Worthington Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2017. The filing is an annual report, not a quarterly filing for “2016 Q4.” The company is a diversified metals manufacturer with three reportable segments: Steel Processing, Pressure Cylinders, and Engineered Cabs, plus Other operations and joint ventures.
Financial performance and position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $3.014 billion | $2.820 billion | +$194.4 million |
| Gross margin | $535.9 million; 17.8% | $452.6 million; 16.1% | +$83.3 million |
| Operating income | $213.1 million; 7.1% | $122.1 million; 4.3% | +$91.1 million |
| Net earnings | $217.9 million | $157.6 million | +$60.3 million |
| Net earnings attributable to controlling interest | $204.5 million; 6.8% of sales | $143.7 million; 5.1% | +$60.8 million |
| Diluted EPS | $3.15 | $2.22 | +$0.93 |
| Cash flow from operations | $335.7 million | $413.3 million | -$77.6 million |
| Capital expenditures | $68.4 million | $97.0 million | -$28.6 million |
| Cash and cash equivalents | $278.1 million | $84.2 million | +$193.9 million |
| Total debt, net | $578.6 million | $581.0 million | -$2.4 million |
| Working capital | $670.2 million | $485.0 million | +$185.1 million |
Fiscal 2017 gross margin was approximately 17.8%, operating margin was 7.1%, and net margin was approximately 7.2%. The company declared $0.80 per common share in dividends during fiscal 2017, compared with $0.76 in fiscal 2016.
- Steel Processing: Net sales increased to $2.075 billion from $1.844 billion; operating income increased to $170.5 million from $112.0 million. Results benefited from higher steel prices, favorable pricing spreads, inventory holding gains, higher volume, and consolidation of Worthington Specialty Processing.
- Pressure Cylinders: Net sales declined to $829.8 million from $844.9 million, but operating income increased to $54.1 million from $28.4 million. Consumer products and alternative fuels improved, while industrial products and oil and gas equipment remained weak.
- Engineered Cabs: Net sales declined to $101.4 million from $121.9 million. The operating loss improved to $7.7 million from $19.3 million due to cost reductions and lower impairment and restructuring charges.
- Unconsolidated affiliates: Equity income declined to $110.0 million from $115.0 million, primarily due to lower WAVE and ArtiFlex contributions and the consolidation of WSP.
Liquidity, debt, and cash flow
- Operating cash flow was $335.7 million. Working capital increased as higher steel prices required greater investment in receivables and inventories.
- The company ended the year with $278.1 million of cash, no borrowings under its $500.0 million revolving credit facility, and approximately $486.4 million of remaining availability after letters of credit.
- Debt consisted principally of $250.0 million of 4.55% senior notes due 2026, $150.0 million of 4.60% notes due 2024, $150.0 million of 6.50% notes due 2020, and term loans. Total debt, before discounts and issuance costs, was $581.2 million.
- The accounts receivable securitization facility permits borrowings of up to $100.0 million and matures in January 2018; no interests in the receivables pool had been sold at May 31, 2017.
- Contractual cash obligations totaled $813.3 million, including $581.1 million of debt principal, $179.6 million of estimated interest, $40.5 million of operating leases, and $12.0 million of royalty obligations.
Material changes versus the prior comparable period
- Revenue increased 6.9%, led primarily by higher Steel Processing selling prices and the WSP consolidation.
- Operating income increased approximately 74.6%, while operating margin expanded from 4.3% to 7.1%.
- No impairment charges were recorded in fiscal 2017, compared with $26.0 million in fiscal 2016, including $23.0 million related to oil and gas equipment assets and $3.0 million related to an Engineered Cabs facility.
- Fiscal 2017 restructuring and other expense was $6.4 million, including costs related to Pressure Cylinders’ cryogenics consolidation and the closure of the Precision Specialty Metals business.
- Cash flow from operations decreased despite higher earnings because receivables and inventories increased with higher steel prices.
- The company made no share repurchases during fiscal 2017, preserving cash for the subsequent AMTROL acquisition.
Outlook, commentary, risks, and unusual items
Management did not provide a specific numerical earnings or revenue forecast in the filing. Management emphasized optimizing existing operations, pursuing strategic acquisitions and joint ventures, cost reductions, new products, and operational efficiencies. Management stated that it believed available cash, operating cash flow, credit facilities, and market access were adequate for normal operating needs, debt service, dividends, capital expenditures, and existing-business working capital.
- On June 2, 2017, after the reporting date, the company acquired AMTROL for approximately $283.0 million, funded primarily with cash on hand. AMTROL expands the Pressure Cylinders segment with water-system tanks and additional U.S. and European cylinder operations.
- Effective June 1, 2017, Packaging Solutions was moved from Steel Processing to Engineered Cabs to pursue design-engineering and manufacturing synergies.
- Fiscal 2017 Steel Processing earnings benefited from significant inventory holding gains in a rising steel-price environment; results could reverse if steel prices decline.
- The company identified potential impairment sensitivity at its Turkish cryogenics joint venture. The asset group had a carrying value of approximately $40.0 million, and estimated undiscounted cash flows exceeded carrying value by only approximately 12% at year-end.
- Key risks include cyclical automotive, construction, oil and gas, and heavy-equipment markets; steel, zinc, helium, energy, and freight price volatility; limited ability to pass through raw-material cost increases; customer concentration and financial distress; joint-venture performance; acquisition integration; litigation and self-insured claims; environmental liabilities; cyber and information-system disruption; foreign operations; and refinancing or covenant risk.
- The company received $102.0 million of distributions from unconsolidated affiliates. Cumulative WAVE distributions exceeded the company’s investment balance, resulting in a $63.0 million liability at May 31, 2017.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether fiscal 2017 Steel Processing margins were sustained after the favorable steel-price and inventory holding-gain environment.
- The post-year-end financial impact, financing, purchase accounting, and integration results of the $283.0 million AMTROL acquisition.
- Debt maturities, particularly the $150.0 million senior notes due in 2020, and the status of the revolving credit and receivables facilities.
- The recoverability of the Turkish cryogenics asset group and the potential for future impairment charges.
- Performance trends in oil and gas equipment, industrial cylinders, Engineered Cabs, WAVE, and ArtiFlex.
- Exposure to automotive customers, steel-price movements, customer concentration, environmental claims, self-insurance reserves, and other contingencies.
- The effect of future accounting standards, including revenue recognition and lease accounting, which were still under evaluation at filing.