4 million of long-term debt. The filing separately reports the carrying amount of long-term debt, including current maturities, at $406.5 million.
- The company had a $425 million revolving credit facility maturing in May 2017, with $9.7 million borrowed and approximately $403.5 million available after certain letters of credit.
- A $100 million receivables securitization facility was available; $20 million of receivable interests had been sold at February 28, 2014.
- Capital expenditures were $52.2 million for the nine-month period. The company generated $220.6 million of operating cash flow, used $1.0 million in investing activities and used $218.1 million in financing activities.
Material changes versus the prior comparable period
- Third-quarter sales increased $153.7 million, or approximately 25%, primarily from acquisitions and higher volumes. Nine-month sales increased $327.2 million, or approximately 17%.
- Third-quarter operating income increased $11.9 million, while nine-month operating income increased $7.8 million. Nine-month operating margin declined because of impairment charges and other unusual items.
- Steel Processing benefited from the consolidation of TWB, stronger automotive, construction and agriculture volumes, and improved margins. Third-quarter sales increased to $478.0 million and operating income to $28.3 million.
- Pressure Cylinders sales increased to $233.3 million in the quarter, supported by acquisitions and higher retail volumes; operating income increased to $21.3 million.
- Engineered Cabs generated a third-quarter operating loss of $1.1 million and a nine-month operating loss of $22.3 million, compared with prior-year operating income of $0.1 million and $5.4 million, respectively.
- Equity income from unconsolidated affiliates declined to $21.2 million in the quarter and $69.2 million year to date, partly because TWB was consolidated after July 31, 2013 rather than reported under equity income.
- Operating cash flow improved by $24.9 million year to date, but financing uses increased because of share repurchases, dividends, debt repayments and distributions to noncontrolling interests.
Guidance, outlook, commentary and unusual items
- Management described third-quarter performance as solid, driven by Steel Processing and modest Pressure Cylinders growth, but partially offset by Engineered Cabs weakness and losses in construction businesses being exited. No specific earnings or revenue guidance was provided.
- Management cited strong volumes: Pressure Cylinders units increased 29%; Steel Processing tons shipped increased 25%, or 12% excluding TWB. North American vehicle production also increased year over year.
- The company is continuing its Transformation Plan, including cost reduction, operational improvements and facility actions. The Baltimore steel facility is scheduled to close by the end of fiscal 2014, and the commercial stairs and certain construction activities are being wound down.
- Fiscal 2014 included $35.4 million of impairment charges: $30.7 million for discontinued non-Worthington trade names and $4.6 million for non-core Steel Processing assets.
- Other unusual items included an $11.0 million noncash gain from remeasuring the previously held TWB interest, a $4.8 million gain on the sale of the Integrated Terminals warehouse, a $2.0 million net gain on the sale of the North American steel high-pressure and acetylene cylinders business, and a $2.8 million insurance gain related to the Austrian facility fire.
- The company acquired a 75% interest in Worthington Aritas for $35.2 million on January 24, 2014 and acquired the Steffes tank manufacturing division for $28.9 million on March 27, 2014, after quarter end. A potential $2.0 million contingent payment for Aritas depends on EBITDA performance.
- The company repurchased 2.38 million shares for $91.1 million during the first nine months, including 1.0 million shares for $40.8 million in the third quarter. The quarterly dividend was $0.15 per share.
- Key risks include cyclical demand, steel and raw-material price volatility, automotive and construction exposure, customer and supplier financial condition, facility closures, execution of transformation initiatives, acquisitions and joint ventures, foreign exchange, litigation, product liability, weather and other operational disruptions.
Investor verification points
- Reconcile reported debt classifications and confirm the company’s refinancing plans for the $101.1 million of current maturities.
- Assess whether sales and earnings growth remains after separating TWB consolidation, acquisitions, inventory holding gains and other unusual items.
- Monitor Engineered Cabs and the construction-related businesses for further losses, impairments or restructuring charges.
- Verify the timing and costs of the Baltimore closure, commercial stairs wind-down and North American cylinder business sale.
- Evaluate working-capital requirements, particularly the significant increase in inventories and receivables.
- Review the impact of the Aritas and Steffes acquisitions, including purchase-price accounting and contingent consideration.
- Consider the $13.2 million aircraft residual-value guarantee, $3.7 million ArtiFlex loan guarantee and $14.3 million of outstanding standby letters of credit.
- Confirm that debt covenants, liquidity availability and the proposed universal shelf registration and contemplated debt offering remain consistent with management’s stated funding plans.