SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File No. 1-8399
WORTHINGTON INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-1189815
- ----------------------------------------- -------------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1205 Dearborn Drive, Columbus, Ohio 43085
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 438-3210
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 March 31, 2002, 85,437,625 of the Registrant's common shares, without
par value, were outstanding.
WORTHINGTON INDUSTRIES, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
February 28, 2002 and May 31, 2001.............................3
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended February 28, 2002 and 2001.........4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended February 28, 2002 and 2001...................5
Notes to Condensed Consolidated Financial Statements...........6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................20
SIGNATURES..................................................................20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORTHINGTON INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEB. 28, MAY 31,
2002 2001
----------------- -----------------
ASSETS (UNAUDITED) (AUDITED)
Current Assets
Cash and cash equivalents $ 610 $ 194
Accounts receivable, net 144,610 169,330
Inventories
Raw materials 103,167 102,051
Work in process 56,933 59,735
Finished products 65,797 65,720
----------------- -----------------
Total Inventories 225,897 227,506
Other current assets 47,601 52,689
----------------- -----------------
Total Current Assets 418,718 449,719
Investments in Unconsolidated Affiliates 89,420 58,638
Goodwill 75,679 76,439
Other Assets 35,845 54,317
Property, Plant and Equipment 1,264,522 1,201,190
Less Accumulated Depreciation 481,349 364,441
----------------- -----------------
Property, Plant and Equipment, net 783,173 836,749
----------------- -----------------
Total Assets $ 1,402,835 $ 1,475,862
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 209,644 $ 207,568
Notes payable 29,039 13,794
Current maturities of long-term debt 1,622 1,748
Other current liabilities 92,146 83,509
----------------- -----------------
Total Current Liabilities 332,451 306,619
Other Liabilities 74,255 69,396
Long-Term Debt 291,430 309,208
Deferred Income Taxes 116,306 140,974
Shareholders' Equity 588,393 649,665
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,402,835 $ 1,475,862
================= =================
See notes to condensed consolidated financial statements.
3
WORTHINGTON INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------------- -----------------------------------
2002 2001 2002 2001
----------------- ---------------- ---------------- -----------------
Net sales $ 405,740 $ 418,717 $1,225,677 $1,360,310
Cost of goods sold 354,889 365,134 1,053,532 1,186,228
----------------- ---------------- ---------------- -----------------
Gross Margin 50,851 53,583 172,145 174,082
Selling, general & administrative expense 36,753 41,916 115,367 125,882
Restructuring expense 64,575 6,474 64,575 6,474
----------------- ---------------- ---------------- -----------------
Operating Income (Loss) (50,477) 5,193 (7,797) 41,726
Other income (expense):
Miscellaneous expense (117) (353) (1,245) (700)
Nonrecurring loss (21,223) - (21,223) -
Interest expense (5,815) (7,300) (17,000) (26,207)
Equity in net income of unconsolidated
affiliates 5,404 5,261 15,365 18,465
----------------- ---------------- ---------------- -----------------
Earnings (Loss) Before Income Taxes (72,228) 2,801 (31,900) 33,284
Income tax expense (benefit) (26,363) 1,023 (11,643) 12,149
----------------- ---------------- ---------------- -----------------
Net Earnings (Loss) $ (45,865) $ 1,778 $ (20,257) $ 21,135
================= ================ ================ =================
Average Common Shares Outstanding -
Diluted 85,985 85,477 85,853 85,662
----------------- ---------------- ---------------- -----------------
Earnings (Loss) Per Common Share - Basic
& Diluted $ (0.53) $ 0.02 $ (0.24) $ 0.25
================= ================ ================ =================
Cash Dividends Declared Per Common
Share $ 0.16 $ 0.16 $ 0.48 $ 0.48
================= ================ ================ =================
See notes to condensed consolidated financial statements.
