Business Context and Reporting Period
Worthington Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended November 30, 2022, covering fiscal 2023. Operations comprise Steel Processing, Consumer Products, Building Products and Sustainable Energy Solutions, with several consolidated and unconsolidated joint ventures. The filing states that the Company plans to separate its Steel Processing business into a separately traded company, targeted for completion by early 2024, subject to required approvals and other conditions.
Key Financial Metrics
| Metric | Three Months Ended November 30, 2022 | Three Months Ended November 30, 2021 | Six Months Ended November 30, 2022 | Six Months Ended November 30, 2021 |
|---|---|---|---|---|
| Net sales | $1,175.5 million | $1,232.9 million | $2,584.2 million | $2,343.7 million |
| Gross margin | $105.8 million; 9.0% | $184.6 million; 15.0% | $275.1 million; 10.6% | $404.0 million; 17.2% |
| Operating income (loss) | $(7.0) million | $90.5 million | $59.7 million | $226.3 million |
| Net earnings attributable to controlling interest | $16.2 million | $110.3 million | $80.3 million | $242.8 million |
| Diluted EPS | $0.33 | $2.15 | $1.63 | $4.71 |
| Net cash provided by operating activities | $132.9 million | $(119.1) million | $214.0 million | $(168.9) million |
Six-month adjusted EBIT, a non-GAAP measure, was $147.6 million versus $320.9 million in the prior-year period. Second-quarter adjusted EBIT was $35.3 million versus $146.9 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $129.6 million at November 30, 2022, compared with $34.5 million at May 31, 2022.
- Total debt, including current maturities, had a carrying value of approximately $693.7 million; short-term borrowings were $4.9 million and long-term debt was $693.5 million before current maturities.
- The $500.0 million revolving credit facility and $175.0 million accounts receivable facility had no borrowings outstanding and were fully available.
- Total shareholders’ equity was $1.639 billion, compared with $1.614 billion at May 31, 2022.
- Management stated that available liquidity is sufficient for normal operating needs, capital expenditures, debt obligations, dividends, working capital and anticipated separation costs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales declined 4.7%, while six-month sales increased 10.3%, primarily reflecting lower Steel Processing prices in the quarter and contributions from the Tempel acquisition completed December 1, 2021.
- Gross margin fell sharply because declining steel prices produced an estimated $95.2 million unfavorable quarter-over-quarter swing from inventory holding gains to inventory holding losses. For the six-month period, the unfavorable swing was estimated at $143.7 million.
- Steel Processing second-quarter adjusted EBIT declined to a loss of $17.2 million from income of $71.9 million. Six-month adjusted EBIT declined to $17.7 million from $179.6 million.
- Consumer Products, Building Products and Sustainable Energy Solutions sales increased in the quarter, but volumes generally declined. Management cited slowing consumer demand and elevated customer inventories.
- Equity income from unconsolidated affiliates decreased to $36.9 million in the quarter and $68.6 million for six months, versus $60.2 million and $113.1 million, respectively.
- Cash flow improved substantially because lower steel prices reduced receivables, inventories and working-capital requirements. The Company generated $214.0 million of operating cash flow for the six months versus a $168.9 million use in the prior-year period.
- SG&A increased 12.1% in the quarter and 10.0% for the six months, primarily due to acquisitions, partly offset by lower incentive compensation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a formal earnings or revenue guidance range. Management expects meaningful inventory holding losses in the third quarter based on prevailing steel prices.
- The planned Steel Processing separation is expected by early 2024, but remains subject to market conditions, capital-structure decisions, tax treatment, regulatory approvals, closing conditions and final Board approval. Separation costs were $9.2 million during the quarter and six-month period.
- On June 2, 2022, the Company acquired Level5 Tools for approximately $57.6 million in cash, with potential additional earnout consideration of up to $25.0 million. Level5 contributed to Consumer Products and generated $1.1 million of earnout-related compensation expense during the six months.
- The Company sold its ArtiFlex equity interest for approximately $42.1 million and recognized a pre-tax loss of approximately $15.8 million. It also sold the WSP Jackson, Michigan facility, recognizing a pre-tax gain of $3.9 million.
- A $4.8 million non-cash pension settlement charge was recorded after transferring approximately 31% of a pension plan’s projected benefit obligation to an insurer.
- The Company recorded a $4.5 million inventory valuation adjustment in the first quarter due to lower steel prices and a $0.3 million impairment charge related to assets held for sale. No inventory adjustment or impairment charge was recorded in the second quarter.
- Principal risks include steel and other commodity price volatility, inventory holding losses, inflation, higher interest rates, recession, weaker demand, supply-chain constraints, customer and supplier financial difficulties, trade restrictions, environmental regulation, cyber risks and execution of the planned separation.
- Outstanding standby letters of credit totaled $14.1 million, with no draws. The maximum aircraft residual-value guarantee was approximately $17.5 million. Management did not believe legal, environmental or guarantee matters were reasonably likely to have a material effect.
Most Important Facts for Investors to Verify
- Whether steel prices stabilize or continue to create inventory holding losses and margin pressure.
- The sustainability of operating cash flow after the current working-capital benefit from lower steel prices.
- The operating performance and final earnout cost of Level5, including the preliminary purchase-price allocation.
- The timing, tax treatment, capital structures and regulatory approvals for the Steel Processing separation.
- The earnings trajectory of WAVE, ClarkDietrich and Serviacero Worthington, which materially affect equity income.
- Future use of the $500.0 million credit facility and $175.0 million receivables facility, particularly if economic conditions weaken.
- The effect of declining volumes, customer inventory reductions and slowing end-market demand on Consumer Products and Building Products.
- The Company’s ability to maintain its $0.31-per-share quarterly dividend; the filing states that future dividends remain subject to Board discretion.