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WOR > SEC Filings for WOR > Form 10-Q on 10-Oct-2013All Recent SEC Filings




Quarterly Report

Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Selected statements contained in this "Item 2. - 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 Quarterly Report on Form 10-Q and "Part I - Item 1A. - Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended May 31, 2013.


The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position of Worthington Industries, Inc., together with its subsidiaries (collectively, "we," "our," "Worthington," or our "Company"), should be read in conjunction with our consolidated financial statements and notes thereto included in "Item
1. - Financial Statements" of this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K for the fiscal year ended May 31, 2013 ("fiscal 2013") includes additional information about Worthington, our operations and our financial position and should be read in conjunction with this Quarterly Report on Form 10-Q.

We are primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products. As of August 31, 2013, excluding our joint ventures, we operated 35 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 Construction Services and Worthington Energy Innovations operating segments.

During the first quarter of fiscal 2014, we made certain organizational changes impacting the internal reporting and management structure of our Steel Packaging operating segment. As a result of these organizational changes, management responsibilities and internal reporting were realigned under our Steel Processing operating segment. 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 August 31, 2013.


The Company's strong performance during the first quarter of fiscal 2014 was aided by solid earnings growth in Steel Processing and Pressure Cylinders as well as higher earnings from our joint ventures. Net earnings in the current quarter included an $11.0 million pre-tax gain and a $4.5 million favorable tax adjustment related to the acquisition of an additional 10% interest in the Company's laser welded blanks joint venture, TWB, as more fully described under Recent Business Developments below.

Volume growth was mixed in the first quarter. Pressure Cylinders volumes were down slightly; however, a more favorable product mix due to a shift to higher priced, lower volume tanks led to a 12% increase in net sales. Steel Processing volumes were up 4% driven by contributions from TWB and improvements in the agriculture and heavy truck markets, which were partially offset by lower tolling volumes.

Engineered Cabs continues to experience soft demand due to lower volumes from key customers. We are responding to the current environment and are implementing a plan to adjust costs accordingly without sacrificing production capacity.

Equity in net income of unconsolidated affiliates ("equity income") during the quarter was up 19% over the prior year period. All of our major joint ventures operated at a profit during the quarter, led by WAVE, ClarkDietrich, and TWB, which contributed $19.7 million, $2.8 million, and $1.8 million of equity income, respectively. TWB's contribution to equity income decreased $0.8 million, reflecting only two months of activity in the current quarter. As more fully described under Recent Business Developments below, this joint venture was consolidated effective August 1, 2013. We received $26.6 million in distributions from our unconsolidated affiliates during the quarter.

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The Company continues its strategy of optimizing existing operations through the Transformation, pursuing growth opportunities that add to our current businesses, and developing new products through innovation. We initiated the diagnostics phase of the Transformation Plan in our Pressure Cylinders operating segment in the first quarter of fiscal 2012, and these efforts are progressing through each facility. Additionally, during the first quarter of fiscal 2013, we initiated the diagnostics phase of the Transformation Plan in our Engineered Cabs operating segment.

Recent Business Developments

On July 31, 2013, we acquired an additional 10% interest in our laser welded blanks joint venture, TWB, increasing our ownership to a 55% controlling interest. As a result, TWB's results are now consolidated within Steel Processing, with the minority member's portion of earnings eliminated within earnings attributable to noncontrolling interest. This transaction was accounted for as a step acquisition, which required that we re-measure our previously held 45% ownership interest to fair value and record the difference between fair value and carrying value as a gain in our consolidated statement of earnings. The re-measurement to fair value resulted in a non-cash pre-tax gain of $11.0 million, which is included in miscellaneous income in our consolidated statement of earnings for the three months ended August 31, 2013.

During the quarter, we repurchased a total of 880,500 common shares for $30.5 million at an average price of $34.66.

On September 25, 2013, the Board of Directors (the "Board") declared a quarterly dividend of $0.15 per share payable on December 27, 2013 to shareholders of record on December 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 the first three months of fiscal 2014 and fiscal 2013 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 50% 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 four of our unconsolidated joint ventures are also to the automotive end market.

Approximately 10% of the net sales of our Steel Processing operating segment, 53% 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. The construction market is also the predominant end market for three of our unconsolidated joint ventures, WAVE, ClarkDietrich and WMSFMCo. 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.

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Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 40% and 47% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as retail, industrial, lawn and garden, agriculture, energy, heavy truck, mining, forestry and appliance. Given the many different products that make up these net sales and the wide variety of end 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:

                                                      Three Months Ended August 31,
                                                                                  Inc /
                                                     2013             2012        (Dec)
 U.S. GDP (% growth year-over-year) 1                    1.1 %           3.0 %      -1.9 %
 Hot-Rolled Steel ($ per ton) 2                   $      627        $    616      $   11
 Detroit Three Auto Build (000's vehicles) 3           2,138           2,068          70
 No. America Auto Build (000's vehicles) 3             3,897           3,802          95
 Zinc ($ per pound) 4                             $     0.84        $   0.84      $ 0.00
 Natural Gas ($ per mcf) 5                        $     3.63        $   2.74      $ 0.89
 On-Highway Diesel Fuel Prices ($ per gallon) 6   $     3.87        $   3.82      $ 0.05

1 2012 figures based on revised actuals 2 CRU Hot-Rolled Index; period average 3 IHS Autobase 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 for our products. A year-over-year increase in U.S. GDP growth rates is indicative of an improving economy, which generally increases demand for our products. Conversely, decreasing U.S. GDP growth rates generally have the opposite effect. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in 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 to cover current replacement costs.

The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2014, fiscal 2013 and fiscal 2012:

                                                  Fiscal Year
                     (Dollars per ton 1)   2014      2013      2012
                     1st Quarter           $ 627     $ 616     $ 709
                     2nd Quarter             N/A     $ 622     $ 660
                     3rd Quarter             N/A     $ 629     $ 718
                     4th Quarter             N/A     $ 595     $ 684
                     Annual Avg.             N/A     $ 616     $ 693

1 CRU Hot-Rolled Index, period average

No single customer contributed more than 10% of our consolidated net sales during the first quarter of fiscal 2014. 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 the first quarter of fiscal 2014, vehicle production for the Detroit Three automakers was up 3% over the comparable period in the prior year. Additionally, North American vehicle production during the first quarter of fiscal 2014 increased 2% over the comparable period in the prior year.

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.

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