Tickers in this Article: WOR, AKS, ROCK, PKX, TRN
Steel processor Worthington Industries (NYSE:WOR) had a double-edged sword type of second quarter in fiscal 2011. Strong demand from the automotive market led to greater volume in the steel processing side of the company while overall economic conditions continued to improve the pressure cylinders business segments. As a result sales were up 30% to $580 million from $448 million in the year ago quarter.

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Sales Don't Always Cure Ails
Unfortunately, the strong sales increase at Worthington was not met with a similar positive result in profits. Thanks to volume increases, sales caused an increase of $86 million. However, as a result of higher commodity costs, steel in this case, net earnings came in at $14.5 million for the quarter compared with $23 million in the year ago quarter. Earnings per share amounted to 20 cents versus 29 cents in the year ago period. Gross margins declined by 300 basis points to 12% from 15% due to lower spreads between the company's selling prices and the cost of steel. Also affecting net income was an increase in debt which led to an interest expense of $4.8 million in the quarter compared with $2 million in the prior year. Short term borrowings increased by $123 million from the year ago period.

Sending a Signal
Worthington's quarterly report may be a signal to investors invested or looking to invest in other businesses that are susceptible to rising input costs. Names like AK Steel (NYSE:AKS), Gibraltar Industries (NYSE:ROCK) and Trinity Industries (NYSE:TRN) are all affected, to varying degrees, by the underlying price of steel and other related commodities. Recently, South Korea's Posco (NYSE:PKX), the third largest steel company in the world, announced that it was raising stainless steel prices in January in response to rising material costs. Clearly, if Worthington and other companies can continue to grow sales at a healthy clip, continued rising prices will not hurt the bottom line as much. But the economy still remains fragile, and it's concerning to see input costs rise so rapidly in this sensitive environment. (For more, see Steel Dynamics: Buy The Muddle Through?)

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