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WOR > SEC Filings for WOR > Form 10-K on 30-Jul-2014All Recent SEC Filings

Show all filings for WORTHINGTON INDUSTRIES INC

Form 10-K for WORTHINGTON INDUSTRIES INC


30-Jul-2014

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. is a corporation formed under the laws of the State of Ohio (individually, the "Registrant" or "Worthington Industries" or, collectively with the subsidiaries of Worthington Industries, Inc., "we," "our," "Worthington" or the "Company"). Founded in 1955, Worthington is primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products. Our manufactured metal products include: pressure cylinders for liquefied petroleum gas ("LPG"), compressed natural gas ("CNG"), oxygen, refrigerant and other industrial gas storage, hand torches and filled hand torch cylinders, propane-filled camping cylinders, cylinders for breathing applications (medical, diving, firefighting), helium-filled balloon kits, steel and fiberglass tanks and processing equipment primarily for the oil and gas industry, and cryogenic pressure vessels for liquefied natural gas ("LNG") and other gas storage applications; engineered cabs and operator stations and cab components; 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, 2014, excluding our joint ventures, we operated 34 manufacturing facilities worldwide, principally in three operating segments, which correspond with our 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 Construction Services and Worthington Energy Innovations ("WEI").

We also held equity positions in 12 active joint ventures, which operated 46 manufacturing facilities worldwide, as of May 31, 2014. Five of these joint ventures are consolidated with the equity owned by the other joint venture member(s) shown as noncontrolling interest in our consolidated balance sheets, and the other joint venture members' portion of net earnings and other comprehensive income shown as net earnings or comprehensive income attributable to noncontrolling interest in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.

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 Steel Processing. Segment information reported in previous periods has been restated to conform to this new presentation.

Overview

The Company had a record year in fiscal 2014, recording the highest annual earnings per diluted share in Company history. Near record revenue and earnings at Steel Processing were partially offset by weakness in Engineered Cabs and larger than expected losses from our construction businesses, the strategic alternatives


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of which are being evaluated by the Company. Pressure Cylinders' operating income declined from fiscal 2013; however, the current year included $32.0 million of non-cash impairment charges, an increase of $25.5 million over fiscal 2013.

Volumes were mixed in fiscal 2014. Pressure Cylinders volumes were up a modest 3%; however, a more favorable product mix due to an increase in higher-priced, lower-volume tanks led to an 8% increase in net sales. Steel Processing volumes were up 23%, driven by contributions from the consolidation of TWB and improvements in the automotive, construction and agriculture markets. Excluding the impact of TWB, Steel Processing volumes were up 12%. Refer to Recent Business Developments below for additional information regarding the Company's acquisition of an additional 10% interest in TWB.

Equity in net income of unconsolidated affiliates ("equity income") during fiscal 2014 was down 3% from fiscal 2013 to $91.5 million. The decrease resulted primarily from the consolidation of TWB on July 31, 2013. Since that date, TWB's results have been consolidated versus reported in equity income. In addition, equity income from ClarkDietrich was lower by $1.8 million on lower volumes caused by severe weather conditions. However, all joint ventures posted positive results, led by WAVE, Serviacero and ClarkDietrich, which contributed $67.1 million, $7.3 million, and $7.0 million of equity income, respectively. We received $85.3 million in cash distributions from our unconsolidated affiliates during fiscal 2014.

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. Our Transformation efforts within Pressure Cylinders, which were initiated in the first quarter of fiscal 2012, continue to gain traction and increase in scope. The efforts in our industrial and consumer products end markets, in particular, are helping to drive recent steady quarterly improvements in our operating margins. We initiated the Transformation in our Engineered Cabs operating segment during the first quarter of fiscal 2013, and these efforts are progressing through each facility. 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 (Income)" of this Annual Report on Form 10-K.

Recent Business Developments

• On July 31, 2013, we acquired an additional 10% interest in our laser welded blank joint venture, TWB, for $17.9 million, increasing our ownership to a 55% controlling interest. As a result, TWB's results have been consolidated within Steel Processing since that date, 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 fiscal 2014.

