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Table of Contents

 

LOGO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2014

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                to                               

Commission File Number 001-08399

WORTHINGTON INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Ohio

  

31-1189815

(State or other jurisdiction of incorporation or organization)

   (I.R.S. Employer Identification No.)

200 Old Wilson Bridge Road, Columbus, Ohio

  

43085

(Address of principal executive offices)

   (Zip Code)

 

(614) 438-3210

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x     NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x     NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date. On December 31, 2014, the number of Common Shares, without par value, issued and outstanding was 68,029,037.


Table of Contents

TABLE OF CONTENTS

 

Safe Harbor Statement

     ii   

Part I. Financial Information

  

Item 1.

   Financial Statements (Unaudited)   
  

Consolidated Balance Sheets –
November 30, 2014 and May 31, 2014

     1   
  

Consolidated Statements of Earnings –
Three and Six Months Ended November 30, 2014 and 2013

     2   
  

Consolidated Statements of Comprehensive Income –
Three and Six Months Ended November 30, 2014 and 2013

     3   
  

Consolidated Statements of Cash Flows –
Three and Six Months Ended November 30, 2014 and 2013

     4   
  

Notes to Consolidated Financial Statements

     5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      43   

Item 4.

   Controls and Procedures      43   

Part II. Other Information

  

Item 1.

   Legal Proceedings      44   

Item 1A.

   Risk Factors     

44

  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds     

44

  

Item 3.

   Defaults Upon Senior Securities (Not applicable)      45   

Item 4.

   Mine Safety Disclosures (Not applicable)      45   

Item 5.

   Other Information (Not applicable)      45   

Item 6.

   Exhibits      46   

Signatures

     48   

Index to Exhibits

     49   

 

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SAFE HARBOR STATEMENT

Selected statements contained in this Quarterly Report on Form 10-Q, including, without limitation, in “PART I – Item 2. – 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 (the “Act”). Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events. These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. These forward-looking statements include, without limitation, statements relating to:

   

outlook, strategy or business plans;

   

the ability to correct performance issues at operations;

   

future or expected growth, forward momentum, performance, sales, volumes, cash flows, earnings, balance sheet strengths, debt, financial condition or other financial measures;

   

projected profitability potential, capacity, and working capital needs;

   

demand trends for us or our markets;

   

additions to product lines and opportunities to participate in new markets;

   

pricing trends for raw materials and finished goods and the impact of pricing changes;

   

anticipated capital expenditures and asset sales;

   

anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof;

   

the ability to make acquisitions and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, newly-created joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations;

   

the alignment of operations with demand;

   

the ability to operate profitably and generate cash in down markets;

   

the ability to maintain margins and capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets;

   

expectations for Company and customer inventories, jobs and orders;

   

expectations for the economy and markets or improvements therein;

   

expected benefits from transformation plans, cost reduction efforts and other new initiatives;

   

expectations for increasing volatility or improving and sustaining earnings, earnings potential, margins or shareholder value;

   

effects of judicial rulings; and

   

other non-historical matters.

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, those that follow:

   

the effect of national, regional and worldwide economic conditions generally and within major product markets, including a recurrent slowing economy;

   

the effect of conditions in national and worldwide financial markets;

   

product demand and pricing;

   

changes in product mix, product substitution and market acceptance of our products;

   

fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities and other items required by operations;

   

effects of facility closures and the consolidation of operations;

   

the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction and other industries in which we participate;

   

failure to maintain appropriate levels of inventories;

   

financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom we do business;

   

the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts;

   

the ability to realize other cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from transformation initiatives, on a timely basis;

   

the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom;

 

ii


Table of Contents
   

capacity levels and efficiencies, within facilities, within major product markets and within the industry as a whole;

   

the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, acts of war or terrorist activities or other causes;

   

changes in customer demand, inventories, spending patterns, product choices, and supplier choices;

   

risks associated with doing business internationally, including economic, political and social instability, foreign currency exposure and the acceptance of our products in new markets;

   

the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment;

   

the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters;

   

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 the outcome of judicial and governmental agency rulings as well as the impact of governmental regulations, both in the United States and abroad, including those adopted by the United States Securities and Exchange Commission and other governmental agencies as contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;

   

the effect of changes to healthcare laws in the United States, which may increase our healthcare and other costs and negatively impact our consolidated financial results and operations; and

   

other risks described from time to time in our filings with the United States Securities and Exchange Commission, including those described in “PART I – Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended May 31, 2014.

We note these factors for investors as contemplated by the Act. It is impossible to predict or identify all potential risk factors. Consequently, you should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Any forward-looking statements in this Quarterly Report on Form 10-Q are based on current information as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to correct or update any such statements in the future, except as required by applicable law.

 

iii


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. – Financial Statements

WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     November 30,
2014
     May 31,
2014
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 96,537       $ 190,079   

Receivables, less allowances of $2,997 and $3,043 at November 30, 2014 and May 31, 2014, respectively

     491,687         493,127   

Inventories:

     

Raw materials

     236,126         213,173   

Work in process

     118,796         105,872   

Finished products

     99,853         90,957   
  

 

 

    

 

 

 

Total inventories

     454,775         410,002   

Income taxes receivable

     13,757         5,438   

Assets held for sale

     28,264         32,235   

Deferred income taxes

     23,064         24,272   

Prepaid expenses and other current assets

     46,310         43,769   
  

 

 

    

 

 

 

Total current assets

     1,154,394         1,198,922   

Investments in unconsolidated affiliates

     194,686         179,113   

Goodwill

     283,418         251,093   

Other intangible assets, net of accumulated amortization of $45,500 and $35,506 at November 30, 2014 and May 31, 2014

     150,534         145,993   

Other assets

     22,450         22,399   

Property, plant & equipment:

     

Land

     15,238         15,260   

Buildings and improvements

     218,801         213,848   

Machinery and equipment

     853,219         848,889   

Construction in progress

     43,115         32,135   
  

 

 

    

 

 

 

Total property, plant & equipment

     1,130,373         1,110,132   

Less: accumulated depreciation

     628,464         611,271   
  

 

 

    

 

 

 

Property, plant and equipment, net

     501,909         498,861   
  

 

 

    

 

 

 

Total assets

   $ 2,307,391       $ 2,296,381   
  

 

 

    

 

 

 

Liabilities and equity

     

Current liabilities:

     

Accounts payable

   $ 324,886       $ 333,744   

Short-term borrowings

     10,769         10,362   

Accrued compensation, contributions to employee benefit plans and related taxes

     62,985         78,514   

Dividends payable

     13,010         11,044   

Other accrued items

     60,961         49,873   

Income taxes payable

     4,396         4,953   

Current maturities of long-term debt

     101,140         101,173   
  

 

 

    

 

 

 

Total current liabilities

     578,147         589,663   

Other liabilities

     62,297         76,426   

Distributions in excess of investment in unconsolidated affiliate

     59,576         59,287   

Long-term debt

     573,734         554,790   

Deferred income taxes

     62,629         71,333   
  

 

 

    

 

 

 

Total liabilities

     1,336,383         1,351,499   

Shareholders’ equity — controlling interest

     872,502         850,812   

Noncontrolling interest

     98,506         94,070   
  

 

 

    

 

 

 

Total equity

     971,008         944,882   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 2,307,391       $ 2,296,381   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2014     2013     2014     2013  

Net sales

   $ 871,012      $ 769,900      $ 1,733,426      $ 1,462,191   

Cost of goods sold

     745,789        641,668        1,478,696        1,222,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     125,223        128,232        254,730        239,196   

Selling, general and administrative expense

     77,308        78,395        152,563        149,935   

Impairment of long-lived assets

     14,235        30,734        16,185        35,375   

Restructuring and other expense (income)

     405        (1,182     398        (5,179

Joint venture transactions

     83        786        190        928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     33,192        19,499        85,394        58,137   

Other income (expense):

        

Miscellaneous income

     1,220        2,472        1,543        13,409   

Interest expense

     (9,676     (6,258     (19,192     (12,498

Equity in net income of unconsolidated affiliates

     22,319        21,086        50,243        48,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     47,055        36,799        117,988        107,085   

Income tax expense

     15,600        8,459        37,713        22,392   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     31,455        28,340        80,275        84,693   

Net earnings attributable to noncontrolling interest

     1,993        5,363        6,645        7,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to controlling interest

   $ 29,462      $ 22,977      $ 73,630      $ 77,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

        

Average common shares outstanding

     67,105        69,304        67,337        69,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to controlling interest

   $ 0.44      $ 0.33      $ 1.09      $ 1.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Average common shares outstanding

     69,181        71,826        69,780        72,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to controlling interest

   $ 0.43      $ 0.32      $ 1.06      $ 1.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding at end of period

     66,912        69,138        66,912        69,138   

Cash dividends declared per share

   $ 0.18      $ 0.15      $ 0.36      $ 0.30   

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
     2014     2013      2014     2013  

Net earnings

   $ 31,455      $ 28,340       $ 80,275      $ 84,693   

Other comprehensive income (loss):

         

Foreign currency translation

     (7,270     3,037         (16,862     2,551   

Cash flow hedges, net of tax

     (1,881     353         (920     3,704   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     (9,151     3,390         (17,782     6,255   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     22,304        31,730         62,493        90,948   

Comprehensive income attributable to noncontrolling interest

     1,559        5,679         5,031        6,458   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to controlling interest

   $ 20,745      $ 26,051       $ 57,462      $ 84,490   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
     2014     2013     2014     2013  

Operating activities

        

Net earnings

   $ 31,455      $ 28,340      $ 80,275      $ 84,693   

Adjustments to reconcile net earnings to net cash provided by operating activities:

        

Depreciation and amortization

     21,200        20,095        41,567        39,555   

Impairment of long-lived assets

     14,235        30,734        16,185        35,375   

Provision for deferred income taxes

     (5,492     (13,110     (6,027     (21,534

Bad debt expense (income)

     143        185        (60     (296

Equity in net income of unconsolidated affiliates, net of distributions

     (813     (3,506     (7,803     (9,421

Net loss (gain) on sale of assets and insurance

     2,370        (7,188     (460     (11,850

Stock-based compensation

     4,498        4,722        8,853        8,502   

Excess tax benefits - stock-based compensation

     (621     (1,534     (5,753     (5,832

Gain on previously held interest in TWB

     -        -        -        (11,000

Changes in assets and liabilities, net of impact of acquisitions:

        

Receivables

     (6,916     7,574        5,836        15,229   

Inventories

     16,087        (21,838     (35,130     (21,323

Prepaid expenses and other current assets

     (5,232     4,072        (8,104     1,707   

Other assets

     3,095        139        3,216        575   

Accounts payable and accrued expenses

     (72,095     (23,922     (30,205     16,700   

Other liabilities

     (505     4,556        (6,496     2,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,409        29,319        55,894        123,783   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

        

