Worthington Industries, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended May 31, 2015. Worthington Industries is a diversified metals manufacturer with three reportable segments: Steel Processing, Pressure Cylinders, and Engineered Cabs. It also reports Construction Services and Worthington Energy Innovations in Other. The company operated, together with joint ventures, 83 manufacturing facilities in 26 states and 11 countries. Foreign operations represented approximately 6% of consolidated sales.
The filing identifies the registrant as Worthington Industries, Inc.; the request metadata refers to Worthington Enterprises, Inc.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $3.384 billion | $3.126 billion | +8.2% |
| Gross margin | $463.5 million; 13.7% | $492.5 million; 15.8% | Down $29.0 million |
| Operating income | $60.6 million; 1.8% | $135.8 million; 4.3% | Down $75.2 million |
| Net earnings | $87.3 million | $160.2 million | Down $72.9 million |
| Net earnings attributable to controlling interest | $76.8 million | $151.3 million | Down $74.5 million |
| Diluted EPS | $1.12 | $2.11 | Down $0.99 |
| Cash flow from operations | $214.4 million | $229.0 million | Down $14.6 million |
| Capital expenditures | $96.3 million | $71.3 million | Up $25.0 million |
| Total debt | $670.7 million | $666.3 million | Up $4.4 million |
| Cash and cash equivalents | $31.1 million | $190.1 million | Down $159.0 million |
| Working capital | $467.8 million | $609.3 million | Down $141.5 million |
Equity income from unconsolidated affiliates was $87.5 million, down from $91.5 million. The company received $78.3 million in distributions from those affiliates. The effective tax rate attributable to controlling interest was 25.1%, compared with 27.5% in fiscal 2014.
Segment performance
- Steel Processing: Sales increased to $2.146 billion from $1.936 billion, while operating income declined to $108.7 million from $119.0 million. Lower steel prices compressed selling-price spreads and created inventory holding losses.
- Pressure Cylinders: Sales increased to $1.001 billion from $928.4 million, and operating income increased modestly to $58.1 million from $55.0 million. Acquisitions and higher oil and gas equipment sales offset weaker industrial products volumes and higher manufacturing costs.
- Engineered Cabs: Sales declined to $193.0 million from $200.5 million. The segment reported an operating loss of $97.3 million, compared with a $26.5 million loss in fiscal 2014, primarily because of $83.9 million of impairment charges and operational problems at the Florence, South Carolina facility.
- Other: Sales declined to $44.1 million from $61.4 million, while the operating loss improved to $9.0 million from $11.8 million as Construction Services continued to wind down.
Material changes versus the prior comparable period
- Sales growth was driven by $185.6 million from acquisitions and $123.7 million from higher existing-customer volumes, partially offset by $51.5 million of lower average selling prices.
- Gross margin deteriorated because of falling steel prices, inventory holding losses, weakness in oil and gas equipment and industrial products, and higher manufacturing costs.
- Impairment charges increased to $100.1 million from $58.2 million. Fiscal 2015 included the full $44.9 million write-off of Engineered Cabs goodwill, $39.0 million of other Engineered Cabs long-lived-asset impairments, and additional impairments related to dHybrid, Worthington Nitin Cylinders, PSM, the New Albany facility, and military construction assets.
- Interest expense increased to $35.8 million from $26.7 million because of higher average debt and interest rates.
- Operating cash flow remained strong but declined, while investing and financing outflows increased substantially due to acquisitions, capital expenditures, share repurchases, debt repayment, and dividends.
- The company repurchased 4.2 million shares for $127.4 million and paid $46.4 million of dividends. The quarterly dividend increased from $0.15 to $0.18 per share during fiscal 2015.
Debt, liquidity, and capital resources
The company amended its revolving credit facility in April 2015, increasing commitments from $425.0 million to $500.0 million and extending maturity to April 2020. Borrowings under the facility were $24.9 million at May 31, 2015. The company also had a $100.0 million receivables securitization facility, of which $60.0 million had been sold at year-end.
Long-term debt included $250.0 million of 4.55% notes due 2026, $150.0 million of 4.60% notes due 2024, and $150.0 million of 6.50% notes due 2020. Total contractual cash obligations were $958.0 million, including $580.4 million of long-term debt, $236.6 million of related interest, $38.5 million of operating leases, and $12.0 million of royalty obligations.
Management stated that available cash, operating cash flow, unused credit capacity, and access to capital markets were adequate for normal operations, capital expenditures, debt service, dividends, acquisitions, and working capital. However, liquidity declined materially, with year-end cash falling to $31.1 million.
Guidance, outlook, commentary, risks, and unusual items
No specific numerical fiscal 2016 earnings or sales guidance is provided in the filing. Management described fiscal 2015 performance as mixed and attributed the decline in profitability to falling steel and oil prices, inventory losses, operational issues, and weak oil and gas, industrial, mining, and agricultural markets.
- The Florence, South Carolina Engineered Cabs facility is being closed, with most business expected to move to Greeneville, Tennessee.
- On June 26, 2015, after the fiscal year-end, the company announced closure of PSM and estimated additional restructuring charges of $1.0 million to $1.5 million, primarily for severance.
- The company completed acquisitions of JRE, MEF, dHybrid, and Rome Strip Steel during fiscal 2015, with aggregate acquisition spending of $105.3 million.
- The company sold its New Albany, Mississippi aluminum high-pressure cylinder business for approximately $8.4 million and recognized a loss of approximately $3.3 million, including severance and allocated goodwill.
- Worthington Nitin Cylinders was no longer manufacturing cylinders, its investment was written off, and the company’s interest remained subject to a planned sale or wind-down.
- A $5.6 million Worthington Nitin Cylinders credit facility was in default at year-end, although the lender had not called the note; the company settled its portion in June 2015.
- Principal risks include cyclicality in automotive, construction, heavy equipment, and oil and gas markets; steel and other raw-material price volatility; customer and supplier concentration; competition and material substitution; acquisition integration; foreign-exchange and international risks; environmental and legal contingencies; self-insurance exposure; and potential future impairment charges.
- The company had approximately $13.4 million of guarantees, including an aircraft residual-value guarantee of approximately $11.7 million, and $14.6 million of outstanding standby letters of credit. Management did not consider these obligations materially likely to affect liquidity.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Engineered Cabs can return to profitability after the Florence closure and the $83.9 million impairment.
- Whether steel-price stabilization improves inventory spreads and Steel Processing margins.
- Demand trends and profitability in oil and gas equipment, industrial products, and cryogenics.
- Integration, earnings contribution, and impairment risk associated with the fiscal 2015 acquisitions.
- Liquidity after the decline in cash, continued share repurchases, dividends, acquisitions, and near-term debt maturities.
- The status and resolution of the defaulted Worthington Nitin Cylinders credit facility and the planned wind-down or sale of related operations.
- The expected cost and timing of the PSM closure and other restructuring actions.
- The sustainability of equity income and cash distributions from unconsolidated joint ventures, particularly WAVE and ClarkDietrich.
- The company’s ability to maintain dividend payments and credit-facility covenant compliance under cyclical or weaker market conditions.