1
Exhibit 13
WORTHINGTON
INDUSTRIES,
INC.
1997
ANNUAL REPORT
TO SHAREHOLDERS
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WORTHINGTON INDUSTRIES, INC.
1997 ANNUAL REPORT
CONTENTS
PAGE
-----
A Message to Our Shareholders......................................................... I-3
The Company........................................................................... I-3
Stock Trading, Price and Dividend Information......................................... I-4
Five Year Selected Financial Data..................................................... I-5
Management's Discussion and Analysis.................................................. I-6
Consolidated Financial Statements
Consolidated Balance Sheets -- May 31, 1997 and 1996................................ I-10
Consolidated Statements of Earnings -- Years ended May 31, 1997, 1996 and 1995...... I-11
Consolidated Statements of Shareholders' Equity -- Years ended May 31, 1997, 1996
and 1995......................................................................... I-12
Consolidated Statements of Cash Flows -- Years ended May 31, 1997, 1996 and 1995.... I-13
Industry Segment Data -- Years ended May 31, 1997, 1996 and 1995.................... I-14
Notes to Consolidated Financial Statements............................................ I-15
Report of Management.................................................................. I-26
Report of Independent Auditors........................................................ I-27
Company Locations..................................................................... I-28
Officers & Directors.................................................................. I-29
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A MESSAGE TO OUR SHAREHOLDERS
This 1997 Annual Report contains the Worthington Industries, Inc. audited
financial statements and all of the information that regulations of the
Securities and Exchange Commission (the "SEC") require to be presented in an
Annual Report to Shareholders. For legal purposes this is the Worthington
Industries, Inc. 1997 Annual Report to Shareholders. Although attached to the
Proxy Statement, this is not part of the Proxy Statement, is not deemed to be
soliciting material, and is not deemed to be filed with the SEC except to the
extent that it is expressly incorporated by reference in a document filed with
the SEC.
We invite our shareholders to also consider our 1997 Summary Annual Report,
which accompanies the Proxy Statement. That Report presents information
concerning the business and financial results of the Company in a format of
detail we believe most of our shareholders will find useful and informative.
Shareholders who would like to receive more detailed information may request our
Annual Report on Form 10-K.
THE WORTHINGTON INDUSTRIES, INC. ANNUAL REPORT ON FORM 10-K, AS FILED WITH
THE SEC, WILL BE PROVIDED TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON WRITTEN
REQUEST TO THE WORTHINGTON INDUSTRIES, INC. INVESTOR RELATIONS DEPARTMENT, 1205
DEARBORN DRIVE, COLUMBUS, OHIO 43085.
THE COMPANY
Worthington Industries, Inc. (together with its subsidiaries, the
"Company") is a leading manufacturer of metal and plastic products. It conducts
its business through three segments: processed steel products, custom products,
and cast products. The Company's net sales for the fiscal year ending May 31,
1997 were approximately $1.9 billion.
PROCESSED STEEL PRODUCTS SEGMENT
STEEL PROCESSING. Worthington Steel is an intermediate processor of flat
rolled steel, processing approximately 3 million tons of steel per year. Its
processing capabilities include pickling, slitting, rolling, annealing, edging,
tension leveling, cut-to-length, configured blanking, laser blank welding,
painting, nickel plating, and hot dipped galvanizing. Worthington Steel has
approximately 1700 customers principally in the automotive, automotive supply,
appliance, electrical, communications, construction, office furniture, office
equipment, agricultural, machinery and leisure time industries.
PRESSURE CYLINDERS. Worthington Cylinders produces portable low pressure
liquid propane cylinders and refrigerant gas cylinders. Refrigerant gas
cylinders are used primarily by major refrigerant gas producers to contain
refrigerant gases for use in charging residential, commercial, automotive and
other air conditioning and refrigeration systems. Reusable steel and aluminum
liquid propane gas cylinders are sold to manufacturers of barbecue grills,
propane and gas grill distributors, mass merchandisers, and manufacturers and
users of material handling, heating, cooking and camping equipment. The Company
also produces recycle and recovery tanks for refrigerant gases, helium balloon
kits, and high pressure cylinders for acetylene, medical, industrial, halon and
electronic gases. Worthington Cylinders has over 2000 customers.
METAL FRAMING. Dietrich Industries is the nation's leading producer of
metal framing products for the commercial and residential building industries.
Major customers include building products distributors, commercial and
residential contractors, and gypsum producers.
AFTERMARKET BODY PANELS. The Gerstenslager Company is a leading independent
supplier of automotive aftermarket body panels in the United States. Major
customers include domestic and transplant automotive and heavy duty truck
manufacturers.
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CUSTOM PRODUCTS SEGMENT
CUSTOM PLASTICS. Worthington Custom Plastics is one of the nation's ten
largest injection molded plastic parts suppliers. Processing capabilities
include painting, foam-in-place molding, vacuum forming, intricate assembly,
silk screening, vacuum metalizing, hot stamping, thermoforming, roll foiling and
appliques. The Company sells to automobile manufacturers and their suppliers,
and to manufacturers of appliances, lawn and garden products, recreational
products, business equipment, audio equipment, furniture, and other items.
PRECISION METALS. Worthington Precision Metals produces extremely close
tolerance metal components for use in power steering, transmission, anti-lock
brake and other automotive mechanical systems. Its customers are primarily
automobile manufacturers and their first tier suppliers.
CAST PRODUCTS SEGMENT
STEEL CASTINGS. Buckeye Steel Castings designs, produces and machines a
broad line of railcar castings, as well as a wide variety of industrial castings
in sizes from 100 lbs. to 30 tons. Buckeye is also North America's leading
designer and producer of undercarriages for mass transit cars. Its products are
sold to the railroad, mass transit, construction and off-highway equipment
markets.
STOCK TRADING, PRICE AND DIVIDEND INFORMATION
Worthington Industries, Inc. Common Stock trades on the Nasdaq Stock Market
under the symbol "WTHG" and is listed in most newspapers as "WorthInd." As of
May 31, 1997, Worthington Industries, Inc. had approximately 10,800 shareholders
of record.
NASDAQ
AVERAGE PRICES
FISCAL 1996 SHARES DAILY ---------------- CASH
QUARTER ENDED TRADED VOLUME LOW HIGH DIVIDENDS
- ------------- ---------- ------- ------ ------ ---------
August 31.............................. 17,304,700 266,266 $19.13 $23.25 $.11
November 30............................ 24,815,800 393,902 $16.63 $20.25 $.11
February 29............................ 17,686,900 285,273 $18.50 $22.13 $.11
May 31................................. 14,093,600 220,213 $19.50 $22.50 $.12
FISCAL 1997
QUARTER ENDED
- -------------
August 31.............................. 14,306,400 223,538 $17.50 $21.63 $.12
November 30............................ 20,569,800 326,505 $19.00 $22.25 $.12
February 28............................ 18,142,300 292,618 $18.13 $22.00 $.12
May 31................................. 14,394,800 228,489 $17.38 $21.00 $.13
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WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
FIVE YEAR SELECTED FINANCIAL DATA
MAY 31 1997 1996 1995 1994 1993
------ ---------- ---------- ---------- ---------- ----------
In thousands, except per share
FINANCIAL RESULTS
Net Sales...................................... $1,911,720 $1,578,090 $1,565,675 $1,349,083 $1,167,896
Cost of Goods Sold............................. 1,634,191 1,333,757 1,310,184 1,146,580 985,170
--------- --------- --------- --------- ---------
Gross Margin................................... 277,529 244,333 255,491 202,503 182,726
Selling, General & Administrative Expense...... 123,283 101,829 90,241 76,430 71,765
--------- --------- --------- --------- ---------
Operating Income............................... 154,246 142,504 165,250 126,073 110,961
Miscellaneous Income........................... 936 1,013 648 955 1,140
Interest Expense............................... (18,427) (8,687) (6,673) (3,460) (3,961)
Equity in Net Income of Unconsolidated
Affiliates - Joint Ventures.................. 13,777 7,333 6,216 (555) 1,816
Equity in Net Income of Unconsolidated
Affiliate - Rouge............................ -- 21,729 32,111 19,406 2,771
--------- --------- --------- --------- ---------
Earnings Before Income Taxes................... 150,532 163,892 197,552 142,419 112,727
Income Taxes................................... 57,214 62,919 74,423 53,521 41,791
--------- --------- --------- --------- ---------
Net Earnings................................... 93,318 100,973 123,129 88,898 70,936
