Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended November 30, 2013; filed January 9, 2014. The filing identifies the registrant as Worthington Industries, Inc. The company is a diversified metals manufacturer with reportable segments in Steel Processing, Pressure Cylinders and Engineered Cabs.
Financial performance and position
| Metric | Three months ended Nov. 30, 2013 | Three months ended Nov. 30, 2012 | Six months ended Nov. 30, 2013 | Six months ended Nov. 30, 2012 |
|---|---|---|---|---|
| Net sales | $769.9 million | $622.6 million | $1,462.2 million | $1,288.7 million |
| Gross margin | $128.2 million; 16.7% | $94.9 million; 15.2% | $239.2 million; 16.4% | $188.5 million; 14.6% |
| Operating income | $19.5 million; 2.5% | $28.8 million; 4.6% | $58.1 million; 4.0% | $62.2 million; 4.8% |
| Net earnings attributable to controlling interest | $23.0 million | $31.8 million | $77.5 million | $65.8 million |
| Diluted EPS | $0.32 | $0.45 | $1.08 | $0.94 |
| Operating cash flow | $29.3 million | $88.4 million | $123.8 million | $159.4 million |
- At November 30, 2013, cash and cash equivalents were $109.1 million, compared with $51.4 million at May 31, 2013. Total assets were $2.04 billion and total liabilities were $1.06 billion.
- Short-term borrowings were $43.5 million and long-term debt, including current maturities, was approximately $406.8 million. The $425 million revolving credit facility had $404.8 million of availability after borrowings and letters of credit.
- Capital expenditures were $30.4 million for the first six months. The company repurchased 1,380,500 shares for $50.3 million and paid $10.4 million in common dividends.
- The quarterly dividend was increased to $0.15 per share from $0.13 in the prior-year comparable quarters.
Material changes versus the prior comparable period
- Second-quarter sales increased $147.3 million, primarily from higher volumes and acquisitions, including the consolidation of TWB. Lower average selling prices reduced the increase by $12.7 million.
- Gross margin improved by $33.4 million, aided by higher volumes and Steel Processing inventory holding gains versus losses in the prior-year quarter.
- Operating income declined $9.3 million in the quarter because of a $30.7 million non-cash impairment charge for trade names, partially offset by stronger Steel Processing performance.
- Second-quarter net earnings attributable to controlling interest decreased $8.8 million to $23.0 million. Year-to-date earnings increased $11.7 million to $77.5 million.
- Steel Processing second-quarter sales rose to $492.1 million and operating income increased to $34.8 million. Pressure Cylinders sales increased modestly to $214.0 million, but operating income fell to $8.3 million. Engineered Cabs sales declined to $47.9 million and reported a $20.9 million operating loss.
- On July 31, 2013, the company acquired an additional 10% of TWB for $17.9 million, increasing ownership to 55% and resulting in consolidation. The step acquisition generated an $11.0 million non-cash pretax gain.
Outlook, unusual items, contingencies and risks
- The company launched a re-branding initiative and plans to discontinue most non-Worthington trade names, except selected retail and joint-venture brands. This resulted in a $30.7 million trade-name impairment charge, including $19.1 million in Engineered Cabs and $11.6 million in Pressure Cylinders.
- A fire at the Austrian Pressure Cylinders facility generated $3.6 million of insurance proceeds through November 30, 2013, including a $2.5 million pretax gain on damaged property. Management stated that insurance coverage prevented a material adverse financial impact.
- Management characterized second-quarter performance as solid, with strength in Steel Processing, modest Pressure Cylinders growth and weakness in Engineered Cabs. Transformation initiatives remain ongoing, particularly in Pressure Cylinders and Engineered Cabs.
- After quarter-end, the company announced the planned closure of its Baltimore steel facility by the end of fiscal 2014 and stated that the net financial effect was not expected to be material. It also announced an agreement to acquire 75% of ARITAS, a Turkish LNG and cryogenic technology company, subject to regulatory approval.
- Key risks include cyclicality, demand and pricing in automotive and construction markets, steel and other raw-material costs, inventory and working-capital requirements, customer and supplier financial condition, facility closures, execution of transformation initiatives, international operations, currency and interest-rate exposure, and litigation or product-liability claims.
- A wrongful-death claim was tendered to the excess-loss insurer, limiting the company’s overall exposure to $2.0 million; a $2.0 million pretax charge was recorded. The company also reported an aircraft residual-value guarantee of approximately $13.5 million, an ArtiFlex loan guarantee for debt of $4.2 million, and $11.7 million of undrawn standby letters of credit.
- Management stated that it was in compliance with debt covenants and had adequate resources for normal operations, capital expenditures, debt payments, dividends and working capital. No material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Verify the effect of consolidating TWB on reported sales, margins, debt, cash flow and noncontrolling interests.
- Separate recurring operating performance from the $30.7 million trade-name impairment, $11.0 million TWB remeasurement gain, insurance gain and asset-sale gains.
- Assess whether Engineered Cabs demand weakness and the announced Baltimore closure could produce additional restructuring or impairment charges.
- Review liquidity after share repurchases, dividends, capital expenditures and potential funding needs for the ARITAS transaction or other acquisitions.
- Monitor steel prices, inventory holding gains or losses, automotive production, construction demand and Pressure Cylinders volume trends.
- Confirm the status and terms of the ARITAS acquisition, the China joint venture, the North American cylinder-business sale and remaining Transformation Plan liabilities.