Investment in property, plant and equipment

     (23,273     (17,060     (47,146     (30,414

Investment in notes receivable

     (2,300     -        (7,300     -   

Acquisitions, net of cash acquired

     (14,543     276        (51,093     53,233   

Distributions from (investments in) unconsolidated affiliates

     129        3,668        (3,671     9,223   

Proceeds from sale of assets and insurance

     921        16,086        1,186        23,733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     (39,066     2,970        (108,024     55,775   
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Net proceeds from (repayments of) short-term borrowings

     (196     (18,736     359        (70,277

Proceeds from long-term debt

     20,480        -        20,480        -   

Principal payments on long-term debt

     (511     (285     (813     (569

Proceeds from (payments for) issuance of common shares

     566        4,286        (454     6,487   

Excess tax benefits - stock-based compensation

     621        1,534        5,753        5,832   

Payments to noncontrolling interest

     -        (875     (2,867     (2,638

Repurchase of common shares

     (21,549     (19,800     (41,620     (50,316

Dividends paid

     (12,138     (10,407     (22,250     (10,407
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (12,727     (44,283     (41,412     (121,888
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (50,384     (11,994     (93,542     57,670   

Cash and cash equivalents at beginning of period

     146,921        121,049        190,079        51,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 96,537      $ 109,055      $ 96,537      $ 109,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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WORTHINGTON INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – Basis of Presentation

The consolidated financial statements include the accounts of Worthington Industries, Inc. and consolidated subsidiaries (collectively, “we,” “our,” “Worthington,” or the “Company”). Investments in unconsolidated affiliates are accounted for using the equity method. Significant intercompany accounts and transactions are eliminated.

dHybrid Systems, LLC (“dHybrid”), Spartan Steel Coating, LLC (“Spartan”), TWB Company, L.L.C. (“TWB”), Worthington Arıtaş Basınçlı Kaplar Sanayi (“Worthington Aritas”), Worthington Energy Innovations, LLC (“WEI”), and Worthington Nitin Cylinders Limited (“Worthington Nitin Cylinders”) in which we own controlling interests of 79.59%, 52%, 55%, 75%, 75%, and 60%, respectively, are consolidated with the equity owned by the other joint venture members shown as noncontrolling interest in our consolidated balance sheets, and the other joint venture members’ portions of net earnings and other comprehensive income (loss) shown as net earnings or comprehensive income attributable to noncontrolling interest in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively.

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair presentation of the results of operations of these interim periods, have been included. Operating results for the three and six months ended November 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2015 (“fiscal 2015”). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended May 31, 2014 (“fiscal 2014”) of Worthington Industries, Inc. (the “2014 Form 10-K”).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards

In March 2013, amended accounting guidance was issued regarding the accounting for cumulative translation adjustment. The amended guidance specifies that a cumulative translation adjustment should be released from earnings when an entity ceases to have a controlling financial interest in a subsidiary or a group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment attributable to the investment would be recognized in earnings upon sale of the investment. The amended guidance is effective prospectively for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2013. Early adoption is permitted. The adoption of this amended accounting guidance on June 1, 2014 did not have a material impact on our consolidated financial position or results of operations.

In May 2014, amended accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The amended guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The amended guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are in the process of evaluating the effect this guidance will have on our consolidated financial position and results of operations. The amended guidance permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method nor have we determined the effect of the amended guidance on our ongoing financial reporting.

 

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NOTE B – Investments in Unconsolidated Affiliates

Our investments in affiliated companies that we do not control, either through majority ownership or otherwise, are accounted for using the equity method. These include ArtiFlex Manufacturing, LLC (“ArtiFlex”) (50%), Clarkwestern Dietrich Building Systems LLC (“ClarkDietrich”) (25%), Samuel Steel Pickling Company (31.25%), Serviacero Planos, S. de R. L. de C.V. (“Serviacero”) (50%), Worthington Armstrong Venture (“WAVE”) (50%), Worthington Specialty Processing (“WSP”) (51%), and Zhejiang Nisshin Worthington Precision Specialty Steel Co., Ltd. (10%). WSP is considered to be jointly controlled and not consolidated due to substantive participating rights of the minority partner.

We received distributions from unconsolidated affiliates totaling $42,569,000 during the six months ended November 30, 2014. We have received cumulative distributions from WAVE in excess of our investment balance totaling $59,576,000 at November 30, 2014. In accordance with the applicable accounting guidance, these excess distributions are reclassified to the liabilities section of our consolidated balance sheet. We will continue to record our equity in the net income of WAVE as a debit to the investment account, and if it becomes positive, it will again be shown as an asset on our consolidated balance sheet. If it becomes obvious that any excess distribution may not be returned (upon joint venture liquidation or otherwise), we will recognize any balance classified as a liability as income immediately.

We use the “cumulative earnings” approach for determining cash flow presentation of distributions from our unconsolidated joint ventures. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions exceed our portion of the cumulative equity in the net earnings of the joint venture, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows. During the six months ended November 30, 2014, we received excess distributions from ClarkDietrich of $129,000.

Combined financial information for our unconsolidated affiliates is summarized as follows:

 

(in thousands)    November 30,
2014
     May 31,
2014
 

Cash

   $ 53,333       $ 52,997   

Receivable from member (1)

     8,635         12,717   

Other current assets

     470,266         454,417   

Noncurrent assets

     290,261         294,001   
  

 

 

    

 

 

 

Total assets

   $ 822,495       $ 814,132   
  

 

 

    

 

 

 

Current liabilities

   $ 156,959       $ 128,595   

Short-term borrowings

     16,178         40,992   

Current maturities of long-term debt

     4,460         4,510   

Long-term debt

     266,107         268,350   

Other noncurrent liabilities

     18,664         20,217   

Equity

     360,127         351,468   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 822,495       $ 814,132   
  

 

 

    

 

 

 

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
(in thousands)    2014      2013      2014      2013  

Net sales

   $ 388,712       $ 357,236       $ 781,262       $ 780,717   

Gross margin

     76,193         76,068         164,945         165,882   

Operating income

     49,864         51,532         113,343         116,072   

Depreciation and amortization

     8,983         9,104         18,105         19,441   

Interest expense

     2,173         2,233         4,335         4,456   

Income tax expense

     2,799         2,862         5,552         5,892   

Net earnings

     44,490         46,149         103,930         105,783   

 

 

(1)

Represents cash owed from a joint venture member as a result of centralized cash management.

 

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The financial results of TWB have been included in the amounts presented in the tables above through July 31, 2013. On July 31, 2013, we completed the acquisition of an additional 10% interest in TWB. As a result, TWB’s results have been consolidated within Steel Processing since that date with the minority member’s portion of earnings eliminated within earnings attributable to noncontrolling interest.

NOTE C – Impairment of Long-Lived Assets

During the second quarter of fiscal 2015, we determined that indicators of impairment were present at the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, due to current and projected operating losses. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value, resulting in an impairment charge of $3,221,000 during the three months ended November 30, 2014.

During the second quarter of fiscal 2015, management committed to a plan to sell certain non-core Engineered Cabs assets. As all of the criteria for classification as assets held for sale were met, the net assets of the business have been presented separately as assets held for sale in our consolidated balance sheet as of November 30, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell, resulting in an impairment charge of $2,389,000 during the three months ended November 30, 2014.

During the second quarter of fiscal 2015, we determined that indicators of impairment were present at the Company’s military construction business. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value, resulting in an impairment charge of $1,179,000 during the three months ended November 30, 2014, which represents the remaining book value of the asset group.

During the fourth quarter of fiscal 2014, management committed to a plan to sell the Company’s 60%-owned consolidated joint venture in India, Worthington Nitin Cylinders. As all of the criteria for classification as assets held for sale were met, the net assets of the business were presented separately as assets held for sale in our consolidated balance sheet as of May 31, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell as of May 31, 2014. As a result of changes in facts and circumstances related to the planned sale of Worthington Nitin Cylinders during the second quarter of fiscal 2015, the Company reassessed the fair value of the business and determined that the remaining book value should be written off resulting in an impairment charge of $6,346,000 during the three months ended November 30, 2014.

During the fourth quarter of fiscal 2014, management committed to a plan to sell certain non-core Steel Processing assets. As all of the criteria for classification as assets held for sale were met, the net assets of the business have been presented separately as assets held for sale in our consolidated balance sheets as of November 30, 2014 and May 31, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell as of May 31, 2014. As a result of changes in facts and circumstances related to the planned sale, the Company reassessed the fair value of the business resulting in additional impairment charges totaling $3,050,000 during the six months ended November 30, 2014.

NOTE D – Restructuring and Other Expense

In fiscal 2008, we initiated a Transformation Plan (the “Transformation Plan”) with the overall goal to improve our sustainable earnings potential, asset utilization and operational performance. The Transformation Plan focuses on cost reduction, margin expansion and organizational capability improvements and, in the process, seeks to drive excellence in three core competencies: sales; operations; and supply chain management. The Transformation Plan is comprehensive in scope and includes aggressive diagnostic and implementation phases. When this process began, we retained a consulting firm to assist in the development and implementation of the Transformation Plan. As the Transformation Plan progressed, we formed internal teams dedicated to this effort, and they ultimately assumed full responsibility for executing the Transformation Plan. Although the consulting firm was again engaged as we rolled out the Transformation Plan in our Pressure Cylinders operating segment, most of the work is now being done by

 

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our internal teams. These internal teams are now an integral part of our business. The Transformation teams will continue to monitor performance metrics and new processes instituted across our transformed operations and drive continuous improvements in all areas of our operations. The expenses related to these teams have been included in selling, general and administrative (“SG&A”) expense since the beginning of fiscal 2013.

To date, we have completed the transformation phases in each of the core facilities within our Steel Processing operating segment, including the facilities of our Mexican joint venture, Serviacero. We also substantially completed the transformation phases at our metal framing facilities prior to their contribution to ClarkDietrich. Transformation efforts within our Pressure Cylinders and Engineered Cabs operating segments, which began during the first quarter of fiscal 2012 and the first quarter of fiscal 2013, respectively, are ongoing.

A progression of the liabilities associated with our restructuring activities, combined with a reconciliation to the restructuring and other expense financial statement caption in our consolidated statement of earnings for the six months ended November 30, 2014 is summarized as follows:

 

(in thousands)    Beginning
Balance
     Expense
(Income)
    Payments     Adjustments      Ending
Balance
 

Early retirement and severance

   $ 6,495       $ (30   $ (3,852   $ 30       $ 2,643   

Facility exit and other costs

     534         618        (932     210         430   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ 7,029         588      $ (4,784   $ 240       $ 3,073   
  

 

 

      

 

 

   

 

 

    

 

 

 

Less: joint venture transactions

        (190       
     

 

 

        

Restructuring and other expense

      $ 398          
     

 

 

        

Approximately $2,753,000 of the total liability as of November 30, 2014 is expected to be paid in the next twelve months. The remaining liability, which consists of lease termination costs and certain severance benefits, will be paid through September 2016.

