WORTHINGTON ENTERPRISES, INC. quarterly report, Q2 FY2013

Worthington Industries, Inc. Form 10-Q Summary

Business context and reporting period

This unaudited Form 10-Q covers the quarter and six months ended November 30, 2012, the second quarter and first six months of fiscal 2013. Worthington is a diversified metals manufacturer operating primarily through Steel Processing, Pressure Cylinders, Engineered Cabs and Other businesses, with additional investments in unconsolidated joint ventures.

Financial performance and position

MetricThree months ended November 30, 2012Three months ended November 30, 2011Six months ended November 30, 2012Six months ended November 30, 2011
Net sales$622.6 million$565.7 million$1,288.7 million$1,168.0 million
Gross margin$94.9 million; 15.2%$56.6 million; 10.0%$188.5 million; 14.6%$128.1 million; 11.0%
Operating income$28.8 million; 4.6%$2.8 million; 0.5%$62.2 million; 4.8%$24.0 million; 2.1%
Net earnings attributable to controlling interest$31.8 million; $0.45 diluted EPS$12.0 million; $0.17 diluted EPS$65.8 million; $0.94 diluted EPS$37.6 million; $0.53 diluted EPS
Operating cash flow$88.4 million$64.4 million$159.4 million$49.5 million
  • Cash and cash equivalents were $32.9 million at November 30, 2012, compared with $41.0 million at May 31, 2012.
  • Total assets were $1.82 billion and total equity was $822.5 million at November 30, 2012.
  • Short-term borrowings were $44.0 million and long-term debt was $406.8 million. Including current maturities, carrying-value debt was $408.0 million.
  • The $425.0 million revolving credit facility had $390.9 million of availability after borrowings and standby letters of credit. The company reported compliance with its debt covenants.
  • Capital expenditures were $24.6 million for the first six months. The company paid $17.1 million in common dividends and received $33.4 million of distributions from unconsolidated affiliates.
  • Equity in net income of unconsolidated affiliates was $25.2 million in the second quarter and $47.9 million year to date.

Material changes versus the prior comparable period

  • Second-quarter sales increased 10.1%, while six-month sales increased 10.3%. Volume growth, particularly from acquisitions, more than offset lower average selling prices caused largely by lower steel prices.
  • Gross margin expanded substantially because of higher volumes, improved product mix, lower Steel Processing inventory holding losses and lower Pressure Cylinders recall costs.
  • Pressure Cylinders sales increased to $207.5 million from $176.7 million, and operating income rose to $17.1 million from $0.5 million. The improvement reflected acquisitions, cost containment, mix and a reduction in recall charges.
  • Steel Processing sales declined to $339.3 million from $373.5 million because of lower steel prices and an 8% volume decline; operating income nevertheless increased to $13.3 million from $7.4 million.
  • Engineered Cabs contributed $57.8 million of second-quarter sales and $0.6 million of operating income. It was acquired on December 29, 2011 and therefore had no comparable prior-year segment results.
  • Operating cash flow increased by $109.9 million year to date, primarily from improved earnings and working-capital changes.
  • On September 17, 2012, the company acquired Westerman, Inc. for approximately $62.7 million in cash and assumed and repaid approximately $7.3 million of debt. Westerman manufactures tanks, pressure vessels and marine hoists.
  • On August 10, 2012, the company issued $150.0 million of unsecured senior notes due 2024 bearing 4.60% interest, using proceeds partly to repay short-term and revolving borrowings.

Guidance, outlook, risks and unusual items

  • The filing does not provide specific numerical earnings or revenue guidance. Management described second-quarter performance as strong and continues to pursue operational optimization, transformation initiatives and growth opportunities.
  • Engineered Cabs experienced production delays at several major customers. Management characterized the volume declines as temporary and planned to adjust variable costs.
  • The voluntary recall of MAP-PRO, propylene and MAAP cylinders and related torch kits generated an additional $2.6 million of expense during the first six months, bringing estimated total pre-tax recall charges to $12.2 million. Supplier recoveries had not been recorded.
  • Restructuring and transformation activities generated $1.7 million of expense year to date. Approximately $1.3 million of related liabilities was expected to be paid in the second half of fiscal 2013, with remaining payments extending through September 2016.
  • The company sold its Czech Republic Pressure Cylinders asset group on October 31, 2012. A first-quarter impairment charge of $1.6 million was partially offset by a $50,000 gain on sale.
  • The accounts receivable securitization facility, with capacity of $150.0 million, expired in January 2013; management was pursuing renewal and expected to renew it before expiration. At November 30, 2012, $15.0 million of receivables interests had been sold.
  • Material risks include cyclical demand, economic weakness, automotive and construction exposure, steel and other commodity-price volatility, raw-material availability, customer and supplier financial difficulties, international operations, recall liabilities, restructuring execution and access to capital markets.
  • Guarantees included a maximum aircraft residual-value obligation of approximately $14.5 million, a $5.0 million guarantee of an ArtiFlex term loan and $11.0 million of undrawn standby letters of credit. Management considered the expected fair value of these obligations immaterial.
  • On December 10, 2012, the board declared an accelerated dividend of $0.26 per share, paid December 28, 2012, representing the third- and fourth-quarter fiscal 2013 dividends.

Important facts for investors to verify

  • Confirm renewal terms and ongoing availability of the accounts receivable securitization facility.
  • Assess whether Pressure Cylinders recall costs remain within the company’s $12.2 million estimate and whether supplier recoveries become collectible.
  • Monitor debt levels, interest expense and the impact of the 4.60% 2024 notes on future cash flows.
  • Evaluate whether Engineered Cabs customer production delays are temporary and whether the segment can sustain improved volumes and margins.
  • Review the contribution and financial condition of unconsolidated joint ventures, including the $65.0 million liability for distributions received from WAVE in excess of the investment balance.
  • Track execution and cash requirements for the Transformation Plan, facility closures and remaining restructuring liabilities.
  • Consider the effect of lower steel prices, automotive production, construction activity and broader economic conditions on demand and margins.