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Worthington Industries Seeks Growth By The Numbers

By: Investor's Business Daily
Posted: 4/5/2013 2:15:00 PM
Referenced Stocks: WOR

To be a leader in its market while running a mature business is not an easy task. That's why Worthington Industries CEO John McConnell took the bull by the horns a few years back and set in motion a major restructuring plan.

Columbus, Ohio-basedWorthington ( WOR ), a maker of steel products for the construction, automobile, hardware and retail markets, saw its growth and margins decline in the mid-1990s and again when the economy went into the recent downturn. That's when McConnell began divesting underperforming assets and restructuring the leading ones.

The company also hired a consultant to help set up what it calls the "transformation."

In order to grow its leading businesses, Worthington pursued an acquisition strategy focusing on higher-growth, higher-margin and higher-value-added manufacturing firms, while setting disciplined goals for rates of return in each business.

"What this really did was take us from an organization that was entrepreneurial and more 'management by feel' and make us very much a metric-driven company where we're using metrics at all levels, we're making decisions based on facts and we're using those metrics to drive performance improvement," said Worthington CFO Andy Rose.

"When you're a growth company and you're emerging, one style of management works. When you mature in some of your businesses and businesses become more competitive, you need to change to continue to stay ahead," he added.

Worthington operates in four segments. Its steel-processing operations consist of buying steel from producers, processing or modifying it and distributing it to end-users. The company is America's largest independent processor of flat-rolled steel.

While this core business is the largest revenue generator, it produces closer to one-third of net income. It is also highly dependent on the automotive industry, however, Worthington is also attempting to increase its exposure to the energy and agriculture markets.

The second segment is pressure cylinders. It contributes 25% to 28% to the company's profits. Here, Worthington makes a variety of cylinders used to hold fuel, helium, natural gas and alternative fuels.

Some of the products include gas barbecue grills, camping equipment, heating systems, refrigerant cylinders, portable propane tanks as well as industrial and specialty high-pressure, acetylene and composite cylinders.

The company also bought its engineered cabs business a little over a year ago. This division makes cabs for mobile equipment in the construction, agriculture, mining, military and forestry markets. It gets 2% to 3% of its profits from that area.

Finally, 40% of Worthington's profits come from 11 joint ventures in the steel and metals-related areas. One of the most significant is the Worthington Armstrong Venture, or WAVE. It makes suspended ceiling systems.

Worthington's metal framing business, which provides more than 30% of all steel framing products sold in the U.S., was converted into a joint venture in 2011 in which Worthington kept a 25% share. This area was the most susceptible to weakness in the U.S. construction markets, so by reducing the share, Worthington effectively removed a large portion of the earnings drag with it, wrote Bridget Freas, senior analyst at Morningstar, in a research report.

"It's hard to get a lot of visibility on that (joint-ventures) business," she said. "You don't have the same kind of disclosure as you would have for their business lines and that used to only be maybe 20% to 25% of their business, and now that's really expanded to being closer to 50%."

The pressure cylinders business has been a more stable business and provides high margins for Worthington. It's also somewhat muted the impact of changes in the economy on other areas.

While the steel processing area has seen the biggest impact from the slow economy, "I've been pretty impressed with the margin profile more recently," said Freas. "Part of that is probably due to higher steel demand, improving environment in the U.S. for steel, and I think also their transformation plan. They've completed that in steel processing."

Worthington has set internal goals for doubling each of their businesses within the next five to seven years, though the time frame for each business is likely to be different due to different growth rates.

"What we're challenging managers to do is: 'You may be in a slow-growth business, but if you are, that means you need to go find other ways to accelerate that growth because we're not going to be content with your business growing at GDP,'" said Rose. "For some businesses that may be five years, for other businesses that may be seven years, it's not likely to be 10 or 12 years. We want to be able to grow our company consistently greater than 10% a year."

Worthington operates in a fragmented industry and a lot of its competitors are smaller private firms. About 15% of its business comes from international operations in Europe and Asia.

"This is a management team that has taken on a lot in terms of trying to make this company perform better than the status quo," said Freas. "They've done so many initiatives in the last few years. The management team has tried to roll up their sleeves and really get down to the nitty-gritty and see where can we cut cost, where can we be more efficient, which business do we want to grow, what's the opportunity. I do think that they have a very well defined strategy."