Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended February 28, 2011, representing the third quarter and first nine months of fiscal 2011. The filing identifies the registrant as Worthington Industries, Inc.; the request metadata references Worthington Enterprises and “2010 Q3,” but the filing period is fiscal 2011 Q3.
Business Context
The company is a diversified metal-processing and manufactured-metal-products business operating primarily through Steel Processing, Pressure Cylinders and Metal Framing. It also reports Automotive Body Panels, Steel Packaging and the newly formed Worthington Global Group within “Other,” and holds interests in unconsolidated joint ventures.
Management reported strengthening automotive demand, improving general economic conditions and stabilization, although continued weakness, in construction markets. Results benefited from higher volumes, acquisitions and steel-price-related inventory holding gains.
Financial Performance
| Metric | Q3 FY2011 | Q3 FY2010 | 9M FY2011 | 9M FY2010 |
|---|---|---|---|---|
| Net sales | $569.4 million | $451.1 million | $1,766.9 million | $1,316.6 million |
| Gross margin | $88.3 million; 15.5% | $57.7 million; 12.8% | $237.0 million; 13.4% | $174.1 million; 13.2% |
| Operating income | $28.0 million; 4.9% | $(35.3) million | $62.0 million; 3.5% | $(20.6) million |
| Net earnings | $28.3 million | $(16.1) million | $69.5 million | $16.1 million |
| Net earnings attributable to controlling interest | $26.3 million | $(17.7) million | $63.1 million | $12.2 million |
| Diluted EPS | $0.35 | $(0.22) | $0.83 | $0.15 |
| Equity in affiliate earnings | $17.0 million | $14.6 million | $51.5 million | $45.8 million |
Quarterly sales increased 26%, driven by $79.1 million of volume growth and $39.2 million of pricing. Nine-month sales increased 34%, driven by $268.2 million of volume growth and $182.1 million of pricing. Gross-margin expansion reflected stronger volumes and wider spreads between selling prices and steel costs.
Segment Results
- Steel Processing: Q3 sales increased 30% to $301.8 million and operating income increased to $14.2 million from $7.5 million. Tons shipped increased 15% to 590,000.
- Pressure Cylinders: Q3 sales increased 17% to $135.9 million and operating income increased to $10.9 million from $4.1 million. Results benefited from improved European operations, North American performance and the Nitin Cylinders acquisition.
- Metal Framing: Q3 sales increased 21% to $81.4 million and the segment returned to operating income of $2.7 million from a $9.1 million loss. For the nine-month period, however, the segment recorded a $7.9 million operating loss.
- Other: Q3 sales increased to $50.4 million and operating income was $0.2 million versus a $37.8 million loss, largely because the prior-year period included a $32.7 million impairment charge.
Cash Flow, Liquidity and Debt
| Metric | 9M FY2011 | 9M FY2010 |
|---|---|---|
| Operating cash flow | $55.3 million | $120.0 million |
| Cash used in investing | $(40.9) million | $(76.4) million |
| Cash used in financing | $(23.7) million | $(45.2) million |
| Ending cash | $49.7 million | $54.7 million |
- Cash flow from operations declined primarily because of working-capital changes, including accounts payable timing and the reclassification of receivables-facility proceeds as borrowings.
- Capital expenditures were $15.9 million, and acquisition spending was $31.7 million, net of cash acquired.
- The company repurchased 5.3 million shares for $75.1 million and paid $22.7 million in common-share dividends during the nine months.
- February 28, 2011 cash and debt included $80.8 million of short-term borrowings and $250.3 million of long-term debt. The $400 million revolving credit facility had no borrowings outstanding, with $385.4 million available after letters of credit. The $100 million receivables securitization facility had $80 million of interests sold.
- Management stated that the company was in compliance with debt covenants and believed available cash, operating cash flow and unused credit facilities were adequate for normal needs.
Material Changes and Unusual Items
- The prior-year comparison benefited substantially from the absence of $35.4 million of long-lived-asset impairment charges recorded in the first nine months of fiscal 2010.
- Interest expense rose to $14.1 million for the nine-month period from $6.4 million, reflecting higher debt, working-capital needs and the April 2010 issuance of $150 million of 6.5% notes due 2020.
- The company acquired 60% of Nitin Cylinders Limited for approximately $21.2 million and acquired Hy-Mark Cylinders assets for $12.2 million. Nitin contributed approximately $2.0 million of Q3 consolidated sales.
- A $1.4 million litigation charge was recorded during the second quarter, increasing reserves for a former-customer dispute to $14.4 million. The company is appealing the underlying judgment.
- The company continued its Transformation Plan, recording $1.5 million of restructuring and other expense for the nine-month period.
- Effective March 1, 2011, the company contributed its Metal Framing business to a new 25%-owned joint venture, ClarkDietrich Building Systems LLC, and received three steel-processing locations. Management expected a fourth-quarter impairment charge on retained Metal Framing assets, a gain on the exchange transaction and approximately $12.4 million of restructuring charges.
- On March 18, 2011, the company formed a 50%-owned wind-tower joint venture and committed to contribute $9.5 million.
Outlook and Risks
Management did not provide a formal quantitative earnings or revenue guidance range in the filing. It cited continued automotive improvement, possible stabilization in construction and benefits from acquisitions and operational efficiencies. The company also noted potential disruption from the March 2011 Japan earthquake and tsunami.
Key risks include cyclicality; steel, commodity, transportation and utility-price volatility; demand and pricing changes; construction-market weakness; customer, supplier or joint-venture financial distress; facility closures and restructuring execution; acquisition integration; impairment risk; litigation; foreign-exchange exposure; and access to capital markets. The filing states that risk factors had not changed significantly from the fiscal 2010 Form 10-K.
Investor Verification Checklist
- Verify the impact and final accounting for the March 1, 2011 ClarkDietrich transaction, including the expected fourth-quarter impairment, exchange gain and approximately $12.4 million of restructuring charges.
- Assess whether operating cash flow remains sufficient after acquisitions, share repurchases, dividends and working-capital requirements.
- Monitor short-term borrowings under the receivables securitization facility and the availability and maturity of the revolving credit facility.
- Evaluate exposure to steel-price inventory holding gains and the sustainability of current selling-price-to-material-cost spreads.
- Follow the former-customer litigation appeal and the adequacy of the $14.4 million reserve.
- Review Metal Framing’s continuing losses on a nine-month basis and the recoverability of related assets.
- Confirm subsequent-event contributions and operating plans for the wind-tower joint venture and other new growth initiatives.