Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended February 28, 2017, compared with February 29, 2016. The filing identifies the registrant as Worthington Industries, Inc., although the request metadata refers to Worthington Enterprises, Inc. The company operates primarily through Steel Processing, Pressure Cylinders, Engineered Cabs and Other, and also owns interests in 11 joint ventures.
Key Financial Metrics
| Metric | Three Months Ended February 28, 2017 | Year-over-Year Change | Nine Months Ended February 28, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $703.4 million | +$56.3 million, 9% | $2,168.8 million | +$63.8 million, 3% |
| Gross margin | $111.0 million; 15.8% | Up from 14.8% | $381.1 million; 17.6% | Up from 15.1% |
| Operating income | $34.3 million; 4.9% | +$9.2 million | $142.3 million; 6.6% | +$74.3 million |
| Net earnings attributable to controlling interest | $35.9 million | +$6.1 million | $148.0 million | +$62.8 million |
| Diluted earnings per share | $0.55 | Up from $0.47 | $2.29 | Up from $1.31 |
| Cash flow from operations | $102.7 million | Down from $106.2 million | $254.9 million | Down from $295.9 million |
Interest expense was $7.7 million for the quarter and $23.2 million year to date. Equity income from unconsolidated affiliates was $22.7 million for the quarter and $84.4 million year to date. The estimated annual effective tax rate was 27.2%, compared with 29.6% in the prior-year period.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $227.3 million at February 28, 2017, compared with $84.2 million at May 31, 2016.
- Total current assets were $1.117 billion and total current liabilities were $489.8 million.
- Long-term debt was $576.0 million, with current maturities of $0.9 million. The carrying amount of total long-term debt, including current maturities, was $576.9 million.
- The company had no borrowings under its $500 million revolving credit facility; $486.4 million remained available after letters of credit.
- No receivable interests were sold under the $100 million accounts receivable securitization facility.
- Cash used in investing activities was $51.2 million, including $52.2 million of capital expenditures. Cash used in financing activities was $60.6 million, including $38.1 million of common-share dividends.
- The company was in compliance with its debt covenants at February 28, 2017. The next quarterly dividend was declared at $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Steel Processing drove the improvement: quarterly sales increased $59.2 million and operating income increased $4.7 million; nine-month sales increased $115.1 million and operating income increased $44.7 million. Higher steel selling prices and favorable pricing spreads were key factors.
- Pressure Cylinders quarterly sales declined $2.3 million, but operating income increased $1.1 million. Year-to-date sales declined $28.0 million, while operating income increased $20.0 million, primarily because the prior year included $23.0 million of impairment charges and restructuring expense was lower overall.
- Engineered Cabs remained unprofitable, but the quarterly operating loss improved to $2.0 million from $4.1 million and the nine-month loss improved to $7.2 million from $17.6 million.
- The consolidation of WSP effective March 1, 2016 contributed $16.7 million of quarterly sales and $52.0 million of nine-month sales.
- No long-lived asset impairment was recorded in the first nine months of fiscal 2017, compared with $26.0 million in the prior-year period.
- Cash from operations decreased despite higher earnings because higher steel prices increased working capital requirements, particularly receivables and inventories.
Outlook, Management Commentary, Risks and Unusual Items
- Management described the quarter as benefiting from near-record Steel Processing earnings, improved Pressure Cylinders and Engineered Cabs performance, stronger pricing spreads and lower inventory holding losses.
- Oil and gas equipment demand remained soft, although volumes appeared to stabilize and certain geographic regions showed improvement. The company reduced costs while retaining capacity for a potential market recovery.
- Management noted exposure to cyclical automotive, construction, steel, oil and gas and industrial markets. Key risks include steel and other raw-material prices, customer demand and pricing, economic conditions, facility closures and consolidation, foreign currency, joint-venture performance, litigation, environmental matters, cyber security and counterparty risks.
- Restructuring and other expense was $6.0 million year to date, including costs related to the Pressure Cylinders organizational changes, closure of the Precision Specialty Metals business, facility exits and consolidation of a cryogenics facility in Turkey. The remaining restructuring liability of $1.1 million was expected to be paid within 12 months.
- The company reported a maximum aircraft residual-value guarantee of approximately $9.6 million and $15.9 million of standby letters of credit; no amounts had been drawn under the letters of credit, and no guarantee liability was recognized for the aircraft obligation.
- Pending legal actions were not expected by management to materially affect financial position, results of operations or cash flows. The company provided no specific earnings or sales guidance.
- The company expects no material impact from the then-pending inventory, derivative, restricted-cash or business-combination accounting updates, while evaluation of revenue recognition, lease, credit-loss, cash-flow-presentation, tax and goodwill guidance remained ongoing in relevant cases.
Investor Verification Items
- Verify the registrant name, since the filing states Worthington Industries, Inc., not Worthington Enterprises, Inc.
- Assess the sustainability of Steel Processing margins and the benefit from higher steel prices and pricing spreads.
- Monitor recovery in oil and gas equipment, industrial cylinders and Engineered Cabs, including the effect of restructuring and cost reductions.
- Reconcile reported earnings with operating cash flow and working-capital growth as steel prices change.
- Review debt maturities, covenant compliance, revolving-credit availability and the $100 million receivables facility.
- Evaluate dependence on equity-method joint ventures, particularly WAVE, ClarkDietrich, Serviacero and ArtiFlex, and the continuing distributions in excess of the WAVE investment balance.
- Consider the potential effects of raw-material, commodity, foreign-currency and interest-rate volatility, restructuring commitments, legal costs and contingent guarantees.