Worthington Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended August 31, 2012, the first quarter of fiscal 2013. Worthington was primarily a diversified metal-processing company with reportable segments in Steel Processing, Pressure Cylinders and Engineered Cabs, plus smaller businesses reported as Other. The company operated 35 manufacturing facilities worldwide, excluding joint ventures, and held interests in 12 joint ventures.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $666.0 million | $602.4 million | +$63.6 million |
| Gross margin | $93.7 million; 14.1% | $71.5 million; 11.9% | +$22.1 million; +220 bps |
| Operating income | $33.4 million; 5.0% | $21.2 million; 3.5% | +$12.2 million |
| Net earnings | $34.9 million | $28.3 million | +$6.5 million |
| Net earnings attributable to controlling interest | $34.0 million | $25.7 million | +$8.3 million |
| Diluted EPS | $0.49 | $0.35 | +$0.14 |
| Operating cash flow | $71.0 million | $(14.8) million | +$85.8 million |
| Capital expenditures | $16.7 million | $6.5 million | +$10.2 million |
Cash and cash equivalents were $30.5 million at August 31, 2012, compared with $41.0 million at May 31, 2012. Total assets were $1.81 billion and total equity was $792.4 million. Dividends declared increased to $0.13 per share from $0.12.
Debt was restructured during the quarter. The company issued $150.0 million of unsecured senior notes due August 2024 at a fixed 4.60% rate and used the proceeds primarily to repay short-term borrowings. At quarter-end, short-term borrowings were $51.2 million, current maturities of long-term debt were $1.3 million and long-term debt was $407.1 million. The $425.0 million revolving credit facility had $383.6 million of availability, including the effect of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher volumes, including acquisitions, which increased sales by approximately $87.5 million. Lower average selling prices, principally in Steel Processing, reduced sales by approximately $48.4 million.
- Pressure Cylinders volumes increased 47%, with units shipped rising to 21.5 million from 14.6 million. Segment operating income increased to $15.0 million from $11.9 million.
- Engineered Cabs, acquired in December 2011, contributed $64.5 million of sales and $4.7 million of operating income; it had no comparable prior-year-quarter results.
- Steel Processing sales declined to $380.0 million from $408.2 million, while operating income was broadly stable at $16.0 million versus $16.3 million.
- Equity income from unconsolidated affiliates declined to $22.6 million from $24.7 million, primarily because of lower earnings at Serviacero and ClarkDietrich. The company received $15.3 million in joint-venture distributions.
- SG&A increased by $14.0 million, reflecting acquisitions, higher profit-sharing and bonus expense, and the absence of a $4.4 million prior-year legal-settlement gain.
- Operating cash flow improved substantially because of working-capital changes, including collections of receivables and reductions in inventories and accounts payable requirements.
Guidance, Outlook, Risks and Unusual Items
Management described first-quarter performance as strong, citing significant Pressure Cylinders volume growth, steady Steel Processing performance and solid Engineered Cabs earnings. No specific quantitative full-year earnings or revenue guidance was provided.
- The company continued its Transformation Plan, including cost reduction and operational initiatives. Diagnostics began in Engineered Cabs during the quarter, while Pressure Cylinders transformation efforts continued.
- A $1.6 million impairment charge was recorded for Pressure Cylinders assets classified as held for sale.
- Restructuring and other expense was $0.4 million, primarily related to the Commercial Stairs closure. The wind-down of former Metal Framing operations generated a $1.2 million net benefit, primarily from asset disposals.
- The voluntary recall of MAP-PRO, propylene and MAAP cylinders generated $1.5 million of additional expense during the quarter and $11.5 million of cumulative pre-tax charges. Potential supplier recoveries had not been recorded.
- On September 17, 2012, after quarter-end, the company acquired Westerman, Inc. for $70.0 million, including approximately $6.0 million used to repay Westerman debt. Westerman manufactures tanks, pressure vessels and marine hoists and was added to Pressure Cylinders.
- Key risks include cyclical demand, automotive and construction exposure, steel and other raw-material price volatility, customer and supplier financial difficulties, recall costs and liabilities, integration and execution of acquisitions, facility closures, joint-venture performance and access to capital markets.
- The company reported compliance with its debt covenants and stated that available cash, operating cash flow and unused credit lines were adequate for normal operating and financing needs. Cash held outside the United States totaled $21.8 million and was not intended for repatriation.
- Guarantee exposures included a $14.7 million maximum aircraft residual-value guarantee, a $5.0 million guarantee of an ArtiFlex term loan and $11.0 million of standby letters of credit; management considered the expected fair values of these obligations immaterial.
Most Important Facts for Investors to Verify
- Whether Pressure Cylinders volume growth and the Westerman acquisition produce sustainable earnings and cash flow.
- The remaining financial and legal exposure from the cylinder recall, including any supplier recovery.
- The effect of higher debt and interest expense following the $150.0 million senior-note issuance and post-quarter-end acquisition.
- Whether Steel Processing margins can be maintained amid lower steel prices, pricing pressure and cyclical automotive demand.
- The performance and cash distributions of unconsolidated affiliates, particularly WAVE, Serviacero and ClarkDietrich.
- Progress, costs and realized benefits from the Transformation Plan, facility closures and asset disposals.
- Completion of the purchase-price allocation and subsequent accounting for the Westerman acquisition.