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Text: On our call today, we have Andy Rose, Worthington's president, and chief executive officer; and Joe Hayek, Worthington's chief financial officer.
Today's call is being recorded and a replay will be made available later on our worthingtonindustries.com website.
Our teams executed very well in the quarter, and the result was a strong financial performance.
For Q3, we reported earnings of $1.11 per share versus $1.27 in the prior-year quarter.
Excluding a small restructuring and impairment charge, we generated $1.13 in the quarter versus $1.36 in the prior year, after adjusting for restructuring and a small gain on our investment in Nikola.
In the quarter, we had inventory holding losses estimated to be $25 million or $0.37 per share.
In the prior-year quarter, we had inventory hoarding gains of $31 million or $0.44 per share.
Consolidated net sales in the quarter of $1.4 billion were up significantly compared to $759 million in Q3 of last year.
The increase in sales was primarily due to higher steel prices, the inclusion of our most recent acquisitions, and higher average selling prices in both consumer and building products.
Gross profit for the quarter decreased to $143 million from $164 million in the prior-year quarter, and gross margin was 10.4% versus 21.6%, primarily due to the swing from inventory holding gains to losses, which were partially offset by increases in both consumer, and building products.
Adjusted EBIT in Q3 was $112 million, down slightly from $126 million in Q3 of last year, and our trailing 12 months adjusted EBIT is now $662 million.
And I spend a few minutes on each of the businesses, In steel processing, net sales of $1.1 billion more than doubled from $504 million in Q3 of last year, are mainly due to the average selling prices being higher, and the inclusion of both Tempel Steel and Shiloh BlankLight business.
Total ship tons were down 2% compared to last year's third quarter despite the recent acquisitions which contributed 80,000 tons during the quarter.
Excluding the impact of acquisitions, total ship tons were down 9% year over year.
Direct tons in Q3 were 51% in mix compared to 48% in the prior year.
Despite the decrease in ship tons, underlying demand during the quarter was healthy.
Volumes were impacted by COVID-related production challenges, last shipping days due to weather, the US Canada bridge closings, and the ongoing semiconductor chip shortage that continues to impact automotive schedules.
Automotive volume increased from the prior-year quarter, but demand was below seasonal norms and is still difficult to predict as production levels demands remain choppy.
Construction demand continued to be solid, but our volumes decreased slightly from the prior year, as we had reserved some capacity for automotive demand that did not materialize.
And market demand is good, and the war in Ukraine, and its impacts on the steel supply chain pricing, and end-market demand are difficult to predict.
Our teams are best in class and continue to navigate market volatility, and supply chain challenges exceptionally well as they remain focused on taking care of each other, their customers, and our partners.
In Q3, steel generated an adjusted EBIT of $7 million compared to $62 million last year.
Large year-over-year decrease was driven by the inventory holding losses I mentioned earlier, estimated to be $25 million in the quarter compared to inventory holding gains of $31 million last year.
An unfavorable swing of $56 million.
Inventory holding losses for the current quarter included a $16 million charge to write inventory down to net realizable value, and to the expected future decline of steel prices at year-end, at quarter-end.
Steel prices have since risen, but based on current steel prices, we believe we will have higher inventory hoarding losses in Q4 than we did in Q3.
In consumer products, net sales in Q3 were $162 million, up 41% from $115 million in the prior year.
The increase was driven by higher average selling prices, combined with higher volumes across the board, and the inclusion of GTI.
Adjusted EBIT for the consumer business was $27 million and the EBIT margin was 16.5% in Q3, compared to $15 million and12.7% last year.
Year on year growth in margin is a credit to the exceptional job our consumer team is doing managing through the current inflationary environment, and this quarter we realized the price, the benefit of price increases that were implemented late in Q2.
Demand remained strong across the board for our consumer business, and while inflationary pressures, shipping, and supply chain issues will likely persist, we're confident in our team's ability to continue growing the business, and delivering value to our customers with a focus on increasing production while developing new, and innovative offerings.
Building products generated net sales of $133 million in Q3, which was up 38% from $96 million in the prior year.
The increase was driven by higher average selling prices.
Building products adjusted EBIT was $50 million, and adjusted EBIT margin was 37.3%, up significantly from $27 million and 28.4% in Q3 last year.
Our wholly owned building products business generated a nearly five-fold year-over-year increase in EBIT during the quarter, due to healthy demand combined with higher average selling prices.
ClarkDietrich's results improved by $15 million year over year, while WAVE was down slightly from a year ago.
ClarkDietrich and WAVE contributed equity earnings of $21 million and $19 million respectively.