Per Share.................................... 0.97 1.05 1.28 0.93 0.74
Per Share - Core (without Rouge equity)...... 0.97 0.90 1.06 0.79 0.72
Depreciation and Amortization.................. 51,388 41,458 36,384 34,468 31,307
Cash Provided By Operating Activities.......... 78,363 146,193 78,313 66,058 66,595
Cash Dividends Declared........................ 45,965 40,872 37,212 33,161 29,329
Per Share.................................... 0.4900 0.4501 0.4101 0.3669 0.3270
Capital Expenditures........................... $ 172,905 $ 119,286 $ 71,314 $ 49,386 $ 29,826
Average Shares Outstanding..................... 96,557 96,487 96,405 96,053 95,374
FINANCIAL POSITION
Current Assets................................. $ 594,128 $ 505,104 $ 474,853 $ 435,465 $ 384,722
Current Liabilities............................ 246,794 167,585 191,672 171,991 149,578
--------- --------- --------- --------- ---------
Working Capital................................ 347,334 337,519 283,181 263,474 235,144
Net Fixed Assets............................... 691,027 544,052 358,579 323,649 308,731
Total Assets................................... 1,561,186 1,282,424 964,299 837,707 731,419
Total Debt*.................................... 417,883 317,997 108,916 73,306 66,541
Shareholders' Equity........................... 715,518 667,318 608,142 525,137 455,784
Per Share.................................... 7.40 6.91 6.30 5.46 4.76
Total Committed Capital*....................... $1,133,401 $ 985,315 $ 717,058 $ 598,443 $ 522,325
Shares Outstanding............................. 96,711 96,505 96,515 96,236 95,788
PERFORMANCE COMPARISON
PROFITABILITY
Return on Net Sales (after taxes).............. 4.9% 6.4% 7.9% 6.6% 6.1%
Return on Average Total Committed Capital*
(after taxes)................................ 8.8% 11.9% 18.7% 15.9% 14.2%
Return on Average Total Committed Capital* (pre
tax & interest).............................. 15.9% 20.3% 31.0% 26.0% 23.3%
Return on Average Shareholders' Equity
(after taxes)................................ 13.5% 15.8% 21.7% 18.1% 16.4%
FINANCIAL CONDITION
Current Ratio.................................. 2.4X 3.0X 2.5X 2.5X 2.6X
Total Debt*/Total Committed Capital*........... 37% 32% 15% 12% 13%
ASSET USE
Inventory Turnover............................. 6.4X 6.5X 6.0X 6.4X 6.4X
Accounts Receivable/Days Sales................. 44 43 46 43 45
GROWTH
Net Sales...................................... 21.1% 0.8% 16.1% 15.5% 14.4%
Net Earnings................................... -7.6% -18.0% 38.5% 25.3% 18.9%
Earnings Per Share............................. -7.6% -18.0% 37.6% 25.7% 17.5%
Earnings Per Share - Core (without Rouge
equity)...................................... 7.8% -15.1% 34.2% 9.7% 20.0%
Cash Dividends Declared Per Share.............. 8.9% 9.7% 11.8% 12.2% 7.3%
All financial data except cash dividends declared includes the results of The
Gerstenslager Company which was acquired in February 1997 through a pooling of
interests.
* Excludes DECS of $88,494,000 at May 31, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Fiscal 1997 was the second most profitable year in the 42 year history of
Worthington Industries for its core businesses. Record annual sales of $1.9
billion were up 21% versus the prior year reflecting the start-up of new
facilities, the inclusion of full year results for Dietrich Industries (acquired
February 1996), the acquisition of Plastics Manufacturing, Inc. (PMI) in
December 1996, and the overall strength of the economy. Net earnings of $93.3
million and earnings per share of $.97 were up 8% over the prior year (adjusted
to eliminate the Rouge Steel equity earnings). Earnings, before interest, taxes,
depreciation, amortization and affiliate earnings, of $206.6 million were a
record, up 12% over the prior year and 2% over fiscal 1995.
Effective the first quarter 1997, the Company took certain steps that
resulted in changing the accounting for its investment in Rouge Steel from the
equity method to the cost method. Accordingly, results for fiscal 1997 do not
reflect the equity earnings from Rouge Steel. The Company believes that to
appropriately compare periods, prior years' results should be adjusted to
eliminate the impact of Rouge Steel. Therefore, core business comparisons do not
include Rouge Steel equity earnings.
Fiscal 1996 sales of just under $1.6 billion were up 1% over fiscal 1995.
For core businesses, net earnings of $86.8 million and earnings per share of
$.90 were both down 15% from the Company's records in fiscal 1995.
The Company continued its aggressive investment program during fiscal 1997.
It completed three acquisitions, formed two joint ventures, started up its
largest steel processing plant to date, broke ground on an even larger steel
processing plant, and invested in several other significant capital projects.
In June 1996, the Company purchased SCM Technologies (SCM), a Canadian
manufacturer of high pressure industrial, medical, helium and electronic gas
cylinders. In December 1996, the Company acquired the net assets of PMI, one of
the largest manufacturers of plastic injection molded parts and thermoformed
panels in the southeastern United States. PMI serves the business equipment,
commercial airline, and medical industries. On February 21, 1997, the Company
acquired The Gerstenslager Company (Gerstenslager) in a tax free pooling of
interests, stock-for-stock exchange. Gerstenslager is a major independent
producer of automotive aftermarket body panels in the United States. Results for
the Company are restated to include Gerstenslager for all periods presented.
In November 1996, the Company and Rouge Steel formed a joint venture to
build a light gauge hot dipped galvanizing facility in Monroe County, Michigan.
The joint venture, called Spartan Steel Coating, broke ground late in fiscal
1997 and is scheduled to be on line in fiscal 1998. The Company owns 52% of the
joint venture and will manage the facility.
In February 1997, the Company formed a joint venture with three of Brazil's
major gas distributors to manufacture pressure cylinders in a facility
previously operated by the three distributors. The Company owns 52% of this
venture and will manage the facility. This venture provides the Company the
opportunity to significantly increase its presence in South American markets.
In general, demand for the Company's products, except for cast products,
was stronger in fiscal 1997 than in fiscal 1996 reflecting the overall strength
of the economy. However, profit margin percentages were lower, primarily due to
higher raw material prices for steel, the start-up of the Company's new hot
dipped galvanizing line, operating problems at the Malvern, Pennsylvania steel
processing plant, and reduced castings volume. In fiscal 1996, sales were
affected by slowing demand in most of the Company's product lines. Margin
percentages declined due to lower volume and lower selling prices used to
stimulate demand. Shifts in product mix, designed
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to increase volume in some lines of business while increasing overall
profitability, reduced average selling prices and margin percentages. As a
percentage of sales, gross margin was 14.5% in fiscal 1997, 15.5% in 1996 and
16.3% in 1995.
Selling, general and administrative (S, G & A) expense as a percentage of
sales was 6.4% in fiscal 1997, 6.5% in 1996 and 5.8% in 1995. In fiscal 1997, S,
G & A increased in line with sales. During fiscal 1996, higher benefit costs and
the addition of Dietrich's higher overhead cost structure were only partially
offset by decreased profit sharing.
Interest expense more than doubled in fiscal 1997 following a 30% increase
in fiscal 1996. The average interest rate dropped 53 basis points in fiscal
1997. The average interest rate was 5.96% in fiscal 1997, 6.49% in 1996, and
6.65% in 1995. Interest is capitalized on major projects in progress.
Capitalized interest totaled $6.6 million in fiscal 1997, $2.9 million in 1996
and $.5 million in 1995. Average debt outstanding was $419.6 million in fiscal
1997, $178.2 million in 1996, and $108.3 million in 1995. Debt levels rose in
fiscal 1997 to fund capital spending, the acquisitions of SCM and PMI, and
increased working capital to support sales growth. Debt levels rose in fiscal
1996 to fund capital spending and the purchase of Dietrich.
Equity in net income of unconsolidated affiliates, excluding Rouge Steel,
increased 88% in fiscal 1997. Equity from Worthington Armstrong Venture (WAVE)
was up substantially. In April 1997, WAVE announced it agreed to buy Peytesa,
SA, a privately held Spanish ceiling grid manufacturer. The transaction will
close in fiscal 1998. WAVE also announced its intentions to build new plants in
Team Valley, England, and Benton Harbor, Michigan. TWB made progress,
substantially reducing its operating loss on increasing production volume. In
April 1997, Bethlehem Steel, LTV Steel, and Rouge Steel joined the Company and
Thyssen, Inc. as minority shareholders of TWB, and the Company's ownership in
TWB was reduced from 50% to 33%. The Acerex joint venture in Mexico posted
profits in its first full fiscal year in operation. In fiscal 1996, equity in
net income of unconsolidated affiliates, excluding Rouge Steel, increased 18%
from fiscal 1995, as WAVE and TWB both posted significant improvements.
The effective tax rate decreased in fiscal 1997 due to lower state taxes.
