Worthington Industries, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended May 31, 2016, filed August 1, 2016. Worthington Industries is a diversified metals manufacturer with three reportable segments: Steel Processing, Pressure Cylinders, and Engineered Cabs. The company also reports Construction Services and Worthington Energy Innovations in Other. Operations, including consolidated and unconsolidated joint ventures, covered 82 manufacturing facilities in 24 states and 11 countries.
Fiscal 2016 sales were concentrated in automotive-related markets, which represented approximately 43% of consolidated net sales. Foreign operations contributed approximately 8% of consolidated net sales. The fourth fiscal quarter is typically seasonally strongest.
Financial performance and position
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $2.820 billion | $3.384 billion | Down $564.5 million |
| Gross margin | $452.6 million; 16.1% | $463.5 million; 13.7% | Dollar decline, margin expansion |
| Operating income | $122.1 million; 4.3% | $60.6 million; 1.8% | Up $61.4 million |
| Net earnings | $157.6 million | $87.3 million | Up $70.3 million |
| Net earnings attributable to controlling interest | $143.7 million | $76.8 million | Up $66.9 million |
| Diluted EPS | $2.22 | $1.12 | Up $1.10 |
| Cash flow from operations | $413.4 million | $214.4 million | Up $198.9 million |
| Capital expenditures | $97.0 million | $96.3 million | Nearly flat |
| Total debt | $583.5 million | $670.7 million | Down $87.2 million |
| Cash and cash equivalents | $84.2 million | $31.1 million | Up $53.1 million |
| Working capital | $485.4 million | $467.8 million | Up $17.6 million |
Fiscal 2016 operating cash flow benefited primarily from lower working-capital requirements associated with lower average steel prices and higher earnings. Cash uses included $34.2 million for acquisitions, $99.8 million for share repurchases, $47.2 million for dividends, $97.0 million for capital expenditures, and $85.8 million of repayments of short-term borrowings.
At May 31, 2016, total current assets were $915.5 million and current liabilities were $430.1 million. The company had no borrowings under its $500.0 million revolving credit facility, and its $100.0 million receivables securitization facility had no interests sold at year-end. Long-term debt was primarily composed of $250.0 million of 2026 Notes, $150.0 million of 2024 Notes, and $150.0 million of 2020 Notes.
Segment performance and material changes
- Steel Processing: Sales decreased to $1.844 billion from $2.146 billion, mainly because lower steel prices reduced selling prices. Operating income increased to $112.0 million from $108.7 million as improved pricing spreads and lower inventory holding losses offset lower sales.
- Pressure Cylinders: Sales decreased to $844.9 million from $1.001 billion. Operating income declined to $28.4 million from $58.2 million, principally because Oil and Gas Equipment volumes fell 64% amid low oil prices. Industrial and consumer products benefited from lower commodity costs and improved manufacturing performance.
- Engineered Cabs: Sales fell to $121.9 million from $193.0 million. The operating loss improved to $19.3 million from $97.3 million because fiscal 2015 included substantial impairment charges, although underlying operating performance remained weak. The Florence, South Carolina facility ceased production on September 30, 2015, with most business transferred to Tennessee.
- Other: Sales declined to $9.2 million from $44.1 million, while operating results improved to $1.0 million of income from a $9.0 million loss, helped by lower Construction Services losses and asset-sale gains. Construction Services is being wound down.
- Joint ventures: Equity income from unconsolidated affiliates rose to $115.0 million from $87.5 million. WAVE contributed $82.7 million. The company received $86.5 million of distributions from unconsolidated affiliates.
Acquisitions, unusual items, and accounting changes
- The company acquired Taylor Wharton’s global CryoScience business for approximately $30.6 million and acquired NetBraze for approximately $3.4 million.
- Effective March 1, 2016, Worthington obtained effective control of the 51%-owned WSP joint venture and began consolidating it. The transaction generated a non-cash, pre-tax gain of approximately $6.9 million.
- Fiscal 2016 impairment charges totaled $26.0 million, including approximately $23.0 million for Oil and Gas Equipment assets and $3.0 million related to the Florence facility closure.
- Restructuring and other expense was $7.2 million, including costs related to the PSM stainless steel business closure, Oil and Gas Equipment workforce reductions, and the Florence closure, partially offset by asset-sale gains.
- The company early adopted accounting changes for share-based payments and deferred-tax presentation. The share-based payment adoption produced a $3.2 million income-tax benefit in fiscal 2016. The filing states that the impact of the other adopted or pending standards was not expected to be material, except that the effects of new revenue and lease standards had not yet been determined.
Guidance, outlook, management commentary, and risks
Management did not provide quantitative fiscal 2017 revenue or earnings guidance in the filing. Management characterized performance as steady despite challenging conditions, citing lower steel and oil prices, improved Steel Processing spreads, and stronger industrial and consumer Pressure Cylinders operations. Demand was steady in most key markets except oil and gas equipment and agriculture.
Management stated that available cash, operating cash flow, committed credit facilities, and unused lines of credit were expected to support normal operations, capital expenditures, debt repayments, dividends, acquisitions, and working capital. The company remained in compliance with its debt covenants and reported investment-grade ratings for senior unsecured long-term debt.
- Cyclical exposure to automotive, construction, heavy equipment, agriculture, and oil and gas markets.
- Volatility in steel, aluminum, zinc, helium, energy, freight, and other raw-material costs, including the risk that price increases cannot be passed through to customers.
- Low oil and natural-gas prices may continue to reduce demand for Oil and Gas Equipment products and could lead to additional impairment charges.
- Customer concentration and financial distress, although no customer exceeded 10% of consolidated sales; the largest customer represented approximately 8%.
- Competition, material substitution away from steel, imports, foreign-exchange exposure, supply interruptions, and customer plant closures.
- Joint-venture governance, partner performance, legal proceedings, environmental liabilities, self-insurance claims, cyber risks, and future restructuring requirements.
- Contractual cash obligations totaled $846.4 million, including $581.4 million of long-term debt, $208.7 million of projected long-term debt interest, $41.7 million of operating leases, and $12.0 million of royalty obligations. Guarantees and standby letters of credit totaled $26.9 million.
Most important facts for an investor to verify
- Whether Oil and Gas Equipment demand and profitability recover from the fiscal 2016 downturn and whether additional asset or goodwill impairments occur.
- Whether Steel Processing can sustain improved pricing spreads as steel prices and inventory costs change.
- Whether Engineered Cabs can reach profitability after the Florence closure and business transfer.
- The recurring versus nonrecurring contribution of equity income, the WSP consolidation, the WSP remeasurement gain, and the ClarkDietrich legal settlement gain.
- Debt maturities, refinancing needs, covenant compliance, interest-rate exposure, and continued availability of revolving and receivables facilities.
- The sustainability of dividends and share repurchases; the quarterly dividend increased from $0.19 to $0.20 per share for the first quarter of fiscal 2017.
- The effect of pending revenue-recognition and lease-accounting standards, which the filing states had not yet been fully determined.