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WOR > SEC Filings for WOR > Form 10-K on 30-Jul-2013All Recent SEC Filings

Show all filings for WORTHINGTON INDUSTRIES INC

Form 10-K for WORTHINGTON INDUSTRIES INC


30-Jul-2013

Annual Report


Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Selected statements contained in this "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management's beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the "Safe Harbor Statement" in the beginning of this Annual Report on Form 10-K and "Part I-Item 1A.-Risk Factors" of this Annual Report on Form 10-K.

Introduction

Worthington Industries, Inc., together with its subsidiaries (collectively, "we," "our," "Worthington," or the "Company"), is primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products. Our manufactured metal products include: pressure cylinder products such as propane, oxygen, refrigerant and industrial cylinders, hand torches, camping cylinders, scuba tanks, compressed natural gas cylinders, helium balloon kits, and steel and fiberglass tanks and processing equipment for primarily the oil and gas industry; engineered cabs and operator stations and cab components; framing systems for mid-rise buildings; steel pallets and racks; and, through joint ventures, suspension grid systems for concealed and lay-in panel ceilings; laser welded blanks; light gauge steel framing for commercial and residential construction; and current and past model automotive service stampings. Our number one goal is to increase shareholder value, which we seek to accomplish by optimizing existing operations, developing and commercializing new products and applications, and pursuing strategic acquisitions and joint ventures.

As of May 31, 2013, excluding our joint ventures, we operated 36 manufacturing facilities worldwide, principally in three reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs. Our remaining operating segments, which do not meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, are combined and reported in the "Other" category. These include the Steel Packaging, Construction Services and Worthington Energy Innovations operating segments.

During the first quarter of fiscal 2013, we made certain organizational changes impacting the internal reporting and management structure of our former Global Group operating segment. As a result of these organizational changes, management responsibilities and internal reporting were re-aligned into two new operating segments: Construction Services and Worthington Energy Innovations. These organizational changes did not impact the composition of our reportable business segments as none of the operating segments impacted met the quantitative thresholds for separate disclosure.

Additionally, we no longer manage our residual metal framing assets in a manner that constitutes an operating segment. Accordingly, the financial results and operating performance of our former Metal Framing operating segment, including activity related to the wind-down of this business, are reported within the Other category for segment reporting purposes. Segment information reported in previous periods has been restated to conform to this new presentation.

We also held equity positions in 12 joint ventures, which operated 47 manufacturing facilities worldwide, as of May 31, 2013.

Overview

The Company's performance during fiscal 2013 was strong relative to the prior year, aided by strong earnings growth in Pressure Cylinders and higher earnings from our joint ventures.

Volume trends were mixed in fiscal 2013. Pressure Cylinders volumes were up 15% driven by the impact of acquisitions. Steel Processing volumes were down 8%, but direct volumes, which carry a higher margin,


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were up approximately 3%, after excluding volumes from the MISA Metals facilities which were wound down or sold during the past year.

Engineered Cabs continues to experience soft demand due to production declines at its top customer. We are responding to the current environment and are implementing a plan to adjust costs accordingly without sacrificing production capacity. We are taking advantage of these market conditions to increase the pace and focus of our transformation work, as described in more detail below.

Equity in net income of unconsolidated affiliates ("equity income") was up a modest 2% over fiscal 2012. However, current year equity income was reduced by $5.8 million of impairment and restructuring charges, including $4.8 million related to the impairment of our 40%-owned metal framing joint venture in China. Excluding these items, equity income was up 8%. With the exception of our joint venture in China, all of our unconsolidated joint ventures operated at a profit during fiscal 2013, led by Worthington Armstrong Venture ("WAVE"), TWB Company, L.L.C. ("TWB"), and Clarkwestern Dietrich Building Systems LLC ("ClarkDietrich"), which contributed $65.5 million, $12.6 million and $8.8 million of equity income, respectively. Additionally, we received $84.5 million in dividends from our unconsolidated joint ventures for the year.

The Company continues its strategy of optimizing existing operations and pursuing growth opportunities that add to our current businesses. We initiated the diagnostics phase of the Transformation Plan within our Pressure Cylinders operating segment in the first quarter of fiscal 2012, and these efforts are progressing through each facility. During the first quarter of fiscal 2013, we initiated the diagnostics phase in our Engineered Cabs operating segment. For additional information regarding the Transformation Plan, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE D - Restructuring and Other Expense" of this Annual Report on Form 10-K.

Recent Business Developments

On August 10, 2012, we issued $150.0 million aggregate principal amount of 12-year Senior Notes due 2024 through a private placement with seven entities within the Prudential Capital Group. The Senior Notes bear interest at a fixed rate of 4.6%.

