Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2013, compared with the periods ended February 29, 2012. The filing identifies the registrant as Worthington Industries, Inc., although the request metadata refers to Worthington Enterprises, Inc.
Business Context
The company is a diversified metals manufacturer focused on value-added steel processing, pressure cylinders and custom-engineered cabs. At February 28, 2013, it operated 35 manufacturing facilities, held equity interests in 12 joint ventures operating 47 facilities, and reported Steel Processing, Pressure Cylinders and Engineered Cabs as its principal segments.
Financial Metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $619.5 million | $611.3 million | $1,908.2 million | $1,779.3 million |
| Gross margin | $97.0 million; 15.7% | $83.3 million; 13.6% | $285.5 million; 15.0% | $211.4 million; 11.9% |
| Operating income | $33.4 million; 5.4% | $18.1 million; 3.0% | $95.6 million; 5.0% | $42.1 million; 2.4% |
| Net earnings | $37.3 million | $28.4 million | $104.8 million | $70.9 million |
| Net earnings attributable to controlling interest | $37.1 million | $25.9 million | $102.9 million | $63.5 million |
| Diluted EPS | $0.52 | $0.37 | $1.46 | $0.90 |
| Equity income from unconsolidated affiliates | $25.7 million | $24.0 million | $73.6 million | $70.6 million |
| Net cash from operating activities | $36.3 million | $87.4 million | $195.7 million | $137.0 million |
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $37.4 million at February 28, 2013, compared with $41.0 million at May 31, 2012.
- Total assets were $1.885 billion, compared with $1.878 billion at May 31, 2012. Total equity increased to $860.8 million from $747.4 million.
- Short-term borrowings declined to $30.6 million from $274.9 million, while long-term debt increased to $406.5 million from $257.5 million.
- The company issued $150.0 million of unsecured senior notes due August 10, 2024, bearing interest at 4.60%, and used the proceeds primarily to repay short-term and revolving borrowings.
- Borrowings under the $425.0 million revolving credit facility were $24.3 million; after letters of credit, $388.7 million remained available. Management stated that debt covenants were satisfied.
- The accounts receivable securitization facility was extended to January 2015 and its capacity was reduced from $150.0 million to $100.0 million. No interests in the eligible receivables pool were sold at quarter-end.
- Capital expenditures were $34.4 million during the first nine months. The company paid $44.1 million of dividends and repaid $251.6 million of short-term borrowings.
Material Changes Versus Prior Comparable Period
- Q3 sales increased $8.3 million, while nine-month sales increased $128.9 million. Lower steel prices reduced reported sales, but acquisitions, higher volumes and product mix were favorable.
- Gross margin expanded by $13.7 million in Q3 and $74.1 million year to date, reflecting improved product mix, lower Steel Processing inventory holding losses and reduced pressure-cylinder recall costs.
- Pressure Cylinders was the principal growth contributor. Q3 sales rose $17.5 million and operating income rose $7.0 million, aided by the Westerman acquisition and improved existing operations. Nine-month sales increased $73.6 million and operating income increased $26.7 million.
- Steel Processing Q3 sales declined $17.7 million and shipments declined 11%, but operating income increased $2.1 million due primarily to lower SG&A and a more favorable direct-versus-toll volume mix. Nine-month operating income increased $7.7 million.
- Engineered Cabs generated Q3 sales of $48.6 million and operating income of $0.1 million, versus a $1.4 million operating loss in the prior-year quarter. Demand remained soft because of production delays and lower demand from its largest customer.
- Equity income increased $1.7 million in Q3 and $3.0 million year to date. WAVE was the largest contributor, generating $17.1 million of Q3 equity income and $50.3 million year to date.
- The voluntary MAP-PRO, propylene and MAAP cylinder recall generated an additional $2.6 million of charges during the first nine months, bringing cumulative pretax charges to $12.2 million. This was below the $9.7 million charged in the prior-year comparable period.
Outlook, Commentary, Risks and Unusual Items
- Management described Q3 performance as strong but reported mixed volume trends: Pressure Cylinders volumes were essentially flat, Steel Processing volumes declined, and Engineered Cabs faced continued weak demand.
- Management is implementing cost reductions in Engineered Cabs while seeking to preserve production capacity. Transformation Plan work continued in Pressure Cylinders, and diagnostics began in Engineered Cabs.
- The company expects approximately $1.8 million of remaining Transformation Plan liabilities to be paid in the fourth quarter of fiscal 2013; remaining lease termination and severance obligations extend through September 2016.
- Indicators of possible impairment were identified for the Indian WNCL joint venture. No impairment was recorded because projected undiscounted cash flows exceeded the $7.5 million asset-group carrying value, but management stated that a write-down remains reasonably possible if estimates change.
- The company’s $6.6 million investment in the Chinese WMSFMCo joint venture was not considered impaired, although sales growth was slower than expected and management will continue monitoring it.
- Key risks include cyclical demand, automotive and construction exposure, steel and other raw-material prices, energy and transportation costs, customer and supplier financial distress, facility closures, acquisitions and integration, foreign exchange, litigation, product liability, healthcare costs and economic weakness in the United States and Europe.
- Contingencies included a $14.2 million maximum aircraft residual-value guarantee, a $5.0 million guarantee of an ArtiFlex term loan and $12.0 million of undrawn standby letters of credit. Management considered the likely fair-value obligations immaterial.
- No material litigation, environmental matters, guarantees or changes in internal control were reported. Disclosure controls were assessed as effective at a reasonable assurance level.
Investor Verification Items
- Verify the sustainability of margin expansion, particularly the contribution from favorable product mix, lower recall costs and derivative gains.
- Monitor Steel Processing volumes, steel-price pass-through, direct-versus-toll mix and automotive customer demand.
- Assess Engineered Cabs’ largest-customer concentration, production delays and progress of planned cost reductions.
- Reconcile debt maturities, variable-rate exposure, credit-facility availability and the effect of the 2024 notes on future interest expense.
- Track remaining product-recall exposure, Transformation Plan payments and the potential for impairment at WNCL or WMSFMCo.
- Evaluate the quality and cash conversion of earnings, including the significant contribution from unconsolidated affiliates and joint-venture distributions.
- Confirm future dividend decisions; the board had accelerated the third- and fourth-quarter fiscal 2013 dividends, while future dividends remained subject to board approval.