UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10–K

(Mark One)

For the fiscal year ended May 31, 2004

OR

For the transition period from                     to                    

Commission File Number 1-8399

WORTHINGTON INDUSTRIES, INC.

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES x NO o

Based upon the closing price of the Common Shares on November 28, 2003, as reported on the New York Stock Exchange composite tape (as reported by The Wall Street Journal), the aggregate market value of the Common Shares (the only common equity) held by non-affiliates of the Registrant as of such date was approximately $983,340,000.

The number of Common Shares issued and outstanding as of August 5, 2004, was 87,309,123.

DOCUMENT INCORPORATED BY REFERENCE

Selected portions of the Registrant’s Proxy Statement to be furnished to shareholders of the Registrant in connection with the Annual Meeting of Shareholders to be held on September 30, 2004, are incorporated by reference into Part III of this Form 10-K to the extent provided herein.

TABLE OF CONTENTS

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SAFE HARBOR STATEMENT

     Selected statements contained in this Annual Report on Form 10-K, including, without limitation, in “PART I – Item 1. – Business” and “PART II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations”, constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information and can often be identified by the words “will”, “may”, “designed to”, “outlook”, “believes”, “should”, “plans”, “expects”, “intends”, “estimates” and similar expressions. These forward-looking statements include, without limitation, statements relating to:

	•		future estimated or expected earnings, charges, working capital, sales, operating results, earnings per share or the earnings impact of certain matters;
	•		pricing trends for raw materials and finished goods;
	•		anticipated capital expenditures and asset sales;
	•		projected timing, results, costs, charges and expenditures related to asset transfers, facility dispositions, shutdowns and consolidations;
	•		new products and markets;
	•		expectations for the economy and markets; and
	•		other non-historical trends.

     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 and pricing, changes in product mix and market acceptance of products;
	•		fluctuations in pricing, quality or availability of raw materials (particularly steel), supplies, utilities and other items required by operations;
	•		effects of facility closures and the consolidation of operations;
	•		the ability to realize price increases, cost savings and operational efficiencies on a timely basis;
	•		the ability to integrate newly acquired businesses and achieve synergies therefrom;
	•		the timing of and changes to matters related to the segregation of the retained and sold assets of the Decatur, Alabama, facility;
	•		capacity levels and efficiencies within our facilities and within the industry as a whole;
	•		financial difficulties of customers, suppliers, joint venture partners and others with whom we do business;
	•		the effect of national, regional and worldwide economic conditions generally and within our major product markets, including a prolonged or substantial economic downturn;
	•		the effect of adverse weather on facility and shipping operations;
	•		changes in customer spending patterns and supplier choices and 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;
	•		deviation of actual results from estimates and/or assumptions used by us in the application of our significant accounting policies;
	•		level of imports and import prices in our markets;
	•		the impact of governmental regulations, both in the United States and abroad; and
	•		other risks described from time to time in filings with the Securities and Exchange Commission.

     Any forward-looking statements in this Form 10-K are based on current information as of the date of this Form 10-K, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.

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PART I

Item 1. – Business

General Overview

     Worthington Industries, Inc., an Ohio corporation (individually, the “Registrant” or “Worthington Industries” or, together with its subsidiaries, “Worthington”), is headquartered in Columbus, Ohio. Founded in 1955, Worthington is primarily a diversified metal processing company, focused on value-added steel processing and manufactured metal products such as metal framing, pressure cylinders, automotive part stampings and, through joint ventures, metal ceiling grid systems and laser welded blanks. Worthington currently operates 44 manufacturing facilities worldwide and holds equity positions in eight joint ventures, which operate an additional 17 manufacturing facilities worldwide.

     Worthington Industries maintains an Internet website at www.worthingtonindustries.com. (This uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Worthington Industries’ website into this Annual Report on Form 10-K.) We make available, free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

     We report our operations in three principal business segments: Processed Steel Products, Metal Framing and Pressure Cylinders. The Processed Steel Products segment includes The Worthington Steel Company business unit (“Worthington Steel”) and The Gerstenslager Company business unit (“Gerstenslager”). The Metal Framing segment is comprised of the Dietrich Industries, Inc. business unit (“Dietrich”). The Pressure Cylinders segment consists of the Worthington Cylinder Corporation business unit (“Worthington Cylinders”). Worthington holds equity positions in eight joint ventures, further identified below under the subheading “Joint Ventures”. Two of our joint ventures are consolidated into our consolidated financial statements which are included in “Item 8. – Financial Statements and Supplementary Data.” During the fiscal year ended May 31, 2004 (“fiscal 2004”), our Processed Steel Products, Metal Framing and Pressure Cylinders segments served over 1,200, 2,400 and 3,450 customers, respectively, located primarily in the United States. Foreign sales account for less than 10% of consolidated net sales and are comprised primarily of sales to customers in Canada and Europe. No single customer accounts for over 10% of our consolidated net sales. Our reportable business segments offer different products and services to the same customer base.

     On May 27, 2004, we signed an agreement to sell our Decatur facility and its cold-rolling assets to Nucor Corporation (“Nucor”) for $82.0 million cash while retaining the slitting and cut-to-length assets and net working capital. The transaction closed effective as of August 1, 2004. For further discussion on this matter, see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Processed Steel Products

     Our Processed Steel Products segment consists of two business units, Worthington Steel and Gerstenslager. For fiscal 2004, the fiscal year ended May 31, 2003 (“fiscal 2003”), and the fiscal year ended May 31, 2002 (“fiscal 2002”), the percentage of consolidated net sales generated by our Processed Steel Products segment was 57.7%, 60.5% and 64.9%, respectively.

     Both Worthington Steel and Gerstenslager are intermediate processors of flat-rolled steel. Worthington Steel occupies a niche in the steel industry by focusing on products requiring exact specifications. These products typically cannot be supplied as efficiently by steel mills or steel end-users. We believe that Worthington Steel is one of the largest independent flat-rolled steel processors in the United States. Gerstenslager is a leading independent supplier of automotive quality exterior body panels to the North American automotive original equipment and past model service markets. Gerstenslager’s strength is its ability to handle a large number of past model service and current model production automotive and heavy-duty truck body parts.

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     Our Processed Steel Products segment operates 10 manufacturing facilities throughout the United States and one consolidated joint venture, Spartan Steel Coating, LLC (“Spartan”). We serve over 1,200 customers from these facilities, principally in the automotive, construction, lawn and garden, hardware, furniture, office equipment, electrical control, tubing, leisure and recreation, appliance, farm implement, HVAC, container and aerospace markets. During fiscal 2004, no single customer represented greater than 10% of net sales for the segment.

     Worthington Steel buys coils of steel from major integrated steel mills and mini-mills and processes them to the precise type, thickness, length, width, shape, temper and surface quality required by customer specifications. Our computer-aided processing capabilities include, among others:

	•		pickling, a chemical process using an acidic solution to remove surface oxide which develops on hot-rolled steel;
	•		slitting, which cuts steel to specific widths;
	•		cold reduction, which achieves close tolerances of thickness and temper by rolling;
	•		hot-dipped galvanizing, which coats steel with zinc and zinc alloys through a hot-dipped process;
	•		hydrogen annealing, a thermal process that changes the hardness and certain metallurgical characteristics of steel;
	•		cutting-to-length, which cuts flattened steel to exact lengths;
	•		tension leveling, a method of applying pressure to achieve precise flatness tolerances for steel;
	•		edging, which conditions the edges of the steel by imparting round, smooth or knurled edges;
	•		CleanCoat™, a dry lubrication process; and
	•		configured blanking, by which steel is stamped into specific shapes.