NOTE E – Contingent Liabilities

We are defendants 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 our consolidated financial position or future results of operations. We believe that environmental issues will not have a material effect on our capital expenditures, consolidated financial position or future results of operations.

Insurance Recoveries

On August 19, 2013, a fire occurred at our Pressure Cylinders facility in Kienberg, Austria, in the building that houses the massing process in the production of acetylene cylinders. The other portions of the Austrian facility were not damaged; however, the massing process building sustained extensive damage and was rendered inoperable. Additionally, we have incurred incremental business interruption costs. The Company has business interruption and property damage insurance and, as a result, the fire did not have a material adverse impact on the Company’s consolidated financial results.

During the second quarter of fiscal 2015, the Company received proceeds of $1,089,000, representing advance payments for the replacement value of damaged equipment. These proceeds were in excess of the $243,000 remaining book value of the assets, resulting in a gain of $846,000 within miscellaneous income in our consolidated statement of earnings for the six months ended November 30, 2014.

Total proceeds received related to insurance claims since the date of loss have been as follows:

 

(in thousands)       

Property and equipment

   $ 6,780   

Business interruption

     3,940   

Other expenses

     1,001   
  

 

 

 

Total insurance proceeds

   $ 11,721   
  

 

 

 

 

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The proceeds for business interruption relate to the loss of profits since the date of the fire and have been recorded as a reduction of manufacturing expense, including $1,072,000 during the six months ended November 30, 2014. The proceeds for other expenses represent reimbursement for incremental expenses related to the fire and were recorded as an offset to manufacturing expense, including $256,000 during the six months ended November 30, 2014.

NOTE F – Guarantees

We do not have guarantees that we believe are reasonably likely to have a material current or future effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. However, as of November 30, 2014, we were party to an operating lease for an aircraft in which we have guaranteed a residual value at the termination of the lease. The maximum obligation under the terms of this guarantee was approximately $12,395,000 at November 30, 2014. We have also guaranteed the repayment of a $2,500,000 term loan entered into by one of our unconsolidated affiliates, ArtiFlex. Based on current facts and circumstances, we have estimated the likelihood of payment pursuant to these guarantees, and determined that the fair value of our obligation under each guarantee based on those likely outcomes is not material and, therefore, no amounts have been recognized in our consolidated financial statements.

NOTE G – Debt and Receivables Securitization

On September 26, 2014, our consolidated joint venture in Turkey, Worthington Aritas, executed a $32,344,000 five-year term loan credit facility denominated in Euros. As of November 30, 2014, we had borrowed $19,745,000 against the facility, leaving $12,599,000 available for future borrowings. The facility bears interest at a variable rate based on EURIBOR. The applicable variable rate was 1.582% at November 30, 2014. On October 15, 2014, we entered into an interest rate swap to fix the interest rate on $19,406,000 of borrowings under this facility at 2.015% starting on December 26, 2014 thru September 26, 2019. Borrowings against the facility will be used for the construction of a new cryogenics manufacturing facility in Turkey.

We have a $425,000,000 multi-year revolving credit facility (the “Credit Facility”) with a group of lenders that matures in May 2017. There were no borrowings outstanding under the Credit Facility at November 30, 2014. However, we provided $13,998,000 in stand-by letters of credit for third-party beneficiaries as of November 30, 2014. While not drawn against, certain of these letters of credit totaling $11,732,000 are issued against availability under the Credit Facility, leaving $413,268,000 available at November 30, 2014.

Borrowings under the Credit Facility have maturities of less than one year. However, we can extend the term of amounts borrowed by renewing these borrowings for the term of the Credit Facility. We have the option to borrow at rates equal to an applicable margin over the LIBOR, Prime or Fed Funds rates. The applicable margin is determined by our credit rating.

We also maintain a $100,000,000 revolving trade accounts receivable securitization facility (the “AR Facility”). The AR Facility has been available throughout fiscal 2015 to date, and was available throughout fiscal 2014. The AR Facility expires in January 2015; however, we are currently in the process of renewing this agreement and expect to renew this facility prior to its expiration. Pursuant to the terms of the AR Facility, certain of our subsidiaries sell their accounts receivable without recourse, on a revolving basis, to Worthington Receivables Corporation (“WRC”), a wholly-owned, consolidated, bankruptcy-remote subsidiary. In turn, WRC may sell without recourse, on a revolving basis, up to $100,000,000 of undivided ownership interests in this pool of accounts receivable to a multi-seller, asset-backed commercial paper conduit (the “Conduit”). Purchases by the Conduit are financed with the sale of A1/P1 commercial paper. We retain an undivided interest in this pool and are subject to risk of loss based on the collectability of the receivables from this retained interest. Because the amount eligible to be sold excludes receivables more than 90 days past due, receivables offset by an allowance for doubtful accounts due to bankruptcy or other cause, concentrations over certain limits with specific customers and certain reserve amounts, we believe additional risk of loss is minimal. The book value of the retained portion of the pool of accounts receivable approximates fair value. As of November 30, 2014, the pool of eligible accounts receivable exceeded the $100,000,000 limit; however, no ownership interests in this pool had been sold.

Short-term borrowings at November 30, 2014 consisted of $4,095,000 outstanding under a credit facility maintained by our consolidated affiliate, Worthington Aritas, that matures in March 2015 and bears interest at a fixed rate of 5.60%, and $6,674,000 outstanding under a $9,500,000 credit facility maintained by our consolidated affiliate, Worthington Nitin Cylinders, that matured in November 2014 and bears interest at a variable rate. The applicable variable rate was 8.54% at November 30, 2014. The borrowings outstanding under the Nitin credit facility are currently in default. However, the lender has not called the note.

 

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NOTE H – Comprehensive Income

The following table summarizes the tax effects on each component of other comprehensive income (loss) for the three months ended November 30, 2014 and 2013:

 

     2014     2013  
(in thousands)    Before-Tax
Amount
    Tax Benefit      Net-of-Tax
Amount
    Before-Tax
Amount
     Tax Expense     Net-of-Tax
Amount
 

Foreign currency translation

   $ (7,270   $ -       $ (7,270   $ 3,037         -      $ 3,037   

Cash flow hedges

     (2,973     1,092         (1,881     661         (308     353   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

   $ (10,243   $ 1,092       $ (9,151   $ 3,698       $ (308   $ 3,390   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table summarizes the tax effects on each component of other comprehensive income (loss) for the six months ended November 30, 2014 and 2013:

 

     2014     2013  
(in thousands)    Before-Tax
Amount
    Tax Benefit      Net-of-Tax
Amount
    Before-Tax
Amount
     Tax Expense     Net-of-Tax
Amount
 

Foreign currency translation

   $ (16,862   $ -       $ (16,862   $ 2,551       $ -      $ 2,551   

Cash flow hedges

     (1,430     510         (920     5,481         (1,777     3,704   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

   $ (18,292   $ 510       $ (17,782   $ 8,032       $ (1,777   $ 6,255   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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NOTE I – Changes in Equity

The following table provides a summary of the changes in total equity, shareholders’ equity attributable to controlling interest, and equity attributable to noncontrolling interest for the six months ended November 30, 2014:

 

     Controlling Interest              
(in thousands)    Additional
Paid-in
Capital
    Cumulative
Other
Comprehensive
Loss,

Net of Tax
    Retained
Earnings
    Total     Non-
controlling
Interest
    Total  

Balance at May 31, 2014

   $ 262,610      $ (3,581   $ 591,783      $ 850,812      $ 94,070      $ 944,882   

Net earnings

     -        -        73,630        73,630        6,645        80,275   

Other comprehensive loss

     -        (16,168     -        (16,168     (1,614     (17,782

Common shares issued, net of withholding tax

     (454     -        -        (454     -        (454

Common shares in NQ plans

     14,227        -        -        14,227        -        14,227   

Stock-based compensation

     16,628        -        -        16,628        -        16,628   

Purchases and retirement of common shares

     (4,350     -        (37,270     (41,620     -        (41,620

Cash dividends declared

     -        -        (24,553     (24,553     -        (24,553

Acquisition of dHybrid Systems, LLC

     -        -        -        -        4,082        4,082   

Dividend to noncontrolling interest

     -        -        -        -        (4,677     (4,677
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 30, 2014

   $ 288,661      $ (19,749   $ 603,590      $ 872,502      $ 98,506      $ 971,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The components of the changes in other comprehensive income (loss) were as follows:

 

(in thousands)    Foreign
Currency
Translation
    Pension
Liability
Adjustment
    Cash
Flow
Hedges
    Accumulated
Other
Comprehensive
Loss
 

Balance as of May 31, 2014

   $ 11,015      $ (11,265   $ (3,331   $ (3,581

Other comprehensive loss before reclassifications

     (15,237     -        (4,878     (20,115

Reclassification adjustments to income (a)

     -        -        3,437        3,437   

Income taxes

     -        -        510        510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of November 30, 2014

   $ (4,222   $ (11,265   $ (4,262   $ (19,749
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The statement of earnings classification of amounts reclassified to income for cash flow hedges is disclosed in “NOTE O – Derivative Instruments and Hedging Activities.”

NOTE J – Stock-Based Compensation

Non-Qualified Stock Options

During the six months ended November 30, 2014, we granted non-qualified stock options covering a total of 96,200 common shares under our stock-based compensation plans. The option price of $43.04 per share was equal to the market price of the underlying common shares at the grant date. The fair value of these stock options, based on the Black-Scholes option-pricing model, calculated at the grant date, was $17.96 per share. The calculated pre-tax stock-based compensation expense for these stock options, after an estimate for forfeitures, is $1,538,000 and will be recognized on a straight-line basis over the three-year vesting period. The following assumptions were used to value these stock options:

 

Dividend yield

     1.88

Expected volatility

     50.92

Risk-free interest rate

     1.88

Expected term (years)

     6.0   

Expected volatility is based on the historical volatility of our common shares and the risk-free interest rate is based on the United States Treasury strip rate for the expected term of the stock options. The expected term was developed using historical exercise experience.

 

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Service-Based Restricted Common Shares

During the six months ended November 30, 2014, we granted an aggregate of 231,515 service-based restricted common shares under our stock-based compensation plans. The fair values of these restricted common shares were equal to the weighted average closing market prices of the underlying common shares on the respective dates of grant, or $40.40 per share. The calculated pre-tax stock-based compensation expense for these restricted common shares, after an estimate for forfeitures, is $8,415,000 and will be recognized on a straight-line basis over the three-year service-based vesting period.

