Worthington Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2023, compared primarily with fiscal 2022. The request references “2022 Q4,” but the supplied filing is an annual report for fiscal 2023, not a quarterly filing.
Business context
Worthington Industries is an industrial manufacturer operating through four segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions. Steel Processing generated 71.1% of fiscal 2023 consolidated sales. The Company operates 28 wholly owned or consolidated manufacturing facilities and has interests in several joint ventures. Automotive represented approximately 37% of consolidated sales, and one automotive customer represented 11.9% of consolidated sales.
On September 29, 2022, the Company announced its plan to separate Steel Processing into a standalone publicly traded company, Worthington Steel, while the remaining company, New Worthington, would comprise Consumer Products, Building Products, and Sustainable Energy Solutions. Completion was expected by early 2024, subject to Board approval, regulatory and tax conditions, financing, and other closing requirements.
Financial performance and key metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $4,916.4 million | $5,242.2 million | $(325.8) million |
| Gross margin | $663.3 million; 13.5% | $714.8 million; 13.6% | $(51.5) million |
| Operating income | $212.4 million | $329.3 million | $(116.9) million |
| Equity income | $161.0 million | $213.6 million | $(52.6) million |
| Net earnings attributable to controlling interest | $256.5 million | $379.4 million | $(122.9) million |
| Diluted EPS | $5.19 | $7.44 | $(2.25) |
| Adjusted EBIT | $402.1 million | $516.5 million | $(114.4) million |
| Cash flow from operations | $625.4 million | $70.1 million | $555.3 million |
| Capital expenditures | $86.4 million | $94.6 million | $(8.2) million |
Fiscal 2023 sales declined primarily because lower steel prices and lower Steel Processing volume more than offset growth in the other segments. Steel Processing sales decreased 11.1% to $3.50 billion, while Consumer Products increased 7.8% to $686.3 million, Building Products increased 8.2% to $586.1 million, and Sustainable Energy Solutions increased 11.6% to $146.1 million.
Gross margin was pressured by lower volumes, higher manufacturing expenses, inflation, and higher fixed-cost absorption. Adjusted EBIT declined in Steel Processing to $121.7 million, Consumer Products to $78.0 million, and Building Products to $204.6 million. Sustainable Energy Solutions improved to $0.9 million.
Cash flow, liquidity, debt, and capital allocation
- Cash and cash equivalents increased to $454.9 million from $34.5 million, largely because of operating working-capital releases as steel prices declined.
- Operating cash flow of $625.4 million included a $410.4 million favorable change in operating working-capital requirements and $240.9 million of cash distributions from unconsolidated joint ventures.
- Total debt was $695.0 million at May 31, 2023, including $689.7 million of long-term debt net of current maturities and $2.8 million of short-term borrowings.
- The $500.0 million revolving credit facility had no borrowings outstanding and was fully available at year-end. The $175.0 million receivables securitization facility also had no borrowings at year-end but was terminated on June 29, 2023.
- The Company was in compliance with debt covenants and stated that it had adequate resources for normal operating costs, capital expenditures, debt repayments, dividends, and working capital.
- Fiscal 2023 dividends were $1.24 per share, or $59.2 million in cash payments. The Board declared a fiscal 2024 quarterly dividend of $0.32 per share.
- No common shares were repurchased during fiscal 2023; approximately 6.1 million shares remained available under existing authorizations.
Material changes and unusual items
- The Company acquired Level5 Tools for approximately $57.6 million in cash, with a potential earnout of up to $25.0 million through calendar 2024. Level5 contributed approximately $33.5 million of fiscal 2023 sales.
- The Company sold its 50% ArtiFlex interest for net proceeds of approximately $35.8 million and recognized a pre-tax loss of approximately $16.1 million.
- WSP sold its remaining Jackson, Michigan facility for net proceeds of approximately $21.3 million and recognized a pre-tax gain of $3.9 million.
- Separation costs were $24.0 million, primarily for audit, advisory, legal, and stand-up costs.
- A non-cash pension settlement charge of $4.8 million resulted from transferring approximately 31% of the Gerstenslager Plan obligation to an insurance company.
- Steel Processing experienced estimated inventory holding losses of $48.7 million in fiscal 2023, compared with estimated holding gains of $21.9 million in fiscal 2022, reflecting the decline in steel prices.
- The Company recorded $2.6 million of long-lived asset impairment charges and $4.6 million of net restructuring and other income.
- On July 28, 2023, after year-end, the Company redeemed its $243.6 million of 4.55% notes due 2026 and recognized an approximately $1.5 million loss on early extinguishment.
Outlook, risks, and contingencies
Management did not provide formal quantitative earnings or sales guidance in the supplied filing. Management stated that demand remained steady in most end markets despite inflation and higher interest rates, while continuing to evaluate the post-Separation capital structure.
- Key operating risks include cyclical automotive and construction demand, steel and other commodity price volatility, inventory holding losses, supply-chain disruptions, freight and energy costs, and the ability to pass cost increases through to customers.
- Customer concentration remains material: the ten largest customers represented approximately 34% of fiscal 2023 sales, and one customer represented approximately 12%.
- The planned Separation could create higher standalone costs, reduce purchasing power and diversification, disrupt operations, or fail to achieve anticipated strategic and financial benefits.
- The tax-free treatment of the Separation depends on satisfying conditions and obtaining a tax opinion; the IRS or courts would not be bound by that opinion.
- The Company is subject to litigation, environmental obligations, self-insured claims, cybersecurity risks, foreign-exchange exposure, and regulatory and tax uncertainty. Management does not expect currently disclosed legal or environmental matters to have a material effect, but future outcomes may differ.
- The Company’s fiscal 2023 goodwill review identified no impairment indicators. Consumer Products goodwill of $257.3 million was identified as a critical audit matter because of the subjectivity of the qualitative impairment assessment.
Most important facts for investors to verify
- Whether and when the Worthington Steel separation was completed, including the final capital structures, tax treatment, financing, and allocation of debt and corporate costs.
- The sustainability of fiscal 2023 operating cash flow, given that a significant portion resulted from working-capital releases associated with falling steel prices.
- Steel Processing margins, inventory holding gains or losses, direct-versus-toll processing mix, and exposure to automotive customers.
- Post-Separation profitability and cost structure of New Worthington, including standalone corporate expenses and purchasing impacts.
- Debt repayment and refinancing requirements, particularly the $150.3 million scheduled in fiscal 2025 and the status of the 2024 notes.
- Performance of Level5 and the potential earnout obligation through calendar 2024.
- Cash distributions and financial performance of unconsolidated affiliates, including WAVE, ClarkDietrich, and Serviacero Worthington.
- Material effects of inflation, interest rates, commodity prices, customer concentration, supply-chain conditions, environmental claims, and self-insured liabilities.