• During the second quarter of fiscal 2014, we committed to a re-branding initiative to brand substantially all of our businesses under the Worthington Industries name. In connection with the branding strategy, the Company discontinued the use of non-Worthington trade names except for retail brand names such as BernzOmatic® and Balloon Time® and for those related to our joint ventures. 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 for additional information.

• On October 18, 2013, we finalized an agreement with Nisshin Steel Co., Ltd. and Marubeni-Itochu Steel Inc. to form Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. The joint venture


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will construct a plant in the Zhejiang Province in the People's Republic of China that will produce cold-rolled strip steel, primarily for the automotive industry. We own a 10% interest in the joint venture with the option to increase our ownership interest to 34%.

• On November 12, 2013, we entered into an agreement to sell the operating assets related to our small and medium steel high pressure industrial gas and acetylene cylinders business in North America. The majority of these assets were located in our Tilbury, Ontario facility, which ceased operations in February 2014.

• On December 10, 2013, we announced the closure of our Baltimore steel facility, which ceased production prior to the end of fiscal 2014. With the consolidation of the steel industry, many of the mills that previously supplied the Baltimore facility have closed, negatively impacting the supply chain there. We concluded that we can more efficiently service our customers in the Mid-Atlantic Region from other Worthington facilities and processing partners. The Company is in the process of shipping the remaining inventory at the Baltimore facility to other Worthington locations and expects to completely exit the facility before the end of the first quarter of fiscal 2015.

• On January 24, 2014, we acquired a 75% interest in Arita? Basinçli Kaplar Sanayi ("Worthington Aritas"), one of Europe's leading cryogenic technology companies for LNG and other gas storage applications. The remaining 25% stake was retained by the prior owners. The total purchase price, including an adjustment for estimated final working capital, was approximately $35.3 million. The purchase price also includes contingent consideration with an estimated fair value of $404,000.

• On March 27, 2014, we acquired the tank manufacturing division of Steffes Corporation for cash consideration of approximately $28.9 million. The division manufactures oilfield storage tanks for customers drilling in the Bakken shale and Williston Basin region out of its facility in Dickinson, North Dakota, and complements our existing operations in Ohio and Kansas that manufacture steel and fiberglass storage tanks, gas separators, gas production units and related wellhead equipment for oil and gas exploration customers in the Marcellus, Utica, Bakken and Mid-Continent regions.

• On April 15, 2014, we completed the public offering of $250.0 million aggregate principal amount of senior unsecured notes. The notes bear interest at a rate of 4.55% and mature in April 2026. A portion of the net proceeds was used to repay borrowings then outstanding under both the Company's $425.0 million revolving credit facility and its $100.0 million trade accounts receivable securitization facility. The remaining net proceeds will be used for general corporate purposes, which may include repayment of other indebtedness.

• On June 25, 2014, the Board authorized the repurchase of an additional 10,000,000 of Worthington Industries' outstanding common shares, increasing the total number of common shares available for repurchase to 11,722,332.

• On June 25, 2014, the Board declared a quarterly dividend of $0.18 per share, an increase of $0.03 per share from the previous quarterly rate. The dividend is payable on September 29, 2014 to shareholders of record on September 12, 2014.

• During the fourth quarter of fiscal 2014, we repurchased a total of 1,000,000 of our common shares for $37.1 million at an average price of $37.14 per share. During fiscal 2014, we repurchased a total of 3,380,500 common shares for $128.2 million at an average price of $37.93.


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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 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 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 four of our unconsolidated joint ventures are also to the automotive end market. The increase in the portion of total net sales made to the automotive market, as shown in the table above, was driven primarily by the consolidation of TWB on July 31, 2013.

Approximately 9% of the net sales of our Steel Processing operating segment, 55% 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 two of our unconsolidated joint ventures: WAVE and ClarkDietrich. 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.

Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 34% and 45% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, 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.