     Worthington Steel also “toll processes” steel for steel mills, large end-users, service centers and other processors. Toll processing is different from our typical steel processing because the mill or end-user retains title to the steel and has the responsibility for selling the end product. Toll processing enhances Worthington’s participation in the market for wide sheet steel and large standard orders, which is a market generally served by steel mills rather than by intermediate steel processors.

     Gerstenslager stamps, assembles, primes and packages exterior automotive body parts and panels. We primarily own the steel used in our Gerstenslager operations but occasionally process consigned material, similar to toll processing. Gerstenslager processes a large number of past model service and current model production automotive and heavy-duty truck parts, managing over 3,000 finished good part numbers and over 25,000 die/fixture sets.

     The Processed Steel Products industry is fragmented and highly competitive. We compete with many other independent intermediate processors and, with respect to automotive stamping, captive processors owned by the automotive companies, independent tier-one suppliers of current model components and a number of smaller competitors. We compete primarily on the basis of product quality, our ability to meet delivery requirements and price. Our technical service and support for material testing and customer specific applications enhance the quality of our products. However, we have not quantified the extent to which our technical service capability has improved our competitive position. See “Item 1. – Business – Technical Services.” We believe that our ability to meet tight delivery schedules is, in part, based on the proximity of our facilities to customers, suppliers, and one another. Again, we have not quantified the extent to which plant location has impacted our competitive position. Our processed steel products are priced competitively, primarily based on market factors including, among other things, the cost and availability of raw materials, transportation and shipping costs, and overall economic conditions in the United States and abroad.

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     On May 27, 2004, we entered into an agreement to sell our Decatur, Alabama, facility and its cold rolling assets to Nucor Corporation. This transaction closed on August 1, 2004. For further discussion on this matter, see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operation”.

     We use our “Worthington Steel” and “Gerstenslager” trade names in our Processed Steel Products segment, and we use the unregistered trademark “CleanCoat™” in connection with our dry lubrication process. We intend to continue the use of our intellectual property. The “CleanCoat™” trademark is important to our Processed Steel Products segment, but we do not consider it material.

Metal Framing

     Our Metal Framing segment consists of one business unit, Dietrich, which designs and produces metal framing components and systems and related accessories for the commercial and residential construction markets within the United States. For fiscal 2004, fiscal 2003 and fiscal 2002, the percentage of consolidated net sales generated by our Metal Framing segment was 27.8%, 24.3% and 17.5%, respectively.

     Our Metal Framing products include steel studs and track, floor and wall system components, roof trusses and other metal framing accessories. Some of our specific products include “TradeReady®” Floor Systems, “Spazzer®” bars, “Clinch-On®” metal corner bead and trim and “Ultra Span®” trusses through our unconsolidated joint venture, Aegis Metal Framing, LLC (“Aegis”).

     Our Metal Framing segment has 27 operating facilities located throughout the United States. We believe that Dietrich is the largest national supplier of metal framing products and supplies, supplying approximately halfAssumed to be a 1.25-1.3B market. of the metal framing products sold in the United States. We have over 2,400 customers, primarily consisting of wholesale distributors, commercial and residential building contractors, and big box material retailers. During fiscal 2004, two customers represented 26% of net sales for the segment, while no other customer represented more than 4% of net sales for the segment.

     The light gauge metal framing industry is very competitive. We compete with five large regional competitors and numerous small, more localized competitors. We compete primarily on the basis of quality, service and price. Similar to our Processed Steel Products segment, the proximity of our facilities to our customers and their project sites provides us with a service advantage and impacts our freight and shipping costs. Our products are transported almost exclusively by common carrier. We have not quantified the extent to which facility location has impacted our competitive position.

     Dietrich uses the registered trademarks “Spazzer®”, “TradeReady®” and “Clinch-On®.” The “Spazzer®” trademark is used in connection with wall component products that are the subject of two United States patents, four pending United States patent applications and several pending foreign patent applications. The trademark “TradeReady®” is used in connection with floor system products that are the subject of two United States patents, three foreign patents, three pending United States patent applications and five pending foreign patent applications. The “Clinch-On®” trademark is used in connection with corner bead and metal trim products for gypsum wallboard that are subject to United States patents. Aegis, an unconsolidated joint venture, uses the “Ultra-Span®” registered trademark in connection with certain patents for proprietary roof trusses. We intend to continue to use and renew each of our registered trademarks. Dietrich also has a number of other patents and trade names relating to specialized products. Although trademarks, trade names and patents are important to our Metal Framing segment, none is considered material.

Pressure Cylinders

     Our Pressure Cylinders segment consists of one business unit, Worthington Cylinders. For fiscal 2004, fiscal 2003, and fiscal 2002, the percentage of consolidated net sales generated by Worthington Cylinders was 13.8%, 14.5% and 16.8%, respectively.

     Worthington Cylinders operates six manufacturing facilities, three in Ohio and one each in Austria, Canada and Portugal. The segment also operates one consolidated joint venture, Worthington Cylinders a.s., in the Czech Republic.

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     Our Pressure Cylinders segment produces a diversified line of pressure cylinders, including low-pressure liquefied petroleum gas (“LPG”) and refrigerant gas cylinders, and high-pressure and industrial/specialty gas cylinders. Our LPG cylinders are sold to manufacturers, distributors and/or mass merchandisers and are used for gas barbecue grills, recreational vehicle equipment, residential heating systems, industrial forklifts and commercial/residential cooking (the latter, generally outside North America). Refrigerant cylinders are sold primarily to major refrigerant gas producers and distributors and are used to hold refrigerant gases for commercial and residential air conditioning and refrigeration systems and for automotive air conditioning systems. High-pressure and industrial/specialty gas cylinders are sold primarily to gas producers and distributors as containers for gases used in: cutting and welding metals; breathing (medical, diving and firefighting); semiconductor production; beverage delivery; and compressed natural gas systems. Worthington Cylinders also produces recovery tanks for refrigerant gases, air reservoirs for truck and trailer original equipment manufacturers, and non-refillable cylinders for “Balloon Time®” helium kits. While a large percentage of our cylinder sales are made to major accounts, Worthington Cylinders has over 3,450 customers. During fiscal 2004, one customer represented 9% of net sales for the segment, while no other single customer represented more than 6% of net sales for the segment.

     Worthington Cylinders’ primary low-pressure cylinder products are steel cylinders with refrigerant gas capacities of 15 to 1,000 lbs. and steel and aluminum cylinders with LPG capacities of 4-1/4 to 420 lbs. In the United States and Canada, our high-pressure and low-pressure cylinders are manufactured in accordance with U.S. Department of Transportation and Transport Canada safety requirements, respectively. Outside the United States and Canada, we manufacture cylinders according to European Union specifications, as well as various other international requirements and standards. Low-pressure cylinders are produced by precision stamping, drawing and welding component parts to customer specifications. They are then tested, painted and packaged as required. Our high-pressure cylinders are manufactured by several processes, including deep drawing, tube spinning and billet piercing.

