Worthington Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2023, the first quarter of fiscal 2024. The filing identifies the registrant as Worthington Industries, Inc.; the request metadata refers to Worthington Enterprises.
Business Context and Reporting Period
Worthington is an industrial manufacturer organized into Steel Processing, Consumer Products, Building Products and Sustainable Energy Solutions. Steel Processing generated 73.9% of consolidated sales. The Company continues to pursue a planned, generally tax-free spin-off of Worthington Steel into a separate publicly traded company, targeted for completion by early calendar 2024, subject to Board, regulatory, financing and other conditions.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $1,193.3 million | $1,408.7 million | Down $215.4 million, or 15.3% |
| Gross margin | $197.5 million; 16.6% | $169.4 million; 12.0% | Up $28.1 million; margin up 460 basis points |
| Operating income | $77.7 million; 6.5% | $66.7 million; 4.7% | Up $11.0 million |
| Net earnings attributable to controlling interest | $96.1 million; 8.1% | $64.1 million; 4.6% | Up $32.0 million |
| Diluted EPS | $1.93 | $1.30 | Up $0.63 |
| Adjusted EBIT | $136.4 million | $112.3 million | Up $24.1 million |
| Cash flow from operations | $59.7 million | $81.0 million | Down $21.3 million |
Sales declined in every segment. Steel Processing sales fell $157.6 million, primarily from lower steel prices, despite higher tons processed. Consumer Products sales fell $39.3 million on lower retail volumes; Building Products declined $16.4 million; and Sustainable Energy Solutions declined $2.1 million.
Steel Processing adjusted EBIT increased $43.1 million to $78.0 million, primarily from improved direct spreads and an estimated $17.0 million favorable year-over-year swing in inventory holding gains and losses. Consumer Products adjusted EBIT declined $11.9 million to $9.0 million. Building Products adjusted EBIT rose $1.3 million to $54.0 million, while Sustainable Energy Solutions generated an adjusted EBIT loss of $4.7 million.
Cash Flow, Debt and Liquidity
- Operating cash flow was $59.7 million. Working capital consumed cash, including a $64.3 million increase in inventories.
- Capital expenditures were $29.3 million, and the Company invested $15.0 million in a note receivable.
- Financing cash outflows were $269.3 million, primarily due to the $243.8 million redemption of the 4.55% senior notes due 2026. Dividends paid were $15.7 million.
- Cash and cash equivalents declined from $454.9 million at May 31, 2023 to $201.0 million at August 31, 2023.
- Total debt, net of discounts and issuance costs, was $448.4 million, including $150.3 million of current maturities. The Company had no borrowings under its $500.0 million revolving credit facility, leaving the full facility available.
- The receivables securitization facility, which permitted borrowings of up to $175.0 million, was terminated on June 29, 2023.
- On September 27, 2023, the revolving credit facility was amended to extend its maturity from August 2026 to September 2028, with commitments unchanged at $500.0 million.
- Management stated that available cash and committed borrowing capacity should meet operating, capital, debt, dividend and planned Separation needs for at least the next 12 months and the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue decreased substantially because of lower steel pricing and lower volumes in most non-steel segments, while Steel Processing tons increased modestly.
- Gross and operating margins improved despite lower revenue, supported by better Steel Processing spreads and lower raw-material and energy costs.
- Equity income increased $22.7 million to $54.4 million. The prior-year period included a $15.8 million loss on the sale of the ArtiFlex investment; excluding that item, current-period equity income increased approximately $6.9 million.
- Interest expense declined $5.5 million to $3.1 million, reflecting lower average debt and higher interest income.
- SG&A increased $8.9 million to $112.3 million, primarily because of higher healthcare, benefits and wage costs.
- The Company incurred $6.0 million of Separation costs and a $1.5 million loss on debt extinguishment. The prior-year period included a $4.8 million non-cash pension settlement charge and a $1.1 million restructuring gain.
- Inventory holding gains were estimated at $15.5 million in the current quarter versus estimated inventory holding losses of $1.5 million in the prior-year quarter. Management expects meaningful inventory holding losses in the second quarter of fiscal 2024 because steel prices had recently declined.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings or revenue guidance. Management noted that results are sensitive to economic conditions, steel and other commodity prices, customer demand, interest rates, inflation, product mix and working-capital requirements.
Management expects the planned Separation to require additional advisory, legal, audit, employee-related and shared-function costs. Completion remains subject to multiple conditions, including final Board approval, regulatory approvals, financing for Worthington Steel, NYSE listing and completion of separation-related agreements and asset transfers.
- Automotive exposure is significant: approximately 55% of Steel Processing sales serve automotive markets, and one automotive customer represented 12.5% of consolidated sales in the quarter.
- The Company added the UAW strikes against Ford, General Motors and Stellantis to its risk factors. Prolonged strikes could reduce customer production, adversely affect results and delay or impair the planned Separation.
- Other material risks include cyclical demand, steel and commodity price volatility, supply-chain disruption, inflation, elevated interest rates, tariffs and trade restrictions, customer or supplier financial distress, environmental regulation, cybersecurity and international operations.
- The Company reported no legal, environmental or guarantee matters that management believes would have a material effect, although it had a potential aircraft lease residual-value guarantee of approximately $16.5 million and $12.1 million of outstanding standby letters of credit.
- Disclosure controls and procedures were deemed effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Confirm the legal entity and ticker applicable to the investment, because the filing is for Worthington Industries, Inc. rather than Worthington Enterprises.
- Assess the sustainability of the improved Steel Processing spreads and the effect of expected second-quarter inventory holding losses.
- Monitor the timing, financing, tax treatment, regulatory approvals and final Board approval of the Worthington Steel Separation.
- Evaluate liquidity after the $243.8 million debt redemption, including the $150.3 million current debt maturity and availability under the revolving credit facility.
- Track automotive demand and the duration and effects of the UAW strikes.
- Reconcile adjusted EBIT with GAAP earnings and consider the impact of Separation costs, debt-extinguishment losses, impairment charges and equity-method income.
- Review the concentration of equity income, including the importance of WAVE, ClarkDietrich and Serviacero Worthington, and the $116.4 million liability representing distributions in excess of the WAVE investment balance.