On September 17, 2012, our Pressure Cylinders operating segment acquired 100% of the outstanding common shares of Westerman, Inc. ("Westerman") for cash consideration of approximately $62.7 million and the assumption of approximately $7.3 million of debt, which was repaid at closing. Westerman manufactures tanks, pressure vessels and other products for the oil and gas and nuclear markets as well as hoists and other products for marine applications. Westerman also leverages its manufacturing competencies to produce pressure vessels, atmospheric tanks, controls and various custom machined components for other industrial end markets. Westerman became part of our Pressure Cylinders operating segment upon closing.

On October 31, 2012, our Pressure Cylinders operating segment completed the sale of its European air brake tank business to Frauenthal Automotive. Based in Hustopece, Czech Republic, Worthington Cylinders a.s. manufactured air brake tank cylinders for the European commercial vehicle market.

On April 9, 2013, our Pressure Cylinders operating segment acquired the business of Palmer Mfg. & Tank, Inc. ("Palmer") for cash consideration of $113.5 million. Palmer manufactures steel and fiberglass tanks and processing equipment for the oil and gas industry, and custom manufactured fiberglass tanks for agricultural, chemical and general industrial applications. The acquired net assets became part of our Pressure Cylinders operating segment upon closing.

During the fourth quarter of fiscal 2013, we repurchased a total of 925,000 of our common shares for $30.4 million at an average price of $32.88 per share.


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On June 21, 2013, we announced the planned consolidation of the BernzOmatic hand torch manufacturing operations in Medina, New York into our existing facility in Chilton, Wisconsin. The Company estimates that the consolidation and closure will result in restructuring charges in the range of $4.0 million to $5.0 million, primarily due to severance costs, relocation and equipment installation, training costs and other miscellaneous start-up costs. Approximately $2.5 million of severance costs were recognized in the fourth quarter of fiscal 2013 in connection with this matter. The closure of the Medina operation is expected to be complete by mid-calendar 2014 to ensure an orderly transition.

On June 26, 2013, the Board of Directors declared a quarterly dividend of $0.15 per share, an increase of $0.02 per share from the previous quarterly rate. The dividend is payable on September 27, 2013 to shareholders of record on September 13, 2013.

Market & Industry Overview

We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for fiscal 2013 and fiscal 2012 is illustrated in the following chart:

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The automotive industry is one of the largest consumers of flat-rolled steel, and thus the largest end market for our Steel Processing operating segment. Approximately 57% of the net sales of our Steel Processing operating segment are to the automotive market. North American vehicle production, primarily by Chrysler, Ford and General Motors (the "Detroit Three automakers"), has a considerable impact on the activity within this operating segment. The majority of the net sales of five of our unconsolidated joint ventures are also to the automotive end market.

Approximately 10% of the net sales of our Steel Processing operating segment, 45% of the net sales of our Engineered Cabs operating segment and substantially all of the net sales of our Construction Services operating segment are to the construction market. While the market price of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including U.S. gross domestic product ("GDP"), the Dodge Index of construction contracts, and trends in the relative price of framing lumber and steel. The construction market is also the predominant end market for three of our unconsolidated joint ventures, WAVE, ClarkDietrich and Worthington Modern Steel Framing Manufacturing Co., Ltd. ("WMSFMCo").

Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 33% and 55% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as leisure and recreation, industrial gas, HVAC, lawn and garden, agriculture, mining and appliance. Given the many different products that make up these net sales and the wide variety of end


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markets, it is very difficult to detail the key market indicators that drive this portion of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing these operating segments.

We use the following information to monitor our costs and demand in our major end markets:

                                                                                              Increase /
                                             Fiscal Year Ended May 31,                        (Decrease)
                                                                                      2013 vs.         2012 vs.
                                        2013            2012            2011            2012             2011
U.S. GDP (% growth
year-over-year)1                           1.7 %           0.5 %           2.4 %            1.2 %           -1.9 %
Hot-Rolled Steel ($ per ton)2         $    616        $    693        $    680        ($     77 )      $      13
Detroit Three Auto Build (000's
vehicles)3                               8,553           8,084           7,251              469              833
No. America Auto Build (000's
vehicles)3                              15,716          14,242          12,756            1,474            1,486
Zinc ($ per pound)4                   $   0.90        $   0.96        $   1.00        ($   0.06 )      ($   0.04 )
Natural Gas ($ per mcf)5              $   3.49        $   3.61        $   4.14        ($   0.12 )      ($   0.53 )
On-Highway Diesel Fuel Prices ($
per gallon)6                          $   3.96        $   3.93        $   3.35        $    0.03        $    0.58

1 2012 figures based on revised actuals 2CRU Index; period average 3 IHS Global 4 LME Zinc; period average 5 NYMEX Henry Hub Natural Gas; period average 6 Energy Information Administration; period average

U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasing U.S. GDP growth rates generally indicate a weaker economy. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative ("SG&A") expense.

The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs.

