Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012 ended February 29, 2012, compared with February 28, 2011. The filing identifies the registrant as Worthington Industries, Inc.; the request metadata refers to Worthington Enterprises, Inc. Financial statements are unaudited.
Business Context
Worthington is a diversified metal-processing and manufactured-metal-products company operating primarily through Steel Processing, Pressure Cylinders and the newly established Engineered Cabs segments. It also holds interests in 11 unconsolidated joint ventures. Fiscal 2012 comparability was significantly affected by the deconsolidation of businesses contributed to ClarkDietrich and ArtiFlex, the wind-down of Metal Framing, and acquisitions in Pressure Cylinders and Engineered Cabs.
Key Financial Metrics
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Net sales | $611.3 million | $569.4 million | $1,779.3 million | $1,766.9 million |
| Gross margin | $83.3 million; 13.6% | $88.3 million; 15.5% | $211.4 million; 11.9% | $237.0 million; 13.4% |
| Operating income | $18.1 million; 3.0% | $28.0 million; 4.9% | $42.1 million; 2.4% | $62.0 million; 3.5% |
| Net earnings | $28.4 million | $28.3 million | $70.9 million | $69.5 million |
| Net earnings attributable to controlling interest | $25.9 million | $26.3 million | $63.5 million | $63.1 million |
| Diluted EPS | $0.37 | $0.35 | $0.90 | $0.83 |
| Cash flow from operations | $87.4 million | $65.1 million | $137.0 million | $55.3 million |
- Sales drivers: Q3 sales increased $41.8 million, primarily from higher selling prices and acquisitions. Excluding joint-venture deconsolidations, volume growth contributed materially. Nine-month sales increased only $12.4 million because deconsolidations reduced reported volume by $309.6 million.
- Segment performance: Q3 Steel Processing sales rose 21.7% and operating income increased to $15.4 million. Pressure Cylinders sales rose 38.1%, but operating income was flat at $10.9 million. Engineered Cabs contributed $40.2 million of sales and a $1.4 million operating loss, including purchase-accounting and acquisition-related costs.
- Liquidity and debt: Cash was $35.3 million at February 29, 2012, versus $56.2 million at May 31, 2011. Short-term borrowings were $285.8 million, including $170.9 million under the $400 million revolving credit facility and $110 million sold under the receivables securitization facility. Long-term debt was $252.5 million.
- Credit availability: Approximately $218.8 million remained available under the revolving credit facility after outstanding borrowings and letters of credit. The company was pursuing renewal and extension of the facility, which was scheduled to mature in May 2013.
- Capital allocation: Nine-month acquisition spending was $232.2 million, capital expenditures were $15.8 million, share repurchases were $52.1 million, and dividends paid were $23.9 million. Quarterly dividends increased to $0.12 per share from $0.10.
- Joint ventures: Equity income increased to $24.0 million in Q3 and $70.6 million year to date, compared with $17.0 million and $51.5 million, respectively. Distributions from unconsolidated affiliates totaled $116.3 million year to date, including a $50 million special dividend from WAVE.
Material Changes Versus Prior Comparable Period
- Gross margin and operating margin declined because of joint-venture deconsolidations, unfavorable Pressure Cylinders mix, higher manufacturing expenses, inventory holding losses and recall-related costs.
- Pressure Cylinders reported nine-month operating income of $23.3 million, down $6.7 million, primarily because of $9.7 million of recall-related charges and costs.
- SG&A decreased $12.7 million year to date, largely because of deconsolidations, but Q3 SG&A increased $2.6 million due to legal accruals, amortization and acquisition costs.
- Cash flow from operations improved substantially, but investing cash use increased because of acquisitions. The resulting funding requirement was met primarily through short-term borrowings, operating cash flow and joint-venture distributions.
- Total assets increased to $1.86 billion from $1.67 billion, reflecting acquisitions, including $61.3 million of additional goodwill and intangible assets relative to May 31, 2011.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that available cash, operating cash flow and unused credit facilities were adequate for normal operating needs, capital expenditures, debt obligations, dividends and working capital. No formal earnings guidance was provided.
- The company announced a voluntary recall of MAP-PRO, propylene and MAAP cylinders and related torch kits because a third-party valve may leak. At February 29, 2012, remaining reserves were $7.0 million. Actual costs may vary based on returns, freight, consumer response and supplier recoveries.
- An additional $1.5 million pre-tax legal accrual was recorded in Q3 related to an Ohio wrongful-death professional-negligence case; insurance limits the company’s overall exposure.
- The Bernz acquisition included settlement of a supply-contract dispute for $10.0 million, compared with previously recorded reserves of $14.4 million, producing a $4.4 million settlement gain.
- Fiscal 2012 acquisitions included Bernz, STAKO, Coleman Cylinders and Angus. Angus was acquired for approximately $132.9 million in cash plus assumed debt and established the Engineered Cabs segment. Subsequent to quarter-end, the company acquired a 75% interest in PSI Energy Solutions for $7.0 million.
- Key ongoing risks include cyclical automotive and construction demand, steel and other commodity-price volatility, customer and supplier financial distress, execution of acquisitions and transformation initiatives, facility closures, product liability and recall costs, foreign currency exposure, and access to capital markets.
- Management stated that no goodwill or indefinite-lived intangible-asset impairment indicators were present during the quarter. The company remained in compliance with debt covenants. Standard & Poor’s maintained a BBB stable rating; Moody’s downgraded the company from Baa2 to Baa3 on March 28, 2012.
Investor Verification Checklist
- Reconcile reported growth with the effects of ClarkDietrich and ArtiFlex deconsolidations and the Metal Framing wind-down.
- Assess whether Pressure Cylinders can recover margins after the recall, acquisition-related costs and unfavorable product mix.
- Verify the remaining recall liability, potential supplier recoveries and any subsequent recall charges.
- Review acquisition integration, purchase-accounting adjustments and the performance of Engineered Cabs.
- Monitor short-term borrowing levels, renewal of the revolving credit facility, receivables securitization availability and the effect of the Moody’s downgrade.
- Evaluate dependence on joint-venture earnings and distributions, including the nonrecurring $50 million WAVE dividend.
- Confirm the status and proceeds of assets held for sale and remaining Metal Framing closure obligations.
- Review the aircraft residual-value guarantee, ArtiFlex loan guarantee, outstanding letters of credit and the $2.0 million annual Coleman trademark royalty commitment.