4
WORTHINGTON INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28,
--------------------------------------
2002 2001
----------------- -----------------
OPERATING ACTIVITIES:
Net earnings (loss) $ (20,257) $ 21,135
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 51,413 53,931
Restructuring expense 64,575 6,474
Nonrecurring loss 21,223 -
Other adjustments (32,680) (7,075)
Changes in current assets and liabilities 3,564 144,662
----------------- -----------------
Net Cash Provided by Operating Activities 87,838 219,127
INVESTING ACTIVITIES:
Investment in property, plant and equipment, net (33,119) (46,885)
Acquisitions, net of cash acquired - (2,043)
Investment in equity affiliates (21,000) -
Proceeds from sale of assets 10,037 818
----------------- -----------------
Net Cash Used by Investing Activities (44,082) (48,110)
FINANCING ACTIVITIES:
Proceeds from (payments on) short-term borrowings 15,246 (120,916)
Proceeds from long-term debt - 2,210
Principal payments on long-term debt (18,004) (2,215)
Repurchase of common shares - (3,406)
Dividends paid (40,986) (41,162)
Other 404 (5,280)
----------------- -----------------
Net Cash Used by Financing Activities (43,340) (170,769)
----------------- -----------------
Increase in cash and cash equivalents 416 248
Cash and cash equivalents at beginning of period 194 538
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 610 $ 786
================= =================
See notes to condensed consolidated financial statements.
5
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 and nine months ended February
28, 2002 are not necessarily indicative of the results that may be expected for
the fiscal year ending May 31, 2002 ("fiscal 2002"). For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Worthington Industries, Inc. 2001 Annual Report to Shareholders and
incorporated by reference in the Form 10-K of Worthington Industries, Inc. for
the fiscal year ended May 31, 2001.
NOTE B - INDUSTRY SEGMENT DATA
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------------- -----------------------------------
IN THOUSANDS 2002 2001 2002 2001
---------------- ---------------- ----------------- -----------------
NET SALES:
Processed Steel Products $ 262,840 $ 266,211 $ 803,946 $ 890,902
Metal Framing 68,515 78,080 223,752 262,305
Pressure Cylinders 70,710 72,707 188,375 202,498
Other 3,675 1,719 9,604 4,605
---------------- ---------------- ----------------- -----------------
$ 405,740 $ 418,717 $ 1 ,225,677 $ 1,360,310
================ ================ ================= =================
OPERATING INCOME (LOSS):
Processed Steel Products $ 10,366 $ 6,235 $ 38,807 $ 20,628
Metal Framing 403 3,703 10,230 20,144
Pressure Cylinders 4,882 2,920 9,220 11,405
Other (1,553) (1,191) (1,479) (3,977)
Restructuring Expense (64,575) (6,474) (64,575) (6,474)
---------------- ---------------- ----------------- -----------------
$ (50,477) $ 5,193 $ (7,797) $ 41,726
================ ================ ================= =================
FEB. 28, MAY 31,
2002 2001
----------------- -----------------
TOTAL ASSETS:
Processed Steel Products $ 867,426 $ 908,090
Metal Framing 236,123 239,890
Pressure Cylinders 158,276 178,866
Other 141,010 149,016
----------------- -----------------
$ 1,402,835 $ 1,475,862
================= =================
6
NOTE C - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------------- -----------------------------------
IN THOUSANDS 2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
Net earnings (loss) $ (45,865) $ 1,778 $ (20,257) $ 21,135
Cash flow hedges (1,230) - (3,612) -
Foreign currency translation 3,020 (437) 3,119 (1,560)
Other (29) (16) (78) (68)
---------------- ---------------- ---------------- -----------------
Total comprehensive
income (loss) $ (44,104) $ 1,325 $ (20,828) $ 19,507
================ ================ ================ =================
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 will be closed and two
others will be restructured. As part of the consolidation plan, the Company
recorded a $64,575,000 pre-tax restructuring expense. The restructuring expense
includes a write-down to fair value of certain property and equipment, severance
and employee related costs, and other items. Of this expense, all but
$11,842,000 for severance and employee related costs are non-cash charges. The
severance and employee related costs are due to the elimination of 542
administrative, production and other employee positions. As of February 28,
2002, 155 employee positions had been eliminated (140 through termination and 15
through retirement and attrition), and severance of $389,000 was paid. The
consolidation process should be substantially completed within the next 12
months.
The components of the restructuring expense are summarized as follows:
AMOUNT BALANCE
CHARGED FEB. 28,
IN THOUSANDS TO INCOME PAYMENTS 2002
--------------- ---------------- ---------------
Property and equipment $ 48,245 $ - $ 48,245
Severance and employee related 11,842 (398) 11,444
Other items 4,488 4,488
--------------- ---------------- ---------------
Total $ 64,575 $ (398) $ 64,177
=============== ================ ===============
The sales of the affected plants will be transferred to other Company
locations except for the sales of Itu, Brazil and the painted and coated
products of the Malvern, Pennsylvania, facility. Net sales for the products that
will not be transferred were $8,683,000 and $13,836,000 for the three months
ended February 28, 2002 and 2001, respectively, and $37,050,000 and $48,557,000
for the nine months ended February 28, 2002 and 2001, respectively. The related
operating loss for these products was $2,185,000 and $4,373,000 for the three
months ended
7
February 28, 2002 and 2001, respectively, and $4,011,000 and $8,185,000 for the
nine months ended February 28, 2002 and 2001, respectively.
