SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(Mark One)
Commission File No. 1-8399
WORTHINGTON INDUSTRIES, INC.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.
As of September 30, 2002, 85,730,018 of the Registrant’s common shares, without par value, were outstanding.
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TABLE OF CONTENTS
INDEX
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SAFE HARBOR STATEMENT
Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute “forward-looking statements” as 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 and can be identified by the words “will”, “may”, “designed to”, “outlook”, “believes”, “should”, “plans”, “expects”, intends”, “estimates” and similar expressions. These forward-looking statements include, without limitation, statements relating to:
Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected. Any number of factors could affect actual results, including, without limitation:
Any forward-looking statements in this Form 10-Q are based on current information as of the date of the report, and we assume no obligation to correct or update any such statements in the future.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WORTHINGTON INDUSTRIES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
See notes to condensed consolidated financial statements.
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WORTHINGTON INDUSTRIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(In Thousands, Except Per Share)
(Unaudited)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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WORTHINGTON INDUSTRIES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
Note A – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended August 31, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2003 (“fiscal 2003”). For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K of Worthington Industries, Inc. for the fiscal year ended May 31, 2002.
Note B – Industry Segment Data
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Note C – Comprehensive Income
The components of comprehensive income are summarized as follows:
Note D – Restructuring Expense
During the quarter ended February 28, 2002, the Company announced a consolidation plan to improve the utilization of assets. This plan affects each of the Company’s business segments as six facilities ultimately will be closed and two others will be restructured. As of August 31, 2002, five of the six facilities have ceased operations while Jackson, Michigan, is in the process of closing. Additionally, the Company has completed the reduction of overhead costs at the Louisville, Kentucky, facility, and the Rock Hill, South Carolina, facility is in the process of being converted to a Metal Framing location. As part of the consolidation plan, the Company recorded a $64,575,000 pre-tax restructuring expense. The restructuring expense included a write-down to fair value of certain property and equipment, severance and employee related costs, and other items. The severance and employee related costs are due to the elimination of 542 administrative, production and other employee positions. As of August 31, 2002, 444 employee positions had been eliminated (411 through termination and 33 through retirement and attrition), and severance of $3,301,000 was paid. The consolidation process should be substantially completed by January 2003.
The components of the restructuring charge are summarized as follows:
The sales of the closed plants are anticipated to transfer to other Company locations except for the sales of the Itu, Brazil, facility and the painted and coated products of the Malvern, Pennsylvania, facility. Net sales for the products that will not be transferred were $5,017,000 and $15,408,000 for the three months ended August 31, 2002 and 2001, respectively. The
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related operating loss for these products was $835,000 and $1,686,000 for the three months ended August 31, 2002 and 2001, respectively.
Note E – Acquisition
On July 31, 2002, the Company acquired all of the outstanding stock of Unimast Incorporated (together with its subsidiaries, “Unimast”) for $113,740,000 in cash (net of cash acquired) plus the assumption of $9,254,000 of debt. Unimast manufactures construction steel products, including light gauge steel framing, plastering steel and trim accessories, and serves the construction industry from ten locations. This acquisition adds capacity for the Company’s existing products, broadens its current product line to include Unimast’s complementary products and introduces new products to the Metal Framing segment, including metal corner bead and trim and vinyl construction accessories. The acquisition was accounted for using the purchase method, with results for Unimast included since the purchase date. The purchase price has been allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition, pending final asset valuation, as follows:
Intangibles include patents and trademarks that are being amortized over a weighted average life of 13 years.
The following pro forma data summarizes the results of operations of the Company for the three months ended August 31, 2002 and 2001, assuming Unimast was acquired at the beginning of each period presented. In preparing the pro forma data, adjustments have been made to conform Unimast’s accounting policies to those of the Company and to reflect purchase accounting adjustments and interest expense:
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The pro forma information does not purport to be indicative of the results of operations which would have actually been obtained if the acquisition had occurred on the dates indicated or the results of operations which will be reported in the future.