The effective rate was 38.0% in fiscal 1997, 38.4% in 1996 and 37.7% in 1995.
The effective tax rate rose in fiscal 1996 due to permanent differences that
became a larger percentage of pre-tax earnings.
PROCESSED STEEL PRODUCTS
In fiscal 1997, the processed steel products segment had its best year
ever, both in sales and operating income. Sales of $1.4 billion and operating
income of $120.9 million were up 27% and 10%, respectively. Operating income
return on sales decreased to 8.5%, primarily due to raw material price
increases, the previously mentioned start-up of new facilities, operating
problems at the Malvern, Pennsylvania steel processing plant, and some product
mix shifts in cylinders and automotive body panels. Steel processing sales were
up over fiscal 1996 primarily due to increased volume at most plants and
additional sales generated by the Delta start-up. Operating income in steel
processing was down for the reasons stated above, resulting in a decrease in
operating income return on sales. Pressure cylinders sales and operating income
were up over fiscal 1996 due to the combination of increased volume in low
pressure liquid propane and recyclable refrigerant cylinders and the acquisition
of SCM in June 1996. In fiscal 1997, both sales and operating income increased
at Dietrich, reflecting a full year of operations, greater volume, and better
margins. Gerstenslager fiscal 1997 sales and operating income were up reflecting
new contracts and the overall strength of the economy.
Fiscal 1996 sales for the processed steel products segment of $1.1 billion
and operating income of $109.7 million were down .3% and 11%, respectively, from
1995. Sales were lower primarily due to lower volume. Operating margins were
lower due to reduced volume and lower selling prices designed to attract more
volume. Profits were also affected by the General Motors strike during the third
quarter and the shutdown of the zinc plating line at the Malvern plant in
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the fourth quarter, which has since been replaced by a new nickel plating line.
Dietrich's operations, which were included from the date of acquisition only,
suffered from pricing pressures and the traditionally slow winter commercial
construction season. Pressure cylinders' sales and earnings were down as
increased demand for heating tanks did not fully offset lower shipments of
refrigerant cylinders. This shift in product mix also affected margins.
In fiscal 1997, the Company's new steel processing facility in Delta, Ohio
commenced operations, bringing on line pickling, slitting and hot dipped
galvanizing. The neighboring North Star/BHP mini-mill began supplying steel to
the plant, however at lower than expected levels. In March 1997, the Company
broke ground for its new cold mill plant in Decatur, Alabama. Pickling and
slitting operations are expected to begin in mid-calendar 1998, followed by cold
mill operations in mid-calendar 1999. At capacity, the plant will be able to
process one million tons of steel per year.
CUSTOM PRODUCTS
Sales for custom products of $380 million were up 18% in fiscal 1997, due
in part to the acquisition of PMI in December 1996, and strong automotive
volume. Operating income of $25.6 million was up 41% driven by increased
automotive volume in custom plastics, the PMI acquisition and improved results
from precision metals.
Sales for custom products of $321 million were up 6% in fiscal 1996.
Operating income decreased 8% to $18.2 million or 5.7% of sales, as better
performance by custom plastics was offset by lower results for precision metals.
The plastics operations increased sales and earnings due to new automotive and
appliance contracts and improvements at the newer facilities in South Carolina
and Kentucky. Volume from new jobs increased sales for precision metals above
1995, but profits were lower due to inefficiencies caused by start-ups and
specification changes on certain high volume parts.
CAST PRODUCTS
As expected in fiscal 1997, sales for cast products decreased 21% to $113.8
million and operating income decreased 47% to $7.8 million. Railcar demand was
down from fiscal 1996 resulting in a decrease in volume, pricing, and leveraging
of fixed costs.
In fiscal 1996, sales decreased 6% to $143.7 million and operating income
was down 33% to $14.6 million. As with fiscal 1997, the primary reason for the
decrease was lower railcar demand.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997, the Company's balance sheet remained strong. Liquid net
assets, as reflected by working capital of $347.3 million, represented 22.2% of
total assets. Working capital as a percentage of sales improved to 18.2%,
dropping from 21.4% in fiscal 1996 and about equal to the fiscal 1995 level of
18.1%. The current ratio was 2.4 to 1 versus 3.0 to 1 at May 31, 1996.
In March 1997, $93 million in Debt Exchangeable for Common Stock (DECS),
payable in Rouge Steel stockholdings, was issued by the Company. In the opinion
of the Company, it is appropriate to examine the Company's debt without the
DECS, since the Company intends to satisfy the DECS obligation with currently
owned Rouge stock.
At May 31, 1997, total balance sheet debt was $506.4 million, $417.9
million if the DECS was excluded. Long-term debt was $450.4 million, $361.9
million without the DECS. Total debt to total committed capital, both excluding
DECS, was 37% versus 32% last year and 15% in fiscal 1995.
Cash provided by operating activities of $78.4 million was down from fiscal
1996's record of $146.2 million, primarily due to increased accounts receivable
and inventory as a result of sales
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growth. At fiscal year end 1997, days sales in accounts receivable increased one
day from fiscal year end 1996 after declining three days from fiscal year-end
1995.
Dividends declared of $.49 per share were a record for the 29th consecutive
year. Capital invested in the Company's businesses (capital expenditures,
investments in unconsolidated affiliates, acquisitions and the market value of
the Worthington stock exchanged for Gerstenslager) totaled $361 million in
fiscal 1997, a 22% increase over fiscal 1996. The most significant projects were
the Delta, Ohio steel processing and galvanizing plant, the Decatur, Alabama
steel processing cold roll plant, the Spartan Steel joint venture with Rouge,
the Malvern, Pennsylvania nickel plating line addition, and the acquisitions
previously noted.
On May 30, 1997, the Company renegotiated its revolving credit agreement
with its bank group to increase the capacity of the revolver to $190 million. At
May 31, 1997, $50 million of the revolver was unused. In connection with various
construction projects, the Company had purchase commitments approximating $165
million as of May 31, 1997. The Company's immediate borrowing capacity, plus its
cash generated from operations, should be more than sufficient to fund expected
normal operating costs, dividends, debt payments and capital expenditures for
existing businesses. While there are no specific needs at this time, the Company
regularly considers long-term debt issuance an alternative depending on
financial market conditions.
The Company believes that environmental issues will not have a material
effect on capital expenditures, consolidated financial position of future
results or operations.
SAFE HARBOR STATEMENT
The Company wishes to take advantage of the Safe Harbor provisions included
in the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements
by the Company relating to future revenues, growth, stock appreciation or plant
start-ups or capabilities and other statements which are not historical
information constitute "forward looking statements" within the meaning of the
Act. All forward looking statements are subject to risks and uncertainties which
could cause actual results to differ from those projected. Factors that could
cause actual results to differ materially include, but are not limited to, the
following: general economic conditions; conditions in the Company's major
markets; competitive factors and pricing pressures; product demand and changes
in product mix; changes in pricing or availability of raw material, particularly
steel; delays in construction or equipment supply; and other risks described
from time to time in the Company's filings with the Securities and Exchange
Commission.
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WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31
------------------------
DOLLARS IN THOUSANDS 1997 1996
---------- ----------
Current Assets:
Cash and cash equivalents.............................................................. $ 7,212 $ 17,580
Accounts receivable, less allowances of $3,900 and $2,792 at May 31, 1997 and 1996..... 266,836 244,256
Inventories
Raw materials........................................................................ 187,572 133,459
Work in process and finished products................................................ 109,316 82,700
---------- ----------
296,888 216,159
Prepaid expenses and other current assets.............................................. 23,192 27,109
---------- ----------
Total Current Assets............................................................ 594,128 505,104
Investment in Unconsolidated Affiliates.................................................. 57,040 138,212
Intangible Assets........................................................................ 98,132 65,256
Other Assets............................................................................. 32,365 29,800
Investment in Rouge...................................................................... 88,494 --
Property, Plant and Equipment:
Land................................................................................... 30,531 23,261
Buildings.............................................................................. 212,848 172,039
Machinery and equipment................................................................ 683,155 564,510
Construction in progress............................................................... 110,087 88,965
---------- ----------
1,036,621 848,775
Less accumulated depreciation.......................................................... 345,594 304,723
---------- ----------
691,027 544,052
---------- ----------
Total Assets.................................................................... $1,561,186 $1,282,424
========== ==========
LIABILITIES
Current Liabilities:
Accounts payable....................................................................... $ 117,910 $ 88,718
Notes payable.......................................................................... 50,000 --
Accrued compensation, contributions to employee benefit plans and related taxes........ 38,058 39,217
Dividends payable...................................................................... 12,572 10,901
Other accrued items.................................................................... 20,244 18,454
Income taxes........................................................................... 2,026 7,820
Current maturities of long-term debt................................................... 5,984 2,475
---------- ----------
Total Current Liabilities....................................................... 246,794 167,585
Other Liabilities........................................................................ 18,839 17,912
Long-Term Debt:
Conventional long-term debt............................................................ 361,899 315,522
Debt exchangeable for common stock..................................................... 88,494 --
---------- ----------
450,393 315,522
Deferred Income Taxes.................................................................... 120,765 114,087
Contingent Liabilities -- Note G......................................................... -- --
Minority Interest........................................................................ 8,877 --
EQUITY
Shareholders' Equity
Preferred shares, $1.00 par value, authorized -- 1,000,000 shares, issued and
outstanding -- none.................................................................. -- --
Common shares, $.01 par value, authorized -- 150,000,000 shares, issued and
outstanding -- 1997 -- 96,711,235 shares; 1996 -- 96,505,271 shares.................. 968 965
Additional paid-in capital............................................................. 114,052 106,079
Unrealized loss on investment.......................................................... (5,563) --
Minimum pension liability.............................................................. -- (189)
Foreign currency translation adjustment................................................ (1,861) (1,248)
Retained earnings...................................................................... 607,922 561,711
---------- ----------
715,518 667,318
---------- ----------
Total Liabilities and Shareholders' Equity...................................... $1,561,186 $1,282,424
========== ==========
See notes to consolidated financial statements.