During the quarter ended February 28, 2001, the Company recorded a pre-tax
restructuring expense of $6,474,000 for the partial shutdown of Malvern. The
Company has sold all of the idled equipment and settled the termination
liabilities for approximately the costs that were accrued.
NOTE E - GOODWILL
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, effective June 2001. SFAS No. 141 requires the use of the purchase
method of accounting for any business combinations initiated after June 30, 2001
and further clarifies the criteria to recognize intangible assets separately
from goodwill. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets are no longer amortized but are reviewed for impairment. During the six
months ended November 30, 2001, the Company performed the required impairment
tests of goodwill. No impairments were indicated. The annual impairment test
will be performed during the fourth quarter of fiscal 2002.
The impact of the adoption of SFAS No. 142 is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------------- -----------------------------------
IN THOUSANDS, EXCEPT PER SHARE 2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
Net earnings (loss) as reported $ (45,865) $ 1,778 $ (20,257) $ 21,135
Add back: goodwill
amortization after-tax - 360 - 1,080
---------------- ---------------- ---------------- -----------------
Adjusted net earnings (loss) $ (45,865) $ 2,138 $ (20,257) $ 22,215
================ ================ ================ =================
Earnings (loss) per common
share as reported - basic &
diluted $ (0.53) $ 0.03 $ (0.24) $ 0.25
Goodwill amortization after-tax - - - 0.01
---------------- ---------------- ---------------- -----------------
Adjusted earnings (loss) per
common share - basic &
diluted $ (0.53) $ 0.03 $ (0.24) $ 0.26
================ ================ ================ =================
8
Goodwill by segment is summarized as follows:
FEB. 28, MAY 31,
IN THOUSANDS 2002 2001
---------------- ----------------
Processed Steel Products $ - $ 17
Metal Framing 57,752 57,752
Pressure Cylinders 17,361 18,104
Other 566 566
---------------- ----------------
$ 75,679 $ 76,439
================ ================
The goodwill related to Processed Steel Products was written off upon the
adoption of SFAS No. 142. The change in the goodwill balance for Pressure
Cylinders relates to foreign currency translation adjustments.
NOTE F - DERIVATIVES
In June 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement requires derivatives to be
carried on the balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The change
in a derivative's fair value related to the ineffective portion of a hedge, if
any, will be immediately recognized in earnings. Adoption of SFAS No. 133
resulted in an immaterial cumulative effect adjustment to miscellaneous expense
and an unfavorable adjustment to other comprehensive income of $1,928,000, net
of tax.
Commodity Swap Contracts: The Company is exposed to market risk for price
fluctuations on purchases of steel, zinc, natural gas, nickel and other raw
materials and utility requirements. To limit this exposure, the Company
negotiates the best prices for its commodities and competitively prices its
products and services to reflect the fluctuations in commodity market prices. To
a limited extent, the Company has entered into commodity derivative instruments
(cash flow hedges) to hedge purchases of steel, zinc and natural gas. The steel
hedges mature at various dates through January 2003, the zinc hedges mature at
various dates through December 2003, and the natural gas hedges mature at
various dates through March 2003. Ineffectiveness has been immaterial for fiscal
2002. The majority of the losses in other comprehensive income will be
reclassified to earnings within 12 months as the commodities are purchased. The
Company has considered the changes in counterparty creditworthiness and expects
the contracts to remain highly effective in offsetting the changes in fair value
of the hedged forecasted transactions.
Foreign Currency Swap Contracts: The translation of the Company's foreign
operations from local currencies to the U.S. dollar subjects the Company to
exposure related to fluctuating exchange rates. The Company does not use
derivative instruments to manage this risk. However, the Company does make
limited use of forward contracts to manage its exposure on certain intercompany
loans with foreign affiliates. The hedges are 100% effective against the
9
amounts recorded in the foreign affiliates' foreign currency translation
balances in other comprehensive income.
NOTE G - NONRECURRING LOSS
During the quarter ended February 28, 2002, the Company established a
$21,223,000 reserve for the impairment of assets related to previously
discontinued operations. During fiscal 1999, the Company sold all of the assets
of its Custom Products and Cast Products business segments for aggregate
proceeds of $194,000,000 in cash and $30,000,000 in preferred stock and
subordinated debt issued by four acquirers. As economic conditions have
deteriorated, each of the issuers has encountered difficulty making scheduled
payments under the terms of the preferred stock and subordinated debt. The
Company will continue to review these assets for impairment indicators and
potential write-downs in value.
NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. Management does not expect the adoption of this Statement to
have a material impact on the Company's financial position or results of
operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Selected statements contained in this Quarterly Report on Form 10-Q, as
filed with the Securities and Exchange Commission (the "SEC"), including,
without limitation, the Management's Discussion and Analysis that follows, that
are not historical fact, constitute "forward-looking statements" that are based
on management's beliefs, estimates, assumptions and currently available
information. These forward-looking statements include, without limitation,
statements relating to future sales and operating results; growth; stock
appreciation; projected capacity levels; pricing trends; anticipated capital
expenditures; plant start-ups; capabilities;, new products and markets;
projected timing, results, costs, charges and expenditures related to plant
closures and consolidations; and other non-historical information. 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, product demand; changes in
product mix and market acceptance of products; changes in pricing or
availability of raw materials, particularly steel; effects of plant closures and
the consolidation of operations; capacity restraints and efficiencies;
conditions in major product markets; delays in construction or equipment supply;
financial difficulties of customers, suppliers and others with whom we do
business; the effect of national, regional and worldwide economic conditions;
risks associated with doing business internationally, including economical,
political and social instability, and foreign currency exposure; acts of war and
terrorist activities; the ability to improve processes and business practices to
keep pace with the economic, competitive and technological environment; the
business environment and impact of governmental regulations, both in the United
States and abroad; and other risks described from time to time in filings with
the SEC.
OVERVIEW
Worthington Industries, Inc. is a diversified steel processor that focuses
on value-added steel processing and metals-related businesses. We operate 43
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 February 28, 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, 2001, 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Of the significant accounting policies identified in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2001, we believe that the
11
following may involve a higher degree of judgment, estimation or assumption that
might lead us to report materially different amounts under different conditions
or using different assumptions:
Allowance for Doubtful Accounts Receivable
Our allowance for doubtful accounts is estimated to cover the risk of loss
related to our accounts receivable, including the risk associated with our
retained interest in the pool of receivables sold through our accounts
receivable securitization ("A/R securitization") facility. This allowance is
maintained at a level we consider appropriate based on historical and other
factors that affect collectibility. These factors include historical trends of
charge-offs, recoveries and credit losses; the careful monitoring of portfolio
credit quality; and current and projected economic and market conditions.
Different assumptions or changes in economic circumstances could result in
changes to the allowance.
Impairment of Long-Lived Assets
We periodically review the carrying value of our long-lived assets held and used
and assets to be disposed of, including goodwill and other intangible assets,
when events and circumstances warrant such a review. This review is performed
using estimates of future cash flows. If the carrying value of a long-lived
asset is considered impaired, an impairment charge is recorded for the amount by
which the carrying value of the long-lived asset exceeds its fair value. We
believe that the estimates of future cash flows and fair value are reasonable;
however, changes in estimates of such cash flows and fair value could affect the
evaluations.
Accounting for Derivatives and Other Contracts at Fair Value
We use derivatives in the normal course of business to manage our exposure to
fluctuations in commodity prices, interest rates and foreign currency rates.
Such accounting is complex and continues to evolve. Significant judgments and
estimates are involved in the estimating of fair value in the absence of quoted
market values. These estimates are based upon valuation methodologies deemed
appropriate in the circumstances; however, the use of different assumptions
could affect the estimated fair values.
Restructuring Reserves
We have recorded reserves in connection with our announced consolidation plan.
These reserves were established based on estimates of the fair value of affected
property, equipment and other items and the expected payments for severance and
employee related costs. Although we do not anticipate significant changes, the
actual costs could differ from these estimates.
RESULTS FROM OPERATIONS
Our earnings for the third quarter ended February 28, 2002 (the "third
quarter") of the fiscal year ending May 31, 2002 ("fiscal 2002") were impacted
by two one-time charges: a $64.6 million pre-tax restructuring expense and a
$21.2 million pre-tax charge to establish a reserve for the impairment of
certain assets. In addition, the comparable quarter of the fiscal year ended May
31, 2001 ("fiscal 2001") was impacted by a $6.5 million charge for the partial
shutdown of the Malvern, Pennsylvania, facility.