     Worthington Cylinders has two principal domestic competitors and several smaller foreign competitors in its major low-pressure cylinder markets; however we believe that we have the largest domestic market share. In our high-pressure cylinder market, we compete against two principal domestic competitors and nine European competitors. We believe that we have the leading market share of the European industrial gas cylinder market and the European non-refillable refrigerant cylinder market. As with our other segments, we compete on the basis of service, price and quality.

     Our Pressure Cylinders segment uses the trade name “Worthington Cylinders” to conduct business and the registered trademark “Balloon Time®” to market our low-pressure helium balloon kits. We intend to continue to use and renew our registered trademark. We also hold domestic and foreign patents applicable to the non-refillable valve used for our refrigerant cylinders. This intellectual property is important to our Pressure Cylinders segment, but is not considered material.

Segment Financial Data

     Financial information for our segments is provided in “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note H – Industry Segment Data.”

Financial Information About Geographic Areas

     Foreign operations and exports represent less than 10% of our production and consolidated net sales. Summary information about our foreign operations is set forth in “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note A – Summary of Significant Accounting Policies – Risks and Uncertainties.” For fiscal 2004 and fiscal 2003, we had operations in North America and Europe and prior years also included operations in South America. Net sales by geographic region are provided in “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note H – Industry Segment Data.”

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Suppliers

     In fiscal 2004, we purchased over 3.5 million tons of steel for use as raw material for our Processed Steel Products, Pressure Cylinders and Metal Framing segments. We purchase steel in large quantities at regular intervals from major primary producers, both domestic and foreign. In our Processed Steel Products segment, we primarily purchase and process steel based on specific customer orders and do not typically purchase steel for inventory. Our Metal Framing and Pressure Cylinders segments purchase steel to meet our production schedules. Our raw materials are purchased in the open market on a negotiated spot market basis at prevailing market prices, we also enter into long-term contracts, some of which have fixed pricing. During fiscal 2004, our major suppliers of steel were, in alphabetical order: Gallatin Steel Company; International Steel Group; Ispat Inland, Inc.; North Star BlueScope Steel LLC; Nucor Corporation; Severstal North America, Inc.; US Steel Corporation; and WCI Steel, Inc. Alcoa Inc. was our primary aluminum supplier for our Pressure Cylinders segment in fiscal 2004. We believe that our supplier relationships are good.

Technical Services

     We employ a staff of engineers and other technical personnel and maintain fully equipped modern laboratories to support our operations. These facilities enable us to verify, analyze and document the physical, chemical, metallurgical and mechanical properties of our raw materials and products. Technical service personnel also work in conjunction with our sales force to determine the types of flat-rolled steel required for our customers’ particular needs. Additionally, technical service personnel design and engineer metal framing structures and provide sealed shop drawings to the building construction markets. To provide these services, we maintain a continuing program of developmental engineering with respect to the characteristics and performance of our products under varying conditions. Laboratory facilities also perform metallurgical and chemical testing as dictated by the regulations of the U.S. Department of Transportation, Transport Canada and other associated agencies, along with International Organization for Standardization (ISO), and customer requirements. All design work complies with current local and national building code requirements. Our ICBO (International Conference of Building Officials) accredited product-testing laboratory supports these design efforts.

Employees

     As of May 31, 2004, we employed approximately 6,700 employees in our operations, excluding unconsolidated joint ventures, approximately 11% of whom were covered by collective bargaining agreements. We believe that we have good relationships with our employees.

Joint Ventures

     As part of our strategy to selectively develop new products, markets and technological capabilities and to expand our international presence, while mitigating the risks and costs associated with those activities, we participate in two consolidated and six unconsolidated joint ventures.

     Consolidated

	•		Spartan Steel Coating, LLC, a 52%-owned consolidated joint venture with Severstal North America, Inc., operates a cold-rolled, hot-dipped galvanizing facility in Monroe, Michigan.
	•		Worthington Cylinders a.s., a 51%-owned consolidated joint venture with a local Czech Republic entrepreneur, operates a pressure cylinder manufacturing facility in Hustopece, Czech Republic.

     Unconsolidated

	•		Acerex, S.A. de C.V. (“Acerex”), a 50%-owned joint venture with Hylsa S.A. de C.V., operates a steel processing facility in Monterrey, Mexico.
	•		Aegis Metal Framing, LLC, a 60%-owned joint venture with MiTek Industries, Inc., headquartered in Chesterfield, Missouri, offers light gauge metal component manufacturers and contractors design, estimating and management software, a full line of metal framing products and integrated professional engineering services.

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	•		TWB Company, LLC (“TWB”), a 50%-owned joint venture with ThyssenKrupp Steel North America, Inc., produces laser welded blanks for use in the automotive industry for products such as inner-door panels. TWB operates facilities in Monroe, Michigan; Columbus, Indiana; and Saltillo, Mexico.
	•		Worthington Armstrong Venture (“WAVE”), a 50%-owned joint venture with Armstrong World Industries, Inc., is one of the three leading global manufacturers of suspended ceiling systems for concealed and lay-in panel ceilings. WAVE operates facilities in Sparrows Point, Maryland; Benton Harbor, Michigan; North Las Vegas, Nevada; Malvern, Pennsylvania; Shanghai, China; Team Valley, United Kingdom; Valenciennes, France; and Madrid, Spain.
	•		Worthington Specialty Processing (“WSP”), a 50%-owned general partnership with U.S. Steel Corporation (“U.S. Steel”) in Jackson, Michigan, operates primarily as a toll processor for U.S. Steel.
	•		Viking & Worthington Steel Enterprise, LLC (“VWS”), a 49%-owned joint venture with Bainbridge Steel, LLC (“Bainbridge”), an affiliate of Viking Industries, LLC, operates a steel processing facility in Valley City, Ohio, and is a qualified minority business enterprise.

     See “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note J – Investments in Unconsolidated Affiliates” for further information about Worthington’s participation in unconsolidated joint ventures.

Environmental Regulation

     Our manufacturing facilities, generally in common with those of similar industries making similar products, are subject to many federal, state and local requirements relating to the protection of the environment. We continually examine ways to reduce emissions and waste and to decrease costs related to environmental compliance. We do not anticipate that cost of compliance or capital expenditures for environmental control facilities required to meet environmental requirements will be material when compared with our overall costs and capital expenditures and, accordingly, will not have a material effect on our net earnings or competitive position.

Item 2. – Properties

General

     In October 2003, we moved our principal corporate offices, as well as the corporate offices for Worthington Cylinders and Worthington Steel, into a leased three-story office building in Columbus, Ohio. The prior corporate office space on Dearborn Drive now accommodates our Information Technology and Training Departments. As of May 31, 2004, we owned or leased a total of approximately 10,250,000 square feet of space for our operations, of which approximately 9,700,000 square feet is devoted to manufacturing, product distribution and sales offices. Our major leases contain renewal options for periods of up to ten years. For information concerning our rental obligations, see the discussion of contractual obligations under “Item 7. – Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Contractual Cash Obligations and Other Commercial Commitments” as well as “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note L – Operating Leases.” We believe that our distribution and office facilities are well maintained, are suitable and provide adequate space for our operations.

