Worthington Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2011. The supplied metadata references “2010 Q4,” but this filing is an annual report covering fiscal 2011, with comparative fiscal 2010 and 2009 results.
Business context
Worthington is a diversified metals processing and manufactured metal products company with three reportable segments: Steel Processing, Pressure Cylinders and Metal Framing. It operated 35 manufacturing facilities and held interests in 12 joint ventures. Automotive and construction represented approximately 33% and 20% of consolidated net sales, respectively. Foreign operations represented approximately 8% of sales.
Financial performance and key metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $2,442.6 million | $1,943.0 million | +$499.6 million, approximately +25.7% |
| Gross margin | $356.2 million; 14.6% | $279.9 million; 14.4% | +$76.3 million |
| Operating income | $124.4 million; 5.1% | $22.0 million; 1.1% | +$102.4 million |
| Net earnings attributable to controlling interest | $115.1 million; $1.53 diluted EPS | $45.2 million; $0.57 diluted EPS | +$69.9 million |
| Equity income from unconsolidated affiliates | $76.3 million | $64.6 million | +$11.7 million |
| Cash flow from operating activities | $71.9 million | $110.4 million | -$38.5 million |
| Capital expenditures | $22.0 million | $34.3 million | -$12.3 million |
Steel Processing sales increased to $1,405.5 million and operating income rose to $77.7 million, supported by higher volumes, automotive recovery and higher steel pricing. Pressure Cylinders sales increased to $591.9 million and operating income to $49.0 million, reflecting improved North American and European performance and acquisitions. Metal Framing sales declined to $249.5 million and the segment reported a $7.5 million operating loss, largely because the business was contributed to ClarkDietrich and construction demand remained weak.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $56.2 million at May 31, 2011, compared with $59.0 million at May 31, 2010.
- Working capital was $366.6 million; current assets were $891.6 million and current liabilities were $525.0 million.
- Total debt was $383.2 million, including $133.0 million of short-term borrowings and $250.3 million of long-term debt.
- The company had $349.5 million available under its $400.0 million revolving credit facility after borrowings and letters of credit.
- The receivables securitization facility had $90.0 million outstanding and was classified as short-term borrowings following an accounting change.
- Worthington repurchased 7.95 million shares for $132.8 million and paid $30.2 million in common-share dividends during fiscal 2011.
- Contractual cash obligations totaled $543.8 million, including $250.3 million of long-term debt, $109.2 million of related interest, $32.4 million of operating leases and $133.0 million of short-term borrowings.
Material changes versus the prior comparable period
- Sales and operating income improved substantially as automotive production recovered, volumes increased and steel prices rose. Average hot-rolled steel prices increased to $680 per ton from $549.
- Gross margin improved modestly as a percentage of sales, while SG&A increased $16.9 million because of acquisitions, profit-sharing and bonuses.
- Impairment charges declined to $4.4 million from $35.4 million, and restructuring expense declined to $2.7 million from $4.2 million.
- Fiscal 2011 operating income included a $10.4 million net gain from the formation and deconsolidation transactions involving ClarkDietrich and ArtiFlex. These transactions also included significant impairment and restructuring charges related to retained facilities.
- Metal Framing assets were contributed to ClarkDietrich on March 1, 2011, and the automotive body panels business was contributed to ArtiFlex on May 9, 2011. Both investments are accounted for under the equity method.
- Worthington acquired Hy-Mark for $12.2 million and acquired a 60% interest in WNCL for approximately $21.2 million. It also formed a 40%-owned Chinese steel-framing joint venture with a $6.2 million cash contribution.
- On July 1, 2011, after the reporting period, the company acquired substantially all of the BernzOmatic business for approximately $51.0 million.
Outlook, commentary, risks and unusual items
- Management reported improving automotive conditions and stabilization in construction, but characterized the global economic recovery as fragile and construction activity as depressed relative to historical norms.
- The Transformation Plan generated approximately $67.9 million of cumulative restructuring charges through fiscal 2011. Management planned to begin the diagnostic phase in Pressure Cylinders during fiscal 2012 and expected additional restructuring charges.
- Management stated that available cash, operating cash flow and credit capacity were adequate for normal operating needs, capital expenditures, debt repayments, dividends and existing working capital requirements, while cautioning that financial-market volatility could affect access to capital.
- Key risks include cyclical automotive and construction demand, steel and other raw-material price volatility, inability to pass cost increases to customers, customer financial distress or bankruptcy, supplier disruptions, competition, joint-venture performance, foreign operations, litigation, self-insured claims, environmental liabilities and potential asset impairments.
- The company recorded $14.4 million of reserves related to litigation with BernzOmatic. The July 2011 acquisition of Bernz included settlement of that dispute; the final accounting and any settlement gain or loss were not complete when the filing was issued.
- Fourth-quarter fiscal 2011 results included a $10.4 million joint-venture transaction gain and $24.7 million of related impairment charges and restructuring costs, as well as $4.4 million of other long-lived-asset impairment charges.
- No quantitative earnings or revenue guidance was provided in the filing.
Most important facts to verify
- Reconcile the metadata’s “2010 Q4” reference with the filing’s actual fiscal 2011 annual reporting period.
- Assess the sustainability of earnings excluding the $10.4 million joint-venture transaction gain and other unusual impairment and restructuring items.
- Review the effect of the ClarkDietrich and ArtiFlex deconsolidations on future consolidated revenue, operating income, assets and equity income.
- Monitor short-term borrowings, the $90.0 million receivables facility balance and debt maturities, particularly the $133.0 million classified as due within one year.
- Evaluate exposure to steel-price movements, automotive and construction demand, customer credit quality and potential future impairments.
- Review the final purchase-price accounting and litigation settlement effects of the July 2011 BernzOmatic acquisition.
- Confirm the company’s ability to fund the anticipated $9.5 million Gestamp wind-steel joint-venture contribution, mostly in fiscal 2012.