All financial data includes the results of The Gerstenslager Company which was
acquired in February 1997 through a pooling of interests.
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WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED MAY 31
----------------------------------------
IN THOUSANDS, EXCEPT PER SHARE 1997 1996 1995
---------- ---------- ----------
Net sales............................................ $1,911,720 $1,578,090 $1,565,675
Cost of goods sold................................... 1,634,191 1,333,757 1,310,184
---------- ---------- ----------
Gross Margin.................................. 277,529 244,333 255,491
Selling, general and administrative expense.......... 123,283 101,829 90,241
---------- ---------- ----------
Operating Income.............................. 154,246 142,504 165,250
Other income (expense):
Miscellaneous income............................... 936 1,013 648
Interest expense................................... (18,427) (8,687) (6,673)
Equity in net income of unconsolidated
affiliates -- Joint Ventures.................... 13,777 7,333 6,216
Equity in net income of unconsolidated
affiliate -- Rouge.............................. -- 21,729 32,111
---------- ---------- ----------
Earnings Before Income Taxes.................. 150,532 163,892 197,552
Income taxes......................................... 57,214 62,919 74,423
---------- ---------- ----------
Net Earnings......................................... $ 93,318 $ 100,973 $ 123,129
========== ========== ==========
Average Common Shares Outstanding.................... 96,557 96,487 96,405
Earnings Per Share................................... $ .97 $ 1.05 $ 1.28
========== ========== ==========
See notes to consolidated financial statements.
All financial data includes the results of The Gerstenslager Company which was
acquired in February 1997 through a pooling of interests.
I-11
12
WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE 1997 1996 1995
-------- -------- --------
COMMON SHARES:
Balance at beginning of year......................... $ 965 $ 965 $ 963
Sale of common shares under stock option plan,
(173,026 in 1997; 116,051 in 1996; 198,144 in
1995)............................................. 2 1 2
Sale of shares under dividend reinvestment plan,
(95,438 in 1997; 90,561 in 1996; 81,102 in
1995)............................................. 1 -- --
Purchase and retirement of common shares,
(62,500 in 1997; 216,500 in 1996)................. -- (1) --
-------- --------
Balance at May 31............................ $ 968 $ 965 $ 965
======== ========
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year......................... $106,079 $102,943 $ 96,637
Sale of common shares under stock option plan,
(173,026 in 1997; 116,051 in 1996; 198,144 in
1995)............................................. 2,114 1,549 2,569
Sale of shares under dividend reinvestment plan,
(95,438 in 1997; 90,561 in 1996; 81,102 in
1995)............................................. 1,895 1,820 1,664
Transactions of unconsolidated affiliates............ 4,033 10 2,073
Purchase and retirement of common shares,
(62,500 in 1997; 216,500 in 1996)................. (69) (243) --
-------- --------
Balance at May 31............................ $114,052 $106,079 $102,943
======== ========
UNREALIZED LOSS ON INVESTMENT:
Balance at beginning of year......................... $ -- $ -- $ --
Valuation adjustment................................. (5,563) -- --
-------- --------
Balance at May 31............................ ($ 5,563) $ -- $ --
======== ========
MINIMUM PENSION LIABILITY:
Balance at beginning of year......................... ($ 189) ($ 1,210) ($ 2,135)
Minimum pension liability adjustment................. 189 339 122
Transactions of unconsolidated affiliate............. -- 682 803
-------- --------
Balance at May 31............................ $ -- ($ 189) ($ 1,210)
======== ========
TRANSLATION ADJUSTMENT:
Balance at beginning of year......................... ($ 1,248) ($ 146) $ --
Foreign currency translation adjustment.............. (613) (1,102) (146)
-------- --------
Balance at May 31............................ ($ 1,861) ($ 1,248) ($ 146)
======== ========
RETAINED EARNINGS:
Balance at beginning of year......................... $561,711 $505,588 $429,671
Net earnings......................................... 93,318 100,973 123,129
Cash dividends declared:
(per share: $.49 in 1997; $.45 in 1996; $.41 in
1995)........................................... (45,965) (40,872) (47,212)
Purchase and retirement of common shares,
(62,500 in 1997; 216,500 in 1996)................. (1,142) (3,978) --
-------- --------
Balance at May 31............................ $607,922 $561,711 $505,588
======== ========
See notes to consolidated financial statements.
All financial data includes the results of The Gerstenslager Company
which was acquired in February 1997 through a pooling of interests.
I-12
13
WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31
------------------------------------
IN THOUSANDS 1997 1996 1995
--------- --------- --------
Operating Activities:
Net earnings......................................... $ 93,318 $ 100,973 $123,129
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization..................... 51,388 41,458 36,384
Provision for deferred income taxes............... 3,326 9,884 15,201
Equity in undistributed net income of
unconsolidated affiliates....................... (9,625) (25,153) (37,847)
Minority interest................................. (27) -- --
Changes in assets and liabilities:
Accounts receivable............................. (8,005) 8,573 (22,989)
Inventories..................................... (70,322) 32,713 (18,279)
Prepaid expenses and other current assets....... 8,331 2,732 (8,411)
Other assets.................................... (2,801) (2,412) 652
Accounts payable and accrued expenses........... 11,658 (22,118) (8,137)
Other liabilities............................... 1,122 (457) (1,390)
--------- --------- --------
Net Cash Provided By Operating Activities.... 78,363 146,193 78,313
Investing Activities:
Investment in property, plant and equipment, net..... (172,905) (119,286) (71,314)
Acquisitions, net of cash acquired................... (69,942) (169,391) --
Investments in unconsolidated affiliates............. (5,420) (8,315) (10,857)
--------- --------- --------
Net Cash Used By Investing Activities........ (248,267) (296,992) (82,171)
Financing Activities:
Proceeds from (payments on) short-term borrowings.... 50,000 (38,200) 28,200
Proceeds from long-term debt......................... 165,715 425,974 35,900
Principal payments on long-term debt................. (23,589) (180,473) (28,490)
Proceeds from issuance of common shares.............. 4,011 3,370 4,235
Proceeds from minority interest...................... 8,904 -- --
Repurchase of common shares.......................... (1,211) (4,222) --
Dividends paid....................................... (44,294) (39,963) (46,276)
--------- --------- --------
Net Cash Provided (Used) By Financing
Activities................................. 159,536 166,486 (6,431)
--------- --------- --------
Increase (decrease) in cash and cash equivalents..... (10,368) 15,687 (10,289)
Cash and cash equivalents at beginning of year....... 17,580 1,893 12,182
--------- --------- --------
Cash and Cash Equivalents at End of Year..... $ 7,212 $ 17,580 $ 1,893
========= ========= ========
See notes to consolidated financial statements.
All financial data includes the results of The Gerstenslager Company
which was acquired in February 1997 through a pooling of interests.