The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2013, fiscal 2012, and fiscal 2011:

   (Dollars per ton 1 )          Fiscal Year                             Inc / (Dec)
                          2013      2012      2011         2013 vs. 2012            2012 vs. 2011
   1st Quarter            $ 616     $ 709     $ 611     ($   93 )      -13.1 %   $     98        16.0 %
   2nd Quarter            $ 622     $ 660     $ 557     ($   38 )       -5.8 %   $    103        18.5 %
   3rd Quarter            $ 629     $ 718     $ 699     ($   89 )      -12.4 %   $     19         2.7 %
   4th Quarter            $ 595     $ 684     $ 851     ($   89 )      -13.0 %   ($   167 )     -19.6 %
   Annual Avg.            $ 616     $ 693     $ 680     ($   77 )      -11.1 %   $     13         1.9 %

1 CRU Hot-Rolled Index

No single customer contributed more than 10% of our consolidated net sales during fiscal 2013. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During fiscal 2013, we continued to benefit from improving automotive production from the Detroit Three automakers, which experienced a 6% increase in vehicle production over the prior year. Additionally, North American vehicle production during fiscal 2013 was up 10% over the prior year.


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Certain other commodities, such as zinc, natural gas and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plant operations and indirectly through transportation and freight expense.

Results of Operations

Fiscal 2013 Compared to Fiscal 2012

Consolidated Operations

The following table presents consolidated operating results for the periods
indicated:



                                                              Fiscal Year Ended May 31,
                                                       % of                            % of           Increase/
      (Dollars in millions)            2013          Net sales         2012          Net sales       (Decrease)
Net sales                            $ 2,612.2            100.0 %    $ 2,534.7            100.0 %    $      77.5
Cost of goods sold                     2,215.6             84.8 %      2,201.8             86.9 %           13.8

Gross margin                             396.6             15.2 %        332.9             13.1 %           63.7
Selling, general and
administrative expense                   258.3              9.9 %        225.1              8.9 %           33.2
Impairment of long-lived assets            6.5              0.2 %          0.4              0.0 %            6.1
Restructuring and other expense            3.3              0.1 %          6.0              0.2 %           (2.7 )
Joint venture transactions                (0.6 )            0.0 %         (0.2 )            0.0 %           (0.4 )

Operating income                         129.1              4.9 %        101.6              4.0 %           27.5
Miscellaneous income                       1.5              0.1 %          2.3              0.1 %           (0.8 )
Interest expense                         (23.9 )           -0.9 %        (19.5 )           -0.8 %            4.4
Equity in net income of
unconsolidated affiliates                 94.6              3.6 %         92.8              3.7 %            1.8
Income tax expense                       (64.5 )           -2.5 %        (51.9 )           -2.0 %           12.6

Net earnings                             136.8              5.2 %        125.3              4.9 %           11.5
Net earnings attributable to
noncontrolling interest                   (0.4 )            0.0 %         (9.7 )           -0.4 %           (9.3 )

Net earnings attributable to
controlling interest                 $   136.4              5.2 %    $   115.6              4.6 %    $      20.8

Net earnings attributable to controlling interest for fiscal 2013 increased $20.8 million over fiscal 2012. Net sales and operating highlights were as follows:

Net sales increased $77.5 million from fiscal 2012. Higher overall volumes, aided by the impact of acquisitions, favorably impacted net sales by $182.6 million. The impact of higher overall volumes was partially offset by lower average selling prices, primarily in Steel Processing, which negatively impacted net sales by $105.1 million. Selling prices are affected by the market price of steel, which averaged $616 per ton during fiscal 2013 versus an average of $693 per ton during fiscal 2012.

Gross margin increased $63.7 million from fiscal 2012 due to the aforementioned increase in volumes, a more favorable product mix, and a decrease in charges related to the fiscal 2012 voluntary product recall in Pressure Cylinders. Gross margin for fiscal 2013 included $2.6 million of product recall charges compared to $9.7 million in the comparable period in the prior year. For additional information regarding the product recall, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE E - Contingent Liabilities and Commitments" of this Annual Report on Form 10-K.

SG&A expense increased $33.2 million from fiscal 2012, primarily due to the impact of acquisitions and higher profit sharing and bonus expense resulting from higher net earnings.

Impairment charges of $6.5 million consisted of $5.0 million related to Pressure Cylinders' investment in a 60%-owned consolidated joint venture in India, $2.0 million of which was attributed


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to the non-controlling interest, and $1.5 million related to the sale of Pressure Cylinders' business in Czech Republic. For additional information regarding these impairment charges, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE C - Goodwill and Other Long-Lived Assets" of this Annual Report on Form 10-K.

