Worthington Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the three and six months ended November 30, 2023, the second quarter of fiscal 2024. Results include the former Steel Processing business through the period end. On December 1, 2023, the Company completed the tax-free separation of Worthington Steel, Inc.; future historical results will present Steel Processing as a discontinued operation.
Remaining operations comprise Consumer Products, Building Products and Sustainable Energy Solutions, while the reported period also includes Steel Processing and related joint ventures. The Company changed its name from Worthington Industries, Inc. to Worthington Enterprises, Inc. following the separation.
Key financial metrics
| Metric | Three months ended Nov. 30, 2023 | Three months ended Nov. 30, 2022 | Six months ended Nov. 30, 2023 | Six months ended Nov. 30, 2022 |
|---|---|---|---|---|
| Net sales | $1,086.9 million | $1,175.5 million | $2,280.2 million | $2,584.2 million |
| Gross margin | $123.7 million; 11.4% | $105.8 million; 9.0% | $321.2 million; 14.1% | $275.1 million; 10.6% |
| Operating income (loss) | $(5.9) million | $(7.0) million | $71.8 million | $59.7 million |
| Net earnings attributable to controlling interest | $24.3 million | $16.2 million | $120.4 million | $80.3 million |
| Diluted earnings per share | $0.49 | $0.33 | $2.40 | $1.63 |
| Adjusted EBIT | $52.8 million | $35.3 million | $189.3 million | $147.6 million |
| Cash flow from operations | $135.0 million | $132.9 million | $194.7 million | $214.0 million |
Net sales declined 7.5% in the quarter and 11.8% year to date, primarily from lower selling prices and lower volumes in several businesses. Quarterly gross margin improved despite lower sales, largely because Steel Processing inventory holding losses were lower year over year. Six-month inventory holding losses were estimated at $19.3 million versus $54.6 million in the prior-year period.
Equity income increased to $42.4 million in the quarter and $96.8 million year to date, supported by WAVE and Serviacero Worthington and, in the quarter, a $2.8 million gain related to the sale of Workhorse’s Brazilian operations.
Cash flow, debt and liquidity
- Cash and cash equivalents were $430.9 million at November 30, 2023, compared with $454.9 million at May 31, 2023.
- Six-month capital expenditures were $62.2 million. Investing cash uses also included a $15.0 million note receivable investment and $21.0 million for the acquisition of Tempel Steel Europe.
- Total debt, net of discounts and issuance costs, was $623.8 million at November 30, 2023, compared with $692.8 million at May 31, 2023.
- Debt included $175.0 million of short-term borrowings, $150.0 million of senior notes due in August 2024, and $298.5 million of long-term debt.
- The Company had no borrowings under its $500.0 million unsecured revolving credit facility, leaving the full commitment available. Management stated that existing cash flow, cash balances and borrowing capacity should meet expected needs for at least 12 months.
- After quarter-end, Worthington Steel paid $150.0 million to Worthington Enterprises in connection with the separation. Worthington Enterprises used the proceeds on December 6, 2023 to redeem its $150.0 million notes due August 2024.
- Dividends declared were $0.32 per common share for the quarter and $0.64 per share for the six-month period. The Board subsequently declared a $0.16 quarterly dividend payable March 29, 2024.
Material changes versus the prior comparable period
- Quarterly net sales decreased $88.6 million, while adjusted EBIT increased $17.5 million to $52.8 million. Steel Processing adjusted EBIT improved by $24.0 million due primarily to reduced inventory holding losses.
- Consumer Products adjusted EBIT declined $4.0 million in the quarter and $15.9 million year to date, reflecting lower volumes, higher manufacturing expense and a product recall reserve.
- Building Products adjusted EBIT was broadly stable year to date at $94.3 million, while Sustainable Energy Solutions reported an adjusted EBIT loss of $7.3 million year to date versus a $0.3 million loss in the prior-year period.
- Six-month equity income increased $28.2 million. The prior-year period included a $15.8 million loss on the sale of the Company’s ArtiFlex investment.
- Interest expense declined to $2.2 million in the quarter and $5.3 million year to date, primarily due to higher interest income and lower average debt.
- Separation costs increased to $22.0 million in the quarter and $28.0 million year to date, compared with $9.2 million in the prior-year periods.
- The Company redeemed its $243.6 million of 4.55% senior notes due 2026 on July 28, 2023, recognizing a $1.5 million loss on extinguishment of debt.
Guidance, outlook, risks and unusual items
The filing does not provide a specific numerical earnings or revenue forecast. Management expects seasonal softness in the fiscal third quarter, particularly in building and construction markets and automotive customer shutdowns, followed historically by stronger fourth-quarter activity.
- A recall of the Balloon Time Mini helium tank resulted in an approximately $3.0 million inventory reserve and an approximately $3.1 million Consumer Products expense.
- Demand and margins remain sensitive to steel, zinc, natural gas, fuel, transportation and labor costs. Declining steel prices can create inventory holding losses; the Company also identifies scrap-price movements as a margin risk.
- Key demand risks include automotive production, construction activity, customer destocking, economic recession, inflation, high interest rates, commodity volatility, supply-chain disruptions, tariffs and imports.
- The separation creates execution, tax, financing, shared-services and ongoing commercial-relationship risks, including obligations under tax, employee, transition-services, trademark and steel-supply agreements.
- The Company reports ongoing ordinary-course legal proceedings and environmental matters but does not expect them to materially affect its financial position or results. It also reported no material guarantee exposure, although it guaranteed up to approximately $16.1 million of aircraft residual value and had $12.1 million of outstanding standby letters of credit.
- Disclosure controls and procedures were concluded to be effective at a reasonable assurance level, and no material changes to internal control over financial reporting were identified during the period.
Most important facts for investors to verify
- Recast financial statements beginning in the fiscal 2024 third quarter, including treatment of Worthington Steel as a discontinued operation.
- Post-separation debt, cash balances, available revolver capacity and the effect of the $150.0 million debt redemption.
- Whether lower steel prices, inventory holding losses and commodity costs continue to affect margins.
- Demand trends and profitability in the remaining Consumer Products, Building Products and Sustainable Energy Solutions segments.
- Costs, tax consequences and operating dependencies arising from the separation agreements with Worthington Steel.
- Resolution and financial impact of the Balloon Time recall, contingent liabilities and aircraft residual-value guarantee.