Worthington Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter ended August 31, 2022, the first quarter of fiscal 2023, compared with the quarter ended August 31, 2021. The company reported four operating segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions. The filing identifies the registrant as Worthington Industries, Inc.
On September 29, 2022, the company announced plans to separate Steel Processing from the other three operating segments into two independent publicly traded companies, targeted for completion by early 2024, subject to market conditions, capital-structure decisions, tax treatment, regulatory approvals, closing conditions, and final Board approval.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,408.7 million | $1,110.8 million | +$297.9 million |
| Gross margin | $169.4 million; 12.0% | $219.4 million; 19.8% | -$50.0 million |
| Operating income | $66.7 million | $135.8 million | -$69.1 million |
| Net earnings attributable to controlling interest | $64.1 million | $132.5 million | -$68.4 million |
| Diluted EPS | $1.30 | $2.55 | -$1.25 |
| Adjusted EBIT | $112.3 million | $174.0 million | -$61.7 million |
| Cash flow from operations | $81.0 million | $(49.8) million | +$130.8 million |
- Revenue increased 26.8%, primarily from acquisitions and higher average selling prices. Steel Processing sales rose to $1,038.9 million, Consumer Products to $188.7 million, Building Products to $150.3 million, and Sustainable Energy Solutions to $30.8 million.
- Steel Processing adjusted EBIT fell $72.8 million to $34.9 million. Consumer Products adjusted EBIT was $20.9 million, Building Products was $52.7 million, and Sustainable Energy Solutions recorded a $1.4 million loss.
- Gross margin declined primarily because of lower Steel Processing margins and an estimated $48.6 million unfavorable swing from inventory holding gains in the prior year to inventory holding losses in the current year. The company also recorded a $4.5 million lower-of-cost-or-net-realizable-value inventory adjustment.
- SG&A increased $7.5 million to $103.4 million, primarily due to acquisitions, partly offset by lower profit-sharing and bonus accruals.
- Equity income from unconsolidated affiliates declined $21.2 million to $31.7 million, including a $15.8 million pretax loss on the sale of the ArtiFlex investment and lower Serviacero Worthington earnings.
- Cash and cash equivalents were $35.8 million at August 31, 2022, compared with $34.5 million at May 31, 2022. Total assets were $3.51 billion and total equity was $1.65 billion.
- Long-term debt, including current maturities, totaled approximately $690.3 million; short-term borrowings totaled $15.6 million. The company had no borrowings under its $500.0 million revolving credit facility and had $500.0 million available. The accounts-receivable facility had $11.2 million outstanding and $163.8 million available.
- Capital expenditures were $21.5 million. Investing cash outflows included the $56.1 million Level5 acquisition, partially offset by approximately $47.9 million of proceeds from the ArtiFlex-related transaction and other asset sales. Financing cash outflows included $32.4 million of short-term debt repayments and $13.9 million of dividends paid.
- The Board declared a quarterly dividend of $0.31 per share payable December 29, 2022. As of August 31, 2022, 6.065 million shares remained available under repurchase authorizations.
Material changes versus the prior comparable period
- Net sales rose substantially, but profitability and margins fell sharply because of lower steel spreads, declining steel prices, inventory holding losses, higher input costs, and weaker results from certain affiliates.
- Steel Processing volume declined to 974,649 tons from 1,062,288 tons, while the mix shifted toward direct tons from toll processing. Consumer Products, Building Products, and Sustainable Energy Solutions volumes increased.
- Cash flow from operations improved by $130.8 million, mainly because working-capital requirements decreased by $125.9 million as average steel prices declined.
- The company acquired Level5 Tools for a net cash purchase price of approximately $56.1 million, with a potential earnout of up to $25.0 million through 2024. The acquisition contributed to Consumer Products and included $0.5 million of earnout-related compensation expense in the quarter.
- The company sold its 50% ArtiFlex interest for approximately $42.1 million and recognized a $15.8 million pretax loss in equity income.
- Other unusual items included a $4.8 million noncash pension settlement charge, a $0.3 million long-lived-asset impairment, and $1.1 million of net restructuring and other income.
- Other comprehensive loss was $20.5 million, primarily from foreign-currency translation and cash-flow hedge losses.
Guidance, outlook, management commentary, risks and contingencies
- The filing does not provide specific earnings or revenue guidance. Management stated that results are cyclical and that operating performance is sensitive to steel prices, product demand, spreads, raw-material costs, energy, transportation, labor, interest rates, and economic conditions.
- Management believes existing cash, operating cash flow, and borrowing capacity are sufficient for normal operating needs, capital expenditures, debt maturities, dividends, and working capital for at least the next 12 months and the foreseeable future.
- Management cited inflation, higher interest rates, possible recession, weakening economic conditions, supply-chain constraints, COVID-19 effects, Russia’s invasion of Ukraine, tariffs and trade restrictions, automotive production, steel-price volatility, and customer or supplier financial difficulties as key risks.
- The company had $16.6 million of standby letters of credit outstanding, with no draws at August 31, 2022, and a maximum aircraft residual-value guarantee of approximately $17.9 million.
- Distributions from unconsolidated affiliates totaled $74.6 million during the quarter. Cumulative distributions from WAVE exceeded the company’s investment balance by $85.0 million and were classified as a liability.
- Management reported compliance with debt covenants and no material changes to previously disclosed market risks or risk factors. Legal and environmental matters were not expected to materially affect financial condition or results.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed separation is approved, receives required regulatory and tax approvals, and remains on track for early 2024.
- The sustainability of Steel Processing margins as steel prices, inventory costs, direct-versus-toll mix, and automotive demand change.
- The performance of Level5 and the potential cost of its earnout, including the remaining consideration of up to $25.0 million.
- The extent to which cash flow depends on distributions from unconsolidated affiliates, particularly WAVE and ClarkDietrich.
- Liquidity after considering cash of $35.8 million, outstanding short-term borrowings, debt maturities, dividends, capital expenditures, and acquisition or separation-related costs.
- Potential earnings effects from derivative positions, including approximately $15.5 million of estimated net hedge losses expected to be reclassified into earnings within the following 12 months.