     Excluding our unconsolidated joint ventures, we have 44 manufacturing facilities and two warehouses. All of our facilities are well maintained and in good operating condition, and we believe they are sufficient to meet our current needs.

Processed Steel Products

     The Processed Steel Products segment operates 10 manufacturing facilities, all of which are owned. These facilities are located in Alabama, Indiana, Kentucky, Maryland, Michigan and Ohio (5). This segment also

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maintains a warehouse in Columbus, Ohio. This segment also includes Spartan, our consolidated joint venture in Michigan.

Metal Framing

     The Metal Framing segment operates 27 facilities. These facilities are located in Arizona (2), California (2), Colorado, Florida (4), Georgia (2), Hawaii, Illinois, Indiana (3), Kansas, Maryland, Massachusetts, New Jersey, Ohio (3), South Carolina, Texas (2) and Washington. Of these facilities, 13 are leased and 14 are owned. This segment also leases administrative offices in Pittsburgh and Blairsville, Pennsylvania.

Pressure Cylinders

     The Pressure Cylinders segment operates six fully-owned, manufacturing facilities. These facilities are located in Ohio (3), Austria, Canada and Portugal. This segment also operates an owned, consolidated joint venture facility in the Czech Republic and leases a manufacturing facility in Portugal.

Joint Ventures

     Our joint ventures operate 17 manufacturing facilities, including those mentioned above. These facilities are located in Ohio, Indiana, Maryland, Michigan (4), Missouri, Nevada, and Pennsylvania domestically, and in China, the Czech Republic, France, Mexico (2), Spain and the United Kingdom. Ten of these facilities are leased, and seven are owned, three of which are subject to mortgages in favor of the joint venture’s lender. See “Item 1. – Business – Joint Ventures.”

Item 3. – Legal Proceedings

     Various legal actions, which generally have arisen in the ordinary course of business, are pending against Worthington. None of this pending litigation, individually or collectively, is expected to have a material adverse effect on Worthington.

Item 4. – Submission of Matters to a Vote of Security Holders

     None.

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Supplemental Item. – Executive Officers of the Registrant

     The following table lists the names, positions held and ages of the Registrant’s executive officers as of May 31, 2004:

     John P. McConnell has served as Worthington Industries’ Chief Executive Officer since June 1993, as a director of Worthington Industries continuously since 1990 and as Chairman of the Board since September 1996.

     John S. Christie has served as President, Chief Operating Officer and a director of Worthington Industries continuously since June 1999. He became interim Chief Financial Officer of Worthington Industries in September 2003 and President and Chief Financial Officer in January 2004.

     Dale T. Brinkman has served as Vice President-Administration and General Counsel of Worthington Industries since 1998. He has also been Secretary of Worthington Industries since 2000 and served as Assistant Secretary from 1982 to 2000.

     Joe W. Harden has served as President, The Worthington Steel Company since February 2003. From February 1999 through February 2003, Mr. Harden served as President of Buckeye Steel Castings Company in Columbus, Ohio, which filed a voluntary petition under the Federal Bankruptcy Act in December 2002.

     Edmund L. Ponko, Jr. has served as President, Dietrich Industries, Inc. since June 2001. From 1981 through June 2001, he served Dietrich Industries, Inc. in various positions.

     Ralph V. Roberts has served as Senior Vice President-Marketing of Worthington Industries since January 2001. From June 1998 through January 2001, he served as President of The Worthington Steel Company. Prior to that time, Mr. Roberts served Worthington Industries in various positions including Vice President-Corporate Development and President of our WAVE joint venture.

     George P. Stoe has served as President, Worthington Cylinder Corporation since January 2003. Mr. Stoe served as President of Zinc Corporation of America, the nation’s largest zinc producer, located in Monaca, Pennsylvania, from November 2000 until December 2002. From April 1999 to November 2000, he served as President of Wise Alloys, LLC, a rolling mill and cast house beverage can recycling and coating operation.

     Virgil L. Winland has served as Senior Vice President-Manufacturing of Worthington Industries since January 2001. He has served in various positions with Worthington Industries since 1971, including President of Worthington Cylinder Corporation from June 1996 through January 2001.

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     Richard G. Welch has served as Controller of Worthington Industries since March 2000 and as its Assistant Controller from September 1999 to March 2000. Before joining Worthington Industries, Mr. Welch served in various accounting and financial reporting capacities with Time Warner Cable, a distributor of cable programming, including Assistant Controller from March 1999 through September 1999.

     Randal I. Rombeiro has served as Treasurer of Worthington Industries since November 2002 and as Assistant Treasurer from 1999 through November 2002. Before joining Worthington Industries, Mr. Rombeiro served as Assistant Treasurer with Mettler-Toledo International, Inc., a global supplier of precision instruments and services, from 1998 to 1999.

     Executive officers serve at the pleasure of the directors. There are no family relationships among the Registrant’s executive officers or directors. No arrangements or understandings exist pursuant to which any individual has been, or is to be, selected as an executive officer.

PART II

Item 5. — Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

     The common shares of Worthington Industries, Inc. (“Worthington Industries”) trade on the New York Stock Exchange (“NYSE”) under the symbol “WOR” and are listed in most newspapers as “WorthgtnInd.” As of June 30, 2004, Worthington Industries had 8,718 registered shareholders. The following table sets forth (i) the low, high and closing prices for Worthington Industries’ common shares for each quarter of fiscal 2003 and fiscal 2004, and (ii) the cash dividends per share paid on Worthington Industries’ common shares during each quarter of fiscal 2003 and fiscal 2004.

Dividend Policy

     Dividends are declared at the discretion of the Board of Directors. Worthington Industries paid quarterly dividends of $0.16 per share in fiscal 2004. The Board of Directors reviews the dividend quarterly and establishes the dividend rate based upon Worthington’s financial condition, results of operations, capital requirements, current and projected cash flows, business prospects and other factors which they may deem relevant. While Worthington Industries has paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that this will continue in the future.

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Item 6. - Selected Financial Data

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Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Selected statements contained in this “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” as used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Annual Report on Form 10-K.

Overview

     The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements included in “Item 8. – Financial Statements and Supplementary Data.”

     Worthington Industries, Inc., together with its subsidiaries, is a diversified metal processing company that focuses on value-added steel processing and manufactured metal products. As of May 31, 2004, we operated 44 facilities worldwide, principally in three reportable business segments: Processed Steel Products, Metal Framing and Pressure Cylinders. We also held equity positions in eight joint ventures, which operated 17 facilities worldwide as of May 31, 2004.

     The results of our operations are mainly driven by two factors, demand and spread. While increased volumes positively impacted operating income during the fiscal year ended May 31, 2004 (“fiscal 2004”), spread, or the difference between the cost of the raw material and the selling price of the finished product, was the main reason for the improvement in the results this year compared to the prior year, with most of the benefit occurring in the fourth quarter. Generally, our operations are favorably impacted in a rising steel-price environment (which typically occurs when demand is increasing), as we are able to raise our selling prices due to the increased cost of steel while lower-priced inventory on hand flows through cost of goods sold. However, the opposite may occur when steel prices fall.

