Safe Harbor Statement
“We had a very good third quarter performance with Steel Processing contributing near record earnings and overall, we produced year-over-year growth, which remains our focus,” Chairman and CEO John McConnell said. “Sales growth, higher steel pricing and higher tolling volume helped drive Steel Processing results. In Pressure Cylinders, demand improved for our helium and camping cylinders, while oil & gas markets remained soft, however, volumes have stabilized and certain markets are showing some increased demand.” McConnell added, “The Company’s joint ventures also contributed steady earnings.”
Consolidated Quarterly Results
Net sales for the third quarter of fiscal 2017 were $703.4 million, up 9% from the comparable quarter in the prior year, when net sales were $647.1 million. The increase was the result of higher average direct selling prices in Steel Processing and higher tolling volume due to the consolidation of the Worthington Specialty Processing (WSP) joint venture effective March 1, 2016.
Gross margin increased $15.1 million from the prior year quarter to $111.0 million on a favorable pricing spread in Steel Processing, which benefited from lower inventory holding losses and improvements in the consumer products business within Pressure Cylinders.
Operating income for the current quarter was $34.3 million, an increase of $9.2 million from the prior year quarter, as the improvement in gross margin was partially offset by higher SG&A expense, up $5.1 million from the prior year quarter on higher profit sharing and bonus expense and the consolidation of WSP.
Interest expense was $7.7 million for the current quarter, compared to $7.9 million in the prior year quarter. The decrease was due to lower short-term borrowings.
Equity income from unconsolidated joint ventures decreased $2.3 million from the prior year quarter to $22.7 million, as lower contributions from ArtiFlex and Serviacero more than offset improvements at ClarkDietrich. The Company received cash distributions of $21.4 million from unconsolidated joint ventures during the quarter, a cash conversion rate of 94% on equity income.
Income tax expense was $11.1 million in the current quarter compared to $11.3 million in the prior year quarter. The decrease was due to favorable discrete items recorded in the current quarter, which more than offset the impact of higher earnings. Tax expense in the current quarter reflects an estimated annual effective rate of 27.2% compared to the estimated annual rate of 29.6% for the prior year quarter.
At quarter-end, total debt was $577.0 million, down $0.4 million from November 30, 2016, due to lower short-term borrowings. The Company had $227.3 million of cash at quarter-end.
Quarterly Segment Results
Steel Processing’s net sales of $478.2 million were up 14%, or $59.1 million, from the comparable prior year quarter on higher average direct selling prices and higher tolling volume due to the consolidation of WSP. Operating income of $26.0 million was $4.7 million higher than the prior year quarter due to a favorable pricing spread, including a benefit from lower inventory holding losses, and contributions from WSP, partially offset by an increase in allocated corporate costs and higher manufacturing expenses. The mix of direct versus toll tons processed was 52% to 48% in the current quarter, compared to 60% to 40% in the prior year quarter. The change in mix was primarily the result of the consolidation of WSP effective March 1, 2016.
Pressure Cylinders’ net sales of $198.4 million were down 1%, or $2.3 million, from the comparable prior year quarter on declines in the industrial products and oil & gas equipment businesses, partially offset by improvements in consumer products. Operating income of $10.1 million was $1.1 million higher than the prior year quarter driven by higher profitability in the consumer products business, partially offset by higher restructuring charges.
Engineered Cabs’ net sales of $23.5 million were down $2.0 million, or 8%, from the prior year quarter due to declines in market demand. The operating loss of $2.0 million was $2.1 million less than the prior year quarter driven by higher gross margin and lower SG&A expense. A favorable pricing spread combined with lower manufacturing costs drove the margin improvements.
The “Other” category includes the energy innovations business, as well as non-allocated corporate expenses. Net sales in the “Other” category were $3.3 million, an increase of $1.5 million over the prior year quarter on higher volume in the energy innovations business. The operating income of $0.2 million for the quarter was driven by improvements in the energy innovations business, partially offset by an increase in non-allocated corporate expenses.
Recent Business Developments
- On March 29, 2017, the Board of Directors declared a quarterly dividend of $0.20 per share payable on June 29, 2017 to shareholders of record on June 15, 2017.
“There is great energy around our Lean Transformation efforts as we accelerate the deployment of more teams, expanding our abilities, moving more quickly and reaching deeper in our Company,” McConnell said. “We believe the economy continues to strengthen though unevenly, with certain markets not as robust as others. After a record first and second quarter and a strong third, we anticipate finishing our fiscal year well.”
Worthington will review fiscal 2017 third quarter and full-year results during its quarterly conference call on March 30, 2017, at 10:30 a.m., Eastern Daylight Time. Details regarding the conference call can be found on the Company web site at www.WorthingtonIndustries.com.
About Worthington Industries
Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America’s premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, transportation and alternative fuel tanks, oil & gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.
Founded in 1955, the Company operates under a long-standing corporate philosophy rooted in the golden rule. Earning money for its shareholders is the first corporate goal. This philosophy serves as the basis for an unwavering commitment to the customer, supplier, and shareholder, and as the Company’s foundation for one of the strongest employee-employer partnerships in American industry.
The Company wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements by the Company relating to outlook, strategy or business plans; the ability to correct performance issues at operations; future or expected growth, forward momentum, performance, sales, volumes, cash flows, earnings, balance sheet strengths, debt, financial condition or other financial measures; pricing trends for raw materials and finished goods and the impact of pricing changes; demand trends for us or our markets; additions to product lines and opportunities to participate in new markets; expected benefits from Transformation efforts; anticipated capital expenditures and asset sales; anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof; projected profitability potential, capacity, and working capital needs; the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, newly-created joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations; the alignment of operations with demand; the ability to operate profitably and generate cash in down markets; the ability to maintain margins and capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets; expectations for Company and customer inventories, jobs and orders; expectations for the economy and markets or improvements therein; expectations for increasing volatility or improving and sustainable earnings, earnings potential, margins or shareholder value; effects of judicial rulings and other non-historical matters constitute “forward-looking statements” within the meaning of the Act. Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected. Any number of factors could affect actual results, including, without limitation, the effect of national, regional and global economic conditions generally and within major product markets, including an economic downturn; the effect of conditions in national and worldwide financial markets; lower oil prices as a factor in demand for products; product demand and pricing; changes in product mix, product substitution and market acceptance of our products; fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations; effects of facility closures and the consolidation of operations; the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction, oil and gas, and other industries in which we participate; failure to maintain appropriate levels of inventories; financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business; the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts; the ability to realize other cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from Transformation initiatives, on a timely basis; the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom; capacity levels and efficiencies, within facilities, within major product markets and within the industries as a whole; the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, civil unrest, international conflicts, or terrorist activities or other causes; changes in customer demand, inventories, spending patterns, product choices, and supplier choices; risks associated with doing business internationally, including economic, political and social instability, foreign currency exposure and the acceptance of our products in markets; the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment; the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters; deviation of actual results from estimates and/or assumptions used by us in the application of our significant accounting policies; level of imports and import prices in our markets; the impact of judicial rulings and governmental regulations, both in the United States and abroad, including those adopted by the United States Securities and Exchange Commission and other governmental agencies as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; the effect of changes to healthcare laws in the United States, which may increase our healthcare and other costs and negatively impact our operations and financial results; cyber security risks; and other risks described from time to time in the Company’s filings with the United States Securities and Exchange Commission, including those described in “Part I – Item 1A. – Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.