Worthington Industries, Inc. — Fiscal 2013 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2013, with comparative fiscal years 2012 and 2011. The source filing identifies the registrant as Worthington Industries, Inc.; it is not a quarterly filing despite the request metadata referring to “2012 Q4.” The company is a diversified metals manufacturer with reportable segments in Steel Processing, Pressure Cylinders and Engineered Cabs, plus Other operations and joint ventures.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $2.612 billion | $2.535 billion | +$77.5 million |
| Gross margin | $396.6 million; 15.2% | $332.9 million; 13.1% | +$63.7 million |
| Operating income | $129.1 million; 4.9% | $101.6 million; 4.0% | +$27.5 million |
| Net earnings attributable to controlling interest | $136.4 million; 5.2% | $115.6 million; 4.6% | +$20.8 million |
| Diluted EPS | $1.91 | $1.65 | +$0.26 |
| Cash flow from operations | $273.0 million | $173.7 million | +$99.3 million |
| Capital expenditures | $44.6 million | $31.7 million | +$12.9 million |
| Total debt | $521.1 million | $533.7 million | -$12.7 million |
| Cash and cash equivalents | $51.4 million | $41.0 million | +$10.4 million |
| Working capital | $418.0 million | $256.0 million | +$162.0 million |
Business and Segment Performance
- Steel Processing: Sales decreased 8.6% to $1.443 billion and operating income decreased to $66.1 million from $71.6 million. Lower steel prices reduced sales, while tons shipped declined 8%; direct volumes increased approximately 3% excluding MISA Metals facilities being wound down or sold. Segment operating margin was 4.6%.
- Pressure Cylinders: Sales increased 11.6% to $859.3 million and operating income increased 47.0% to $66.4 million. Units shipped rose 15%, supported by the Westerman and Palmer acquisitions, improved product mix and lower recall costs. Segment operating margin improved to 7.7% from 5.9%.
- Engineered Cabs: Sales increased to $226.0 million from $104.3 million because fiscal 2012 included only five months of Angus ownership. Operating income declined modestly to $4.2 million from $4.9 million, reflecting lower demand and production delays at a major customer.
- Other: Sales were $83.5 million and operating loss improved to $7.5 million from $20.0 million, primarily due to lower selling, general and administrative and restructuring costs and gains associated with asset dispositions.
- Joint ventures: Equity income increased modestly to $94.6 million. WAVE contributed $65.5 million, ClarkDietrich $8.8 million and TWB $12.6 million. The company received $84.5 million in distributions from unconsolidated affiliates.
Cash Flow, Liquidity and Debt
- Operating cash flow of $273.0 million funded $44.6 million of capital expenditures, $175.2 million of acquisitions net of cash acquired, $44.1 million of dividends and $30.4 million of share repurchases.
- Investing cash flow was negative $202.0 million, primarily due to acquisitions and capital expenditures.
- Financing cash flow was negative $60.6 million. The company repaid $168.4 million of short-term borrowings and issued $150.0 million of 4.60% senior notes due 2024.
- At May 31, 2013, the company had $405.0 million available under its $425.0 million revolving credit facility, after $8.3 million of borrowings and approximately $11.7 million of letters of credit.
- The receivables securitization facility had a $100.0 million capacity, all of which was utilized at year-end, and was extended to January 2015.
- Long-term debt included $100.0 million of effectively fixed-rate 2014 Notes, $149.9 million of 6.50% 2020 Notes and $150.0 million of 4.60% 2024 Notes. Management reported compliance with debt covenants and investment-grade ratings.
- Total contractual cash obligations were $735.3 million, including $407.3 million of long-term debt, $172.4 million of long-term debt interest, $29.9 million of operating leases and $12.0 million of royalty obligations.
Material Changes and Unusual Items
- Worthington acquired Westerman for approximately $62.7 million in September 2012 and Palmer for approximately $113.5 million in April 2013, expanding Pressure Cylinders into energy, oil and gas, nuclear and industrial markets.
- The company issued $150.0 million of 4.60% senior notes due 2024 and used proceeds largely to reduce revolving and receivables-facility borrowings.
- Fiscal 2013 included $6.5 million of long-lived asset impairment charges, primarily related to the Indian WNCL joint venture and the sale of the Czech air-brake tank business.
- Restructuring and other expense was $3.3 million, including approximately $2.5 million for severance associated with consolidating BernzOmatic hand-torch production from Medina, New York, into Chilton, Wisconsin. Total Transformation Plan charges reached approximately $77.2 million since fiscal 2008.
- Pressure Cylinders recorded $2.6 million of additional voluntary product-recall costs in fiscal 2013, following $9.7 million in fiscal 2012. The company was pursuing recovery from the supplier, but had not recorded any recovery.
- The company recognized a $4.8 million impairment of its 40%-owned China construction joint venture and was in the process of dissolving its Gestamp Worthington Wind Steel joint venture.
- During the fourth quarter, the company repurchased 925,000 common shares for $30.4 million. It declared $0.52 per share of fiscal 2013 dividends and subsequently declared a $0.15 per share quarterly dividend for fiscal 2014.
Outlook, Commentary and Risks
Management characterized fiscal 2013 performance as strong relative to the prior year, driven by Pressure Cylinders and improved joint-venture earnings. Automotive production improved, but Steel Processing volumes declined and Engineered Cabs faced soft demand and concentration at a major customer. Management continued transformation efforts in Pressure Cylinders and Engineered Cabs and planned cost adjustments without reducing production capacity. No formal quantitative earnings or revenue guidance is provided in the filing.
- Principal risks include cyclical automotive and construction demand, customer financial distress or bankruptcy, steel and other raw-material price volatility, supply interruptions, energy and freight costs, competition and material substitution.
- Engineered Cabs had significant customer concentration: its top four customers represented approximately 80% of segment sales. The company’s largest consolidated customer represented approximately 5% of total sales, and its ten largest customers represented approximately 25%.
- Goodwill at Engineered Cabs was $44.9 million, and estimated fair value exceeded carrying value by less than 10%; a 100-basis-point reduction in the long-term growth rate could result in an impairment under the company’s model.
- Other contingencies include a $14.0 million maximum aircraft residual-value guarantee, a $5.0 million guarantee of an ArtiFlex term loan and $11.7 million of undrawn standby letters of credit.
- The company is substantially self-insured for workers’ compensation, liability, property and medical claims. Environmental compliance costs were not expected to be material, but future environmental liabilities cannot be fully quantified.
- Seasonality is significant: sales are generally strongest in the fourth fiscal quarter and weaker in the third quarter. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the requested period against the filing: this is the fiscal-year 2013 Form 10-K, not a “2012 Q4” report.
- Reconcile reported earnings growth with acquisition timing, lower steel prices, product-recall costs, impairments and restructuring charges.
- Review Pressure Cylinders integration and performance of Westerman and Palmer, including energy-market exposure.
- Monitor Steel Processing direct volumes, steel-price spreads, inventory valuation and automotive demand.
- Assess Engineered Cabs customer concentration and the sensitivity of its goodwill valuation to weaker demand or lower growth assumptions.
- Review refinancing requirements, particularly $114.8 million of debt and short-term borrowings due in fiscal 2014 and $101.2 million due in fiscal 2015.
- Evaluate the sustainability of cash distributions from joint ventures, including the $63.2 million liability for distributions received from WAVE in excess of the investment balance.
- Track unresolved product-recall recovery claims, restructuring cash payments, guarantees, tax contingencies and potential environmental or self-insurance exposures.