The building products team has done a great job navigating a very challenging environment by continuing to focus on serving our customers.
Going forward, we believe that strong demand in the commercial and residential building markets that we serve will persist, though inflationary conditions will also persist.
In Sustainable Energy Solutions', net sales in Q3 were $31 million, down slightly from $32 million in the prior year, despite significantly lower volumes through the divestiture of our LPG gas business.
Excluding the divestiture, net sales were up 31% in Q3 versus last year.
Business reported an adjusted EBIT loss of $3 million in the quarter compared to break-even results in the prior year, as higher average selling prices were more than offset by the impact of significantly increased input costs.
This business is in the early stages of repositioning itself to serve the global hydrogen ecosystem, and adjacent sustainable energies like compressed natural gas, and will benefit as those volumes ramp at the European market remains challenged, and the ongoing war in Ukraine has caused business conditions in Europe to deteriorate further, with materially increased energy prices and demand uncertainty.
However, longer-term, the conflict may accelerate Europe's planned adoption of hydrogen and alternative fuels.
Now, our plan is to be prepared to be a leader in serving that market.
With respect to cash flows and our balance sheet.
Cash flow from operations was $74 million in the quarter, with free cash flow totaling $51 million.
We started to see our operating working capital levels decrease during the quarter, primarily due to lower steel prices, which added $49 million cash flow.
During the quarter, we received $29 million in dividends from our unconsolidated JVs', spend $270 million on the acquisition of Tempel, invested $24 million in capital projects, paid $14 million in dividends, and spent $54 million to repurchase a million shares of our common stock at an average price of $54.26.
Following the Q3 purchases, we have slightly over $7 million shares remaining under our share repurchase authorization.
Looking at our balance sheet and liquidity position.
Funded debt at quarter end of $813 million increased $111 million sequentially, primarily to fund the acquisition of Tempel.
Interest expense of $8 million was up slightly due to higher average debt levels, and we ended Q3 with $44 million in cash and $396 million available under our revolving credit facility.
Yesterday, the board declared a $0.28 per share dividend for the quarter, which is payable in June of 2022.
We had another very good quarter despite the continuation of a difficult operating environment and the emergence of inventory holding loss headwinds.
I'm not surprised, but continue to be humbled, and grateful for the commitment of our employees to doing what it takes to deliver for our customers.
And market demand remains strong across most of our product lines.
But operating challenges remain, including labor availability, supply chain disruptions, transportation shortages, and an extremely volatile steel pricing environment.
Our commercial purchasing and supply chain teams have done an excellent job reacting quickly, and effectively to higher input costs by passing through price increases as appropriate.
Our experts in steel processing continue to prove that they are world-class at managing through this volatility without compromising customer quality and service.
The benefit of higher selling prices was particularly noticeable in the year-over-year improvement in consumer products, in building products this quarter.
ClarkDietrich had another strong quarter, and an exceptional calendar year, but we expect their business to gradually return to more normalized levels in 2022.
Sustainable Energy Solutions' are struggling due to lower automotive demand in Europe, and higher input costs.
We continue to be very bullish on the future of all these business segments as we refine and execute more dynamic growth strategies that will continue to leverage innovation, transformation, and M&A.
Most of you on the call know there was a precipitous decline in steel prices during the quarter from an all-time high for hot roll of $1958 per ton.
During the quarter, it fell briefly below $1 thousand per ton.
However, the recent events in Ukraine have reverse this trend significantly, as hot roll now sits around 1300 in upward pressure.
The decline during the quarter helped us achieve a modest level of working capital relief, although this may be short-lived.
But we've yet to establish specific targets, so this is in process.
Worthington today has many products and solutions that enable emissions reductions, and we intend to increase our focus on these products to capitalize on the growth opportunity in those businesses.
We believe firmly that we have a huge opportunity to play a central role in building the bridge to a cleaner environment.
We are positioning our businesses to maximize this opportunity.
Several of these areas include laser welding, lightweight applications, electrical steel eliminations for batteries and transformers, and gas systems for the hydrogen ecosystem.
Many other of our existing products already offer cleaner fuel alternatives that can bridge us to a future dominated by wind, solar, hydrogen, and hydroelectric.
The business environment continues to be very challenging.
Our teams continue to go above and beyond to manage through these difficulties and deliver for our customers and shareholders.
We are well-positioned for whatever the market brings us next.
Will now take questions.

user
q3 sales rose 82 percent to $1.4 billion.
q3 earnings per share $1.11.
qtrly adjusted earnings per share $1.13.
steel price volatility is expected to remain a headwind for co.
overall, our businesses are performing well, and underlying end market demand remains healthy.

assistant