12
In January 2002, we announced a consolidation plan that included the
closing of six of our facilities and the restructuring of two others. The eight
facilities impacted by the consolidation plan represent each of the company's
three business segments - Processed Steel Products (4), Metal Framing (1) and
Pressure Cylinders (3). In our Processed Steel Products segment, we have
initiated closing procedures at our facilities located in Malvern and Jackson,
Michigan, and we are cutting overhead costs at our Louisville, Kentucky,
facility. The Rock Hill, South Carolina, facility will become a Metal Framing
location serving both Metal Framing and Processed Steel Products. The current
Metal Framing facility in Fredericksburg, Virginia, will be closed and its
operations moved to Rock Hill. In our Pressure Cylinders segment, we are
discontinuing the operations of two partnerships in Itu, Brazil, and closing a
production facility in Claremore, Oklahoma.
This consolidation plan includes a workforce reduction of 542 employees and
results in a pre-tax restructuring charge of $64.6 million. Of this charge,
$11.8 million represents a cash outlay for severance and employee related
payments, and the remainder represents the write-down of assets to their fair
market value. Going forward, we estimate this plan will actually improve our
annual operating income by $10 million, despite reducing sales by $75
million. Headcount reductions and reduced depreciation will account for savings
of $6 million and $4 million, respectively. See Note D of the Notes to
Condensed Consolidated Financial Statements for more information.
In addition to the restructuring charge, we established a $21.2 million
reserve for the impairment of certain preferred stock and subordinated debt we
received as partial payment from four acquirers when we sold the assets of our
Custom Products and Cast Products business segments during fiscal 1999. As
economic conditions have deteriorated, each of the issuers has encountered
difficulty making scheduled payments under the terms of the preferred stock and
subordinated debt. The combined after-tax impact of these two charges reduced
our net income for the fiscal 2002 third quarter by $54.5 million.
In February 2002, we formed Aegis Metal Framing, LLC ("Aegis"), a joint
venture with MiTek Industries, Inc. ("MiTek"). Aegis combines the manufacturing
and distribution capabilities of our Metal Framing segment with the software,
engineering and marketing functions of MiTek's Steel Framing Systems division.
We invested $21.0 million for a 60% interest in the joint venture and purchased
the rollforming assets of MiTek for $1.1 million. This joint venture will be
accounted for on the equity method, as control of the critical business
decisions will be equally shared with Mitek. Manufacturing is contracted to our
Metal Framing segment which manufactures and sells the product to Aegis.
Effective June 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 eliminates the pooling method of
business combinations while SFAS No. 142 eliminates the requirement to amortize
goodwill and indefinite-lived intangible assets. While there was no impact from
adopting SAFS No. 141, SFAS No. 142 increased after-tax income by approximately
$0.4 million and $1.1 million for the three and nine month periods ending
February 28, 2002, respectively. See Note E of the Notes to Condensed
Consolidated Financial Statements for more information.
13
We took a $6.5 million pre-tax restructuring charge last year in the third
quarter when we closed a portion of our Malvern facility. The result of this
partial closure was a reduction in the workforce of 160 employees and the
write-down to fair market value of the affected assets. The after-tax impact of
this charge reduced our fiscal 2001 income by $4.1 million. This partial closure
was substantially completed by December 31, 2001.
THIRD QUARTER - FISCAL 2002 COMPARED TO FISCAL 2001
For the third quarter of fiscal 2002, net sales decreased 3% or $13.0
million to $405.7 million from $418.7 million in the comparable quarter of
fiscal 2001. The decrease in net sales primarily was due to competitive pricing
pressure within our Processed Steel Products and Metal Framing segments.
Overall, volumes were up and partially offset the price decrease. Volume gains
in Processed Steel Products and Metal Framing were somewhat reduced by weaker
demand within Pressure Cylinders.
Gross margin decreased 5% or $2.7 million to $50.9 million for the third
quarter of fiscal 2002 from $53.6 million in the comparable quarter of fiscal
2001. The decrease primarily was due to average selling prices falling more
quickly than material costs, reducing gross margin by $12.3 million. Higher
sales volume and lower manufacturing expenses partially offset this decrease by
$5.1 million and $4.5 million, respectively. Manufacturing expenses were
favorable due to lower wages and benefit expenses from headcount reductions and
reduced utilities expense mainly due to lower natural gas cost. These factors
reduced gross margin as a percentage of sales to 12.5% for the third quarter of
fiscal 2002 from 12.8% in the comparable quarter of fiscal 2001. The current and
prior period gross margins remain below historical levels.
