Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended November 30, 2010, fiscal 2011. The supplied filing is for Worthington Industries, Inc., although the request metadata identifies Worthington Enterprises, Inc. Results are unaudited and presented under U.S. GAAP.
Business Context
Worthington is a diversified metal-processing and manufactured-metal-products company operating primarily through Steel Processing, Pressure Cylinders and Metal Framing. The company operated 41 manufacturing facilities and held equity interests in eight joint ventures. Management cited stronger automotive demand, acquisitions and improving general economic conditions, offset by continued weakness in commercial construction.
Key Financial Metrics
| Metric | Three Months Ended Nov. 30, 2010 | Three Months Ended Nov. 30, 2009 | Six Months Ended Nov. 30, 2010 | Six Months Ended Nov. 30, 2009 |
|---|---|---|---|---|
| Net sales | $580.7 million | $448.0 million | $1,197.5 million | $865.5 million |
| Gross margin | $69.8 million; 12.0% | $67.2 million; 15.0% | $148.7 million; 12.4% | $116.4 million; 13.4% |
| Operating income | $12.9 million; 2.2% | $19.1 million; 4.3% | $34.0 million; 2.8% | $14.6 million; 1.7% |
| Net earnings attributable to controlling interest | $14.5 million | $23.2 million | $36.8 million | $29.9 million |
| Diluted EPS | $0.20 | $0.29 | $0.49 | $0.38 |
| Cash dividends per share | $0.10 | $0.10 | $0.20 | $0.20 |
Six-month net earnings attributable to controlling interest increased 23% year over year, despite a 23% decline in the second quarter. Interest expense increased to $9.5 million from $4.6 million for the six-month period, primarily due to higher debt, share repurchases, working-capital needs and the April 2010 issuance of $150 million of 6.5% notes due 2020.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was negative $9.7 million, compared with positive $134.1 million in the prior-year period. The change was driven largely by accounts-payable timing, annual bonus and profit-sharing payments, working-capital requirements and the accounting classification of receivables-facility proceeds.
- Six-month investing cash outflow was $16.5 million, including $10.8 million of capital expenditures and $12.2 million paid for the Hy-Mark Cylinders acquisition.
- Six-month financing cash inflow was $28.1 million, including $123.7 million of short-term borrowings, partially offset by $75.1 million of share repurchases and $15.3 million of dividends paid.
- Cash and cash equivalents were $60.9 million at November 30, 2010, compared with $59.0 million at May 31, 2010.
- Short-term borrowings were $123.7 million and long-term debt was $250.2 million at November 30, 2010. The revolving credit facility had $313.1 million of availability after borrowings and letters of credit.
- The $100 million accounts-receivable facility had $45 million of interests sold and was scheduled to expire in January 2011; management expected renewal before expiration.
- Management stated that the company was in compliance with debt covenants and believed available cash, operating resources and unused credit capacity were adequate for normal needs.
Material Changes Versus the Prior Comparable Period
- Sales increased 30% in the quarter and 38% for the six months, reflecting higher volumes from acquisitions and stronger automotive demand, together with higher selling prices associated with increased steel costs.
- Gross-margin percentages declined because of inventory holding losses, narrower spreads and higher manufacturing costs; the prior-year quarter benefited from inventory holding gains.
- Steel Processing sales increased substantially, but quarterly operating income fell to $8.4 million from $14.7 million as lower spreads and higher SG&A offset volume gains.
- Pressure Cylinders operating income improved to $9.5 million from $4.1 million in the quarter and to $19.1 million from $10.0 million for the six months, aided by stronger North American and improving European operations.
- Metal Framing generated a $6.7 million quarterly operating loss and a $10.6 million six-month operating loss, compared with prior-year operating income or a smaller loss. Weak commercial construction demand, lower volumes, competitive pricing and inventory holding losses were key factors.
- The company repurchased 5.3 million shares for $75.1 million during the six months, reducing the share base by more than 6.5%; 3.2 million shares remained authorized for repurchase at November 30, 2010.
Outlook, Unusual Items and Risks
- No specific earnings or revenue guidance was provided. Management described improving automotive and general economic conditions but continued weakness in construction markets.
- The Transformation Plan generated $1.0 million of restructuring expense for the six months, including facility closures, asset consolidation and severance. Remaining activities were expected to progress through the end of fiscal 2011.
- Management was evaluating the long-term strategy of Metal Framing; this evaluation could trigger future long-lived-asset impairment testing. No impairment was recorded for the six months, while the prior-year period included a $2.7 million Steel Packaging impairment charge.
- A $1.4 million additional reserve was recorded for the BernzOmatic litigation, bringing the total reserve to $14.4 million. The company intended to appeal the verdict and related awards.
- Other exposures included steel and commodity prices, interest rates, foreign exchange, customer credit, cyclical demand, construction weakness, automotive conditions and access to capital markets.
- The company had an aircraft residual-value guarantee with a maximum obligation of approximately $14.7 million and $8.2 million of undrawn standby letters of credit; management considered the fair value and expected exposure immaterial.
- On December 22, 2010, after quarter-end, the company acquired 60% of Nitin Cylinders Limited in India for approximately $21 million to expand its compressed-natural-gas and industrial-gas cylinder business.
Investor Verification Items
- Confirm the registrant identity: the filing text names Worthington Industries, Inc., not Worthington Enterprises, Inc.
- Assess whether negative operating cash flow, increased short-term borrowings and the receivables-facility renewal affected subsequent liquidity.
- Monitor Metal Framing performance and any resulting impairment or restructuring charges.
- Review the outcome and cash impact of the BernzOmatic appeal and litigation reserve.
- Evaluate whether steel-price movements and inventory holding losses continue to pressure margins.
- Verify the integration and financial contribution of Hy-Mark and the subsequent Nitin Cylinders acquisition.
- Reconcile an apparent MD&A reference stating that VIE guidance was adopted on June 1, 2011 with Note A, which states adoption occurred on June 1, 2010.