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Results of Operations" -->
Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations
Overview
Worthington Industries, Inc. is a diversified steel processor that focuses on value-added steel processing and metals-related businesses. As of August 31, 2002, we operated 50 facilities worldwide, principally in three reportable business segments: Processed Steel Products, Metal Framing and Pressure Cylinders. We also hold equity positions in seven joint ventures, which as of August 31, 2002, operated 16 facilities worldwide.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements included elsewhere in this report. Our Annual Report on Form 10-K for the fiscal year ended May 31, 2002, includes additional information about our company, our operations and our financial position, and should be read in conjunction with this Quarterly Report on Form 10-Q.
Results of Operations
On July 31, 2002, we acquired the stock of Unimast Incorporated, a wholly-owned subsidiary of WHX Corporation, for $113.7 million in cash (net of cash acquired) and $9.3 million of assumed debt. Unimast Incorporated and its subsidiaries (together, “Unimast”) manufacture construction steel products, including light gauge steel framing, plastering steel and trim accessories, and serves the construction industry from ten locations. The acquisition was accounted for using the purchase method, with results for Unimast included since the purchase date. Unimast is included in our Metal Framing segment.
First Quarter – Fiscal 2003 Compared to Fiscal 2002
For the first quarter of fiscal 2003, net sales increased 28% or $115.9 million to $525.5 million (up 23% or $93.9 million to $503.5 million excluding the impact of the Unimast acquisition) from $409.6 million in the comparable quarter of fiscal 2002. The increase in net sales primarily was due to higher volumes in Processed Steel Products and Pressure Cylinders. Higher average selling prices in Metal Framing and Processed Steel Products also contributed to the increase.
Gross margin increased 49% or $29.4 million to $89.4 million for the first quarter of fiscal 2003 from $60.0 million in the comparable quarter of fiscal 2002. The main reason for the increase was higher volumes, especially in Processed Steel Products and Pressure Cylinders, which increased gross margin by $38.3 million. Higher conversion expenses partially offset the increase in gross margin by $14.1 million, including increases in variable expenses such as wages and profit sharing ($5.2 million) and freight ($3.9 million). In addition, $2.6 million in asset impairment charges lowered gross margin. These factors combined to increase gross margin as a percentage of net sales to 17.0% in the first quarter of fiscal 2003 from 14.6% in the comparable quarter of fiscal 2002.
Selling, general and administrative (“SG&A”) expense increased 26% or $9.7 million to $47.1 million for the first quarter of fiscal 2003 from $37.4 million in the comparable quarter of fiscal 2002 primarily due to the increase in compensation and benefits expense ($7.9 million)
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associated with higher earnings. In addition, prior year SG&A was reduced by a $1.9 million pre-tax gain on the sale of an airplane.
Operating income increased 87% or $19.7 million to $42.3 million for the first quarter of fiscal 2003 (up 76% or $17.2 million to $39.8 million excluding the impact of the Unimast acquisition) from $22.6 million in the comparable quarter of fiscal 2002. Operating income as a percentage of net sales increased to 8.1% in the first quarter of fiscal 2003 (7.6% excluding the impact of the Unimast acquisition) from 5.5% in the comparable quarter of fiscal 2002.
Interest expense increased 11% or $0.6 million to $6.1 million for the first quarter of fiscal 2003 from $5.5 million in the comparable quarter of fiscal 2002 due to additional debt incurred for and assumed in connection with the Unimast acquisition and offset by a $0.3 million decrease in capitalized interest. Accounts receivable securitization (“A/R securitization”) facility fees decreased $0.6 million to $0.9 million for the first quarter of fiscal 2003 from $1.5 million in the comparable quarter of fiscal 2002 and were classified as miscellaneous expense.
Equity in net income of unconsolidated affiliates increased 72% or $3.5 million to $8.4 million for the first quarter of fiscal 2003 from $4.9 million in the comparable quarter of fiscal 2002. Lower operating expenses at WAVE and WSP, higher net sales at Acerex and TWB, and the inclusion of Aegis Metal Framing were the principal reasons for the increase.
Our effective tax rate was 36.5% for the first quarter of fiscal 2003 and fiscal 2002. The effective tax rate differed from the U.S. statutory rate of 35% primarily as a result of state income taxes, offset by foreign earnings taxed at lower rates.