I-13
14
WORTHINGTON INDUSTRIES, INC. AND SUBSIDIARIES
INDUSTRY SEGMENT DATA
MAY 31,
------------------------------------
IN THOUSANDS 1997 1996 1995
---------- ---------- ----------
NET SALES
Processed steel products............................... $1,417,891 $1,113,351 $1,110,432
Custom products........................................ 380,048 321,013 302,096
Cast products.......................................... 113,781 143,726 153,147
---------- ---------- ----------
$1,911,720 $1,578,090 $1,565,675
========== ========== ==========
EARNINGS
Processed steel products............................... $ 120,866 $ 109,742 $ 123,806
Custom products........................................ 25,607 18,200 19,754
Cast products.......................................... 7,773 14,562 21,690
---------- ---------- ----------
Operating income.................................... 154,246 142,504 165,250
Miscellaneous income..................................... 936 1,013 648
Interest expense......................................... (18,427) (8,687) (6,673)
Equity in net income of unconsolidated affiliates........ 13,777 29,062 38,327
---------- ---------- ----------
Earnings before income taxes........................ $ 150,532 $ 163,892 $ 197,552
========== ========== ==========
IDENTIFIABLE ASSETS
Processed steel products............................... $1,042,770 $ 821,135 $ 554,408
Custom products........................................ 232,301 178,679 165,619
Cast products.......................................... 70,376 71,225 78,099
Corporate.............................................. 158,699 73,173 61,409
---------- ---------- ----------
1,504,146 1,144,212 859,535
Investment in unconsolidated affiliates................ 57,040 138,212 104,764
---------- ---------- ----------
$1,561,186 $1,282,424 $ 964,299
========== ========== ==========
DEPRECIATION AND AMORTIZATION EXPENSE
Processed steel products............................... $ 31,656 $ 24,290 $ 21,296
Custom products........................................ 12,843 10,330 8,710
Cast products.......................................... 4,928 4,647 4,362
Corporate.............................................. 1,961 2,191 2,016
---------- ---------- ----------
$ 51,388 $ 41,458 $ 36,384
========== ========== ==========
CAPITAL EXPENDITURES
Processed steel products............................... $ 157,521 $ 89,841 $ 41,698
Custom products........................................ 9,083 17,423 22,254
Cast products.......................................... 3,722 5,427 4,041
Corporate.............................................. 2,579 6,595 3,321
---------- ---------- ----------
$ 172,905 $ 119,286 $ 71,314
========== ========== ==========
- ---------------
( ) Indicates deduction
Corporate expenses are allocated on a consistent basis among industry
segments over the three-year period. "Capital expenditures" are net of normal
disposals and exclude amounts in connection with acquisitions and divestitures.
See notes to consolidated financial statements.
All financial data includes the results of The Gerstenslager Company
which was acquired in February 1997 through a pooling of interests.
I-14
15
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts
of Worthington Industries, Inc. and subsidiaries (the "Company"). Investments in
unconsolidated affiliates are accounted for using the equity method. Significant
intercompany accounts and transactions are eliminated. Certain reclassifications
were made to prior years' amounts to conform with the 1997 presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles 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.
Investment in Rouge: In the first quarter of 1997, the Company irrevocably
converted Class B shares (2.5 votes per share) of Rouge Steel Company common
stock for Class A shares (1 vote per share) of Rouge Steel Company common stock
which reduced its voting interest in Rouge to below 20%. In addition, the
Company's seats on the Board of Directors of Rouge, and its future right to
those seats, were relinquished. As a result of these two steps, the Company has
no ability to exercise significant influence over Rouge. Therefore, the
Company's investment in Rouge no longer qualifies for the equity method of
accounting and was changed to the cost method. As a result, after May 31, 1996,
the Company's equity share of Rouge earnings is no longer included in reported
earnings or earnings per share. In addition, the investment in Rouge common
stock was transferred from investment in unconsolidated affiliates and is shown
separately in 1997. This investment is adjusted to market value as an
"available-for-sale" security with a net of tax adjustment to shareholder's
equity.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
Inventories: Inventories are valued at the lower of cost or market. Cost is
determined using the specific identification method for steel processing and the
first-in, first-out method for all other businesses.
Deferred Start-up Costs: The Company's policy is to capitalize certain
costs of starting up new plants and facilities. It is the Company's opinion that
these costs are recoverable and will be amortized beginning with the start of
production over a period not to exceed five years. At May 31, 1997, unamortized
deferred start-up costs totaled $5,475,000.
Intangible Assets: Intangible Assets include goodwill which is being
amortized on the straight-line method over periods ranging from 30 to 40 years.
Unamortized goodwill was $97,728,000 at May 31, 1997. Amortization expense was
$2,409,000 in 1997 and $548,000 in 1996.
Property and Depreciation: Property, plant and equipment are carried at
cost and depreciated using the straight-line and units-of-production methods
over the estimated useful lives of the assets. Accelerated depreciation methods
are used for income tax purposes.
Capitalized Interest: Interest is capitalized in connection with
construction of qualified assets. Under this policy, the Company capitalized
interest of $6,559,000 in 1997, $2,880,000 in 1996 and $529,000 in 1995.
Revenue Recognition: The Company recognizes revenue at the time of
shipment.
Environmental Costs: Environmental costs are capitalized if the costs
extend the life of the property, increase its capacity, and/or mitigate or
prevent contamination from future operations. Costs related to environmental
contamination treatment and clean-up are charged to expense.
I-15
16
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings Per Share: Earnings per common share equals net earnings divided
by the weighted average number of common shares outstanding. Common stock
equivalents were not included in the weighted average common shares outstanding
as the dilution would be immaterial. During February 1997, the Financial
Accounting Standards Board (FASB) issued Statement No. 128, "Earnings Per
Share," effective for the Company's third quarter of fiscal 1998. This statement
establishes standards for computing and presenting earnings per share (EPS). It
requires dual presentation of basic and diluted EPS on the face of the income
statement and a reconciliation between the computations. The impact of Statement
No. 128 on the calculation of EPS is not expected to be material.
Recently Issued FASB Statements: The FASB recently issued Statements No.
129, "Disclosure of Information about Capital Structure," No. 130, "Reporting
Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 129 deals with items already
disclosed by the Company. Statement No. 130, effective for fiscal 1999, will
require separate reporting of certain items affecting shareholders' equity
outside of those included in arriving at net earnings. Statement No. 131,
effective for fiscal 1999, establishes requirements for reporting information
about operating segments in annual reports and interim statements. This
statement will require a change in the way the Company's segments are presently
reported; however, the extent of the change has not been determined.
Statements of Cash Flows: With respect to non-cash activities, the Company
recorded its increased equity from the Rouge Steel Company's initial public
offering as an increase in investments in unconsolidated affiliates of
$3,215,000 and additional paid-in capital (net of deferred taxes) of $2,073,000
in 1995.
Supplemental cash flow information for the years ended May 31 is as
follows:
IN THOUSANDS 1997 1996 1995
------- ------- -------
Interest paid................................ $26,587 $11,273 $ 7,325
Income taxes paid............................ 58,912 51,346 65,270
Derivatives and Financial Instruments: The following methods and
assumptions were used by the Company in estimating the fair value of its
financial instruments: Cash and cash equivalents, other assets, and long-term
debt-The carrying amounts reported in the balance sheets approximate fair value.
The Company does not engage in currency speculation and generally enters
into forward exchange contracts only to hedge specific foreign currency
transactions. The amount of these contracts outstanding at any time is
immaterial. Gains or losses from these contracts offset gains or losses of the
assets, liabilities or transactions being hedged.
Risks and Uncertainties: The Company, including unconsolidated affiliates,
operates 66 production facilities in 22 states and eight countries (see "Company
Locations" on page I-28), in the business segments listed in Industry Segment
Data on page I-14, and does business in the markets described under "The
Company" beginning on page I-3. The Company's largest markets are the automotive
and automotive supply markets. Foreign operations and exports represent less
than 10% of the Company's production and sales, respectively. The Company's
largest supplier is Rouge Steel Company from whom it purchases steel at a slight
discount under a purchase contract expiring in 2003. Less than 30% of the
Company's labor force is covered by collective bargaining agreements, all of
which expire over one year from May 31, 1997. See Note H for significant
business transacted with a major customer. The concentration of credit risks
from financial instruments related to the markets served by the Company, is not
expected to have a
I-16
17
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
material adverse effect on the Company's consolidated financial position, cash
flow or future results of operations.
NOTE B -- SHAREHOLDERS' EQUITY
The Board of Directors is empowered to determine the issue prices, dividend
rates, amounts payable upon liquidation, voting rights and other terms of the
preferred shares when issued.
NOTE C -- DEBT
Debt at May 31 is summarized as follows:
IN THOUSANDS 1997 1996
-------- --------
Short-term notes payable to bank -- unsecured........ $ 50,000 $ --
Revolver -- unsecured................................ 140,000 85,000
Senior notes due 2006 -- unsecured................... 200,000 200,000
Other................................................ 27,883 32,997
-------- --------
Total conventional debt.................... 417,883 317,997
Debt exchangeable for common stock................... 88,494 --
-------- --------
Total debt................................. 506,377 317,997
Less current maturities and short-term notes
payable............................................ 55,984 2,475
-------- --------
Total long-term debt....................... $450,393 $315,522
======== ========
The short-term note payable to bank was borrowing against the Company's
uncommitted line of credit and at May 31, 1997 had a weighted average interest
rate of 5.9%.
