Worthington Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Report for the three months ended August 31, 2010, the first quarter of fiscal 2011. Worthington is a diversified metal-processing and manufactured-metal-products company operating primarily through Steel Processing, Pressure Cylinders and Metal Framing, with additional smaller businesses and equity-method joint ventures.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Net sales | $616.8 million | $417.5 million |
| Gross margin | $78.9 million; 12.8% | $49.2 million; 11.8% |
| Operating income (loss) | $21.1 million; 3.4% | $(4.5) million; (1.1%) |
| Net earnings | $24.3 million | $7.6 million |
| Net earnings attributable to controlling interest | $22.4 million; $0.29 diluted EPS | $6.7 million; $0.08 diluted EPS |
| Cash flow from operating activities | $(69.2) million | $96.2 million |
| Capital expenditures | $6.3 million | $7.7 million |
| Cash and cash equivalents, period end | $64.9 million | $102.4 million |
Steel Processing generated $354.9 million of sales and $16.6 million of operating income. Pressure Cylinders generated $136.1 million of sales and $9.6 million of operating income. Metal Framing generated $84.5 million of sales and a $3.9 million operating loss.
At August 31, 2010, total debt consisted of $165.1 million of short-term borrowings and $250.2 million of long-term debt. The revolving credit facility had $326.7 million of availability after outstanding borrowings and letters of credit. The $100 million receivables securitization facility had $65 million sold at quarter-end and expires in January 2011. Management stated that debt covenants were satisfied and that resources were adequate for normal operating needs, capital expenditures, debt redemptions, dividends and working capital.
Material changes versus the prior comparable period
- Sales increased 48%, driven by higher volumes, stronger automotive production, acquisitions and higher steel-related selling prices.
- Gross margin expanded by $29.7 million, with the margin rate improving by approximately one percentage point.
- Operating results improved from a loss to income, helped by stronger Steel Processing and Pressure Cylinders performance and lower restructuring expense.
- Operating cash flow declined sharply because of working-capital timing, a $74.2 million adverse accounts-payable change, bonus and profit-sharing payments, higher receivables and inventories, and the revised accounting treatment of receivables securitization proceeds.
- The Company repurchased 4.75 million shares for $67.4 million during the quarter, paid $7.9 million of dividends and increased short-term borrowings.
- On June 21, 2010, the Company acquired substantially all manufacturing assets of Hy-Mark Cylinders for $12.2 million, including $4.4 million of goodwill.
- Metal Framing remained unprofitable because of weak commercial construction demand, although its operating loss improved modestly.
Outlook, commentary, risks and unusual items
Management cited improving automotive demand, stronger vehicle production and benefits from acquisitions and the Transformation Plan. Construction markets remained sluggish, and management noted that hot-rolled steel prices had declined approximately 9% from the prior fiscal quarter, potentially signaling economic weakness. No specific quantitative earnings or revenue guidance was provided.
- The Transformation Plan generated $1.1 million of restructuring and other expense, including facility-closure and consolidation charges, partly offset by an $0.9 million gain on asset dispositions. A Joliet, Illinois facility with a $3.8 million book value was classified as held for sale.
- Following an October 1, 2010 post-trial ruling in the BernzOmatic litigation, the Company recorded an additional $1.4 million pre-tax charge and increased the reserve to $14.4 million. Management intends to appeal. The charge reduced reported first-quarter net earnings by approximately $0.9 million, or $0.01 per share, compared with the September 29 earnings release.
- Commodity, steel-price, interest-rate and foreign-exchange exposures are managed partly through derivatives. Derivative liabilities totaled $13.7 million at August 31, 2010, primarily interest-rate contracts.
- 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 expected fair-value obligation immaterial.
- Key risks include cyclical automotive and construction demand, steel and other raw-material price volatility, customer and supplier financial distress, liquidity and capital-market conditions, facility closures, acquisitions, litigation and potential receivables deterioration.
Most important facts for investors to verify
- Whether the operating recovery and improved margins persist if automotive production weakens or steel prices decline.
- The timing and outcome of the BernzOmatic appeal and whether the $14.4 million reserve ultimately covers the obligation.
- Renewal or refinancing of the receivables securitization facility, which expires in January 2011.
- The sustainability of liquidity given negative operating cash flow, share repurchases, acquisitions and increased short-term borrowings.
- Progress and remaining costs of the Transformation Plan and the disposition of held-for-sale facilities.
- The effect of the Hy-Mark acquisition and other acquisitions on future earnings, goodwill and cash requirements.