Market-Based Restricted Common Shares

During the six months ended November 30, 2014, we granted an aggregate of 50,000 restricted common shares to two key employees under one of our stock-based compensation plans. Vesting of these restricted common share awards is contingent upon the price of our common shares reaching $60.00 per share and remaining at or above that price for 30 consecutive days during the five-year period following the date of grant and the completion of a five-year service vesting period. The grant-date fair value of these restricted common shares, as determined by a Monte Carlo simulation model, was $32.06 per share. The Monte Carlo simulation model is a statistical technique that incorporates multiple assumptions to determine the probability that the market condition will be achieved. The following assumptions were used to determine the grant-date fair value and the derived service period for these restricted common shares:

 

Dividend yield

     1.60

Expected volatility

     44.00

Risk-free interest rate

     1.70

The calculated pre-tax stock-based compensation expense for these restricted common shares is $1,603,000 and will be recognized on a straight-line basis over the five-year service vesting period.

Performance Share Awards

We have awarded performance shares to certain key employees that are earned based on the level of achievement with respect to corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the three-year periods ending May 31, 2015, 2016 and 2017. These performance share awards will be paid, to the extent earned, in common shares of the Company in the fiscal quarter following the end of the applicable three-year performance period. The fair value of our performance shares is determined by the closing market prices of the underlying common shares at their respective grant dates and the pre-tax stock-based compensation expense is based on our periodic assessment of the probability of the targets being achieved and our estimate of the number of common shares that will ultimately be issued. During the six months ended November 30, 2014, we granted performance share awards covering an aggregate of 62,000 common shares (at target levels). The calculated pre-tax stock-based compensation expense for these performance shares is $2,648,000 and will be recognized over the three-year performance period.

NOTE K – Income Taxes

Income tax expense for the six months ended November 30, 2014 and November 30, 2013 reflected estimated annual effective income tax rates of 33.5% and 27.8%, respectively. The annual effective income tax rates exclude any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. Net earnings attributable to noncontrolling interest is a result of our Spartan, TWB, Worthington Aritas, WEI, dHybrid, and Worthington Nitin Cylinders consolidated joint ventures. The earnings attributable to the noncontrolling interest in Spartan, WEI, dHybrid and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in Spartan, WEI, dHybrid, and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. All of the tax expense of Worthington Aritas and Worthington Nitin Cylinders, both foreign corporations, is reported in our consolidated tax expense. Since the consolidation of TWB on July 31, 2013, all of the tax expense of TWB’s wholly-owned foreign corporations has been reported in our consolidated tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. Our actual effective income tax rate for fiscal 2015 could be materially different from the forecasted rate as of November 30, 2014.

 

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NOTE L – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share attributable to controlling interest for the three and six months ended November 30, 2014 and 2013:

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
(in thousands, except per share amounts)    2014      2013      2014      2013  

Numerator (basic & diluted):

           

Net earnings attributable to controlling interest – income available to common shareholders

   $ 29,462       $ 22,977       $ 73,630       $ 77,534   

Denominator:

           

Denominator for basic earnings per share attributable to controlling interest – weighted average common shares

     67,105         69,304         67,337         69,454   

Effect of dilutive securities

     2,076         2,522         2,443         2,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share attributable to controlling interest – adjusted weighted average common shares

     69,181         71,826         69,780         72,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to controlling interest

   $ 0.44       $ 0.33       $ 1.09       $ 1.12   

Diluted earnings per share attributable to controlling interest

   $ 0.43       $ 0.32       $ 1.06       $ 1.08   

Stock options covering 147,859 and 396 common shares for the three months ended November 30, 2014 and 2013, respectively, and 113,744 and 197 common shares for the six months ended November 30, 2014 and 2013, respectively, have been excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive, as the exercise price of the stock options was greater than the average market price of the common shares during the respective periods.

 

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NOTE M – Segment Operations

Summarized financial information for our reportable segments is shown in the following table:

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 
(in thousands)    2014     2013     2014     2013  

Net sales

        

Steel Processing

   $ 552,756      $ 492,134      $ 1,105,087      $ 894,575   

Pressure Cylinders

     252,744        214,022        501,703        430,922   

Engineered Cabs

     51,540        47,868        101,094        96,329   

Other

     13,972        15,876        25,542        40,365   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net sales

   $ 871,012      $ 769,900      $ 1,733,426      $ 1,462,191   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Steel Processing

   $ 33,877      $ 34,786      $ 69,746      $ 57,449   

Pressure Cylinders

     9,580        8,275        29,186        27,729   

Engineered Cabs

     (5,609     (20,892     (7,754     (21,196

Other

     (4,656     (2,670     (5,784     (5,845
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

   $ 33,192      $ 19,499      $ 85,394      $ 58,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring and other expense (income)

        

Steel Processing

   $ -      $ -      $ (30   $ (4,762

Pressure Cylinders

     405        (1,849     428        (1,447

Engineered Cabs

     -        -        -        -   

Other

     -        667        -        1,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated restructuring and other expense (income)

   $ 405      $ (1,182   $ 398      $ (5,179
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment of long-lived assets

        

Steel Processing

   $ 1,100      $ -      $ 3,050      $ 4,641   

Pressure Cylinders

     9,567        11,634        9,567        11,634   

Engineered Cabs

     2,389        19,100        2,389        19,100   

Other

     1,179        -        1,179        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated impairment of long-lived assets

   $ 14,235      $ 30,734      $ 16,185      $ 35,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Joint venture transactions

        

Steel Processing

   $ -      $ -      $ -      $ -   

Pressure Cylinders

     -        -        -        -   

Engineered Cabs

     -        -        -        -   

Other

     83        786        190        928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated joint venture transactions

   $ 83      $ 786      $ 190      $ 928   
  

 

 

   

 

 

   

 

 

   

 

 

 
(in thousands)    November 30,
2014
    May 31,
2014
             

Total assets

        

Steel Processing

   $ 875,269      $ 850,748       

Pressure Cylinders

     870,789        818,720       

Engineered Cabs

     178,761        181,251       

Other

     382,572        445,662       
  

 

 

   

 

 

     

Consolidated total assets

   $ 2,307,391      $ 2,296,381       
  

 

 

   

 

 

     

 

14


Table of Contents

NOTE N – Acquisitions

dHybrid Systems, LLC

On October 20, 2014, we acquired a 79.59% ownership interest in dHybrid, a leader in compressed natural gas (“CNG”) systems for large trucks. The remaining 20.41% was retained by a founding member. The total purchase price was $15,918,000, which includes contingent consideration with an estimated fair value of $3,979,000. The acquired business became part of our Pressure Cylinders operating segment upon closing.

The contingent consideration arrangement requires the Company to pay $3,979,000 of additional consideration when cumulative net sales beginning January 1, 2013 reach $20,000,000 plus 50% of gross margin above certain thresholds in each of the five twelve-month periods following the closing date. We determined the acquisition-date fair value of the contingent consideration obligation using a probability weighted cash flow approach based on management’s projections of future sales and gross margin. Refer to “Note P – Fair Value Measurements” for additional information regarding the fair value measurement of the contingent consideration obligation.

The assets acquired and liabilities assumed were recognized at their acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired. In connection with the acquisition of the net assets of dHybrid, we identified and valued the following identifiable intangible assets:

 

(in thousands)           Useful Life  

Category

   Amount      (Years)  

Technological know-how

   $ 3,100         10   

Customer relationships

     600         7   

Backlog

     88         Less than 1   
  

 

 

    

Total acquired identifiable intangible assets

   $ 3,788      
  

 

 

    

The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes a going-concern element that represents our ability to earn a higher rate of return on this group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.

 

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Table of Contents

The following table summarizes the consideration transferred for our 79.59% interest in dHybrid and the fair value assigned to the assets acquired and liabilities assumed at the acquisition date:

 

(in thousands)       

Consideration Transferred:

  

Cash consideration

   $ 11,939   

Fair value of contingent consideration

     3,979   
  

 

 

 

Total consideration

   $ 15,918   
  

 

 

 

Estimated Fair Value of Assets Acquired and Liabilities Assumed:

  

Cash and cash equivalents

   $ 795   

Accounts receivable

     1,459   

Inventories

     3,300   

Prepaid expenses and other current assets

     38   

Intangible assets

     3,788   

Property, plant and equipment

     396   
  

 

 

 

Total identifiable assets

     9,776   

Accounts payable

     (1,163

Accrued liabilities

     (160

Long-term debt

     (5,000
  

 

 

 

Net identifiable assets

     3,453   

Goodwill

     16,547   
  

 

 

 

Net assets

     20,000   

Noncontrolling interest

     (4,082
  

 

 

 

Total consideration

   $ 15,918   
  

 

 

 

Operating results of the acquired business have been included in our consolidated statements of earnings for the three and six months ended November 30, 2014 from the acquisition date, forward. Pro forma results, including the acquired business since the beginning of fiscal 2014, would not be materially different than reported results.

Midstream Equipment Fabrication, LLC

On August 1, 2014, we acquired the net assets of Midstream Equipment Fabrication LLC (“MEF”) for cash consideration of $35,232,000 and the assumption of certain liabilities. MEF manufactures patented horizontal heated and high pressure separators used to separate oilfield fluids and gas for customers drilling in the Eagle Ford Shale and is well-situated to serve customers in the Permian Basin. The acquired net assets became part of our Pressure Cylinders operating segment upon closing.

The assets acquired and liabilities assumed were recognized at their acquisition-date fair values, with goodwill representing the excess of the purchase price over the fair value of the net identifiable assets acquired. In connection with the acquisition of the net assets of MEF, we identified and valued the following identifiable intangible assets:

 

(in thousands)           Useful Life  

Category

   Amount      (Years)  

Technological know-how

   $ 5,100         10   

Customer relationships

     4,300         7   

Non-compete agreements

     2,400         4   

Backlog

     1,800         Less than 1   
  

 

 

    

Total acquired identifiable intangible assets

   $ 13,600      
  

 

 

    

The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes a going-concern element that represents our ability to earn a higher rate of return on this group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.

 

16


Table of Contents

The following table summarizes the consideration transferred for the net assets of MEF and the fair value assigned to the assets acquired and liabilities assumed at the acquisition date:

 

(in thousands)       

Accounts receivable

   $ 3,329   

Inventories

     3,550   

Intangible assets

     13,600   

Property, plant and equipment

     166   
  

 

 

 

Total identifiable assets

     20,645   

Accounts payable

     (555

Other accrued items

     (92

Deferred revenue

     (4,808
  

 

 

 

Net assets

     15,190   

Goodwill

     23,202   
  

 

 

 

Purchase price

     38,392   

Less: estimated excess working capital

     3,160   
  

 

 

 

Cash paid at closing

   $ 35,232   
  

 

 

 

During the second quarter of fiscal 2015, the Company paid $3,399,000 to settle the final working capital. The Company incurred $273,000 of acquisition-related costs that were expensed within SG&A expense during the six months ended November 30, 2014. Operating results of the acquired business have been included in our consolidated statements of earnings for the three and six months ended November 30, 2014 from the acquisition date, forward. Pro forma results, including the acquired business since the beginning of fiscal 2014, would not be materially different than reported results.

James Russell Engineering Works, Inc.

