Worthington Industries, Inc. Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended November 30, 2012, the second quarter and first six months of fiscal 2013. Worthington is a diversified metals manufacturer operating primarily through Steel Processing, Pressure Cylinders, Engineered Cabs and Other businesses, with additional investments in unconsolidated joint ventures.
Financial performance and position
| Metric | Three months ended November 30, 2012 | Three months ended November 30, 2011 | Six months ended November 30, 2012 | Six months ended November 30, 2011 |
|---|---|---|---|---|
| Net sales | $622.6 million | $565.7 million | $1,288.7 million | $1,168.0 million |
| Gross margin | $94.9 million; 15.2% | $56.6 million; 10.0% | $188.5 million; 14.6% | $128.1 million; 11.0% |
| Operating income | $28.8 million; 4.6% | $2.8 million; 0.5% | $62.2 million; 4.8% | $24.0 million; 2.1% |
| Net earnings attributable to controlling interest | $31.8 million; $0.45 diluted EPS | $12.0 million; $0.17 diluted EPS | $65.8 million; $0.94 diluted EPS | $37.6 million; $0.53 diluted EPS |
| Operating cash flow | $88.4 million | $64.4 million | $159.4 million | $49.5 million |
- Cash and cash equivalents were $32.9 million at November 30, 2012, compared with $41.0 million at May 31, 2012.
- Total assets were $1.82 billion and total equity was $822.5 million at November 30, 2012.
- Short-term borrowings were $44.0 million and long-term debt was $406.8 million. Including current maturities, carrying-value debt was $408.0 million.
- The $425.0 million revolving credit facility had $390.9 million of availability after borrowings and standby letters of credit. The company reported compliance with its debt covenants.
- Capital expenditures were $24.6 million for the first six months. The company paid $17.1 million in common dividends and received $33.4 million of distributions from unconsolidated affiliates.
- Equity in net income of unconsolidated affiliates was $25.2 million in the second quarter and $47.9 million year to date.
Material changes versus the prior comparable period
- Second-quarter sales increased 10.1%, while six-month sales increased 10.3%. Volume growth, particularly from acquisitions, more than offset lower average selling prices caused largely by lower steel prices.
- Gross margin expanded substantially because of higher volumes, improved product mix, lower Steel Processing inventory holding losses and lower Pressure Cylinders recall costs.
- Pressure Cylinders sales increased to $207.5 million from $176.7 million, and operating income rose to $17.1 million from $0.5 million. The improvement reflected acquisitions, cost containment, mix and a reduction in recall charges.
- Steel Processing sales declined to $339.3 million from $373.5 million because of lower steel prices and an 8% volume decline; operating income nevertheless increased to $13.3 million from $7.4 million.
- Engineered Cabs contributed $57.8 million of second-quarter sales and $0.6 million of operating income. It was acquired on December 29, 2011 and therefore had no comparable prior-year segment results.
- Operating cash flow increased by $109.9 million year to date, primarily from improved earnings and working-capital changes.
- On September 17, 2012, the company acquired Westerman, Inc. for approximately $62.7 million in cash and assumed and repaid approximately $7.3 million of debt. Westerman manufactures tanks, pressure vessels and marine hoists.
- On August 10, 2012, the company issued $150.0 million of unsecured senior notes due 2024 bearing 4.60% interest, using proceeds partly to repay short-term and revolving borrowings.
Guidance, outlook, risks and unusual items
- The filing does not provide specific numerical earnings or revenue guidance. Management described second-quarter performance as strong and continues to pursue operational optimization, transformation initiatives and growth opportunities.
- Engineered Cabs experienced production delays at several major customers. Management characterized the volume declines as temporary and planned to adjust variable costs.
- The voluntary recall of MAP-PRO, propylene and MAAP cylinders and related torch kits generated an additional $2.6 million of expense during the first six months, bringing estimated total pre-tax recall charges to $12.2 million. Supplier recoveries had not been recorded.
- Restructuring and transformation activities generated $1.7 million of expense year to date. Approximately $1.3 million of related liabilities was expected to be paid in the second half of fiscal 2013, with remaining payments extending through September 2016.
- The company sold its Czech Republic Pressure Cylinders asset group on October 31, 2012. A first-quarter impairment charge of $1.6 million was partially offset by a $50,000 gain on sale.
- The accounts receivable securitization facility, with capacity of $150.0 million, expired in January 2013; management was pursuing renewal and expected to renew it before expiration. At November 30, 2012, $15.0 million of receivables interests had been sold.
- Material risks include cyclical demand, economic weakness, automotive and construction exposure, steel and other commodity-price volatility, raw-material availability, customer and supplier financial difficulties, international operations, recall liabilities, restructuring execution and access to capital markets.
- Guarantees included a maximum aircraft residual-value obligation of approximately $14.5 million, a $5.0 million guarantee of an ArtiFlex term loan and $11.0 million of undrawn standby letters of credit. Management considered the expected fair value of these obligations immaterial.
- On December 10, 2012, the board declared an accelerated dividend of $0.26 per share, paid December 28, 2012, representing the third- and fourth-quarter fiscal 2013 dividends.
Important facts for investors to verify
- Confirm renewal terms and ongoing availability of the accounts receivable securitization facility.
- Assess whether Pressure Cylinders recall costs remain within the company’s $12.2 million estimate and whether supplier recoveries become collectible.
- Monitor debt levels, interest expense and the impact of the 4.60% 2024 notes on future cash flows.
- Evaluate whether Engineered Cabs customer production delays are temporary and whether the segment can sustain improved volumes and margins.
- Review the contribution and financial condition of unconsolidated joint ventures, including the $65.0 million liability for distributions received from WAVE in excess of the investment balance.
- Track execution and cash requirements for the Transformation Plan, facility closures and remaining restructuring liabilities.
- Consider the effect of lower steel prices, automotive production, construction activity and broader economic conditions on demand and margins.