     While pricing in the steel industry historically has been unpredictable, the industry experienced unprecedented steel price increases during the second half of fiscal 2004 for three main reasons. First, the People’s Republic of China experienced strong growth in steel production, which required more raw materials. This contributed to U.S. shortages in the supply of steel scrap and coke, two key materials used in the manufacture of steel. Thus, prices soared for these commodities, in turn raising the cost of steel. Second, the weakened U.S. dollar and higher transportation costs made foreign steel more expensive than domestic steel, thereby reducing the supply of imports to the U.S. Finally, the consolidation of the steel industry reduced the availability of steel. Because of these conditions, obtaining steel was challenging, but our long-term relationships with the mills were advantageous.

     We strive to manage the peaks and valleys associated with rapid changes in steel pricing by effectively controlling inventory. This has been a critical focus for the last several years. With inventory levels consistently under 60 days during fiscal 2004, we reduced some of the benefit we might have realized in the year. We intend to continue to manage our inventory to reduce the negative impact from the downside of this cycle.

     Our focus over the last several years has been to improve our return on capital by investing in growth markets and products, consolidating facilities, and divesting non-strategic assets or those that were not delivering appropriate returns. Our plant consolidation plan, announced during January 2002, was substantially completed in fiscal 2004, and resulted in closed facilities and approximately $12.0 million in annualized savings. We also completed the integration of Unimast Incorporated (together with its subsidiaries, “Unimast”), acquired in July 2002, into our Metal Framing segment, which is expected to generate future savings.

     On May 27, 2004, we signed an agreement to sell our Decatur, Alabama, steel-processing facility and its cold-rolling assets to Nucor Corporation (“Nucor”) for $82.0 million cash while retaining the slitting and cut-to-length assets and net working capital associated with this facility. This transaction closed effective as of August 1, 2004.

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     Equity income from our six unconsolidated joint ventures was up significantly in fiscal 2004. All six joint ventures increased net income, including record years for WAVE, TWB, Acerex and Aegis. Joint venture income has been a consistent and significant contributor to our profitability. Collectively, the unconsolidated joint ventures generated $604.2 million in annual sales, which are not reflected in our consolidated sales. More importantly, over the last three years, our aggregate annual return on the investment in these joint ventures has averaged 36%. The joint ventures are also a source of cash to us, with aggregate annual distributions averaging more than $20.0 million over the same time period. Because of our success with joint ventures, we are regularly looking for additional opportunities where we can bring together complementary skill sets and minimize our risk and capital requirements.

     We formed our newest joint venture during fiscal 2004. On June 27, 2003, Worthington Steel joined with Bainbridge Steel, LLC (“Bainbridge”), an affiliate of Viking Industries LLC, a qualified minority business enterprise (“MBE”), to create Viking & Worthington Steel Enterprise, LLC (“VWS”), an unconsolidated joint venture in which Worthington Steel has a 49% interest and

     Bainbridge has a 51% interest. VWS purchased substantially all of the assets of Valley City Steel, LLC in Valley City, Ohio, for approximately $5.7 million. Bainbridge manages the operations of the joint venture, and Worthington Steel provides assistance in operations, selling and marketing. VWS operates as an MBE.

Results of Operations

Fiscal 2004 Compared to Fiscal 2003

 Consolidated Operations

     The following table presents our consolidated operating results for the fiscal years indicated:

     Net earnings increased $11.6 million to $86.8 million in fiscal 2004, from $75.2 million for the year ended May 31, 2003 (“fiscal 2003”). Fiscal 2004 diluted earnings per share increased $0.13 to $1.00 per share from $0.87 per share in fiscal 2003.

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     Net sales increased 7%, or $159.2 million, to $2,379.1 million in fiscal 2004 from $2,219.9 million in fiscal 2003. In the second half of fiscal 2004, we raised our selling prices to meet the dramatic increase in steel prices. This accounted for approximately 60% of the year-over-year increase in sales. The remaining increase was primarily due to an increase in volumes in Metal Framing caused by the acquisition of Unimast, which closed July 31, 2002, and contributed two additional months of sales in fiscal 2004 compared to fiscal 2003.

     Gross margin increased 24%, or $72.5 million, to $375.4 million in fiscal 2004 from $302.9 million in fiscal 2003. Favorable pricing accounted for $64.5 million of the increase with higher volumes contributing an additional $26.6 million. These increases were partially offset by an $18.6 million increase in direct labor and manufacturing expenses due to higher profit sharing and the addition of Unimast. Collectively, these factors increased gross margin as a percentage of net sales to 15.8% in fiscal 2004 from 13.6% in fiscal 2003.

     Selling, general and administrative (“SG&A”) expense remained a consistent 8.2% of net sales. In total, SG&A expense increased $13.1 million, to $195.8 million in fiscal 2004 from $182.7 million in fiscal 2003. This was mainly due to a $6.3 million increase in profit sharing expense, which was up significantly due to record earnings. In addition, the acquisition of Unimast, an increase in bad debt expense and higher professional fees contributed to the increase. The increase in bad debt expense is a result of higher receivables balances, and the increase in professional fees is related to our implementation of a new enterprise resource planning system. For more information on the system implementation, see the discussion on capital spending in the Liquidity and Capital Resources section.

     Impairment charges and other for fiscal 2004 includes a $67.4 million pre-tax charge in fiscal 2004 for the impairment of certain assets and other related costs at the Decatur, Alabama, steel-processing facility and a $2.0 million pre-tax charge in fiscal 2004 for the impairment of certain assets related to the European operations of Pressure Cylinders. In fiscal 2003, a favorable adjustment of $5.6 million was made to the fiscal 2002 plant consolidation restructuring charge. Refer to “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note N – Impairment Charges and Restructuring Expense” for more information.

     Miscellaneous expense decreased $5.6 million from fiscal 2003 due in part to a $3.6 million gain from the settlement of a hedge position with the Enron bankruptcy estate. In addition, lower usage of the accounts receivable securitization facility during fiscal 2004 resulted in a $1.7 million reduction in related fees.

     A nonrecurring loss of $5.4 million was recognized in fiscal 2003 for potential liabilities relating to certain workers’ compensation claims of Buckeye Steel Castings Company (“Buckeye Steel”) for the period prior to its sale by Worthington in fiscal 1999, when a Worthington guaranty was in place.

     Interest expense decreased 10%, or $2.6 million, to $22.2 million in fiscal 2004 from $24.8 million in fiscal 2003 due to lower average debt balances and lower average interest rates.

     Equity in net income of unconsolidated affiliates increased 37%, or $11.1 million, to $41.1 million in fiscal 2004 from $30.0 million in fiscal 2003. The main reasons for the increase were higher net sales and margins at each of our six unconsolidated affiliates. WAVE, TWB, Acerex and Aegis all had record years.

     Our effective tax rate was 31.9% for fiscal 2004. During fiscal 2004, a $7.7 million credit was recorded to income tax expense, comprised of a $6.3 million credit for the favorable resolution of certain tax audits and a $1.4 million credit for an adjustment to deferred taxes. Excluding this $7.7 million credit, the effective tax rate was 38.0%. This increase from 36.5% in fiscal 2003 was due to higher state and local tax rates and a change in our mix of income.