On July 31, 2014, we acquired the net assets of James Russell Engineering Works, Inc. (“JRE”) for cash consideration of $1,571,000. JRE manufactures aluminum and stainless steel cryogenic transport trailers used for hauling liquid oxygen, nitrogen, argon, hydrogen and liquefied natural gas (“LNG”) for producers and distributors of industrial gases and LNG. The acquired net assets became part of our Pressure Cylinders operating segment upon closing.

The assets acquired and liabilities assumed were recognized at their acquisition-date fair values. The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes a going-concern element that represents our ability to earn a higher rate of return on this group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.

 

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Table of Contents

The following table summarizes the consideration transferred for the net assets of JRE and the fair value assigned to the assets acquired and liabilities assumed at the acquisition date:

 

(in thousands)       

Cash

   $ 253   

Accounts receivable

     509   

Inventories

     2,793   

Prepaid expense and other current assets

     40   

Property, plant and equipment

     250   
  

 

 

 

Total identifiable assets

     3,845   

Accounts payable

     (514

Other accrued items

     (2,160
  

 

 

 

Net identifiable assets

     1,171   

Goodwill

     400   
  

 

 

 

Total cash consideration

   $ 1,571   
  

 

 

 

Operating results of the acquired business have been included in our consolidated statements of earnings for the three and six months ended November 30, 2014 from the acquisition date, forward. Pro forma results, including the acquired business since the beginning of fiscal 2014, would not be materially different than reported results.

NOTE O – Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, currency exchange risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.

Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Currency Exchange Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign exchange rates. We enter into various contracts that change in value as foreign exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating exchange rates; however, derivative instruments are not used to manage this risk.

Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative instruments to manage the associated price risk.

We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines and enter into derivative instruments only with major financial institutions. We do not have significant exposure to any one counterparty and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “Note P – Fair Value” for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.

 

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Table of Contents

The following table summarizes the fair value of our derivative instruments and the respective financial statement caption in which they were recorded in our consolidated balance sheet at November 30, 2014:

 

     Asset Derivatives      Liability Derivatives  
(in thousands)    Balance
Sheet
Location
     Fair
Value
     Balance
Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments:

           

Interest rate contracts

     Receivables       $ -         Accounts payable       $ 2,102   
     Other assets         -         Other liabilities         183   
     

 

 

       

 

 

 
        -            2,285   
     

 

 

       

 

 

 

Foreign exchange contracts

     Receivables         106         Accounts payable         -   

Commodity contracts

     Receivables         -         Accounts payable         3,444   
     

 

 

       

 

 

 

Totals

      $ 106          $ 5,729   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity contracts

     Receivables       $ 231         Accounts payable       $ 595   
     

 

 

       

 

 

 

Totals

      $ 231          $ 595   
     

 

 

       

 

 

 

Total Derivative Instruments

      $ 337          $ 6,324   
     

 

 

       

 

 

 

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $324,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the respective line in which they were recorded in the consolidated balance sheet at May 31, 2014:

 

     Asset Derivatives      Liability Derivatives  
(in thousands)    Balance
Sheet
Location
   Fair
Value
     Balance
Sheet
Location
   Fair
Value
 

Derivatives designated as hedging instruments:

           

Interest rate contracts

   Receivables    $ -       Accounts payable    $ 4,180   

Commodity contracts

   Receivables      456       Accounts payable      -   
     

 

 

       

 

 

 

Totals

      $ 456          $ 4,180   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity contracts

   Receivables    $ 796       Accounts payable    $ 295   

Foreign exchange contracts

   Receivables      32       Accounts payable      -   
     

 

 

       

 

 

 

Totals

      $ 828          $ 295   
     

 

 

       

 

 

 

Total Derivative Instruments

      $ 1,284          $ 4,475   
     

 

 

       

 

 

 

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $730,000 increase in receivables with a corresponding increase in accounts payable.

Cash Flow Hedges

We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are

 

19


Table of Contents

designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same financial statement caption associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.

The following table summarizes our cash flow hedges outstanding at November 30, 2014:

 

(in thousands)    Notional
Amount
     Maturity Date

Commodity contracts

   $ 57,368       December 2014 - July 2016

Interest rate contracts

     120,000       December 2014 - September 2019

Foreign currency contracts

     11,168       December 2014 - June 2015

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the three months ended November 30, 2014 and 2013:

 

(in thousands)   Gain (Loss)
Recognized
in OCI
(Effective
Portion)
    Location of
Gain (Loss)
Reclassified

from
Accumulated
OCI
(Effective
Portion)
  Gain (Loss)
Reclassified
from
Accumulated
OCI
(Effective
Portion)
    Location of
Gain (Loss)
(Ineffective

Portion)
and Excluded

from
Effectiveness
Testing
    Gain (Loss)
(Ineffective
Portion)
and Excluded
from
Effectiveness
Testing
 

For the three months ended November 30, 2014:

         

Interest rate contracts

  $ -      Interest expense   $ (1,137     Interest expense      $ -   

Commodity contracts

    (4,362   Cost of goods sold     (356     Cost of goods sold        -   

Foreign currency contracts

    (103   Miscellaneous income     -        Miscellaneous income        -   
 

 

 

     

 

 

     

 

 

 

Totals

  $ (4,465     $ (1,493     $ -   
 

 

 

     

 

 

     

 

 

 

For the three months ended November 30, 2013:

         

Interest rate contracts

  $ (181   Interest expense   $ (1,057     Interest expense      $ -   

Commodity contracts

    (1,047   Cost of goods sold     (812     Cost of goods sold        -   
 

 

 

     

 

 

     

 

 

 

Totals

  $ (1,228     $ (1,869     $ -   
 

 

 

     

 

 

     

 

 

 

 

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Table of Contents

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the six months ended November 30, 2014 and 2013:

 

(in thousands)   Gain (Loss)
Recognized
in OCI
(Effective
Portion)
    Location of
Gain (Loss)
Reclassified

from
Accumulated
OCI
(Effective
Portion)
  Gain (Loss)
Reclassified
from
Accumulated
OCI
(Effective
Portion)
    Location of
Gain (Loss)
(Ineffective

Portion)
and Excluded
from
Effectiveness
Testing
  Gain (Loss)
(Ineffective
Portion)
and Excluded
from
Effectiveness
Testing
 

For the six months ended November 30, 2014:

         

Interest rate contracts

  $ -      Interest expense   $ (2,285   Interest expense   $ -   

Commodity contracts

    (4,775   Cost of goods sold     (1,152   Cost of goods sold     -   

Foreign currency contracts

    (103   Miscellaneous income     -      Miscellaneous income     -   
 

 

 

     

 

 

     

 

 

 

Totals

  $ (4,878     $ (3,437     $ -   
 

 

 

     

 

 

     

 

 

 

For the six months ended November 30, 2013:

         

Interest rate contracts

  $ (384   Interest expense   $ (2,120   Interest expense   $ -   

Commodity contracts

    2,617      Cost of goods sold     (1,128   Cost of goods sold     -   
 

 

 

     

 

 

     

 

 

 

Totals

  $ 2,233        $ (3,248     $ -   
 

 

 

     

 

 

     

 

 

 

The estimated net amount of the losses recognized in accumulated OCI at November 30, 2014 expected to be reclassified into net earnings within the succeeding twelve months is $2,118,000 (net of tax of $1,251,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2014, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2015 and 2016.

Economic (Non-designated) Hedges

We enter into foreign currency contracts to manage our foreign exchange exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.

The following table summarizes our economic (non-designated) derivative instruments outstanding at November 30, 2014:

 

(in thousands)    Notional
Amount
     Maturity Date(s)

Commodity contracts

   $ 57,607       December 2014 - June 2016

 

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Table of Contents

The following table summarizes the loss recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended November 30, 2014 and 2013:

 

     Location of Loss    Loss Recognized
in Earnings for the
Three Months Ended
November 30,
 
(in thousands)    Recognized in Earnings    2014     2013  

Commodity contracts

   Cost of goods sold    $ (2,360   $ (394

Foreign currency contracts

   Miscellaneous income (expense)      (218     -   
     

 

 

   

 

 

 

Total

      $ (2,578   $ (394
     

 

 

   

 

 

 

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the six months ended November 30, 2014 and 2013:

 

     Location of Gain (Loss)    Gain (Loss) Recognized
in Earnings for the
Six Months Ended
November 30,
 
(in thousands)    Recognized in Earnings    2014     2013  

Commodity contracts

   Cost of goods sold    $ (2,417   $ 282   

Foreign currency contracts

   Miscellaneous income (expense)      43        (5
     

 

 

   

 

 

 

Total

      $ (2,374   $ 277   
     

 

 

   

 

 

 

The gain (loss) on the foreign currency derivatives significantly offsets the gain (loss) on the hedged item.

NOTE P – Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

 

Level 1

      Observable prices in active markets for identical assets and liabilities.

Level 2

      Observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3

      Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

 

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Table of Contents

Recurring Fair Value Measurements

At November 30, 2014, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Totals  

Assets

           

Derivative contracts (1)

   $ -       $ 337       $ -       $ 337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 337       $ -       $ 337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative contracts (1)

   $ -       $ 6,324       $ -       $ 6,324   

Contingent consideration obligation (2)

     -         -         3,979         3,979   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ -       $ 6,324       $ 3,979       $ 10,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

At May 31, 2014, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Totals  

Assets

           

Derivative contracts (1)

   $ -       $ 1,284       $ -       $ 1,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 1,284       $ -       $ 1,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative contracts (1)

   $ -       $ 4,475       $ -       $ 4,475   

Contingent consideration obligation (2)

     -         -         404         404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ -       $ 4,475       $ 404       $ 4,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The fair value of our derivative contracts is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “Note O – Derivative Instruments and Hedging Activities” for additional information regarding our use of derivative instruments.

 

(2)

The fair value of the Company’s contingent consideration obligations is determined using a probability weighted cash flow approach based on management’s projections of future cash flows of the acquired businesses. The fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements.

 

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Table of Contents

Non-Recurring Fair Value Measurements

At November 30, 2014, our financial assets and liabilities measured at fair value on a non-recurring basis were as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Totals  

Assets

           

Long-lived assets held for sale (1)

   $ -       $ 21,821       $ -       $ 21,821   

Long-lived assets held and used (2)

     -         3,750         -         3,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 25,571       $ -       $ 25,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

During the fourth quarter of fiscal 2014, management committed to a plan to sell certain non-core Steel Processing assets. As all of the criteria for classification as assets held for sale were met, the net assets of this business, which consist of net working capital and property, plant and equipment, have been presented separately as assets held for sale in our consolidated balance sheets as of November 30, 2014 and May 31, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell as of May 31, 2014. As a result of changes in facts and circumstances related to the planned sale during fiscal 2015, the Company reassessed the fair value of this business and determined that additional impairment charges of $3,050,000 were required for the six months ended November 30, 2014. Fair value of $19,402,000 was determined based on market prices for similar assets.