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

                                                                                           Increase /
                                          Fiscal Year Ended May 31,                        (Decrease)
                                                                                    2014 vs.         2013 vs.
                                     2014            2013            2012             2013             2012
U.S. GDP (% growth
year-over-year)1                        1.7 %           2.2 %           2.2 %            -0.5 %            0.0 %
Hot-Rolled Steel ($ per ton)2      $    651        $    616        $    693        $       35        ($     77 )
Detroit Three Auto Build
(000's vehicles)3                     9,020           8,557           8,126               463              473
No. America Auto Build (000's
vehicles)3                           16,381          15,744          14,329               637            1,415
Zinc ($ per pound)4                $   0.86        $   0.90        $   0.96        ($    0.04 )      ($   0.06 )
Natural Gas ($ per mcf)5           $   4.08        $   3.49        $   3.61        $     0.59        ($   0.12 )
On-Highway Diesel Fuel Prices
($ per gallon)6                    $   3.92        $   3.96        $   3.93        ($    0.04 )      $    0.03

1 2013/2012 figures based on revised actuals 2CRU Hot-Rolled 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 2014, fiscal 2013, and fiscal 2012:

       (Dollars per ton 1)                  Fiscal Year                                  Inc / (Dec)
                                     2014       2013      2012            2014 vs. 2013                 2013 vs. 2012
1st Quarter                          $ 627      $ 616     $ 709     $      11              1.8 %    ($   93 )        -13.1 %
2nd Quarter                          $ 651      $ 622     $ 660     $      29              4.7 %    ($   38 )         -5.8 %
3rd Quarter                          $ 669      $ 629     $ 718     $      40              6.4 %    ($   89 )        -12.4 %
4th Quarter                          $ 655      $ 595     $ 684     $      60             10.1 %    ($   89 )        -13.0 %
Annual Avg.                          $ 651      $ 616     $ 693     $      35              5.7 %    ($   77 )        -11.1 %

1 CRU Hot-Rolled Index

No single customer contributed more than 10% of our consolidated net sales during 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 fiscal 2014, we continued to benefit from improving automotive production from the Detroit Three automakers, which experienced a 5% increase in vehicle production over the prior year. Overall North American vehicle production was up 4% during fiscal 2014.

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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Results of Operations

Fiscal 2014 Compared to Fiscal 2013

Consolidated Operations

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



                                                              Fiscal Year Ended May 31,
                                                      % of                              % of            Increase/
     (Dollars in millions)           2014           Net sales          2013           Net sales         (Decrease)
Net sales                          $ 3,126.4             100.0 %     $ 2,612.2             100.0 %     $      514.2
Cost of goods sold                   2,633.9              84.2 %       2,215.6              84.8 %            418.3

Gross margin                           492.5              15.8 %         396.6              15.2 %             95.9
Selling, general and
administrative expense                 300.4               9.6 %         258.3               9.9 %             42.1
Impairment of long-lived assets         58.2               1.9 %           6.5               0.2 %             51.7
Restructuring and other expense
(income)                                (2.9 )            -0.1 %           3.3               0.1 %             (6.2 )
Joint venture transactions               1.0               0.0 %          (0.6 )             0.0 %              1.6

Operating income                       135.8               4.3 %         129.1               4.9 %              6.7
Miscellaneous income                    16.9               0.5 %           1.5               0.1 %             15.4
Interest expense                       (26.7 )            -0.9 %         (23.9 )            -0.9 %              2.8
Equity in net income of
unconsolidated affiliates               91.5               2.9 %          94.6               3.6 %             (3.1 )
Income tax expense                     (57.3 )            -1.8 %         (64.5 )            -2.5 %             (7.2 )

Net earnings                           160.2               5.1 %         136.8               5.2 %             23.4
Net earnings attributable to
noncontrolling interest                 (8.9 )            -0.3 %          (0.4 )             0.0 %              8.5

Net earnings attributable to
controlling interest               $   151.3               4.8 %     $   136.4               5.2 %     $       14.9

Fiscal 2014 net earnings attributable to controlling interest increased $14.9 million over fiscal 2013. Net sales and operating highlights were as follows:

• Net sales increased $514.2 million from fiscal 2013. Higher overall volumes, aided by the impact of acquisitions, favorably impacted net sales by $532.7 million. The impact of higher overall volumes was partially offset by lower average selling prices, which negatively impacted net sales by $18.5 million.