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Segment Operations

     Processed Steel Products

     Our Processed Steel Products segment represents approximately 60% of consolidated net sales. Its results are significantly impacted by the automotive industry, which accounts for approximately 60% of its net sales, and the steel pricing environment. With the Big 3 automotive production volumes down from fiscal 2003, our volumes have decreased as well. However, the increased demand for steel in the latter part of fiscal 2004 led to higher steel prices and an environment that enabled us to significantly improve the spread between our selling prices and material costs, which resulted in a 14% increase in our gross margin.

     On May 27, 2004, we signed an agreement to sell our Decatur, Alabama, steel-processing facility and its cold-rolling assets to Nucor for $82.0 million cash (the “Decatur Sale Transaction”). This transaction closed as of August 1, 2004. The Decatur assets sold include the land and buildings, the four-stand tandem cold mill, the temper mill, the pickle line and the annealing furnaces. The sale excluded the slitting and cut-to-length assets and net working capital. We will continue to serve customers requiring steel-processing services in our core business of slitting and cutting-to-length at the current site under a long-term building lease with Nucor. Both companies are working closely to provide current customers a seamless transition and uninterrupted supply. The repositioning of our efforts to serve the growing southeastern market will now enable us to focus on our core value-added processing strengths supported by a supply relationship with Nucor, one of our country’s strongest steel producers.

     As a result of the sale agreement, we recorded a $67.4 million pre-tax charge during our fourth quarter ended May 31, 2004, primarily for the impairment of assets at the Decatur facility. All but an estimated $0.8 million of the pre-tax charge was non-cash. An additional pre-tax charge, estimated at $5.7 million, mainly relating to contract termination costs will be recognized during the first quarter of fiscal 2005 ending August 31, 2004.

     The following table presents a summary of operating results for the Processed Steel Products segment for the fiscal years indicated:

     Operating income decreased $63.0 million, to $18.0 million in fiscal 2004 from $81.0 million in fiscal 2003. The decline was due to the $67.4 million impairment and other charge for the Decatur sale transaction recorded in fiscal 2004 versus the $8.7 million restructuring credit recorded in fiscal 2003. Excluding the effect of the impairment charges and other line item from each year, operating income increased $13.1 million, to $85.4 million in fiscal 2004 from $72.3 million in fiscal 2003. A $28.1 million favorable impact to operating income resulted from an increase in the spread between selling prices and material costs, as higher average selling prices were matched against lower-cost inventory. This, however, was reduced by an $8.0 million increase in SG&A expense, a $5.2 million increase in labor and manufacturing expenses and a slight decrease in volume, primarily as a result of a drop in tolling tons. SG&A expense as a percentage of net sales increased to 6.5% in fiscal 2004 from 6.0% in fiscal 2003, reflecting higher profit sharing and bonus expense and an increase in bad debt expense. The $5.2 million increase in labor and manufacturing expense is primarily due to increased profit sharing expense.

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     Metal Framing

     In fiscal 2004, our Metal Framing segment posted its best performance ever. From August 2002 until the third quarter of fiscal 2004, we experienced a depressed commercial construction market and deteriorating spreads between average selling prices and material costs. In the first half of fiscal 2004, we also incurred approximately $4.0 million of unanticipated integration costs related to the Unimast acquisition, primarily for temporary labor and repairs and maintenance of equipment and facilities. During the third quarter of fiscal 2004, we began to realize synergies from the acquisition and, aided by an improving economy, spreads widened and demand began to pick up. This trend continued into the fourth quarter of fiscal 2004 as spreads improved dramatically and volume continued to increase. Through the integration, we were able to maintain the combined market shares of Dietrich and Unimast.

     The following table presents a summary of operating results for the Metal Framing segment for the fiscal years indicated:

     Operating income increased $41.3 million, to a record $63.8 million in fiscal 2004 from $22.5 million in fiscal 2003. A volume increase of 13% included the impact of twelve months of Unimast activity in fiscal 2004 compared to only ten months during fiscal 2003, and was better than the 8% improvement in the U.S. Census Bureau’s index of office construction. Average selling prices increased 9% and, as a result, net sales increased 23%, or $122.6 million, to $662.0 million in fiscal 2004 from $539.4 million in fiscal 2003. Gross margin increased 54% to $133.8 million from $87.0 million in fiscal 2003 mostly due to an increase in the spread between average selling prices and material costs and the volume increase mentioned above. Gross margin as a percentage of net sales increased to 20.2% in fiscal 2004 from 16.1% in fiscal 2003. Even though SG&A expense increased $7.1 million, it decreased as a percentage of net sales to 10.6% in fiscal 2004 from 11.7% in fiscal 2003 due to the significant increase in net sales. SG&A expense increased primarily due to a $3.4 million increase in profit sharing and bonus expense related to higher income and a $3.1 million increase in wages due mainly to the Unimast acquisition. In addition, a $1.6 million restructuring charge was recorded during the second quarter of fiscal 2003. The combined impact of the factors discussed above was an increase in operating income as a percentage of net sales to 9.6% in fiscal 2004 from 4.2% in fiscal 2003.

     Pressure Cylinders

     We consider the pressure cylinders market to be stable. While we have seen reduced demand for certain liquefied petroleum gas (“LPG”) cylinders during fiscal 2004 and 2003 due to the diminishing impact of the regulations effective April 2002 requiring overfill prevention devices on these cylinders, the impact has not been as significant as originally expected. Increases in total North American unit sales, which represent approximately 80% of total units sales, were offset by declines at our European facilities where the strong Euro has made it unattractive for our customers to export their products. We have had success in the European market with our high-pressure and refrigerant cylinders, but we have struggled with LPG cylinder sales due to overcapacity and declining demand. As a result, an impairment charge of $2.0 million on certain of our European LPG assets was recorded during the fourth

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quarter of fiscal 2004. Despite the charge, this segment continues to provide consistent and excellent profitability and returns on capital.

     The following table presents a summary of operating results for the Pressure Cylinders segment for the fiscal years indicated:

     Operating income decreased 9%, or $2.9 million, to $29.4 million in fiscal 2004 from $32.3 million in fiscal 2003. Excluding the impairment charges and other from each year, operating income decreased $2.3 million, to $31.4 million in fiscal 2004 from $33.7 million in fiscal 2003. Net sales increased 2%, or $6.9 million, to $328.7 million in fiscal 2004 from $321.8 million in fiscal 2003. This increase was primarily due to the benefit of a $12.0 million gain related to the translation of European sales to U.S. dollars, partially offset by a decline in the average selling price of steel portable and refrigerant cylinders in North America. Higher unit sales in North America were offset by lower unit sales in Europe. Gross margin was slightly lower than in fiscal 2003 because of higher labor and manufacturing expenses in Europe and lower average selling prices in North America, partially offset by favorable pricing in Europe. Operating income was minimally impacted by the favorable exchange rate. The previously mentioned factors decreased operating income as a percentage of net sales to 8.9% in fiscal 2004 from 10.0% in fiscal 2003.

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Fiscal 2003 Compared to Fiscal 2002

  Consolidated Operations

     The following table presents our consolidated operating results for the fiscal years indicated:

     Net earnings increased $68.7 million to $75.2 million in fiscal 2003, from $6.5 million in the year ended May 31, 2002 (“fiscal 2002”). Fiscal 2003 diluted earnings per share increased $0.79 per share to $0.87 per share from diluted earnings per share of $0.08 in fiscal 2002. The increase in fiscal 2003 net earnings primarily was due to the inclusion of two significant charges in fiscal 2002 results: a $64.6 million pre-tax restructuring expense and a $21.2 million pre-tax charge related to the impairment of certain assets. See below for a detailed description of these items.

