Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the quarter ended February 28, 2023, covering the three and nine months ended that date. The business operated through Steel Processing, Consumer Products, Building Products and Sustainable Energy Solutions, with additional earnings from unconsolidated joint ventures. The filing describes a planned separation of Steel Processing into Worthington Steel and the remaining businesses into New Worthington, expected by early 2024, subject to regulatory, tax, market and other conditions.
The request metadata identifies the company as Worthington Enterprises, while the filing itself identifies the registrant as Worthington Industries, Inc.; this should be verified.
Financial Performance and Position
| Metric | Three Months Ended February 28, 2023 | Prior-Year Quarter | Nine Months Ended February 28, 2023 | Prior-Year Period |
|---|---|---|---|---|
| Net sales | $1,103.3 million | $1,378.2 million | $3,687.5 million | $3,721.9 million |
| Gross margin | $143.8 million; 13.0% | $143.1 million; 10.4% | $418.9 million; 11.4% | $547.1 million; 14.7% |
| Operating income | $30.1 million; 2.7% | $37.6 million; 2.7% | $89.8 million; 2.4% | $263.9 million; 7.1% |
| Net earnings attributable to controlling interest | $46.3 million | $56.3 million | $126.6 million | $299.1 million |
| Diluted EPS | $0.94 | $1.11 | $2.57 | $5.83 |
| Adjusted EBIT | $71.3 million | $84.6 million | $219.0 million | $405.5 million |
- Third-quarter sales declined 19.9%, primarily because of substantially lower steel prices and lower Steel Processing toll volumes. Nine-month sales declined 0.9%.
- Third-quarter gross margin improved modestly in dollars and expanded to 13.0%, but nine-month gross margin fell materially because of estimated Steel Processing inventory holding losses and higher manufacturing costs.
- Third-quarter equity income declined to $36.9 million from $47.5 million. Nine-month equity income declined to $105.5 million from $160.6 million, including a $16.1 million loss related to the sale of the ArtiFlex investment.
- Cash and cash equivalents were $267.2 million at February 28, 2023, compared with $34.5 million at May 31, 2022.
- Nine-month operating cash flow was $396.1 million, compared with cash used of $94.7 million in the prior-year period. The improvement primarily reflected a $466.2 million reduction in operating working-capital requirements as steel prices declined.
- Nine-month capital expenditures were $68.7 million. The company spent $56.1 million on the Level5 acquisition and received approximately $71.3 million from asset and investment sales.
- Total debt, including current maturities, was approximately $689.6 million at February 28, 2023, compared with $696.6 million at May 31, 2022. The estimated fair value of long-term debt was $638.2 million.
- The company had no borrowings under its $500.0 million revolving credit facility or $175.0 million accounts-receivable facility. Approximately $3.6 million of short-term borrowings remained outstanding at Tempel China.
- Cash dividends declared were $0.31 per share for the quarter and $0.93 per share for the nine-month period, compared with $0.28 and $0.84, respectively, in the comparable periods.
Material Changes Versus Prior Comparable Period
- Steel Processing sales fell $295.6 million in the quarter and $175.4 million year to date, driven primarily by lower average selling prices. Nine-month Steel Processing adjusted EBIT fell $161.2 million to $25.5 million.
- The estimated unfavorable swing from Steel Processing inventory holding gains to losses was approximately $145.4 million for the nine-month period: estimated losses of $81.2 million in fiscal 2023 versus gains of $64.2 million in fiscal 2022.
- Consumer Products sales increased $54.8 million year to date, aided by higher prices and the Level5 acquisition, but adjusted EBIT decreased $12.4 million because of lower volumes, inflationary costs and higher SG&A.
- Building Products sales increased $75.1 million year to date, while adjusted EBIT decreased $7.6 million as lower joint-venture earnings offset improved operating income.
- SG&A increased $22.4 million year to date, primarily due to acquisitions and divestitures. Separation costs totaled $6.3 million in the quarter and $15.6 million year to date.
- The company acquired Level5 for approximately $59.3 million, including a potential earnout of up to $25.0 million through 2024. It also sold its ArtiFlex interest for approximately $41.8 million of net proceeds.
- Long-term debt was reduced through the open-market repurchase of $5.6 million principal amount of the 2026 Notes, generating a $0.1 million gain.
Guidance, Outlook, Commentary and Risks
- No formal quantitative earnings or revenue guidance is provided in the filing. Management expects meaningful Steel Processing inventory holding gains in the fourth quarter of fiscal 2023 based on then-current steel prices.
- Management reported generally steady demand through the third quarter and cited potential pent-up automotive demand, but noted inflation, elevated interest rates, softening economic conditions and supply-chain uncertainty.
- The planned separation is expected to be completed by early 2024, but remains subject to final Board approval, regulatory approvals, tax qualification, capital-structure decisions and other closing conditions. Separation costs and execution risks may continue.
- Key operating exposures include volatile steel, zinc, natural gas, diesel, labor and transportation costs; the ability to pass cost changes through to customers; customer demand and inventory levels; automotive and construction activity; imports and tariffs; and supply-chain disruptions.
- Other significant risks include recession and interest-rate effects, foreign currency exposure, joint-venture performance, customer or supplier financial distress, environmental and climate-related regulation, cybersecurity, litigation and tax-law changes.
- Outstanding stand-by letters of credit totaled $14.1 million, with no draws at February 28, 2023. The company also guaranteed an aircraft lease residual value with a maximum obligation of approximately $17.2 million.
- Management stated that legal and environmental matters were not expected to materially affect financial position or results, and that the company was in compliance with debt covenants.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the period.
Important Facts for Investors to Verify
- Confirm the registrant and corporate identity, given the metadata reference to Worthington Enterprises versus the filing’s stated registrant, Worthington Industries, Inc.
- Assess the sustainability of earnings after excluding inventory holding effects, asset-sale gains, the ArtiFlex loss, pension settlement charges and Separation costs.
- Evaluate the financial and tax consequences, timing, approvals and post-separation capital structures for Worthington Steel and New Worthington.
- Monitor Steel Processing spreads, steel prices, inventory valuation and the expected fourth-quarter inventory holding gains.
- Review the decline in unconsolidated joint-venture earnings and the $116.8 million liability representing distributions in excess of the WAVE investment balance.
- Confirm liquidity after dividends, capital expenditures, debt maturities, potential earnout payments and continuing Separation expenditures.
- Track demand trends in automotive, construction and retail markets, as well as inflationary manufacturing costs and supply-chain conditions.