Restructuring charges of $3.3 million consisted primarily of a $2.5 million accrual for severance costs associated with the recently announced consolidation of our BernzOmatic hand torch manufacturing operation in Medina, New York into the existing Pressure Cylinders facility in Chilton, Wisconsin and $1.8 million of facility exit and other costs associated with the closure of our commercial stairs business. For additional information regarding these restructuring charges, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE D - Restructuring and Other Expense" of this Annual Report on Form 10-K.

In connection with the wind down of our former Metal Framing operating segment, we recognized a net benefit of $0.6 million within the "joint venture transactions" financial statement caption in our consolidated statement of earnings. This amount consisted primarily of $1.9 million of net gains on asset disposals partially offset by facility exit and other costs. For additional information, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE D - Restructuring and Other Expense" of this Annual Report on Form 10-K.

Interest expense of $23.9 million was $4.4 million higher than the prior fiscal year, as the impact of higher average interest rates due to a higher mix of long-term versus short-term debt more than offset the impact of lower average debt levels. For additional information, refer to "Item
8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE G - Debt and Receivables Securitization" of this Annual Report on Form 10-K.

Equity income increased $1.8 million from fiscal 2012. The majority of equity income is generated by our WAVE joint venture, where our portion of net earnings increased $3.5 million, or 6%, to $65.5 million. Additionally, our portion of net earnings of ClarkDietrich and TWB increased $2.7 million and $2.3 million, respectively, over fiscal 2012. The overall increase in equity income was partially offset by a $4.8 million charge related to the write-off of the investment in our joint venture in China. For additional financial information regarding our unconsolidated affiliates, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE B - Investments in Unconsolidated Affiliates" of this Annual Report on Form 10-K.

Income tax expense increased $12.6 million from fiscal 2012 due primarily to higher earnings. Fiscal 2013 income tax expense reflects an effective tax rate attributable to controlling interest of 32.1% versus 31.0% in fiscal 2012. These rates are calculated based on net earnings attributable to controlling interest, as reflected in our consolidated statements of earnings. The increase in the effective tax rate attributable to controlling interest was due primarily to a reduction in the benefit associated with lower tax rates on foreign income. The reduction in the tax benefit associated with lower tax rates on foreign income was due to certain foreign impairment charges for which there was no associated tax benefit. The 32.1% rate is lower than the federal statutory rate of 35% primarily as a result of the benefits from the qualified production activities deduction and lower tax rates on foreign income (collectively decreasing the rate by 3.6%). These impacts are partially offset by state and local income taxes of 1.0% (net of their federal tax benefit). For additional information, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - NOTE L - Income Taxes" of this Annual Report on Form 10-K.


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Segment Operations

Steel Processing

The following table presents a summary of operating results for our Steel
Processing operating segment for the periods indicated:



                                                             Fiscal Year Ended May 31,
                                                     % of                              % of            Increase/
    (Dollars in millions)           2013           Net sales          2012           Net sales         (Decrease)
Net sales                         $ 1,443.5             100.0 %     $ 1,578.5             100.0 %     $     (135.0 )
Cost of goods sold                  1,269.5              87.9 %       1,399.9              88.7 %           (130.4 )

Gross margin                          174.0              12.1 %         178.6              11.3 %             (4.6 )
Selling, general and
administrative expense                107.9               7.5 %         109.1               6.9 %             (1.2 )
Joint venture transactions                -               0.0 %          (2.1 )            -0.1 %              2.1

Operating income                  $    66.1               4.6 %     $    71.6               4.5 %     $       (5.5 )

Material cost                     $ 1,036.1                         $ 1,159.3                         $     (123.2 )
Tons shipped (in thousands)           2,659                             2,898                                 (239 )

Net sales and operating highlights were as follows:

Net sales decreased $135.0 million from fiscal 2012. Lower base material prices throughout fiscal 2013 led to decreased pricing for our products, negatively impacting net sales by $120.7 million. Overall volumes were also down during fiscal 2013, negatively impacting net sales by $14.3 million. The mix of direct versus toll tons was 56% to 44% during fiscal 2013 versus 51% to 49% in the prior fiscal year. After excluding volumes from the MISA Metals facilities, which were wound down or sold during the current year, direct volumes increased approximately 3%. The change in mix of direct versus toll tons was driven primarily by our Spartan joint venture. As expected, volumes at Spartan were down as a result of our partner moving business to their in-house galvanizing facility. However, volumes have stabilized at the lower level and the business remains solidly profitable.

Operating income decreased $5.5 million from fiscal 2012 primarily due to the impact of lower volumes. Also contributing to the decrease was a $2.1 million gain in the prior fiscal year related to the disposal of two of the three MISA Metals steel processing facilities acquired in fiscal 2011. This gain was included in the joint venture transactions financial statement caption to correspond with amounts previously recognized in connection with this transaction.

Pressure Cylinders

The following table presents a summary of operating results for our Pressure
Cylinders operating segment for the periods indicated:



                                                             Fiscal Year Ended May 31,
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