The following provides further information on net sales and operating income by segment:
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Liquidity and Capital Resources
For the first quarter of fiscal 2003, we generated $130.4 million in cash from operating activities, representing a $90.0 million increase from the comparable period of fiscal 2002. This improvement primarily was due to lower accounts receivable (caused by a $69.5 million increase in the sale of accounts receivable through our A/R securitization facility) and higher net income.
Our significant investing and financing activities during the first quarter of fiscal 2003 included investing $113.7 million in the Unimast acquisition, disbursing $13.7 million in dividends to shareholders, and spending $6.4 million on capital additions. These transactions were funded by the cash flows from our operations and proceeds from short-term borrowings.
Capital spending during the first quarter of fiscal 2003 included the following: $1.9 million in our Processed Steel Products segment; $3.1 million in our Metal Framing segment including expenditures related to the Rock Hill restructuring; $0.9 million in our Pressure Cylinders segment; and $0.5 million in Other.
In November 2000, we entered into a $120.0 million revolving A/R securitization facility which was expanded to $190.0 million in May 2001. Pursuant to the terms of the facility, certain of our subsidiaries sell their accounts receivable, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote
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subsidiary. In turn, WRC sells, on a revolving basis, undivided ownership interests in this pool of accounts receivable to independent third parties. We retain an undivided interest in this pool and are subject to risk of loss based on the collectibility of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables past due, balances with foreign customers, concentrations over limits with specific customers, and certain reserve amounts, we believe additional risk of loss is minimal. Also because of these exclusions, no discount occurs on the sale and no gain or loss is recorded; however, facility fees of $0.9 million and $1.5 million were incurred during the first quarter of fiscal 2003 and 2002, respectively. The book value of the retained portion approximates fair value. We continue to service the accounts receivable. No servicing asset or liability has been recognized, as our cost to service the accounts receivable is expected to approximate the servicing income. As of August 31, 2002, a $169.5 million undivided interest in this pool had been sold (up from $100.0 million at May 31, 2002).
Consolidated net working capital declined $34.4 million from May 31, 2002, to $116.6 million at August 31, 2002. The primary contributors to the decrease were higher accounts payable (due to increased raw material purchases and the assumption of $24.4 million of Unimast payables) and the previously mentioned decline in accounts receivable, partially offset by the increase in inventories (due to increased business and the addition of Unimast).
During August 2002, we added $35.0 million of additional commitments to our two revolving credit facilities, bringing them to a combined total of $345.0 million. Our 364-day facility, maturing May 2003, now represents $172.5 million in commitments from fifteen banks. Our five-year facility, maturing May 2007, also represents $172.5 million in commitments from fifteen banks. At August 31, 2002, there was a total of $5.0 million in borrowings outstanding under the 364-day facility at an interest rate of 2.51%. There was no outstanding balance under the five-year facility at August 31, 2002.
At August 31, 2002, our total debt was $310.4 million compared to $295.6 million at the end of fiscal 2002. Our debt to capital ratio increased slightly to 33.3% at August 31, 2002, from 32.8% at the end of fiscal 2002.
The $113.7 million of cash paid for the acquisition of Unimast was provided by the sale of receivables through our A/R securitization facility and by borrowings under the revolving credit facilities.
We expect to continue to assess acquisition opportunities as they arise. Additional financing may be required if we decide to make additional acquisitions. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms when required. Absent any other acquisitions, we anticipate that cash flows from operations and unused short-term borrowing capacity should be more than sufficient to fund expected normal operating costs, dividends, working capital, and capital expenditures for our existing businesses.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks have not changed significantly from those disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2002.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the filing date of this Quarterly Report on Form 10-Q, the Company, under the supervision, and with the participation, of its management, including its principal executive officer and principal financial officer, performed an evaluation of the Company’s disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them, particularly during the period for which the periodic reports are being prepared.
Changes in Internal Controls
No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed pursuant to Securities Exchange Act Rule 13a-15 referred to above.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant’s Annual Meeting of Shareholders was held on September 26, 2002. In connection with the meeting, proxies were solicited. Following are the voting results on the proposal considered and voted upon:
1. All nominees for election to the class of directors whose terms expire in 2005 were elected by the following vote:
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CERTIFICATIONS
I, John P. McConnell, certify that:
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I, John T. Baldwin, certify that:
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