Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the quarter ended August 31, 2011, the first quarter of fiscal 2012. The company is a diversified metal-processing and manufactured-metal-products business with primary operating segments in Steel Processing and Pressure Cylinders. It also held interests in 12 joint ventures and operated 30 manufacturing facilities excluding joint ventures.
The filing reflects significant portfolio changes: the Dietrich metal-framing and Gerstenslager automotive-body-panel businesses were contributed to the ClarkDietrich and ArtiFlex joint ventures earlier in 2011 and were deconsolidated. The company also acquired Bernz on July 1, 2011.
Financial Performance and Position
| Metric | Q1 Fiscal 2012 | Q1 Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $602.4 million | $616.8 million | Down $14.4 million |
| Gross margin | $71.5 million; 11.9% | $78.9 million; 12.8% | Down $7.4 million; margin compressed |
| Operating income | $21.2 million; 3.5% | $21.1 million; 3.4% | Up $0.1 million |
| Net earnings | $28.3 million; 4.7% | $24.3 million; 3.9% | Up $4.1 million |
| Net earnings attributable to controlling interest | $25.7 million | $22.4 million | Up $3.3 million |
| Diluted EPS | $0.35 | $0.29 | Up $0.06 |
| Cash dividends declared per share | $0.12 | $0.10 | Increased $0.02 |
- Segment performance: Steel Processing sales increased 15% to $408.2 million, but operating income declined slightly to $16.3 million. Pressure Cylinders sales increased 24% to $168.8 million and operating income rose to $11.9 million, aided by the Bernz acquisition and a $4.4 million litigation-settlement gain. Metal Framing sales fell to $3.1 million from $84.5 million following deconsolidation and facility wind-down activities.
- Equity income: Income from unconsolidated affiliates increased to $24.7 million from $18.3 million, including contributions from ClarkDietrich and ArtiFlex. The company received $19.6 million of distributions from unconsolidated affiliates during the quarter.
- Cash flow: Operating activities used $14.8 million, compared with $69.2 million used in the prior-year quarter. Investing activities used $43.2 million, including $41.0 million for Bernz and $6.5 million for capital expenditures. Financing activities provided $38.8 million, primarily from $76.3 million of increased short-term borrowings.
- Liquidity: Cash and cash equivalents declined to $36.9 million from $56.2 million at May 31, 2011. The company reported $209.2 million of short-term borrowings and $250.3 million of long-term debt. Its $400 million revolving credit facility had $264.4 million of availability after borrowings and letters of credit. The $100 million receivables securitization facility had $80 million outstanding and expires in January 2012.
- Balance sheet: Total assets were $1.645 billion and total equity was $731.5 million at August 31, 2011. Assets held for sale increased to $29.2 million, primarily reflecting remaining metal-framing operations and Vinyl Corp.
Material Changes Versus the Prior Comparable Period
- Sales declined overall because deconsolidation of the joint-venture businesses reduced reported volume by approximately $104.6 million. Excluding those transactions, volume increased by approximately $38.1 million and higher steel prices added approximately $51.7 million to sales.
- Gross margin declined because of deconsolidation effects and inventory holding losses as steel prices and replacement costs changed. Excluding joint-venture effects, management stated that gross margin increased 3%.
- SG&A decreased $11.4 million, helped by the $4.4 million gain from settling the Bernz litigation and by deconsolidation, partly offset by acquisition-related expenses.
- Non-recurring charges of approximately $3.2 million were incurred for the wind-down of retained metal-framing facilities. Restructuring and other expense totaled $1.7 million, primarily for Pressure Cylinders transformation-plan consulting fees.
- Shares repurchased totaled 2.1 million for $35.4 million. The company had 8.4 million shares remaining under its June 2011 repurchase authorization at quarter-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management described results as favorable despite economic uncertainty and stated that it believed available cash, operating resources, unused credit capacity, and access to capital markets were adequate for normal operating needs, capital expenditures, debt obligations, dividends, and working capital. Management also cautioned that financial-market volatility could affect access to capital and financing terms.
- Key operating sensitivities include economic conditions, automotive and construction demand, steel and other raw-material prices, product pricing, customer and supplier financial health, inventory levels, imports, foreign exchange, energy and transportation costs, and execution of cost-reduction and transformation initiatives.
- The company completed the $41 million Bernz acquisition and subsequently completed the approximately $42 million acquisition of Poland-based STAKO on September 30, 2011. STAKO became part of Pressure Cylinders.
- The company committed to sell its remaining metal-framing operations, which were classified as assets held for sale. No impairment charge was recognized because the carrying value was not considered in excess of fair value for the relevant asset groups.
- The Bernz dispute was settled for $10 million at closing; a previously recorded $14.4 million reserve produced a $4.4 million settlement gain.
- Guarantees included an aircraft residual-value obligation of approximately $15.6 million, a $5 million guarantee of an ArtiFlex term loan, and $9.0 million of undrawn standby letters of credit. Management considered the likely fair values of these obligations immaterial.
- The company reported compliance with its debt covenants, and Moody’s changed its rating outlook from negative to stable during the quarter. No material changes to previously disclosed risk factors were reported.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported sales and margins after the ClarkDietrich and ArtiFlex deconsolidations, including the effect of equity-method earnings replacing consolidated operations.
- Assess the sustainability of Pressure Cylinders earnings after removing the $4.4 million Bernz settlement gain and considering acquisition integration and input-cost pressures.
- Review short-term borrowing levels, the January 2012 expiration of the receivables facility, revolving-credit availability, and covenant compliance.
- Evaluate cash generation, since operating cash flow was negative despite positive net earnings and significant financing support.
- Track the planned sale and valuation of remaining metal-framing assets and Vinyl Corp., including possible exit costs.
- Consider the effect of the subsequent STAKO acquisition, including purchase price, financing, integration, and operating performance.
- Monitor steel-price volatility, automotive and construction demand, joint-venture distributions, and the company’s share-repurchase and dividend policies.