Selling, general and administrative ("SG&A") expense decreased 12% or $5.1
million to $36.8 million for the third quarter of fiscal 2002 from $41.9 million
in the comparable quarter of fiscal 2001. Almost all SG&A categories were
reduced by double-digit percentages, including professional fees attributed to
lower consulting expenses; depreciation and amortization, due to lower levels of
capital spending and the elimination of goodwill amortization resulting from the
adoption of SFAS No. 142; and utilities expense.
As a result, operating income increased 21% or $2.4 million to $14.1
million for the third quarter of fiscal 2002 from $11.7 million in the
comparable quarter of fiscal 2001, excluding the effects of the previously
mentioned restructuring expenses.
Interest expense decreased 20% or $1.5 million to $5.8 million for the
third quarter of fiscal 2002 from $7.3 million in the comparable quarter of
fiscal 2001 primarily due to lower average debt resulting from lower working
capital requirements and lower short-term interest rates. A/R securitization
facility fees, which are recorded as miscellaneous expense, decreased $0.9
million to $0.8 million for the third quarter of fiscal 2002 from $1.7 million
in the comparable quarter of fiscal 2001.
Equity in net income of unconsolidated affiliates increased 3% or $0.1
million to $5.4 million for the third quarter of fiscal 2002 from $5.3 million
in the comparable quarter of fiscal 2001. Higher operating income at WAVE and
TWB was offset by lower results at WSP and Acerex.
14
An income tax benefit of $26.4 million was recorded for the third quarter
of fiscal 2002 compared to an expense of $1.0 million in the comparable quarter
of fiscal 2001. The pre-tax loss in the current year resulting from the
previously mentioned restructuring expense and the non-recurring loss were the
reasons for the fluctuation. The estimated effective tax rate was 36.5% for the
third quarter of fiscal 2002 and fiscal 2001.
The following provides further information on net sales and operating
income by segment:
- Processed Steel Products. Net sales decreased 1% or $3.4 million to
$262.8 million for the third quarter of fiscal 2002 from $266.2
million in the comparable quarter of fiscal 2001. Average selling
prices declined due to lower raw material costs and a shift in product
mix from direct to toll processing. However, increases in direct
volumes, mainly in the automotive and construction markets, and higher
toll processing volumes partially offset the decline in the average
selling price. Operating income of $10.4 million for the third quarter
of fiscal 2002 increased 66% or $4.2 million from $6.2 million in the
comparable quarter of fiscal 2001. The increase in volumes mentioned
above, especially in toll processing, improved operating income by
$1.7 million. Additionally, compensation and benefits expense declined
$3.0 million due to a reduction of employees, and utilities expense
fell by $2.9 million primarily due to lower natural gas costs. Despite
these positives, a decrease in the spread between the selling price
and the purchase price of steel reduced operating income by $3.4
million.
- Metal Framing. Net sales of $68.5 million for the third quarter of
fiscal 2002 decreased 12% or $9.6 million from $78.1 million in the
comparable quarter of fiscal 2001. Intense competition continued in
the commercial construction market resulting in lower average selling
prices. However, higher volumes, particularly in the new facilities in
Hawaii and Washington, partially offset the overall decline. Operating
income decreased 89% or $3.3 million to $0.4 million for the third
quarter of fiscal 2002 from $3.7 million in the comparable quarter of
fiscal 2001. Severe pricing pressure outweighed the favorable cost of
raw materials, reducing operating income by $9.5 million. However,
increased volumes of the core building products partially offset the
decrease by $4.6 million. This was further offset by lower
manufacturing and SG&A expenses of $1.6 million caused by a variety of
factors including the elimination of goodwill amortization.
- Pressure Cylinders. Net sales decreased 3% or $2.0 million to $70.7
million for the third quarter of fiscal 2002 from $72.7 million in the
comparable quarter of fiscal 2001. The economic recession and high
inventory levels at certain major customers reduced sales volumes and
were primarily responsible for lower sales. Improved European sales
partially offset reduced sales in North America, especially in the
refrigerant cylinder product line. Operating income increased 67% or
$2.0 million to $4.9 million for the third quarter of fiscal 2002 from
$2.9 million in the comparable quarter of fiscal 2001. Lower raw
materials expense helped offset a $1.8 million negative impact caused
by lower sales volumes. In addition, direct labor costs were lower by
$0.3 million, and reductions in other manufacturing expenses of $1.2
15
million led to gross margins that were comparable to the prior period.
Due to the reduced sales activity and cost containment efforts,
selling and administrative expenses were favorable by $2.0 million in
the quarter, leading to the overall improvement in operating income.