• Gross margin increased $95.9 million from fiscal 2013 due to the aforementioned increase in volumes and a higher spread between average selling prices and material costs due in part to the favorable impact of inventory holding gains in Steel Processing in fiscal 2014, compared to inventory holding losses in fiscal 2013.

• SG&A expense increased $42.1 million from fiscal 2013, due primarily to the impact of acquisitions and higher profit sharing and bonus expense. The overall increase in SG&A expense was partially offset by a net pre-tax gain of $4.0 million for the favorable settlement of a legal dispute with a supplier involved in the fiscal 2012 voluntary product recall in Pressure Cylinders. For additional information regarding this and other significant legal matters, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note E - Contingent Liabilities and Commitments."

• Impairment charges of $58.2 million consisted of $30.7 million related to the write-off of certain trade name intangible assets as a result of a re-branding initiative, $19.0 million for the impairment of Worthington Nitin Cylinders, our 60%-owned consolidated joint venture in India, $7.1 million related to the Company's stainless steel business, Precision Specialty Metals, and $1.4 million related to the Company's aluminum high-pressure cylinder business in New Albany, Mississippi.


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Approximately $7.6 million, or 40%, of the total impairment charge related to Worthington Nitin Cylinders was attributed to the non-controlling interest. 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 income of $2.9 million was driven by $7.1 million of net gains on the sale of assets, including $4.8 million related to the sale of our Integrated Terminals warehouse facility in Detroit, Michigan, and $2.3 million related to the sale of our North American steel high pressure and acetylene cylinders business. The impact of these items was partially offset by $2.5 million of accrued severance costs and $1.7 million of facility exit costs related to various restructuring and exit activities. For additional information, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note D - Restructuring and Other Expense (Income)" of this Annual Report on Form 10-K.

• In connection with the wind down of our former Metal Framing operating segment, we recognized net charges of $1.0 million within the joint venture transactions financial statement caption, consisting primarily of facility exit costs. For additional information, refer to "Item 8. - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note D - Restructuring and Other Expense (Income)" of this Annual Report on Form 10-K.

• Interest expense of $26.7 million was $2.8 million higher than the prior fiscal year. The increase was due to the impact of higher average debt levels and higher average interest rates resulting from an increase in the usage of long-term debt versus short-term debt. 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 decreased $3.1 million from fiscal 2013 to $91.5 million. Adjusting for the removal of TWB from equity income, due to its consolidation, and the impact of a $4.8 million charge for the write-off of our metal framing joint venture in China in fiscal 2013, equity income was up $2.8 million led by higher contributions from WSP, WAVE, and Serviacero, which increased $2.5 million, $1.6 million and $1.4 million, respectively. Equity income at ClarkDietrich decreased $1.8 million on lower volumes related to severe weather conditions. However, all joint ventures posted positive results, led by WAVE, Serviacero and ClarkDietrich, which contributed $67.1 million, $7.3 million, and $7.0 million of equity income, respectively. 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 decreased $7.2 million from fiscal 2013. The impact of higher earnings was more than offset by (a) a one-time $7.1 million favorable tax adjustment associated with the acquisition of an additional 10% interest in TWB (the "TWB acquisition adjustment"), (b) a one-time $2.3 million tax write-off of an investment in a foreign subsidiary, and
(c) $2.2 million of research and development credits. The TWB acquisition adjustment related primarily to the estimated U.S. deferred tax liability associated with the unremitted earnings of TWB's wholly-owned foreign corporations.

Fiscal 2014 income tax expense reflects an effective tax rate attributable to controlling interest of 27.5% vs. 32.1% in fiscal 2013. The 27.5% rate is lower than the federal statutory rate of 35% primarily as a result of (a) the TWB acquisition adjustment, and (b) benefits from (i) the qualified production . . .

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