During the second quarter of fiscal 2015, management committed to a plan to sell certain non-core Engineered Cabs assets. As all of the criteria for classification as assets held for sale were met, the net assets of the business have been presented separately as assets held for sale in our consolidated balance sheets as of November 30, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell, resulting in an impairment charge of $2,389,000 during the three months ended November 30, 2014. Fair value of $2,419,000 was determined based on market prices for similar assets.

 

(2)

During the second quarter of fiscal 2015, we determined that indicators of impairment were present at the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, due to current and projected operating losses. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value of $3,750,000, resulting in an impairment charge of $3,221,000 during the three months ended November 30, 2014.

During the second quarter of fiscal 2015, we determined that indicators of impairment were present at the Company’s military construction business. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value, resulting in an impairment charge of $1,179,000 during the three months ended November 30, 2014, which represents the remaining book value of the asset group.

 

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During the fourth quarter of fiscal 2014, management committed to a plan to sell the Company’s 60%-owned consolidated joint venture in India, Worthington Nitin Cylinders. As all of the criteria for classification as assets held for sale were met, the net assets of the business were presented separately as assets held for sale in our consolidated balance sheet as of May 31, 2014. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell as of May 31, 2014. As a result of changes in facts and circumstances related to the planned sale of Worthington Nitin Cylinders during the second quarter of fiscal 2015, the Company reassessed the fair value of the business and determined that the remaining book value should be written off resulting in an impairment charge of $6,346,000.

At May 31, 2014, our assets measured at fair value on a non-recurring basis were categorized as follows:

 

(in thousands)    Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Totals  

Assets

           

Long-lived assets held for sale (1)

   $ -       $ 25,040       $ -       $ 25,040   

Long-lived assets held and used (2)

     -         7,034         -         7,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ -       $ 32,074       $ -       $ 32,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

During the fourth quarter of fiscal 2014, management committed to a plan to sell the Company’s 60%-owned consolidated joint venture in India, Worthington Nitin Cylinders. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell. As the fair value of the asset group, or $5,925,000, was lower than its net book value, an impairment charge of $18,959,000 was recognized within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings. The portion of this impairment loss attributable to the noncontrolling interest, or $7,583,000, was recorded within net earnings attributable to noncontrolling interest in our fiscal 2014 consolidated statement of earnings.

During the fourth quarter of fiscal 2014, management committed to plans to sell certain non-core Steel Processing assets. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair value less costs to sell. As the fair value of the asset group, or $19,115,000, was lower than its net book value, an impairment charge of $7,141,000 was recognized within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings.

 

(2)

During the fourth quarter of fiscal 2014, we determined that indicators of impairment were present at the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, due to current and projected operating losses. Recoverability of the identified asset group was tested using future cash flow projections based on management’s long-range estimates of market conditions. The sum of these undiscounted future cash flows was less than the net book value of the asset group. In accordance with the applicable accounting guidance, the net assets were written down to their fair value of $7,034,000, resulting in an impairment charge of $1,412,000 within impairment of long-lived assets in our fiscal 2014 consolidated statement of earnings.

The fair value of non-derivative financial instruments included in the carrying amounts of cash and cash equivalents, receivables, notes receivable, income taxes receivable, other assets, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $711,589,000 and $674,488,000 at November 30, 2014 and May 31, 2014, respectively. The carrying amount of long-term debt, including current maturities, was $674,874,000 and $655,963,000 at November 30, 2014 and May 31, 2014, respectively.

 

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NOTE Q – Subsequent Events

At November 30, 2014, we had $100,000,000 aggregate amount of unsecured floating rate senior notes outstanding due on December 17, 2014. We repaid these notes during December 2014 using a combination of cash on hand and borrowings available under our revolving credit facilities.

 

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Table of Contents

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected statements contained in this “Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of  Operations” constitute “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Quarterly Report on Form 10-Q and “Part I - Item 1A. - Risk Factors” of our Annual Report on Form 10-K for  the fiscal year ended May 31, 2014.

Introduction

The following discussion and analysis of market and industry trends, business developments, and the results of operations and financial position of Worthington Industries, Inc., together with its subsidiaries (collectively, “we,” “our,” “Worthington,” or our “Company”), should be read in conjunction with our consolidated financial statements and notes thereto included in “Item 1. – Financial Statements” of this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K for the fiscal year ended May 31, 2014 (“fiscal 2014”) includes additional information about Worthington, our operations and our consolidated financial position and should be read in conjunction with this Quarterly Report on Form 10-Q.

We are primarily a diversified metals manufacturing company, focused on value-added steel processing and manufactured metal products. As of November 30, 2014, excluding our joint ventures, we operated 34 manufacturing facilities worldwide, principally in three operating segments, which correspond with our reportable business segments: Steel Processing, Pressure Cylinders and Engineered Cabs. Our remaining operating segments, which do not meet the applicable aggregation criteria or quantitative thresholds for separate disclosure, are combined and reported in the “Other” category. These include the Construction Services and Worthington Energy Innovations operating segments.

We also held equity positions in 13 active joint ventures, which operated 48 manufacturing facilities worldwide, as of November 30, 2014. Six of these joint ventures are consolidated with the equity owned by the other joint venture member(s) shown as noncontrolling interest in our consolidated balance sheets, and the other joint venture member(s)’ portion of net earnings and other comprehensive income shown as net earnings or comprehensive income attributable to noncontrolling interest in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. The remaining seven of these joint ventures are accounted for using the equity method.

Overview

The Company delivered strong sales growth during the second quarter of fiscal 2015, as compared to the same quarter of fiscal 2014, however, higher than expected manufacturing costs in a few isolated plants combined with the unfavorable impact of inventory holding losses in Steel Processing in the current quarter, compared to inventory holding gains in the prior year quarter limited earnings growth. Demand was generally good in most of our key end markets with the exception of agriculture, but excessive costs related to bringing new capacity online in the oil and gas equipment business in Pressure Cylinders and the ramp up of new products at our Florence, South Carolina plant in Engineered Cabs negatively impacted earnings during the quarter.

Equity in net income of unconsolidated affiliates (“equity income”) for the quarter was up $1.2 million, or 6%, over the prior year period. The overall increase was driven by WAVE and ArtiFlex where our equity portion of income increased by $2.2 million and $1.3 million, respectively. However, equity income from ClarkDietrich decreased $1.9 million on lower margins. We received $21.6 million in cash distributions from our unconsolidated affiliates during the quarter.

The Company continues its strategy of optimizing existing operations through the Transformation Plan, pursuing growth opportunities that add to our current businesses, and developing new products through innovation. Our transformation efforts within Pressure Cylinders, which were initiated in the first quarter of fiscal 2012, continue to gain traction and increase in scope. We initiated the Transformation Plan in our Engineered Cabs operating segment during the first quarter of fiscal 2013, and these efforts are progressing through each facility.

 

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Recent Business Developments

 

   

On July 31, 2014, the Company acquired the net assets of James Russell Engineering Works, Inc. (“JRE”) for cash consideration of $1.6 million. JRE manufactures aluminum and stainless steel cryogenic transport trailers used for hauling liquid oxygen, nitrogen, argon, hydrogen and liquefied natural gas (“LNG”) for producers and distributors of industrial gases and LNG. The acquired net assets became part of our Pressure Cylinders operating segment upon closing.

 

   

On August 1, 2014, the Company acquired the net assets of Midstream Equipment Fabrication LLC (“MEF”) for cash consideration of $35.2 million and the assumption of certain liabilities. MEF manufactures patented horizontal heated and high pressure separators used to separate oilfield fluids and gas for customers drilling in the Eagle Ford Shale and is well-situated to serve customers in the Permian Basin. The acquired net assets became part of our Pressure Cylinders operating segment upon closing.

 

   

On October 20, 2014, we acquired a 79.59% ownership interest in dHybrid Systems, LLC (“dHybrid”), a leader in compressed natural gas (“CNG”) systems for large trucks. The remaining 20.41% was retained by a founding member. The total purchase price was $15.9 million, which includes contingent consideration with an estimated fair value of $4.0 million. The acquired business became part of our Pressure Cylinders operating segment upon closing.

 

   

On November 13, 2014, the Company’s consolidated tailor welded blanking joint venture, TWB, opened a new facility in Cambridge, Ontario. The facility will initially operate one laser welding line with the capacity to produce 2 million tailor welded blanks per year.

 

   

On December 17, 2014, the Board of Directors of Worthington Industries, Inc. (the “Board”) declared a quarterly dividend of $0.18 per share payable on March 27, 2015 to shareholders of record on March 13, 2015.

 

   

During the quarter, the Company repurchased a total of 600,000 common shares for $21.5 million at an average price of $35.91.

Market & Industry Overview

We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of our net sales by end market for the second quarter of fiscal 2015 and the second quarter of fiscal 2014 is illustrated in the following chart:

 

LOGO

The automotive industry is one of the largest consumers of flat-rolled steel, and thus the largest end market for our Steel Processing operating segment. Approximately 60% of the net sales of our Steel Processing operating segment are to the automotive market. North American vehicle production, primarily by Chrysler, Ford and General Motors (the “Detroit Three automakers”), has a considerable impact on the activity within this operating segment. The majority of the net sales of four of our unconsolidated joint ventures are also to the automotive end market.

 

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Approximately 10% of the net sales of our Steel Processing operating segment, 60% of the net sales of our Engineered Cabs operating segment and substantially all of the net sales of our Construction Services operating segment are to the construction market. The construction market is also the predominant end market for two of our unconsolidated joint ventures: WAVE and ClarkDietrich. While the market price of steel significantly impacts these businesses, there are other key indicators that are meaningful in analyzing construction market demand, including U.S. gross domestic product (“GDP”), the Dodge Index of construction contracts and, in the case of ClarkDietrich, trends in the relative price of framing lumber and steel.

Substantially all of the net sales of our Pressure Cylinders operating segment, and approximately 30% and 40% of the net sales of our Steel Processing and Engineered Cabs operating segments, respectively, are to other markets such as consumer products, industrial, lawn and garden, agriculture, oil and gas equipment, heavy truck, mining, forestry and appliance. Given the many different products that make up these net sales and the wide variety of end markets, it is very difficult to detail the key market indicators that drive this portion of our business. However, we believe that the trend in U.S. GDP growth is a good economic indicator for analyzing these operating segments.