On May 30, 1997, the Company amended the terms of its revolving credit
agreement. Under the amended terms, the Company maintains a $190,000,000
revolving credit facility with six banks, of which $50,000,000 was available on
May 31, 1997. The credit agreement is committed through 2002 and the agreement
permits two one year extensions with the consent of the parties. The Company
pays a commitment fee of nine basis points per annum on the unused credit
amount. The rate of interest is determined at the time of borrowing, based upon
a choice of options as specified in the agreement, and was 5.9% at May 31, 1997.
To maintain compliance with the agreement, the Company must preserve a ratio of
debt to total capitalization, excluding the DECS, of less than 50%. At May 31,
1997, the Company's ratio of debt to total capitalization, as calculated in
accordance with the agreement, was 38.6%.
During the year ended May 31, 1996, the Company filed a shelf registration
for the issuance of up to $450,000,000 of debt securities and issued
$200,000,000 of 7.125% Notes due 2006. The majority of the proceeds were used to
repay a bridge loan credit facility that was used to finance the acquisition of
Dietrich Industries (see Note K).
During March 1997, the Company issued approximately $93 million of three
year notes exchangeable into Class A Common Stock of Rouge Steel Company in the
form of DECS (SM) (Debt Exchangeable for Common Stock (SM)). The DECS have an
interest rate of 7.25% and are due March 1, 2000. At maturity, holders of the
DECS will receive in exchange for the principle amount of the notes, shares of
common stock of Rouge Steel Company (Rouge shares) held by the Company (or at
the Company's option, cash in lieu of the shares). It is the Company's intention
to settle the majority of the DECS using Rouge shares. The number of Rouge
shares (or the amount of cash to be paid) will be based upon the price of Rouge
Steel Class A Common Stock shortly before the maturity of the DECS. If the value
of Rouge shares increases to a certain point the
I-17
18
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECS liability would increase, partially offsetting the market value increase in
the stock. Because the stock is considered an "available for sale" security, a
net of tax adjustment to shareholder's equity will be made for the net change
both in stock value and the carrying amount of the DECS liability. The Company
used the net proceeds from the DECS offering to pay down short-term notes
payable and to partially fund the Spartan Steel Coating joint venture.
At May 31, 1997, the Company had "Other" debt that primarily included
industrial development revenue bonds and a Canadian dollar revolving term credit
facility with interest rates ranging from 3.4% to 8.0%. In the previous year,
"Other" debt primarily includes industrial development revenue bonds and
borrowings of Gerstenslager that were repaid at the date of the Gerstenslager
acquisition.
The Company enters into interest rate swap agreements to manage interest
costs and exposure to changing interest rates. At May 31, 1997, agreements were
in place that effectively converted $150,000,000 of the 7.125% Notes due 2006
from fixed rate debt to floating. The interest rate swap agreements are
accounted for by recording interest expense at the variable rate (6.0% at May
31, 1997). No gains or losses are explicitly deferred. These agreements expire
on May 15, 2001. The counterparties to these agreements are major financial
institutions.
Principal payments due on long-term debt, including lease purchase
obligations, in the next five fiscal years are as follows: 1998 -- $5,984,000;
1999 -- $1,200,000; 2000 -- $98,336,000; 2001 -- $1,138,000;
2002 -- $141,147,000; and thereafter -- $208,572,000.
The Company is guarantor on bank loans primarily for three separate joint
ventures. These guarantees totaled $34,000,000 at May 31, 1997, and relate to
debt with varying maturities. The Company believes the guarantees will not
significantly affect its consolidated financial position or future results of
operations.
NOTE D -- INCOME TAXES
Income taxes for the years ended May 31 were as follows:
IN THOUSANDS 1997 1996 1995
------- ------- -------
Current:
Federal................................... $47,420 $44,364 $49,553
State and local........................... 6,468 8,671 9,669
Deferred:
Federal................................... 3,809 9,916 14,042
State..................................... (483) (32) 1,159
------- ------- -------
$57,214 $62,919 $74,423
======= ======= =======
Under Statement of Financial Accounting Standards Board No. 109,
"Accounting for Income Taxes," the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
I-18
19
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The components of the Company's
deferred tax liabilities and assets as of May 31 are as follows:
IN THOUSANDS 1997 1996
-------- --------
Deferred tax assets:
Allowance for doubtful accounts.................... $ 1,395 $ 1,291
Inventory.......................................... (1,896) (4,671)
Accrued expenses................................... 4,422 4,629
Income taxes....................................... 3,686 3,257
Other.............................................. 620 553
-------- --------
8,227 5,059
Deferred tax liabilities:
Property, plant and equipment...................... 80,923 75,176
Undistributed earnings of unconsolidated
affiliates...................................... 39,842 38,911
-------- --------
120,765 114,087
-------- --------
Net deferred tax liability........................... $112,538 $109,028
======== ========
The reasons for the difference between the effective income tax rate and
the statutory federal income tax rate were as follows:
1997 1996 1995
---- ---- ----
Federal statutory rate................................ 35.0% 35.0% 35.0%
State and local income taxes, net of federal tax
benefit............................................. 2.6 3.5 3.7
Other................................................. .4 (.1) (1.0)
---- ---- ----
38.0% 38.4% 37.7%
==== ==== ====
NOTE E -- EMPLOYEE BENEFIT PLANS
Certain employees of the Company participate in a current cash profit
sharing plan and a deferred profit sharing plan. Contributions to and costs for
these plans are determined as a percentage of the Company's pre-tax income
before profit sharing.
Certain operations have non-contributory defined benefit pension plans
covering a majority of their employees qualified by age and service. Company
contributions to these plans comply with ERISA's minimum funding requirements.
I-19
20
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the components of net periodic pension cost for the defined
benefit plans in 1997, 1996 and 1995, and the contributions charged to pension
expense for the defined contribution plans follows:
1997 1996 1995
------- ------- -------
IN THOUSANDS
Defined benefit plans:
Service cost (benefits earned during the period)........... $ 1,792 $ 1,563 $ 1,356
Interest cost on projected benefit obligation.............. 3,735 3,525 3,242
Actual return on plan assets............................... (5,924) (9,644) (3,949)
Net amortization and deferral.............................. 955 5,673 281
------- ------- -------
Net pension cost on defined benefit plans.................. 558 1,117 930
Defined contribution plans................................... 6,397 5,298 5,373
------- ------- -------
Total pension expense...................................... $ 6,955 $ 6,415 $ 6,303
======= ======= =======
Pension expense was calculated assuming a weighted average discount rate of
7.9% and a weighted average expected long-term rate of 8.0%. Plan assets consist
principally of listed equity securities and fixed income instruments. The
following table sets forth the funded status and amounts recognized in the
Company's consolidated balance sheet for defined benefit pension plans at May
31:
PLANS WHOSE
PLANS WHOSE ASSETS ACCUMULATED
EXCEED ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
-------------------- -------------------
1997 1996 1997 1996
-------- ------- ------- -------
IN THOUSANDS
Actuarial present value of benefit obligations:
Vested....................................... $ 45,445 $37,849 $10,047 $ 9,014
======== ======= ======= =======
Accumulated.................................. $ 45,945 $38,200 $10,469 $ 9,551
======== ======= ======= =======
Projected benefit obligation................... $ 45,945 $38,200 $10,469 $ 9,551
Plan assets at fair value...................... 55,861 52,199 8,206 7,587
-------- ------- ------- -------
Projected benefit obligation less than (in
excess of) plan assets....................... $ 9,917 $13,999 $(2,262) $(1,964)
======== ======= ======= =======
Comprised of:
Accrued pension cost........................... $ -- $ -- $(1,979) $(1,732)
Prepaid pension cost........................... 3,678 3,244 (86) (23)
Unrecognized:
Net gain..................................... 15,398 15,541 803 931
Prior service cost........................... (10,603) (6,505) (1,987) (2,169)
Unrecorded net asset (obligation) at
transition, net of amortization.............. 1,444 1,718 (30) (5)
Adjustment to recognize minimum liability...... -- -- 1,017 1,034
-------- ------- ------- -------
$ 9,917 $13,999 $(2,262) $(1,964)
======== ======= ======= =======
NOTE F -- STOCK OPTIONS
Under its employee stock option plans, the Company may grant employees
incentive stock options to purchase shares at not less than 100% of market value
at date of grant or non-qualified
I-20
21
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock options at a price determined by the Compensation and Stock Option
Committee. Generally, options are exercisable at the rate of 20% per year
beginning one year from date of grant and expire ten years thereafter.