YEAR-TO-DATE - FISCAL 2002 COMPARED TO FISCAL 2001
For the first nine months of fiscal 2002, net sales decreased 10% or $134.6
million to $1,225.7 million from $1,360.3 million in the comparable period of
fiscal 2001. This decline was volume driven within our Processed Steel Products
and Pressure Cylinders segments and was impacted by lower selling prices in
Metal Framing and Processed Steel Products.
Gross margin decreased 1% or $2.0 million to $172.1 million for the first
nine months of fiscal 2002 from $174.1 million in the comparable period of
fiscal 2001. Higher priced steel and the inability to increase sales prices
caused the depressed margin in the prior year period. Overall, the gross margin
was $1.9 million lower than the prior year mainly due to lower sales volume
combined with a reduction in the spread between the average selling price and
material cost which reduced the gross margin by $13.8 million and $2.2 million,
respectively. This was largely offset by a $14.1 million decrease in
manufacturing expenses caused by a $7.7 million reduction in wages and benefits
from headcount reductions, a $5.0 million reduction in utilities mainly from
lower natural gas cost and a $2.2 million decrease in repairs and maintenance
expenses. These factors increased gross margin as a percentage of sales to 14.0%
for the first nine months of fiscal 2002 from 12.8% in the comparable period of
fiscal 2001.
SG&A expense decreased 8% or $10.5 million to $115.4 million for the first
nine months of fiscal 2002 from $125.9 million in the comparable period of
fiscal 2001. The reduction was attributable to a variety of factors including a
$5.8 million decrease in professional expenses, a $2.7 million decrease in
depreciation and amortization due to lower capital spending and the elimination
of goodwill amortization, a $1.9 million gain on the sale of an airplane, a $1.7
million gain related to a legal settlement, and lower travel and entertainment
expenses of $0.9 million. The decrease was partially offset by a $3.4 million
increase in bad debt expense.
Excluding the effects of the previously mentioned restructuring expenses,
operating income increased 18% or $8.6 million to $56.8 million for the first
nine months of fiscal 2002 from $48.2 million in the comparable period of fiscal
2001.
Interest expense decreased 35% or $9.2 million to $17.0 million for the
first nine months of fiscal 2002 from $26.2 million in the comparable period of
fiscal 2001. This decrease primarily was driven by lower average debt levels due
to the A/R securitization facility and lower working capital requirements,
combined with lower average short-term interest rates. A/R securitization
facility fees of $3.3 million for the first nine months of fiscal 2002 were
recorded as miscellaneous expense.
Equity in net income of unconsolidated affiliates decreased 17% or $3.1
million to $15.4 million for the first nine months of fiscal 2002 from $18.5
million in the comparable period of fiscal 2001 due to lower sales at WAVE, WSP
and TWB and higher operating expenses at each joint venture.
16
An income tax benefit of $11.6 million was recorded for the first nine
months of fiscal 2002 compared to an expense of $12.1 million in the comparable
period of fiscal 2001. The pre-tax loss in the current year resulting from the
previously mentioned restructuring expense and the non-recurring loss were the
reasons for the fluctuation. The estimated effective tax rate was 36.5% for the
year-to-date periods of both fiscal 2002 and fiscal 2001.
The following provides further information on net sales and operating
income by segment:
- Processed Steel Products. Net sales decreased 10% or $87.0 million to
$803.9 million for the first nine months of fiscal 2002 from $890.9
million in the comparable period of fiscal 2001. Even with a strong
third quarter, the weak year-to-date demand for steel led to lower
volumes. Furthermore, selling prices fell due to reduced raw material
costs and a shift in product mix from direct to toll processing.
Operating income increased 88% or $18.2 million to $38.8 million for
the first nine months of fiscal 2002 from $20.6 million in the
comparable period of fiscal 2001. Improvement in the spread between
direct selling prices and raw material costs increased operating
income by $18.3 million. Additional savings were achieved through an
$8.7 million decrease in compensation and benefits expense due to a
reduction of employees, a $4.6 million decrease in utilities costs
primarily due to lower natural gas expenses, a $1.7 million gain
related to a legal settlement, a $1.5 million reduction in repairs and
maintenance, a $1.5 million reduction in professional fees and a $1.2
million reduction in depreciation. Lower volumes and higher bad debt
expense reduced operating income by $20.8 million and $2.2 million,
respectively.
