Worthington Industries (WOR) has been under some pressure since reporting Q3 (Feb) earnings after the close last Wednesday. We thought it would be a good idea to provide some color to better understand the results.
In case you're not familiar, WOR is primarily what's known as a steel processor. They do not make steel, rather they purchase large 20-ton coils from steel producers like AKS, NUE, MT, STLD and X. They then process the steel coils further to the precise type, thickness, length, width, shape and surface quality required by customer specifications.
These products cannot typically be supplied as efficiently by steel mills to the end-users of these products. So steel processors like WOR fill this niche. The majority of revenue comes from its Steel Processing unit which accounted for 65% of revenue in FY16. About half of segment revenue comes from the automotive market. Other key end markets include agricultural, appliance, construction, hardware, HVAC, lawn and garden, office equipment etc.
Worthington also does what's known as toll processing for steel mills, large end-users, service centers and other processors. Toll processing is different from typical steel processing in that the mill retains title to the steel and has the responsibility for selling the end product.
In addition to steel processing, WOR also has a Pressure Cylinders operating segment which makes pressure cylinders, tanks and various accessories. Examples include propane cylinders for barbequing, hand held torches etc. Worthington also has an Engineered Cabs segment which makes enclosed cabs where crane operators or farmers sit to operate that equipment.
Turning to its FebQ results, non-GAAP EPS came in at $0.55, which was a good bit below market expectations. Revenue rose 8.7% year/year to $703.4 mln, which also was below market expectations. The company does not provide guidance so analyst models are always a bit in the dark which can lead to volatility around earnings.
WOR said that sales growth, higher steel pricing and higher tolling volume helped drive its Steel Processing segment results. In Pressure Cylinders, demand improved for helium and camping cylinders, while oil & gas markets remained soft, however, volumes have stabilized and certain markets are showing some increased demand.
Breaking it down by segment, Steel Processing revenue of $478.2 mln was up 14% YoY on higher average direct selling prices and higher tolling volume due to the consolidation of WSP. The mix of direct vs toll tons processed was 52% to 48% in FebQ, compared to 60% to 40% in the prior year quarter. Again, the change in mix was primarily the result of the consolidation of its WSP joint venture.
Pressure Cylinders' sales of $198.4 mln were down 1% YoY due to declines in the industrial products and oil & gas equipment businesses, partially offset by improvements in consumer products. Engineered Cabs segment sales fell 8% YoY to $23.5 mln due to declines in market demand.
Looking ahead, WOR says that the economy continues to strengthen though unevenly, with certain markets not as robust as others. After a record Q1 (Aug) and Q2 (Nov), a strong Q3 (Feb), the company anticipates finishing its fiscal year well.
In sum, the stock made a nice run from mid-January 2016 when it traded as low as $25.50 to as high as $62.44 in late November. The surprise Trump win propelled the stock sharply higher in November on hopes that WOR would benefit from more protectionist trade policies and on increased infrastructure spending. However, the stock has pulled back in recent months on mediocre NovQ and FebQ results as WOR missed EPS expectations after large EPS beats in MayQ and AugQ.