Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended November 30, 2011; filed January 17, 2012. The unaudited statements cover Worthington Industries, a diversified metal-processing and manufactured-metal-products company with primary reportable segments of Steel Processing and Pressure Cylinders. The fiscal year ends May 31.
Financial performance and position
| Metric | Three months ended Nov. 30, 2011 | Three months ended Nov. 30, 2010 | Six months ended Nov. 30, 2011 | Six months ended Nov. 30, 2010 |
|---|---|---|---|---|
| Net sales | $565.7 million | $580.7 million | $1,168.0 million | $1,197.5 million |
| Gross margin | $56.6 million; 10.0% | $69.8 million; 12.0% | $128.1 million; 11.0% | $148.7 million; 12.4% |
| Operating income | $2.8 million; 0.5% | $12.9 million; 2.2% | $24.0 million; 2.1% | $34.0 million; 2.8% |
| Net earnings | $14.2 million | $16.9 million | $42.5 million | $41.1 million |
| Net earnings attributable to controlling interest | $12.0 million | $14.5 million | $37.6 million | $36.8 million |
| EPS attributable to controlling interest | $0.17 | $0.20 | $0.53 | $0.49 |
| Cash flow from operating activities | $64.4 million | $59.5 million | $49.5 million | $(9.7) million |
At November 30, 2011, cash and cash equivalents were $53.8 million, total assets were $1.61 billion, and total equity was $710.3 million. Current assets were $808.7 million against current liabilities of $489.4 million.
Total debt included $226.1 million of short-term borrowings and $250.3 million of long-term debt. The $400 million revolving credit facility had $136.1 million drawn and $255.0 million of availability after outstanding letters of credit. The company also had $85.0 million sold under its accounts-receivable securitization facility. Management stated that debt covenants were satisfied at November 30, 2011.
Six-month investing cash uses included $79.8 million for acquisitions and $10.0 million for capital expenditures. Financing included $52.1 million of share repurchases, $15.6 million of dividends to common shareholders, and $93.1 million of net short-term borrowings. The quarterly dividend was $0.12 per share, compared with $0.10 in the prior-year quarters.
Material changes versus the prior comparable periods
- Second-quarter sales declined 2.6%, while six-month sales declined 2.5%, largely because the ClarkDietrich and ArtiFlex joint-venture transactions removed previously consolidated businesses from reported sales.
- Excluding the joint-venture effects, volumes increased, aided by acquisitions and stronger automotive activity. Steel Processing sales rose 18% in the quarter and 16% year to date; Pressure Cylinders sales rose 30% and 27%, respectively.
- Higher steel prices increased reported selling prices, but gross-margin percentages declined because of inventory holding losses, higher manufacturing costs, mix effects, and the product recall accruals.
- Second-quarter operating income fell $10.1 million, and year-to-date operating income fell $10.0 million. Pressure Cylinders operating income declined $9.0 million in the quarter and $6.7 million year to date.
- Equity income from unconsolidated affiliates increased to $21.9 million in the quarter and $46.6 million year to date, compared with $16.2 million and $34.5 million, respectively, in the prior periods. WAVE, ClarkDietrich, and ArtiFlex were important contributors.
- Share count declined materially because of repurchases: period-end common shares were 68.9 million versus 74.1 million a year earlier. The lower share count helped year-to-date EPS despite lower operating income.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available cash, operating cash flow, and unused credit capacity were adequate for normal operations, capital expenditures, debt obligations, dividends, and working capital, while noting continued financial-market uncertainty.
- The January 2012 voluntary recall of MAP-PRO, Propylene, and MAAP cylinders and related torch kits involved a potentially leaking third-party valve. The company recorded a $4.7 million product-return accrual, $3.9 million of recall-related costs, and a $1.1 million inventory write-off, for a $9.7 million pretax reduction to reported results. Actual costs may vary, and recoveries from the supplier will not be recorded until agreed.
- The recall is expected to be paid largely before the end of fiscal 2012 and could involve additional return, freight, legal, notification, and other costs. The company reported no known fire or injury incidents.
- Fiscal 2012 acquisitions included Bernz for approximately $41.0 million and STAKO for approximately $41.5 million. Subsequent to quarter-end, the company acquired Coleman’s propane-cylinder business for approximately $23.4 million and Angus Industries for $180.0 million, including assumed debt and equity consideration.
- The Angus acquisition increased borrowings under the revolving credit facility to $210.9 million at December 31, 2011 and reduced availability to $139.1 million after a $50.0 million standby letter of credit. This post-quarter-end leverage and liquidity change is not reflected in the November 30 balance sheet.
- WAVE completed a refinancing and paid a non-recurring $50.0 million special dividend to each joint-venture member. Worthington used part of its dividend proceeds to fund the Angus acquisition.
- The Metal Framing wind-down generated $5.2 million of post-closure costs, partly offset by $2.1 million of asset-sale gains and a $1.1 million severance credit. The company recorded $3.8 million of transformation-related professional fees year to date.
- Other disclosed exposures included a maximum aircraft residual-value guarantee of approximately $15.4 million, a $5.0 million guarantee of an ArtiFlex term loan, and $9.0 million of undrawn standby letters of credit. Management did not expect these obligations to be material based on current facts.
- Steel, automotive, construction, commodity prices, foreign exchange, customer financial condition, inventory levels, facility closures, acquisitions, joint ventures, and economic conditions remain significant operating risks. The company stated that other pending legal actions were not expected to materially affect its financial position or results.
Most important facts for an investor to verify
- Reconcile reported sales and margins for the effects of deconsolidating ClarkDietrich and ArtiFlex and the related increase in equity-method earnings.
- Assess the ultimate cost and duration of the cylinder recall, including customer returns, logistics, legal costs, inventory exposure, and potential supplier recovery.
- Review post-quarter-end debt, standby letters of credit, covenant capacity, and liquidity following the Angus acquisition.
- Evaluate the purchase-price allocations, goodwill, intangible assets, and integration performance for Bernz, STAKO, Coleman, and Angus.
- Monitor Steel Processing and Pressure Cylinders margins for steel-price movements, inventory holding losses, manufacturing costs, mix, and demand changes.
- Consider the sustainability of cash flows and shareholder returns given acquisitions, $52.1 million of share repurchases, dividends, and reliance on short-term borrowings.
- Verify the renewal and terms of the $100 million accounts-receivable securitization facility, which was scheduled to expire in January 2012.