- Metal Framing. Net sales of $223.8 million for the first nine months
of fiscal 2002 decreased 15% or $38.6 million from $262.3 million in
the comparable period of fiscal 2001. The erosion of sales prices for
core building products brought on by weak demand and strong
competition combined with the elimination of the stainless product
line in December of 2000 caused the reduction in sales. Operating
income decreased 49% or $9.9 million to $10.2 million for the first
nine months of fiscal 2002 from $20.1 million in the comparable period
of fiscal 2001. The net impact of lower average selling prices and
lower raw materials cost was a $19.9 million reduction in operating
income. In addition, increased costs related to the new Hawaii and
Washington facilities contributed to a $1.2 million increase in
manufacturing expense. Increased volumes partially offset these
decreases by $9.4 million.
- Pressure Cylinders. Net sales decreased 7% or $14.1 million to $188.4
million for the first nine months of fiscal 2002 from $202.5 million
in the comparable period of fiscal 2001. This decrease was primarily
due to weak domestic demand for LPG cylinders. Operating income
decreased 19% or $2.2 million to $9.2 million for the first nine
months of fiscal 2002 from $11.4 million in the comparable period of
fiscal 2001. Lower overall sales volumes, especially the LPG product
line, reduced operating income by $6.0 million. Higher bad debt
expense of $1.4 million also contributed to the decrease. These
factors were partially offset by lower compensation and benefits
expenses of $2.8 million due to headcount reduction, a $0.9 million
decrease in utilities expense and a $0.8 million reduction in supplies
expense.
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LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of fiscal 2002, we generated $87.8 million in
cash from operating activities, representing a $131.3 million decrease from the
comparable period of fiscal 2001. The decrease primarily was due to the initial
sale of accounts receivable as part of the A/R securitization facility in
November 2000 (see description below) and the prior year reduction in inventory
levels.
Our investing and financing activities during the first nine months of
fiscal 2002 included disbursing $41.0 million in dividends to shareholders,
investing $33.1 million in capital projects, investing $21.0 million in the
Aegis joint venture, and retiring $18.0 million of long-term debt. These
transactions were funded by the cash flows from our operations, $15.2 million in
proceeds from short-term borrowings and $10.0 million in proceeds from the sale
of assets ($7.5 million for the corporate jet and $2.4 million for the Malvern
assets).
Capital spending during the first nine months of fiscal 2002 included the
following: $14.3 million in our Processed Steel Products segment primarily to
complete the construction of the Clyde facility; $11.9 million in our Metal
Framing segment with spending for MiTek machinery, the Washington facility and
engineering software development; $4.0 million in the Pressure Cylinders segment
partly for a new hydraulic press in Westerville; and $2.9 million in Other
mainly in our steel pallet business to complete the installation of certain
welding equipment.
We have entered into a $190.0 million revolving A/R securitization facility
with two commercial banks. Under this facility, certain of our subsidiaries sell
their accounts receivable, on a revolving basis, to Worthington Receivables
Corporation ("WRC"), a wholly-owned, bankruptcy-remote subsidiary. WRC then
sells 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. As of February 28, 2002, a $100.0 million undivided interest
in this pool had been sold. The proceeds from these sales have been used to
reduce short-term borrowings.
Consolidated net working capital declined $56.8 million from May 31, 2001
to $86.3 million at February 28, 2002. A reduction in accounts receivable due to
lower sales in all segments and a decrease in other current assets due to the
sale of certain assets, combined with an increase in notes payable and an
increase in other current liabilities for restructuring related accruals, were
the main reasons for the decrease.
We maintain a $190.0 million revolving credit facility (the "Revolver")
with a group of commercial banks, which expires in May 2003, to finance the cash
requirements of our business operations. We had no outstanding borrowings under
the Revolver at February 28, 2002. We also have short-term uncommitted lines of
credit extended by various commercial banks available as needed. Outstanding
borrowings under these uncommitted lines at February 28, 2002 were $9.0 million.
At February 28, 2002, our total debt was $322.1 million compared to $324.8
million at the end of fiscal 2001. The decrease in shareholders' equity,
combined with the slight decline in debt, caused our debt to capital ratio to
increase to 35.4% from 33.3% at the end of fiscal 2001.
18
From time to time, we engage in discussions with respect to selected
acquisitions, and 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 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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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
None
Reports on Form 8-K:
A Current Report on Form 8-K, dated January 24, 2002, was filed during the
third quarter of fiscal 2002 to summarize the material provisions of our
recently adopted consolidation plan. This information was provided under
Item 5.
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.
WORTHINGTON INDUSTRIES, INC.
Date: April 15, 2002 By: /s/ John T. Baldwin
-------------- --------------------------------------
John T. Baldwin
Vice President & Chief Financial
Officer (On behalf of the Registrant
and as Principal Financial Officer)
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