Worthington Enterprises, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended February 29, 2024, compared with February 28, 2023. The request references “2023 Q3,” but the filing is for fiscal 2024 third quarter. The company completed the separation of Worthington Steel on December 1, 2023; prior-period Steel results are presented as discontinued operations.
Business Context and Reporting Changes
- Worthington Enterprises now consists of Consumer Products, Building Products, and Sustainable Energy Solutions.
- Worthington Steel was distributed to shareholders on a one-for-one basis and became a separate public company.
- The company received a $150.0 million dividend from Worthington Steel and distributed $218.0 million to Worthington Steel in connection with the separation.
- On February 1, 2024, the company acquired an 80% controlling interest in Halo, an outdoor-cooking business, for $9.4 million of cash consideration.
Key Financial Metrics
| Metric | Three Months Ended February 29, 2024 | Prior Comparable Period | Change |
|---|
| Net sales | $316.8 million | $346.3 million | Down $29.5 million, or 8.5% |
| Gross profit | $73.1 million | $79.0 million | Down $5.9 million |
| Gross margin | 23.1% | 22.8% | Up 30 basis points |
| Operating income | $4.3 million | $4.0 million | Up $0.3 million |
| Net earnings from continuing operations | $22.0 million | $29.8 million | Down $7.8 million |
| Diluted EPS from continuing operations | $0.44 | $0.60 | Down $0.16 |
| Adjusted EBITDA | $66.9 million | $70.2 million | Down $3.3 million |
| Adjusted EBITDA margin | 21.1% | 20.3% | Up 80 basis points |
| Metric | Nine Months Ended February 29, 2024 | Prior Comparable Period | Change |
|---|
| Net sales | $926.9 million | $1,049.7 million | Down $122.8 million, or 11.7% |
| Gross profit | $206.0 million | $229.4 million | Down $23.4 million |
| Gross margin | 22.2% | 21.9% | Up 30 basis points |
| Operating income (loss) | $(17.4) million | $14.5 million | Down $31.9 million |
| Net earnings from continuing operations | $66.8 million | $75.6 million | Down $8.8 million |
| Diluted EPS from continuing operations | $1.33 | $1.53 | Down $0.20 |
| Adjusted EBITDA | $187.8 million | $212.3 million | Down $24.5 million |
Segment Performance
- Consumer Products: Third-quarter sales increased 1.9% to $133.2 million, supported by higher volume. Adjusted EBITDA rose $4.5 million to $25.6 million. Nine-month sales declined 9.0% to $369.9 million, and adjusted EBITDA declined $15.3 million to $52.5 million, primarily from lower volumes and customer destocking.
- Building Products: Third-quarter sales declined 19.4% to $148.2 million, primarily because of unfavorable product mix. Adjusted EBITDA declined $5.0 million to $53.1 million. Nine-month sales declined 14.2% to $465.4 million, while adjusted EBITDA increased modestly to $158.5 million, supported by higher equity income.
- Sustainable Energy Solutions: Third-quarter sales increased 11.3% to $35.4 million, but adjusted EBITDA deteriorated to a $2.7 million loss because volumes remained insufficient to absorb fixed costs. Nine-month sales declined 9.0% to $91.6 million and adjusted EBITDA declined to a $6.4 million loss.
- Equity income: Increased to $43.2 million in the third quarter and $127.3 million for nine months. WAVE contributed higher earnings, while ClarkDietrich earnings declined from the prior year.
Cash Flow, Debt, and Liquidity
- Nine-month operating cash flow was $244.8 million, down from $396.1 million, primarily because of higher working-capital requirements and lower distributions from unconsolidated affiliates.
- Capital expenditures were $72.2 million; acquisitions used $29.7 million, including $8.7 million for Halo.
- Cash and cash equivalents were $227.3 million at February 29, 2024, compared with $422.3 million at May 31, 2023.
- Net cash used in financing activities was $355.9 million, including debt redemptions, separation-related cash transfers, and $48.9 million of dividends.
- Total debt, net, was $298.0 million at February 29, 2024, compared with $690.0 million at May 31, 2023. The company redeemed the 2026 Notes for approximately $243.6 million and the 2024 Notes for $150.0 million.
- The $500.0 million unsecured revolving credit facility was amended to extend maturity to September 27, 2028. No borrowings were outstanding, leaving the full $500.0 million available.
- Management believes available cash and borrowing capacity are sufficient for operating requirements, capital expenditures, debt obligations, dividends, and working capital for at least the next 12 months.
Material Changes, Outlook, and Unusual Items
- The separation materially changed the company’s scale, capital structure, reporting segments, cost base, and comparability with prior periods.
- Separation costs were $3.0 million in the quarter and $12.5 million year to date; approximately $31.0 million of separation costs were incurred during the nine months, including amounts attributed to discontinued operations.
- A non-cash pension settlement charge of $8.1 million was recorded in the quarter and excluded from adjusted EBITDA.
- Income tax expense included approximately $9.2 million of one-time discrete tax charges related to the separation. The estimated annual effective tax rate increased to 30.8% from 22.6%.
- The company recorded approximately $1.9 million of inventory valuation charges related to imported propane tanks with unexpectedly high transportation costs.
- A $3.0 million inventory reserve was recorded in the second quarter for the Balloon Time mini helium tank recall. Direct recall costs are expected to be immaterial.
- Management described residential construction and long-term outdoor recreation fundamentals as relatively favorable, while noting weakness or uncertainty in nonresidential construction, home improvement, discretionary consumer spending, and European renewable-energy markets.
- Sustainable Energy Solutions remains exposed to weak European economic conditions and slow adoption of hydrogen and compressed-natural-gas transportation applications. Management believes the long-term outlook is positive but acknowledges that continued weak results or strategic alternatives could lead to impairment.
- Key risks include economic recession, interest rates and inflation, customer demand and destocking, raw-material and transportation costs, supply-chain disruption, tariffs, foreign currency, environmental regulation, cybersecurity, litigation, and the ability to realize benefits from the separation and transformation initiatives.
Investor Verification Checklist
- Verify the pro forma impact of the Worthington Steel separation when assessing year-over-year revenue, margins, cash flow, debt, and earnings trends.
- Assess the sustainability of earnings from WAVE and other unconsolidated affiliates, including the $116.8 million liability for distributions received in excess of the WAVE investment balance.
- Monitor Building Products mix, Consumer Products demand and destocking, and Sustainable Energy Solutions’ path to covering fixed costs.
- Reconcile adjusted EBITDA to GAAP earnings and evaluate the recurring nature of excluded separation, pension, restructuring, and other items.
- Evaluate liquidity after the large debt redemptions, the reduction in cash, planned capital expenditures, dividends, acquisitions, and potential working-capital needs.
- Review the preliminary purchase-price allocation and integration performance for Halo.
- Consider the aircraft lease residual-value guarantee of approximately $15.8 million and $12.1 million of outstanding standby letters of credit.
- Confirm the board-declared $0.16 quarterly dividend payable June 28, 2024, and the 6.1 million shares remaining under repurchase authorizations.
