Worthington Industries, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2015, compared with the corresponding periods ended November 30, 2014. The filing identifies the registrant as Worthington Industries, Inc., not Worthington Enterprises, Inc. The company operates primarily through Steel Processing, Pressure Cylinders and Engineered Cabs, with additional businesses reported in Other.
Financial Performance and Position
| Metric | Three months ended Nov. 30, 2015 | Three months ended Nov. 30, 2014 | Six months ended Nov. 30, 2015 | Six months ended Nov. 30, 2014 |
|---|---|---|---|---|
| Net sales | $699.8 million | $871.0 million | $1,458.0 million | $1,733.4 million |
| Gross margin | $109.2 million; 15.6% | $125.2 million; 14.4% | $222.2 million; 15.2% | $254.7 million; 14.7% |
| Operating income | $12.0 million; 1.7% | $33.2 million; 3.8% | $43.0 million; 2.9% | $85.4 million; 4.9% |
| Net earnings | $25.6 million | $31.5 million | $60.1 million | $80.3 million |
| Net earnings attributable to controlling interest | $23.2 million | $29.5 million | $54.7 million | $73.6 million |
| Diluted EPS | $0.36 | $0.43 | $0.84 | $1.06 |
| Cash flow from operating activities | $50.6 million | $1.4 million | $188.4 million | $55.9 million |
- Revenue declined approximately 20% in the quarter and 16% year to date, primarily because of lower volumes and substantially lower steel prices.
- Gross margin percentage improved, reflecting lower manufacturing costs, favorable pricing spreads and lower freight costs, but absolute gross margin declined with lower sales.
- Operating results included $23.0 million of second-quarter long-lived-asset impairment charges, principally related to Oil & Gas Equipment, and $1.5 million of restructuring and other expense.
- Cash and cash equivalents were $27.4 million at November 30, 2015, compared with $31.1 million at May 31, 2015.
- Total debt consisted of $49.5 million of short-term borrowings, $0.9 million of current long-term maturities and $579.0 million of long-term debt. The company reported compliance with debt covenants.
- The $500.0 million revolving credit facility matures in April 2020; $25.2 million was drawn and $474.8 million remained available. The $100.0 million receivables securitization facility had $20.0 million of receivables interests sold.
- Six-month capital expenditures were $60.5 million. Six-month dividends paid were $23.6 million, and share repurchases totaled $71.5 million for 2.5 million shares.
Material Changes Versus Prior Comparable Period
- Steel Processing: Second-quarter sales declined $85.0 million to $467.8 million and operating income declined $7.3 million to $26.6 million. Lower tolling volume, lower steel prices and a reduced price spread outweighed benefits from the Rome Strip Steel acquisition, lower freight costs and a $2.6 million litigation-related material-cost credit.
- Pressure Cylinders: Sales declined $51.5 million to $201.2 million and operating income fell $19.9 million, from income of $9.6 million to a loss of $10.3 million. Oil & Gas Equipment sales fell $41.9 million, volumes declined 65%, and the segment recorded a $23.0 million impairment charge.
- Engineered Cabs: Sales declined 44% to $28.7 million, while the operating loss improved by $1.3 million to $4.3 million. Production at the Florence, South Carolina facility ceased September 30, 2015, with operations transferred primarily to Greeneville, Tennessee.
- Unconsolidated affiliates: Equity income increased $6.9 million in the quarter and $5.6 million year to date, reaching $29.2 million and $55.8 million, respectively. Results benefited from WAVE, ArtiFlex and ClarkDietrich, including a $4.0 million ClarkDietrich legal settlement.
- Interest expense: Quarterly expense declined $1.9 million and year-to-date expense declined $3.5 million, primarily due to lower average debt and repayment of $100.0 million of floating-rate notes in December 2014.
- Cash flow: Operating cash flow increased substantially because lower steel prices reduced receivables and inventory requirements. Financing cash outflows increased because of share repurchases, debt repayment and dividends.
Outlook, Commentary, Risks and Unusual Items
- Management described the quarter as steady, citing lower manufacturing costs, improved Industrial Products and Consumer Products profitability and strong joint-venture contributions. Demand remained healthy in many markets but weak in Oil & Gas and Agriculture.
- No quantitative earnings or revenue guidance was provided. Management stated that fiscal-year results may not be inferred directly from interim results.
- Low oil prices materially reduced Oil & Gas Equipment demand and cash-flow projections. Two asset groups with a $59.9 million carrying value were written down to $36.9 million using Level 3 discounted cash-flow assumptions and a 13% discount rate. Management stated that further impairment testing may be required if market conditions deteriorate.
- The company allocated $26.0 million of Pressure Cylinders goodwill to the Oil & Gas Equipment reporting unit; no goodwill impairment was recorded from the subsequent test.
- Restructuring activities include the closure of Precision Specialty Metals, the pending closure of a York, Pennsylvania steel-packaging facility, the Florence facility closure and other workforce reductions. The remaining restructuring liability at November 30, 2015 was $4.0 million and was expected to be paid within twelve months.
- Subsequent to quarter-end, on December 7, 2015, the company acquired Taylor Wharton’s global CryoScience business and a Theodore, Alabama manufacturing facility for $31.4 million. The business will be reported in Pressure Cylinders.
- Material risk factors include economic and market cyclicality, steel and other commodity-price volatility, weak Oil & Gas demand, customer and supplier financial difficulties, facility closures, inventory and working-capital requirements, foreign currency exposure, legal and environmental matters, and the possibility of additional asset impairments.
- The company guaranteed approximately $11.1 million of aircraft lease residual value and an $0.8 million ArtiFlex term loan; management considered the expected fair value of these obligations immaterial. Worthington Nitin Cylinders had $2.1 million outstanding under a facility that was in default, although the lender had not called the note and the company had settled its portion.
- Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of November 30, 2015.
Facts Investors Should Verify
- Whether Oil & Gas Equipment demand and cash-flow assumptions stabilize or lead to additional impairments.
- The sustainability of operating performance after excluding impairment, restructuring, disposal gains and the ClarkDietrich legal settlement.
- Progress and cash costs associated with the PSM, York and Florence closures and the company’s planned exit from Construction Services.
- The effect of lower steel prices, commodity hedges and inventory holding losses on future margins and working capital.
- Liquidity after the Taylor Wharton acquisition, capital expenditures, dividends, share repurchases and any reduction in operating cash flow.
- Performance and distributions from unconsolidated affiliates, including the $58.2 million liability for distributions received from WAVE in excess of the investment balance.
- Integration and profitability of the acquired CryoScience business within Pressure Cylinders.