Worthington Steel, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 29, 2024. The filing is a 2024 fiscal Q3 report, despite the request metadata indicating “2023 Q3.” Financial statements are unaudited.
Business context and reporting period
Worthington Steel processes flat-rolled steel for automotive, construction, agriculture, heavy-truck, machinery and other markets, using both direct steel sales and toll processing. Automotive was 50% of Q3 sales and 52% of nine-month sales.
The company separated from Worthington Enterprises on December 1, 2023, and began trading as an independent public company. The current nine-month statements combine pre-separation carve-out results with post-separation standalone results; prior periods are combined carve-out results. Management cautions that historical allocations and results may not represent standalone costs or performance.
Financial results and key metrics
| Metric | Three months ended Feb. 29, 2024 | Prior-year quarter | Nine months ended Feb. 29, 2024 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $805.8 million | $780.7 million | $2,519.6 million | $2,723.7 million |
| Gross margin | $120.1 million; 14.9% of sales | $63.2 million; 8.1% | $308.8 million; 12.3% | $186.3 million; 6.8% |
| Operating income | $66.3 million | $9.5 million | $127.2 million | $30.5 million |
| Net earnings attributable to controlling interest | $49.0 million | $5.4 million | $101.5 million | $19.8 million |
| Diluted EPS attributable to controlling interest | $0.98 | $0.11 | $2.05 | $0.40 |
| Operating cash flow | $44.7 million | $118.2 million | $163.9 million | $235.7 million |
Q3 volume was 985,668 tons, up 40,817 tons year over year. Adjusted EBIT, a non-GAAP measure, was $66.9 million for the quarter versus $10.7 million, and $154.0 million for nine months versus $37.8 million.
At February 29, cash was $60.8 million; current assets were $1,022.9 million and current liabilities were $645.4 million. Debt was $147.2 million, all short-term borrowings under the revolving credit facility; no long-term debt was reported. The facility permits borrowings up to $550 million subject to eligible collateral and matures November 30, 2028. The weighted-average rate on outstanding facility debt was 6.92%; the swing-loan rate was 9.0%. The company reported compliance with financial covenants.
Nine-month capital expenditures were $58.6 million, compared with $36.4 million. Cash used in investing activities was $78.8 million, including $21.0 million for the Voestalpine acquisition. The company ended the period with $60.8 million cash, up $28.1 million from the fiscal-year start.
Material changes versus prior comparable periods
- Q3 sales rose $25.1 million, primarily from higher average selling prices and, to a lesser extent, higher volume. Nine-month sales declined $204.1 million, primarily because of lower average selling prices.
- Q3 gross margin increased $56.9 million, mainly from improved direct spreads and higher volume. Management attributed $45.9 million of the change to a swing from estimated inventory holding losses of $26.6 million in the prior-year quarter to estimated holding gains of $19.3 million in the current quarter.
- For nine months, gross margin rose $122.5 million; management cited a $119.9 million increase in direct spreads, including an $81.2 million favorable change from estimated prior-year inventory holding losses to no estimated holding losses in the current period.
- SG&A increased $3.1 million in Q3 and $13.0 million year to date, primarily due to compensation and benefit costs as a standalone company. Q3 separation costs fell to $1.0 million from $4.0 million; nine-month separation costs increased to $19.5 million from $12.0 million.
- Q3 equity income from the unconsolidated Serviacero Worthington joint venture improved to $2.9 million from a $0.2 million loss. Nine-month equity income increased to $15.7 million from $3.5 million.
- Nine-month operating cash flow declined by $71.8 million. Management cited a $128.1 million reduction in cash from operating working capital and $22.2 million more undistributed earnings from the unconsolidated affiliate, partly offset by $84.3 million higher net earnings.
Outlook, management commentary, risks and unusual items
No specific earnings, revenue or margin guidance was provided. Management said available cash, operating cash flow and debt facilities should be adequate for obligations and operations over the next 12 months and foreseeable future, while noting there is no assurance that future financing will be available on acceptable terms. The board declared a quarterly dividend of $0.16 per share, payable June 28, 2024.
Management reported North American vehicle production was higher in Q3 year over year. It also said high interest rates and economic uncertainty have weighed on demand in several non-automotive markets; inflation continues to pressure input, conversion and SG&A costs. Hot-rolled steel prices rose in Q3 after declining in the first two quarters, but had declined again since Q3. Steel-price volatility can affect pass-through pricing, inventory holding gains or losses, margins and potential inventory write-downs. The business is seasonal, with historically weaker Q3 activity and stronger fiscal Q4 sales.
Key exposures include steel and other commodity prices and availability, cyclical end markets, competitive pricing, customer and supplier financial health, tariffs and trade restrictions, foreign currency, interest rates, inflation, and operational, cyber, environmental and legal risks. One automotive customer represented 13.2% of Q3 sales. Management said pending legal matters were not expected to materially affect financial condition or results; a $1.2 million standby letter of credit was outstanding with no amounts drawn.
Unusual and comparability-related items include the December 2023 separation, the $150.0 million cash distribution to the former parent funded through debt, historical corporate-cost allocations, inventory holding gains and losses, and the acquisition of Voestalpine in November 2023. A $1.4 million impairment charge was recorded in Q1 fiscal 2024 for equipment held for sale; no impairment was recorded in Q3.
Most important facts for investors to verify
- Whether Q3 gross-margin strength and earnings are sustainable without the substantial favorable inventory holding gain comparison.
- How standalone operating costs, including SG&A and separation-related expenses, develop after the transition from the former parent.
- Working-capital movements and cash generation, given the decline in nine-month operating cash flow.
- Borrowing-base availability, interest expense and refinancing or liquidity needs under the secured revolving facility.
- Steel-price trends, customer pass-through timing, and concentration in automotive demand and the 13.2% customer.
- The performance and cash distributions of Serviacero Worthington; no distributions were received during the current nine-month period.