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

 

     Three Months Ended
November 30,
    Six Months  Ended
November 30,
 
     2014     2013     Inc /
(Dec)
    2014     2013     Inc /
(Dec)
 

U.S. GDP (% growth year-over-year) 1

     2.4     1.8     0.6     2.6     1.7     0.9

Hot-Rolled Steel ($ per ton) 2

   $ 651      $ 651      $ 0      $ 662      $ 639      $ 23   

Detroit Three Auto Build (000’s vehicles) 3

     2,316        2,455        (139     4,561        4,555        6   

No. America Auto Build (000’s vehicles) 3

     4,438        4,350        88        8,618        8,213        405   

Zinc ($ per pound) 4

   $ 1.04      $ 0.85      $ 0.19      $ 1.01      $ 0.85      $ 0.16   

Natural Gas ($ per mcf) 5

   $ 3.98      $ 3.63      $ 0.35      $ 4.30      $ 3.63      $ 0.67   

On-Highway Diesel Fuel Prices ($ per gallon) 6

   $ 3.71      $ 3.89      ($ 0.18   $ 3.80      $ 3.88      ($ 0.09

 

 

1 

2013 figures based on revised actuals 2 CRU Hot-Rolled Index; period average 3 IHS Global 4 LME Zinc; period average 5 NYMEX Henry Hub Natural Gas; period average 6 Energy Information Administration; period average

U.S. GDP growth rate trends are generally indicative of the strength in demand and, in many cases, pricing for our products. A year-over-year increase in U.S. GDP growth rates is indicative of a stronger economy, which generally increases demand and pricing for our products. Conversely, decreasing U.S. GDP growth rates generally indicate a weaker economy. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and in selling, general and administrative (“SG&A”) expense.

The market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results. When steel prices fall, we typically have higher-priced material flowing through cost of goods sold, while selling prices compress to what the market will bear, negatively impacting our results. On the other hand, in a rising price environment, our results are generally favorably impacted, as lower-priced material purchased in previous periods flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs.

 

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The following table provides the average quarterly market price per ton of hot-rolled steel during fiscal 2015 (first and second quarters), fiscal 2014 and fiscal 2013:

 

(Dollars per ton 1)                                                
     Fiscal Year      Increase / (Decrease)  
     2015      2014      2013      2015 vs. 2014     2014 vs. 2013  

1st Quarter

   $ 673       $ 627       $ 616       $ 46         7.3   $ 11         1.8

2nd Quarter

   $ 651       $ 651       $ 622       $ 0         0.0   $ 29         4.7

3rd Quarter

     N/A       $ 669       $ 629         N/A         N/A      $ 40         6.4

4th Quarter

     N/A       $ 655       $ 595         N/A         N/A      $ 60         10.1

Annual Avg.

     N/A       $ 651       $ 616         N/A         N/A      $ 35         5.7

 

 

1

CRU Hot-Rolled Index, period average

No single customer contributed more than 10% of our consolidated net sales during the second quarter of fiscal 2015. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers. During the second quarter of fiscal 2015, vehicle production for the Detroit Three automakers was down 6% from the comparable period in the prior year. However, North American vehicle production as a whole during the second quarter of fiscal 2015 increased 2% over the comparable period in the prior year.

Certain other commodities, such as zinc, natural gas and diesel fuel, represent a significant portion of our cost of goods sold, both directly through our plant operations and indirectly through transportation and freight expense.

Results of Operations

Second Quarter – Fiscal 2015 Compared to Fiscal 2014

Consolidated Operations

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

 

    Three Months Ended November 30,  
(Dollars in millions)   2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

  $ 871.0        100.0   $ 769.9        100.0   $ 101.1   

Cost of goods sold

    745.8        85.6     641.7        83.3     104.1   
 

 

 

     

 

 

     

 

 

 

Gross margin

    125.2        14.4     128.2        16.7     (3.0

Selling, general and administrative expense

    77.3        8.9     78.4        10.2     (1.1

Impairment of long-lived assets

    14.2        1.6     30.7        4.0     (16.5

Restructuring and other expense (income)

    0.4        0.0     (1.2     -0.2     1.6   

Joint venture transactions

    0.1        0.0     0.8        0.1     (0.7
 

 

 

     

 

 

     

 

 

 

Operating income

    33.2        3.8     19.5        2.5     13.7   

Miscellaneous income

    1.2        0.1     2.5        0.3     (1.3

Interest expense

    (9.7     -1.1     (6.3     -0.8     3.4   

Equity in net income of unconsolidated affiliates

    22.3        2.6     21.1        2.7     1.2   

Income tax expense

    (15.6     -1.8     (8.5     -1.1     7.1   
 

 

 

     

 

 

     

 

 

 

Net earnings

    31.4        3.6     28.3        3.7     3.1   

Net earnings attributable to noncontrolling interest

    1.9        0.2     5.3        0.7     3.4   
 

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest

  $ 29.5        3.4   $ 23.0        3.0   $ 6.5   
 

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest for the three months ended November 30, 2014 increased $6.5 million from the comparable period in the prior year. Net sales and operating highlights were as follows:

 

   

Net sales increased $101.1 million over the comparable period in the prior year. Higher overall volume favorably impacted net sales by $76.6 million driven by higher volume in Steel Processing and the impact of recent acquisitions in Pressure Cylinders.

 

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Gross margin decreased $3.0 million from the comparable period in the prior year to $125.2 million. Higher manufacturing expenses combined with the unfavorable impact of inventory holding losses in Steel Processing in the current quarter, compared to inventory holding gains in the prior year quarter, more than offset the impact of higher volume.

 

   

SG&A expense decreased $1.1 million from the comparable period in the prior year driven by lower profit sharing and bonus expense.

 

   

Impairment charges of $14.2 million include $6.3 million related to the Company’s 60%-owned consolidated joint venture in India, $3.2 million related to the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, $2.4 million related to certain non-core Engineered Cabs assets, $1.2 million related to the military construction business and $1.1 million related to certain non-core Steel Processing assets. Impairment charges in the comparable period in the prior year consisted of $30.7 million related to the write-off of certain trade name intangible assets in connection with a branding initiative committed to during the second quarter of fiscal 2014. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

   

Interest expense of $9.7 million was $3.4 million higher than the comparable period in the prior year. The increase was due to the impact of higher average debt levels resulting from the issuance of $250.0 million of notes in April 2014.

 

   

Equity income increased $1.2 million over the prior year quarter to $22.3 million on net sales of $388.7 million. The overall increase was driven by WAVE and ArtiFlex where our equity portion of income increased by $2.2 million and $1.3 million, respectively. However, equity income from ClarkDietrich decreased $1.9 million on lower volumes. For additional financial information regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.

 

   

Income tax expense increased $7.1 million from the comparable period in the prior year due to higher earnings, primarily resulting from the impact of trade name impairment charges recorded in the prior year quarter. The current quarter expense of $15.6 million was calculated using an estimated annual effective income tax rate of 33.5% versus 27.8% in the prior year quarter. Refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE K – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.

Segment Operations

Steel Processing

The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:

 

     Three Months Ended November 30,  
(Dollars in millions)    2014      % of
Net sales
    2013      % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 552.8         100.0   $ 492.1         100.0   $ 60.7   

Cost of goods sold

     487.6         88.2     422.7         85.9     64.9   
  

 

 

      

 

 

      

 

 

 

Gross margin

     65.2         11.8     69.4         14.1     (4.2

Selling, general and administrative expense

     30.2         5.5     34.6         7.0     (4.4

Impairment of long-lived assets

     1.1         0.2     -         0.0     1.1   
  

 

 

      

 

 

      

 

 

 

Operating income

   $ 33.9         6.1   $ 34.8         7.1   $ (0.9
  

 

 

      

 

 

      

 

 

 

Material cost

   $ 400.7         $ 349.8         $ 50.9   

Tons shipped (in thousands)

     899           817           82   

 

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Net sales and operating highlights were as follows:

 

   

Net sales increased $60.7 million over the comparable period in the prior year to $552.8 million due to the combined impact of higher volume and higher average selling prices. Overall volume was up 10% and the mix of direct versus toll tons was 60% to 40% versus a mix of 62% to 38% in the comparable period in the prior year.

 

   

Operating income decreased slightly from the prior year quarter to $33.9 million due to higher manufacturing expenses and the unfavorable impact of inventory holding losses in the current quarter compared to inventory holding gains in the prior year quarter. The change between the inventory holding gains and losses more than offset the impact of higher volume. Operating income in the current period included an impairment charge of $1.1 million related to certain non-core Steel Processing assets. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

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Pressure Cylinders

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

 

    Three Months Ended November 30,  
(Dollars in millions)   2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

  $ 252.7        100.0   $ 214.0        100.0   $ 38.7   

Cost of goods sold

    197.2        78.0     163.3        76.3     33.9   
 

 

 

     

 

 

     

 

 

 

Gross margin

    55.5        22.0     50.7        23.7     4.8   

Selling, general and administrative expense

    35.9        14.2     32.6        15.2     3.3   

Impairment of long-lived assets

    9.6        3.8     11.6        5.4     (2.0

Restructuring and other expense (income)

    0.4        0.1     (1.8     -0.9     2.2   
 

 

 

     

 

 

     

 

 

 

Operating income

  $ 9.6        3.8   $ 8.3        3.9   $ 1.3   
 

 

 

     

 

 

     

 

 

 

Material cost

  $ 115.8        $ 95.2        $ 20.6   

Net sales by principal class of products:

         

Consumer Products

  $ 63.2        $ 55.1        $ 8.1   

Industrial Products

    98.9          105.7          (6.8

Alternative Fuels

    17.4          16.9          0.5   

Oil and Gas Equipment

    66.9          36.3          30.6   

Cryogenics

    6.3          -          6.3   
 

 

 

     

 

 

     

 

 

 

Total Pressure Cylinders

  $ 252.7        $ 214.0        $ 38.7   
 

 

 

     

 

 

     

 

 

 

Units shipped by principal class of products:

         

Consumer Products

    13,397,701          11,175,806          2,221,895   

Industrial Products

    5,601,385          6,026,615          (425,230

Alternative Fuels

    87,785          86,701          1,084   

Oil and Gas Equipment

    3,010          1,859          1,151   

Cryogenics

    162          -          162   
 

 

 

     

 

 

     

 

 

 

Total Pressure Cylinders

    19,090,043          17,290,981          1,799,062   
 

 

 

     

 

 

     

 

 

 

Net sales by principal class of product presented in the table above differ from the amounts reported in our earnings release dated December 17, 2014 as miscellaneous sales such as rebates, discounts and freight income have been reclassified from industrial products to various other classes of products. As a result, net sales for industrial products have decreased by $5.0 million from what was included in the earnings release and net sales for oil and gas equipment, consumer products and alternative fuels have increased by $3.7 million, $1.0 million and $0.3 million, respectively. Total net sales have not changed.

Net sales and operating highlights were as follows:

 

   

Net sales increased $38.7 million over the comparable period in the prior year to $252.7 million on higher volume driven by the impact of recent acquisitions.