     On July 31, 2002, we acquired the stock of Unimast, a wholly-owned subsidiary of WHX Corporation, for $114.7 million in cash (net of cash acquired) and $9.3 million of assumed debt. Unimast manufactures construction steel products, including light gauge steel framing, plastering steel and trim accessories, and serves the construction industry. The results of Unimast have been included in our Metal Framing segment since the acquisition date.

     Net sales increased 27%, or $474.9 million, to $2,219.9 million in fiscal 2003 from $1,745.0 million in fiscal 2002. The increase primarily was due to the addition of Unimast and higher average selling prices in Metal Framing combined with higher average selling prices and volumes in Processed Steel Products.

     Gross margin increased 14%, or $38.1 million, to $302.9 million in fiscal 2003 from $264.8 million in fiscal 2002. Higher volumes, primarily in Metal Framing due to the Unimast acquisition, contributed $94.2 million. However, the improvement in gross margin was partially offset by an 8%, or $41.9 million, increase in conversion expenses. Furthermore, the net impact of higher material costs in excess of higher average selling prices reduced gross margin by $14.2 million. Together, these factors decreased gross margin as a percentage of net sales to 13.6% in fiscal 2003 from 15.2% in fiscal 2002.

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     SG&A expense decreased as a percentage of net sales to 8.2% in fiscal 2003 from 9.5% in fiscal 2002. In total, SG&A expense increased 10%, or $16.8 million, to $182.7 million in fiscal 2003 from $165.9 million in fiscal 2002. The main reason for the increase was the $14.7 million in additional SG&A expenses due to the acquisition of Unimast. Most of this increase was attributable to compensation and benefits costs. In addition, the prior year results included the favorable impact of $3.7 million in legal settlements. A $10.2 million decrease in bad debt expense partially offset the overall increase.

     During the third quarter ended February 28, 2002 (the “third quarter”) of fiscal 2002, we recorded a $64.6 million pre-tax restructuring charge as a result of the consolidation plan announced in January 2002. This plan included the reduction of approximately 542 employees, the closing of six of our facilities and the restructuring of two other facilities. The eight facilities impacted by the consolidation plan affected each of our three business segments - - Processed Steel Products (4), Metal Framing (1) and Pressure Cylinders (3). In our Processed Steel Products segment, we closed facilities located in Malvern, Pennsylvania, and Jackson, Michigan, and we reduced overhead costs at our facility in Louisville, Kentucky. We converted the Rock Hill, South Carolina, facility into a Metal Framing facility serving both Metal Framing and Processed Steel Products. The Metal Framing facility in Fredericksburg, Virginia, was closed and its operations moved to Rock Hill. In our Pressure Cylinders segment, we discontinued the operations of two partnerships in Itu, Brazil, and we closed a production facility in Claremore, Oklahoma. See “Item 8. – Financial Statements and Supplementary Data – Note N – Impairment Charges and Restructuring Expense” for more information.

     During the second quarter ended November 30, 2002 (the “second quarter”) of fiscal 2003, we recorded a $5.6 million favorable pre-tax adjustment to the original restructuring charge in fiscal 2002 mentioned above. This credit was the result of higher-than-estimated proceeds from the sale of real estate at our former facility in Malvern, Pennsylvania, and the net reduction of previously established reserves, partially offset by estimated charges for the announced closure of three additional facilities. See “Item 8. – Financial Statements and Supplementary Data – Note N – Impairment Charges and Restructuring Expense” for more information.

     As part of our sale of Buckeye Steel in the fiscal year ended May 31, 1999 (“fiscal 1999”), the acquirer assumed certain workers’ compensation liabilities which arose while our workers’ compensation guarantee was in place. The acquirer agreed to indemnify us against claims made on our guarantee related to the assumed workers’ compensation claims. During the second quarter of fiscal 2003, economic conditions caused Buckeye Steel to cease operations and file for bankruptcy thereby raising the issue of the acquirer’s ability to fulfill its obligations. As a result, we recorded a $5.4 million reserve for the estimated potential liability relating to these workers’ compensation claims.

     During the third quarter of fiscal 2002, we also recorded a $21.2 million pre-tax charge for the impairment of certain preferred stock and subordinated debt that 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 deteriorated, each of the issuers encountered difficulty making scheduled payments under the terms of the preferred stock and subordinated debt.

     Interest expense increased 9%, or $2.1 million, to $24.8 million in fiscal 2003 from $22.7 million in fiscal 2002 due to higher average short-term debt balances, partially offset by lower average interest rates.

     Equity in net income of unconsolidated affiliates increased 30%, or $6.9 million, to $30.0 million in fiscal 2003 from $23.1 million in fiscal 2002. The main reasons for the increase were higher net sales at each unconsolidated affiliate and improved margins at WAVE, WSP and TWB. In addition, during fiscal 2003, TWB acquired the ownership interests of Rouge Steel, LTV Steel and Bethlehem Steel, thereby increasing our ownership interest from 33% to 50% and resulting in an increase in equity in net income of unconsolidated affiliates of $0.8 million.

     Our effective tax rate of 36.5% in fiscal 2003 was unchanged from fiscal 2002.

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Segment Operations

     Processed Steel Products

     The following table presents a summary of operating results for the fiscal years indicated:

     Operating income increased $67.4 million, to $81.0 million in fiscal 2003 from $13.6 million in fiscal 2002. Most of the improvement was due to the $52.1 million restructuring expense included in fiscal 2002 results and the $8.7 million restructuring credit recorded in the second quarter of fiscal 2003. In addition, SG&A expense as a percentage of net sales declined to 6.0% in fiscal 2003 from 7.6% in fiscal 2002. This decrease of $5.7 million primarily was due to the reduction of $5.5 million in bad debt expense. However, despite higher net sales, the decline in the spread between selling prices and material costs decreased gross margin as a percentage of net sales to 11.4% in fiscal 2003 from 13.4% in fiscal 2002. Net sales rose 19%, or $210.7 million, to $1,343.4 million in fiscal 2003 from $1,132.7 million in fiscal 2002. Higher average selling prices, reflecting the rising cost of steel, increased net sales by $124.0 million. Increased shipments to most markets, particularly the automotive industry, contributed $86.7 million in additional net sales. The net result of the factors mentioned above was an increase in operating income as a percentage of net sales to 6.0% in fiscal 2003 from 1.2% in fiscal 2002.

     Metal Framing

     The following table presents a summary of operating results for the fiscal years indicated:

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     Operating income increased 18%, or $3.4 million, to $22.5 million in fiscal 2003 from $19.1 million in fiscal 2002 due to higher net sales. The combined impact of increased volumes, attributable to the Unimast acquisition, and higher average selling prices, which were instituted in response to rising raw material costs, resulted in an increase in net sales of 76%, or $233.4 million, to $539.4 million in fiscal 2003 from $306.0 million in fiscal 2002. Excluding Unimast, volumes actually decreased due to a weak commercial construction market. This volume decline, combined with the aforementioned increase in raw material costs, decreased gross margin as a percentage of net sales to 16.1% in fiscal 2003 from 19.5% in fiscal 2002. SG&A expense decreased as a percentage of net sales to 11.7% in fiscal 2003 from 12.9% in fiscal 2002. Overall, SG&A expense increased primarily due to the Unimast acquisition which added $14.7 million, comprised mainly of compensation and benefits expenses. In addition, a $1.6 million restructuring expense was recorded during the second quarter of fiscal 2003. These items partially offset the overall improvement in operating income. The combined impact of the factors discussed above was a decrease in operating income as a percentage of net sales to 4.2% in fiscal 2003 from 6.3% in fiscal 2002.