The following table summarizes the option plans' activity for the years
ended May 31:
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
-AVERAGE -AVERAGE -AVERAGE
IN THOUSANDS, EXCEPT PER SHARE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding -- beginning of year..... 2,174 15.57 1,821 13.97 1,164 9.00
Granted.............................. 434 20.44 501 20.20 882 19.25
Exercised............................ (173) 8.92 (116) 9.48 (198) 8.91
Forfeited............................ (65) 18.92 (32) 19.46 (27) 9.09
----- ----- -----
Outstanding -- end of year........... 2,370 16.85 2,174 15.57 1,821 13.97
===== ===== =====
Exercisable at end of year........... 1,081 13.14 996 10.73 939 9.01
Weighted-average fair value of
options granted during the year.... $4.96 $4.51
Options outstanding at May 31, 1997 had exercise prices ranging from $7.11
to $21.375 and expiration dates ranging from December 1997 to February 2007.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in 1997 and
1996 consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would not have been materially affected.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yields of 2.53%; expected volatility of
23.0%; risk-free interest rates of 5.12%; and expected lives of 5 years. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
NOTE G -- CONTINGENT LIABILITIES AND COMMITMENTS
The Company is a defendant in certain legal actions. In the opinion of
management, the outcome of these actions, which is not clearly determinable at
the present time, would not significantly affect the Company's consolidated
financial position or future results of operations. The Company believes that
environmental issues will not have a material effect on capital expenditures,
consolidated financial position or future results of operations.
In connection with various construction projects, the Company had purchase
commitments approximating $165 million as of May 31, 1997.
NOTE H -- INDUSTRY SEGMENT DATA
Sales for processed steel products and custom products include $267,126,000
in 1997, $220,542,000 in 1996 and $222,231,000 in 1995 to a major automobile
manufacturer purchasing through decentralized divisions and subsidiaries in
different geographical areas. Industry segment
I-21
22
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
descriptions on pages I-3 and I-4, Company locations on page I-28, and segment
data on page I-14 of the Annual Report are an integral part of these financial
statements.
NOTE I -- RELATED PARTY TRANSACTIONS
The Company purchases from and sells to affiliated companies, certain raw
materials and services at prevailing market prices. Sales to affiliated
companies for fiscal 1997, 1996 and 1995, totaled $25 million, $51 million and
$61 million, respectively. Accounts receivable related to these transactions
were $16 million and $10 million at May 31, 1997 and 1996, respectively.
Purchases for fiscal 1997, 1996 and 1995, totaled $1 million, $167 million and
$194 million, respectively. Accounts payable to related parties were $5 million
and $18 million at May 31, 1997 and 1996, respectively.
NOTE J -- INVESTMENT IN UNCONSOLIDATED AFFILIATES
During the quarter ended August 31, 1996, the Company took certain steps
relative to its investment in Rouge Steel which resulted in the Company
accounting for this investment on the cost method instead of the equity method
(see Note A). As a result, after May 31, 1996, Rouge's results are no longer
included in the table below.
The Company's investments in affiliated companies which are not
"majority-owned" and controlled are accounted for using the equity method.
Investments carried at equity and the percentage interest owned consist of
Worthington Specialty Processing, partnership (50%), London Industries, Inc.
(60%), Worthington Armstrong Venture, partnership (50%), TWB Company (33%),
Acerex, S.A. de C.V. (50%) and Worthington S.A. (52%).
During April 1997, TWB Company sold new shares for $19.5 million to three
different owners giving them a total ownership interest of 33%. As a result, the
Company's share of ownership was reduced from 50% to 33%. An increase in
additional paid-in capital of $3,798,000 (net of deferred taxes of $2,328,000)
was recorded from the transaction. The proceeds were used by TWB to repay
advances to the Company.
During February 1997 the Company formed Worthington S.A., a joint venture
with three major gas distributors in Brazil. At May 31, 1997, the Company's
share of the underlying net assets of Worthington S.A. was less than the
carrying amount included in investment in unconsolidated affiliates by
$2,248,000. This difference is being amortized by decreasing equity in net
income of unconsolidated affiliates using the straight-line method over 40
years.
Financial information for affiliated companies accounted for by the equity
method is as follows:
1997 1996 1995
-------- ---------- ----------
IN THOUSANDS
Current assets........................ $ 91,267 $ 553,023 $ 569,447
Noncurrent assets..................... 130,259 287,247 227,315
Current liabilities................... 32,152 233,441 240,044
Noncurrent liabilities................ 72,646 176,618 167,915
Minority interests.................... -- 6,404 21,404
Net sales............................. 240,545 1,383,343 1,386,824
Gross margin.......................... 56,775 122,500 170,234
Net income............................ $ 24,813 $ 88,644 $ 122,116
I-22
23
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's share of undistributed earnings of unconsolidated affiliates
included in consolidated retained earnings was $76,166,000 at May 31, 1997.
NOTE K -- ACQUISITIONS
During June 1996, the Company acquired the stock of SCM Technologies (SCM)
for $8.4 million. SCM designs, engineers and manufactures high pressure
industrial, medical, halon and electronic gas cylinders and is located near
Windsor, Ontario. The transaction was accounted for as a purchase. The results
of operations for SCM are included in the financial statements of the Company
since the date of acquisition. Goodwill in the amount of $3.8 million resulting
from the purchase is being amortized using the straight-line method over 40
years.
On December 3, 1996, the Company acquired the net assets of Plastics
Manufacturing, Inc. (PMI) for $61.6 million in a business combination accounted
for as a purchase. PMI is a manufacturer of plastic injection molded and
thermoformed parts. The results of operations for PMI are included in the
financial statements of the Company since the date of acquisition. Goodwill in
the amount of $30.6 million resulting from the purchase is being amortized using
the straight-line method over 30 years.
Proforma results including SCM and PMI since the beginning of the earliest
period presented would not be materially different than actual results.
On February 21, 1997, the Company acquired The Gerstenslager Company
(Gerstenslager) in a business combination accounted for as a pooling of
interests. Gerstenslager is a producer of aftermarket automotive body panels in
the United States. Gerstenslager was primarily owned by a subsidiary of JMAC,
Inc., an investment company which is owned by John P. McConnell, Chairman and
CEO of the Company and a partnership involving John P. McConnell, John H.
McConnell, Chairman Emeritus, and a trust for the benefit of their families. All
of the stock of Gerstenslager was exchanged for 5,675,000 Common Shares of the
Company which had a value of $113 million based on an average share price prior
to the closing date. The Board of Directors of the Company received an opinion
from an independent investment banking firm attesting to the fairness of this
consideration. All financial statements of the Company have been restated to
include Gerstenslager for all periods presented. Transactions between the
companies have been immaterial. Sales and net income for the Company before the
pooling, Gerstenslager and the combined results for the periods presented are as
follows:
WORTHINGTON
IND., INC.
AS
PREVIOUSLY
IN THOUSANDS REPORTED GERSTENSLAGER COMBINED
----------- ------------- -----------
SIX MONTHS ENDED NOVEMBER 30, 1997 (UNAUDITED)
Net sales......................................... $ 831,821 $ 56,820 $ 888,641
Net income........................................ $ 40,116 $ 4,512 $ 44,628
YEAR ENDED MAY 31, 1996
Net sales......................................... $ 1,477,838 $ 100,252 $ 1,578,090
Net income........................................ $ 91,342 $ 9,631 $ 100,973
YEAR ENDED MAY 31, 1995
Net sales......................................... $ 1,483,569 $ 82,106 $ 1,565,675
Net income........................................ $ 116,686 $ 6,443 $ 123,129
I-23
24
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 5, 1996, the Company acquired all of the outstanding capital
stock of Dietrich Industries, Inc. (Dietrich) for approximately $146 million in
cash and $23 million in assumed liabilities, net of cash acquired. Dietrich,
based in Pittsburgh, Pennsylvania, is involved primarily in the manufacture and
sale of metal framing products for the commercial and residential construction
markets. The acquisition was accounted for using purchase accounting with
results for Dietrich included since the purchase date. The purchase price
exceeded the fair value of the net assets acquired by approximately $66 million
which is being amortized over 40 years.
The following proforma data summarizes the results of operations of the
Company for the twelve months ended May 31, 1996 and May 31, 1995, assuming
Dietrich was acquired at June 1, 1994. In preparing the proforma data,
adjustments have been made to conform Dietrich's accounting policies to those of
the Company and to reflect purchase accounting adjustments and interest expense:
TWELVE MONTHS ENDED
---------------------------
IN THOUSANDS, EXCEPT PER SHARE (UNAUDITED) MAY 31, 1996 MAY 31, 1995
------------ ------------
Net sales.......................................... $1,761,067 $1,851,037
========== ==========
Net earnings....................................... 102,134 126,902
========== ==========
Earnings per common share.......................... $ 1.06 $ 1.32
========== ==========
The proforma 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.
NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended May 31, 1997 and 1996:
THREE MONTHS ENDED
-----------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AUGUST NOVEMBER FEBRUARY MAY
-------- -------- -------- --------
1997
Net sales........................................ $430,292 $458,349 $486,551 $536,528
Gross margin..................................... 63,355 65,688 68,239 80,247
Net earnings..................................... 21,961 22,667 21,817 26,873
Earnings per share............................... $ .23 $ .23 $ .23 $ .28
1996
Net sales........................................ $345,901 $375,611 $386,454 $470,124
Gross margin..................................... 50,131 57,208 61,228 75,766
Net earnings..................................... 22,487 27,849 24,059 26,578
Earnings per share............................... $ .23 $ .29 $ .25 $ .28
I-24
25
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The data above has been restated to include the results of The
Gerstenslager Company which was acquired in February 1997 through a pooling of
interests. Gerstenslager's separate results before the acquisition, and the
change to previously reported results for the Company are shown below.
THREE MONTHS ENDED
-------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AUGUST NOVEMBER FEBRUARY MAY
------- ------- ------- -------
1997
Net sales............................................. $27,721 $29,099
Gross margin.......................................... 5,680 5,485
Net earnings.......................................... 2,362 2,150
Earnings per share.................................... $ .01 $ .00
1996
Net sales............................................. $20,165 $21,067 $26,230 $32,790
Gross margin.......................................... 3,126 4,197 6,939 8,808
Net earnings.......................................... 979 1,661 3,163 3,828
Earnings per share.................................... $ (.01) $ .00 $ .02 $ .03
I-25
26
REPORT OF MANAGEMENT
The management of Worthington Industries is responsible for the preparation
of the accompanying consolidated financial statements in conformity with
generally accepted accounting principles appropriate in the circumstances.
Management is also responsible for the determination of estimates and judgments
used in the financial statements and the preparation of other financial
information included in this Annual Report to Shareholders. The financial
statements have been audited by Ernst & Young LLP, independent auditors.
The management of the Company has established and maintains an accounting
system and related internal controls that it believes are sufficient to provide
reasonable assurance that assets are safeguarded against unauthorized
acquisition, use or disposition, that transactions are executed and recorded in
accordance with management's authorization and that the financial records are
reliable for preparing financial statements. The concept of reasonable assurance
is based on the recognition that the cost of a system of internal control must
be related to the benefits derived and that the balancing of the factors
requires estimates and judgments. Management considers the recommendations of
the internal auditors and independent certified public accountants concerning
the Company's system of internal control and takes appropriate actions which are
cost effective in the circumstances.
The Board of Directors has an Audit Committee of Directors who are not
members of management. The Audit Committee meets periodically with the Company's
management, internal auditors and independent certified public accountants to
review matters relating to financial reporting, auditing and internal control.
To ensure auditor independence, both the internal auditors and independent
certified public accountants have full and free access to the Audit Committee.
/s/ JOHN P. McCONNELL
--------------------------------------
John P. McConnell, Chairman & CEO
/s/ DONALD G. BARGER, JR.
--------------------------------------
Donald G. Barger, Jr., Vice
President-CFO
/s/ MICHAEL R. SAYRE
--------------------------------------
Michael R. Sayre, Corporate Controller
I-26
27
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Worthington Industries, Inc.
We have audited the accompanying consolidated balance sheets of Worthington
Industries, Inc. and subsidiaries as of May 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Worthington
Industries, Inc. and subsidiaries at May 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Columbus, Ohio
June 18, 1997
I-27
28
COMPANY LOCATIONS
PROCESSED STEEL PRODUCTS
THE WORTHINGTON STEEL COMPANY
Columbus, Monroe & Delta, Ohio
Louisville, Kentucky
Rock Hill, South Carolina
Baltimore, Maryland
Jackson & Taylor, Michigan
Malvern, Pennsylvania
Porter, Indiana
Decatur, Alabama
Midland, Georgia
WORTHINGTON CYLINDER CORPORATION
Columbus, Jefferson & Westerville, Ohio
Claremore, Oklahoma
Citronelle, Alabama
Guelph & Tilbury, Ontario, Canada
DIETRICH INDUSTRIES, INC.
Hammond & LaPorte, Indiana
Hicksville, Warren & Aurora, Ohio
Atlanta, Georgia
Baltimore, Maryland
Lunenburg, Massachusetts
Colton & Stockton, California
Phoenix, Arizona
Wildwood & Miami, Florida
East Brunswick, New Jersey
Hutchins, Texas
Fredericksburg, Virginia
Denver, Colorado
Lenexa, Kansas
THE GERSTENSLAGER COMPANY
Wooster, Ohio
CUSTOM PRODUCTS
WORTHINGTON CUSTOM PLASTICS, INC.
Mason, Salem & Upper Sandusky, Ohio
St. Matthews, South Carolina
Lebanon, Kentucky
Harrisburg & Concord, North Carolina
WORTHINGTON PRECISION METALS, INC.
Mentor, Ohio
Franklin, Tennessee
CAST PRODUCTS
BUCKEYE STEEL CASTINGS COMPANY
Columbus, Ohio
WORTHINGTON MACHINE TECHNOLOGY
Columbus, Ohio
I. H. SCHLEZINGER
Columbus, Ohio
JOINT VENTURES
WORTHINGTON SPECIALTY PROCESSING (WSP)
Steel Processing
Jackson, Michigan
ACEREX
Steel Processing
Monterrey, Mexico
SPARTAN STEEL COATING
Steel Processing
Monroe, Michigan
TWB COMPANY
Tailor Laser Welded Blanks
Monroe, Michigan
WORTHINGTON ARMSTRONG VENTURE (WAVE)
Suspended Ceilings
Malvern, Pennsylvania
Sparrows Point, Maryland
Valenciennes, France
North Las Vegas, Nevada
Shanghai, China
Madrid, Spain
Team Valley, England
Benton Harbor, Michigan
WORTHINGTON S.A.
Pressure Cylinders
Sao Palo, Brazil
LONDON INDUSTRIES, INC.
Custom Plastics
London, Ohio
I-28
29
OFFICERS & DIRECTORS
CORPORATE OFFICERS
John H. McConnell*
Chairman Emeritus & Founder
Director, 1955
John P. McConnell*
Chairman & Chief Executive Officer
Director, 1975
Donal H. Malenick*
President & Chief Operating Officer
Director, 1959
Pete A. Klisares*
Assistant to the Chairman
Director, 1991
William S. Dietrich
President - Dietrich Industries
Director, 1996
Donald G. Barger, Jr.
Vice President & Chief Financial Officer, 1993
Edward A. Ferkany
Group Vice President - Processed Steel, 1974
Robert J. Borel
Vice President - Engineering, 1973
Ralph V. Roberts
Vice President - Corporate
Development, 1973
Mark H. Stier
Vice President - Human Resources, 1975
Thomas L. Hockman
Vice President - Personnel, 1973
Dale T. Brinkman
General Counsel, 1982
Michael R. Sayre
Corporate Controller, 1993
OUTSIDE DIRECTORS
Charles R. Carson+
Retired Senior Vice President
General Electric Company
Director, 1986
John E. Fisher++
Retired General Chairman
Nationwide Insurance Companies
Director, 1993
John F. Havens++
Retired Chairman
Banc One Corporation
Director, 1988
Katherine S. LeVeque+
Chief Executive Officer
LeVeque Enterprises
Commercial Real Estate
Director, 1992
Robert B. McCurry++
Senior Advisor to President
Toyota Motor Sales, U.S.A. Inc.
Director, 1972
Charles D. Minor+
Counsel
Vorys, Sater, Seymour and Pease
Secretary - Director, 1962
Gerald B. Mitchell++
Retired Chairman
Dana Corporation
Director, 1986
James Petropoulos+
Owner
James Petropoulos & Company
Commercial Real Estate
Director, 1976
SUBSIDIARY OFFICERS
John R. Halula
Group Vice President, 1980
Worthington Custom Plastics, Inc.
Joe W. Harden
Vice President - General Manager, 1980
Buckeye Steel Castings Company
Derek R. West
Vice President - General Manager, 1991
Worthington Precision Metals, Inc.
Virgil L. Winland
Group Vice President, 1971
Worthington Cylinder
Corporation
Jay D. Wisner
President, 1997
The Gerstenslager Company
- ---------------
* Member of Executive Committee
+ Member of Audit Committee
++ Member of Compensation and Stock Option Committee
Note: Year indicates initial year of employment or Board membership
I-29