WORTHINGTON ENTERPRISES, INC. quarterly report, Q2 FY2015

Worthington Industries, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended November 30, 2014; fiscal 2015 second quarter. The filing was signed January 9, 2015. Worthington is a diversified metals manufacturer operating in Steel Processing, Pressure Cylinders, Engineered Cabs and other businesses, with interests in 13 joint ventures.

Financial performance and position

Metric	Three months ended Nov. 30, 2014	Prior year	Six months ended Nov. 30, 2014	Prior year
Net sales	$871.0 million	$769.9 million	$1,733.4 million	$1,462.2 million
Gross margin	$125.2 million; 14.4%	$128.2 million; 16.7%	$254.7 million; 14.7%	$239.2 million; 16.4%
Operating income	$33.2 million; 3.8%	$19.5 million; 2.5%	$85.4 million; 4.9%	$58.1 million; 4.0%
Net earnings	$31.5 million	$28.3 million	$80.3 million	$84.7 million
Net earnings attributable to controlling interest	$29.5 million	$23.0 million	$73.6 million	$77.5 million
Diluted EPS	$0.43	$0.32	$1.06	$1.08

Second-quarter sales increased $101.1 million, or approximately 13%, primarily from higher volume and recent acquisitions. Six-month sales increased $271.2 million, or approximately 19%. Despite higher sales, gross margin percentage declined because of higher manufacturing costs and Steel Processing inventory holding losses versus gains in the prior-year quarter.

Operating income benefited from lower impairment charges than in the prior-year period. Interest expense increased to $9.7 million in the quarter and $19.2 million year to date, reflecting higher average debt after the April 2014 issuance of $250 million of notes. Equity income from unconsolidated affiliates was $22.3 million in the quarter and $50.2 million year to date.

Steel Processing: Second-quarter sales increased to $552.8 million and operating income was $33.9 million, compared with $34.8 million in the prior year. Six-month operating income rose to $69.7 million from $57.4 million.
Pressure Cylinders: Second-quarter sales increased to $252.7 million and operating income to $9.6 million. Growth reflected acquisitions and higher oil and gas equipment sales, partly offset by costs of bringing new capacity online.
Engineered Cabs: Sales increased to $51.5 million, but the segment posted a $5.6 million operating loss. Startup costs for new products at the Florence, South Carolina facility continued to pressure results.
Other: Second-quarter sales declined to $14.0 million and operating loss increased to $4.7 million, including a $1.2 million impairment related to the military construction business.

Cash flow, liquidity and debt

Six-month operating cash flow was $55.9 million, down from $123.8 million in the prior year, primarily because of working-capital changes and lower deferred-tax provisions.
Six-month investing cash outflow was $108.0 million, including $51.1 million for acquisitions and $47.1 million of capital expenditures.
Six-month financing cash outflow was $41.4 million, including $41.6 million of share repurchases and $22.3 million of dividends, partly offset by $20.5 million of long-term borrowings.
Cash and cash equivalents declined to $96.5 million at November 30, 2014 from $190.1 million at May 31, 2014.
Total debt consisted of $10.8 million of short-term borrowings, $101.1 million of current long-term debt maturities and $573.7 million of long-term debt. The carrying amount of long-term debt, including current maturities, was $674.9 million.
The $425 million revolving credit facility had no borrowings outstanding and approximately $413.3 million available after letters of credit. The $100 million accounts-receivable securitization facility had no receivables sold at November 30, 2014 and was expected to be renewed before its January 2015 expiration.
A $100 million aggregate amount of unsecured floating-rate senior notes matured December 17, 2014 and was repaid during December using cash and revolving-credit availability.
Management stated that available cash, operating cash flow and unused credit lines were adequate for normal operations, capital expenditures, debt redemptions, dividends and working capital. Debt covenants were reported to be in compliance.

Material changes, unusual items and outlook

The Company acquired JRE for $1.6 million, MEF for $35.2 million and a 79.59% interest in dHybrid for total consideration of $15.9 million, including $4.0 million of estimated contingent consideration. All were added to Pressure Cylinders.
Second-quarter impairment charges totaled $14.2 million, including $6.3 million for Worthington Nitin Cylinders in India, $3.2 million for the New Albany aluminum cylinder business, $2.4 million for Engineered Cabs assets, $1.2 million for military construction and $1.1 million for non-core Steel Processing assets.
Assets held for sale totaled $28.3 million at November 30, 2014. The Company planned to sell certain non-core Engineered Cabs and Steel Processing assets and its 60%-owned India joint venture.
The Transformation Plan remained ongoing, particularly in Pressure Cylinders and Engineered Cabs, with the goal of reducing costs, expanding margins and improving operational performance.
Management described demand as generally good in key end markets except agriculture, but identified higher manufacturing costs, inventory holding losses, new-capacity startup costs and new-product launch costs as constraints on earnings growth.
No specific numerical earnings or revenue guidance was provided in the filing. Forward-looking results remain subject to economic conditions, customer demand, steel and other commodity prices, foreign exchange, facility performance, acquisitions, restructuring and market conditions in oil and gas, automotive, construction and agriculture.

Risks and contingencies

Lower or volatile oil and natural-gas prices could reduce customer drilling and production spending and weaken demand for oil and gas equipment.
Steel, zinc, natural gas, transportation and other input-cost volatility can affect margins and inventory holding gains or losses.
Engineered Cabs goodwill had a reported $44.9 million balance and its estimated fair value exceeded carrying value by less than 10% at the fiscal 2014 annual test. Weak markets or failure to reduce costs could result in future impairment.
The Company had $6.7 million of borrowings outstanding under the Worthington Nitin Cylinders credit facility, which had matured and was in default; the lender had not called the note as of November 30, 2014.
Guarantees included up to approximately $12.4 million of aircraft residual value exposure and a $2.5 million guarantee of an ArtiFlex term loan. Management considered the expected fair-value obligations immaterial.
The Company had $14.0 million of standby letters of credit outstanding, with no amounts drawn.
Legal proceedings were described as ordinary-course matters and were not expected to materially affect financial position, results or cash flows.
The estimated annual effective tax rate was 33.5% for fiscal 2015 versus 27.8% in the prior-year comparable period; the actual rate may differ materially from the estimate.

Important facts for investors to verify

Whether Pressure Cylinders acquisitions and new capacity generate sustainable margins after startup and integration costs.
Progress and proceeds from planned asset sales, including Worthington Nitin Cylinders and non-core Steel Processing and Engineered Cabs assets.
The status of the defaulted Worthington Nitin Cylinders borrowing and the renewal of the accounts-receivable securitization facility.
Cash generation relative to capital expenditures, acquisitions, dividends, repurchases and upcoming debt maturities.
Exposure to steel-price movements, inventory holding losses, oil and gas demand, agriculture weakness and foreign-currency volatility.
Engineered Cabs operating performance and the risk of additional goodwill or long-lived-asset impairments.
The eventual impact and transition method for the new revenue-recognition standard, which had not yet been determined.