     Pressure Cylinders

     The following table presents a summary of operating results for the fiscal years indicated:

     Operating income increased 193%, or $21.3 million, to $32.3 million in fiscal 2003 from $11.0 million in fiscal 2002. The improvement primarily was due to higher net sales and the $10.7 million restructuring expense in fiscal 2002, partially offset by the $1.4 million restructuring expense from the second quarter of fiscal 2003. Net sales increased 10%, or $29.0 million, to $321.8 million in fiscal 2003 from $292.8 million in fiscal 2002. Higher European net sales, due to increased volumes and the strengthening of the Euro against the U.S. dollar, contributed $24.6 million to the increase. Strong domestic demand in fiscal 2003 for LPG cylinders increased net sales by $12.4 million and was driven by new regulations that required overfill prevention devices in most states on certain sizes of LPG cylinders. These regulations also positively impacted net sales upon their inception in the fourth quarter of fiscal 2002. Gross margin as a percentage of net sales increased to 20.6% in fiscal 2003 from 19.1% in fiscal 2002. Together, the previously mentioned factors increased operating income as a percentage of net sales to 10.0% in fiscal 2003 from 3.8% in fiscal 2002.

  Liquidity and Capital Resources

     In fiscal 2004, we generated $79.4 million in cash from operating activities, representing a $101.3 million decrease from fiscal 2003. The decrease primarily was due to an increase in net working capital partially offset by higher net earnings.

     Consolidated net working capital of $358.1 million at May 31, 2004 increased $170.0 million from May 31, 2003. The increase was due to a $179.9 million increase in receivables caused by higher selling prices and volumes. Lower usage of the accounts receivable securitization facility also contributed to the increase as usage of the facility declined to $60.0 million from $140.0 million at May 31, 2003. Additionally, inventory increased $94.1 million and accounts payable increased $162.4 million. These increases were driven by the higher volume of sales and significantly higher steel prices.

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     Our primary investing and financing activities during fiscal 2004 included disbursing $55.2 million in dividends to shareholders and spending $29.6 million on capital projects. These transactions were funded by the cash flows from our operations, $10.6 million in proceeds from the sale of common shares in connection with stock option exercises and $5.6 million from the sale of assets related to our restructuring efforts and the aforementioned sale of certain Metal Framing assets.

     Capital spending during fiscal 2004 included the following: $6.1 million in our Processed Steel Products segment; $10.3 million in our Metal Framing segment; $3.2 million in our Pressure Cylinders segment; and $10.0 million in Other. In our Other category, $5.2 million of the $10.0 million in capital spending was related to our new corporate headquarters. In addition, we spent $3.9 million as we began implementing a new enterprise resource planning (“ERP”) system. Over the three-year life of this ERP system implementation, we expect to incrementally spend approximately $35.0 million, with $21.0 million being capitalized and $14.0 million being charged to SG&A expense. For the fiscal year ending May 31, 2005, we expect to spend approximately $10.0 million, of which $6.0 million will be capitalized. Our annual capital spending, barring acquisitions, should remain at or below our annual depreciation expense.

     Our short-term liquidity needs are primarily served by a $190.0 million short-term trade accounts receivable securitization (“TARS”) facility, $45.0 million in short-term uncommitted credit lines and a $435.0 million long-term revolving credit facility, which matures in May 2007. The long-term revolving credit facility serves as an informal committed backstop to the TARS facility and uncommitted credit lines while also providing additional credit capacity for general corporate purposes. Our decision to utilize the TARS facility and uncommitted lines versus the long-term revolving credit facility is dependent on the relative cost of capital obtained through each source.

     The TARS facility has been in place since November 2000 and renews every 364 days. The next renewal will occur in November 2004. Pursuant to the terms of the facility, certain of our subsidiaries sell their accounts receivable, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC sells, on a revolving basis, undivided ownership interests in this pool of accounts receivable to independent third parties. We retain an undivided interest in this pool and are subject to risk of loss based on the collectibility of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables past due, balances with foreign customers, concentrations over limits with specific customers, and certain reserve amounts, we believe additional risk of loss is minimal. Also because of these exclusions, no discount occurs on the sale, and no gain or loss is recorded. Facility fees of $1.6 million and $3.3 million were incurred during fiscal 2004 and fiscal 2003, respectively, and were recorded as miscellaneous expense. The book value of the retained portion of the pool of accounts receivable approximates fair value. We continue to service the accounts receivable. No servicing asset or liability has been recognized, as our cost to service the accounts receivable is expected to approximate the servicing income. As of May 31, 2004, a $60.0 million undivided interest in this pool had been sold, down from $140.0 million at May 31, 2003.

     During fiscal 2004, we increased our available short-term uncommitted lines of credit from $30.0 million with two banks to $45.0 million with three banks. The uncommitted lines of credit are extended to us on a discretionary basis. Because the outstanding principal amounts can be reset and adjusted daily, these lines typically provide us with the greatest amount of funding flexibility compared to our other sources of short-term capital. These lines supplement our short-term liquidity and allow us to reduce short-term borrowing costs. At May 31, 2004, we had no borrowings outstanding under the uncommitted lines of credit.

     Our $435.0 million long-term revolving credit facility, provided by a group of 15 banks, matures in May 2007. In July 2004, we amended this facility to increase the borrowing limit and eliminate certain covenants. As a result of the restructuring, the facility size was increased from $235.0 million to $435.0 million with the same group of 15 banks. The increase in the facility was necessitated by several factors including higher working capital needs, capital expenditures related to our ERP implementation, and potential acquisitions. In addition, the larger facility significantly enhances our flexibility related to the upcoming long-term note maturity on May 15, 2006. At May 31, 2004, we had no borrowings outstanding under the revolving credit facility.

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     At May 31, 2004, our total debt was $288.4 million compared to $292.0 million at the end of fiscal 2003. Our debt to total capitalization ratio improved to 29.9% at May 31, 2004, from 31.5% at the end of fiscal 2003 due to higher net earnings in fiscal 2004.

     We expect to continue to assess acquisition opportunities as they arise. Additional financing may be required if we decide to make additional acquisitions. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms when required. Absent any other acquisitions, we anticipate that cash flows from operations and unused borrowing capacity should be sufficient to fund expected normal operating costs, dividends, working capital, and capital expenditures for our existing businesses.

  Contractual Cash Obligations and Other Commercial Commitments

     The following table summarizes our contractual cash obligations as of May 31, 2004. Certain of these contractual obligations are reflected on our consolidated balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States.

     The following table summarizes our other commercial commitments as of May 31, 2004. Certain of these commercial commitments are reflected on our consolidated balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States.