 

   

Operating income increased $1.3 million over the prior year quarter to $9.6 million as contributions from recent acquisitions were largely offset by higher manufacturing and SG&A expense driven by higher than expected costs associated with bringing new capacity online in the oil and gas equipment business. Impairment charges in the current quarter consisted of $6.3 million related to the Company’s 60%-owned consolidated joint venture in India and $3.2 million related to the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi. Impairment charges in the comparable period in the prior year consisted of $11.6 million related to the write-off of certain trade name intangible assets in connection with a branding initiative committed to during the second quarter of fiscal 2014. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

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Engineered Cabs

The following table presents a summary of operating results for our Engineered Cabs operating segment for the periods indicated:

 

     Three Months Ended November 30,  
(Dollars in millions)    2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 51.5        100.0   $ 47.9        100.0   $ 3.6   

Cost of goods sold

     47.6        92.4     41.6        86.8     6.0   
  

 

 

     

 

 

     

 

 

 

Gross margin

     3.9        7.6     6.3        13.2     (2.4

Selling, general and administrative expense

     7.1        13.8     8.1        16.9     (1.0

Impairment of long-lived assets

     2.4        4.7     19.1        39.9     (16.7
  

 

 

     

 

 

     

 

 

 

Operating loss

   $ (5.6     -10.9   $ (20.9     -43.6   $ 15.3   
  

 

 

     

 

 

     

 

 

 

Material cost

   $ 23.7        $ 21.5        $ 2.2   

Net sales and operating highlights were as follows:

 

   

Net sales increased $3.6 million over the comparable period in the prior year on higher volumes.

 

   

Operating loss in the current quarter decreased $15.3 million to $5.6 million due to lower impairment charges, which were down $16.7 million from the prior year quarter. Excluding the impact of the impairment charges, operating income was down $1.4 million largely due to startup costs related to new product launches in our Florence, South Carolina facility. Impairment charges in the current quarter consisted of $2.4 million related to certain non-core Engineered Cabs assets. Impairment charges in the comparable period in the prior year consisted of $19.1 million related to the write-off of certain trade name intangible assets in connection with a branding initiative committed to during the second quarter of fiscal 2014. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

Other

The Other category includes the Construction Services and Worthington Energy Innovations operating segments, as they do not meet the quantitative thresholds for separate disclosure. Certain income and expense items not allocated to our operating segments are also included in the Other category, including costs associated with our non-captive insurance company, as is the activity related to the wind-down of our former Metal Framing operating segment. The following table presents a summary of operating results for the Other category for the periods indicated:

 

     Three Months Ended November 30,  
(Dollars in millions)    2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 14.0        100.0   $ 15.9        100.0   $ (1.9

Cost of goods sold

     13.4        95.7     14.1        88.7     (0.7
  

 

 

     

 

 

     

 

 

 

Gross margin

     0.6        4.3     1.8        11.3     (1.2

Selling, general and administrative expense

     4.0        28.6     3.0        18.9     1.0   

Impairment of long-lived assets

     1.2        8.6     -        0.0     1.2   

Restructuring and other expense

     -        0.0     0.7        4.4     (0.7

Joint venture transactions

     0.1        0.7     0.8        5.0     (0.7
  

 

 

     

 

 

     

 

 

 

Operating loss

   $ (4.7     -33.6   $ (2.7     -17.0   $ (2.0
  

 

 

     

 

 

     

 

 

 

 

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Net sales and operating highlights were as follows:

 

   

Net sales decreased $1.9 million from the comparable period in the prior year, mostly due to reductions at Worthington Energy Innovations.

 

   

Operating loss increased $2.0 million to $4.7 million. The increase was driven by losses within Construction Services, which included a $1.2 million impairment charge related to the military construction business.

Six Months Year-to-Date – Fiscal 2015 Compared to Fiscal 2014

Consolidated Operations

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

 

     Six Months Ended November 30,  
(Dollars in millions)    2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 1,733.4        100.0   $ 1,462.2        100.0   $ 271.2   

Cost of goods sold

     1,478.7        85.3     1,223.0        83.6     255.7   
  

 

 

     

 

 

     

 

 

 

Gross margin

     254.7        14.7     239.2        16.4     15.5   

Selling, general and administrative expense

     152.6        8.8     149.9        10.3     2.7   

Impairment of long-lived assets

     16.2        0.9     35.4        -        (19.2

Restructuring and other expense (income)

     0.3        0.0     (5.1     -0.3     5.4   

Joint venture transactions

     0.2        0.0     0.9        0.1     (0.7
  

 

 

     

 

 

     

 

 

 

Operating income

     85.4        4.9     58.1        4.0     27.3   

Miscellaneous income

     1.5        0.1     13.4        0.9     (11.9

Interest expense

     (19.2     -1.1     (12.5     -0.9     6.7   

Equity in net income of unconsolidated affiliates

     50.2        2.9     48.0        3.3     2.2   

Income tax expense

     (37.7     -2.2     (22.4     -1.5     15.3   
  

 

 

     

 

 

     

 

 

 

Net earnings

     80.2        4.6     84.6        5.8     (4.4

Net earnings attributable to noncontrolling interest

     (6.6     -0.4     (7.1     -0.5     (0.5
  

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest

   $ 73.6        4.2   $ 77.5        5.3   $ (3.9
  

 

 

     

 

 

     

 

 

 

Net earnings attributable to controlling interest for the six months ended November 30, 2014 decreased $3.9 million from the comparable period in the prior year. Net sales and operating highlights were as follows:

 

   

Net sales increased $271.2 million from the comparable period in the prior year. The increase was driven largely by higher volume in Steel Processing and the impact of recent acquisitions in Pressure Cylinders.

 

   

Gross margin increased $15.5 million from the comparable period in the prior year due to the increase in volumes. Higher manufacturing expenses combined with the unfavorable impact of lower inventory holding gains in Steel Processing partially offset the impact of higher volume.

 

   

SG&A expense increased $2.7 million from the comparable period in the prior year due primarily to the impact of acquisitions offset by lower profit sharing and bonus expense.

 

   

Impairment charges of $16.2 million consisted of $6.3 million related to the Company’s 60%-owned consolidated joint venture in India, $3.2 million related to the Company’s aluminum high-pressure cylinder business in New Albany, Mississippi, $3.1 million related to certain non-core Steel Processing assets, $2.4 million related to certain non-core Engineered Cabs assets, and $1.2 million related to the military construction business. Impairment charges in the comparable period in the prior year consisted of $30.7 million related to the write-off of certain trade name intangible assets in connection with a branding initiative committed to during the second quarter of fiscal 2014 and $4.7 million related to certain non-core assets within Steel Processing. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

   

Miscellaneous income decreased $11.9 million from the comparable period in the prior year due to an $11.0 million non-cash gain in the prior year period related to the acquisition of an additional 10% interest in the TWB joint venture.

 

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Interest expense of $19.2 million was $6.7 million higher than the comparable period in the prior year. The increase was due to the impact of higher average debt levels resulting from the issuance of $250.0 million of notes in April 2014.

 

   

Equity income increased $2.2 million over the prior year period to $50.2 million on net sales of $781.3 million. The equity portion of income from WAVE, Serviacero and ArtiFlex exceeded the prior year period by $3.4 million, $1.9 million and $1.5 million, respectively. However, equity income from ClarkDietrich decreased $2.8 million on lower volumes. Additionally, TWB contributed equity income of $1.8 million in the prior year, prior to its consolidation in July of 2013. For additional financial information regarding our unconsolidated affiliates, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE B – Investments in Unconsolidated Affiliates” of this Quarterly Report on Form 10-Q.

 

   

Income tax expense increased $15.3 million from the comparable period in the prior year due to (i) higher earnings, primarily resulting from the impact of trade name impairment charges recorded in the prior year, and (ii) an approximately $7.2 million favorable tax impact associated with the acquisition of an additional 10% interest in TWB recorded in the prior year (the “TWB acquisition adjustment”). The TWB acquisition adjustment related primarily to the estimated U.S. deferred tax liability associated with the unremitted earnings of TWB’s wholly-owned foreign corporations. Tax expense of $37.7 million for the six months ended November 30, 2014 was calculated using an estimated annual effective rate of 33.5% versus 27.8% in the prior year comparable period. See “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE K – Income Taxes” of this Quarterly Report on Form 10-Q for more information on our tax rates.

Segment Operations

Steel Processing

The following table presents a summary of operating results for our Steel Processing operating segment for the periods indicated:

 

     Six Months Ended November 30,  
(Dollars in millions)    2014     % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

   $ 1,105.1        100.0   $ 894.6        100.0   $ 210.5   

Cost of goods sold

     970.2        87.8     773.8        86.5     196.4   
  

 

 

     

 

 

     

 

 

 

Gross margin

     134.9        12.2     120.8        13.5     14.1   

Selling, general and administrative expense

     62.2        5.6     63.5        7.1     (1.3

Impairment of long-lived assets

     3.1        0.3     4.6        0.5     (1.5

Restructuring and other income

     (0.1     0.0     (4.7     -0.5     4.6   
  

 

 

     

 

 

     

 

 

 

Operating income

   $ 69.7        6.3   $ 57.4        6.4   $ 12.3   
  

 

 

     

 

 

     

 

 

 

Material cost

   $ 795.6        $ 637.6        $ 158.0   

Tons shipped (in thousands)

     1,804          1,536          268   

Net sales and operating highlights were as follows:

 

   

Net sales increased $210.5 million from the comparable period in the prior year on higher volume resulting from the consolidation of TWB and increased sales in the automotive and construction markets. Excluding the impact of TWB, overall volumes were up 13% and the mix of direct versus toll tons processed was 55% to 45%, compared to 57% to 43% in the comparable prior year period.

 

   

Operating income increased $12.3 million from the comparable period in the prior year. Higher manufacturing expenses combined with the unfavorable impact of lower inventory holding gains in the current year partially offset the impact of higher volume. Operating income in the current period included an impairment charge of $3.1 million related to certain non-core Steel Processing assets. For additional information, refer to “Item 1. – Financial Statements – Notes to Consolidated Financial Statements – NOTE C – Impairment of Long-Lived Assets” of this Quarterly Report on Form 10-Q.

 

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Pressure Cylinders

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

 

    Six Months Ended November 30,  
(Dollars in millions)   2014      % of
Net sales
    2013     % of
Net sales
    Increase/
(Decrease)
 

Net sales

  $ 501.7         100.0   $ 430.9        100.0   $ 70.8   

Cost of goods sold

    391.6         78.1     329.7        76.5     61.9   
 

 

 

      

 

 

     

 

 

 

Gross margin

    110.1         21.9     101.2        23.5     8.9   

Selling, general and administrative expense

    70.9         14.1     63.3        14.7     7.6   

Impairment of long-lived assets

    9.6         1.9     11.6        -        (2.0

Restructuring and other expense (income)

    0.4         0.1     (1.4     -        1.8   
 

 

 

      

 

 

     

 

 

 

Operating income

  $ 29.2         5.8   $ 27.7        6.4   $ 1.5   
 

 

 

      

 

 

     

 

 

 

Material cost

  $ 234.3         $ 196.8        $ 37.5   

Net sales by principal class of products:

          

Consumer Products

  $ 133.4         $ 120.3        $ 13.1   

Industrial Products

    198.6           204.8          (6.2