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Diversified industrial manufacturing company Worthington (NYSE:WOR) fell short of the market’s revenue expectations in Q3 CY2024, with sales falling 78.4% year on year to $257.3 million. Its non-GAAP profit of $0.50 per share was also 29.6% below analysts’ consensus estimates.
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Worthington (WOR) Q3 CY2024 Highlights:
- Revenue: $257.3 million vs analyst estimates of $296.1 million (13.1% miss)
- EPS (non-GAAP): $0.50 vs analyst expectations of $0.71 (29.6% miss)
- Gross Margin (GAAP): 24.3%, up from 16.6% in the same quarter last year
- EBITDA Margin: 18.8%, up from 9.5% in the same quarter last year
- Free Cash Flow Margin: 12.2%, up from 2.5% in the same quarter last year
- Market Capitalization: $2.23 billion
Company Overview
Founded by a steel salesman, Worthington (NYSE:WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.
Engineered Components and SystemsEngineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthReviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Over the last five years, Worthington’s revenue declined by 19.7% per year. This shows demand was weak, a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Worthington’s recent history shows its demand has stayed suppressed as its revenue has declined by 40.2% annually over the last two years. Worthington isn’t alone in its struggles as the Engineered Components and Systems industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
Worthington also breaks out the revenue for its most important segments, Consumer Products and Building Products, which are 45.7% and 54.3% of revenue. Over the last two years, Worthington’s Consumer Products revenue (cylinders, torches, balloon kits, tools) averaged 11.2% year-on-year declines while its Building Products revenue (refrigerant, cylinders, tanks) was flat.
This quarter, Worthington missed Wall Street’s estimates and reported a rather uninspiring 78.4% year-on-year revenue decline, generating $257.3 million of revenue. Looking ahead, Wall Street expects revenue to decline 39.2% over the next 12 months.
Operating MarginOperating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.
Worthington was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.9% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.
Looking at the trend in its profitability, Worthington’sannual operating margin decreased by 3.2 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers.
In Q3, Worthington generated an operating profit margin of negative 1.8%, down 9 percentage points year on year. Conversely, the company’s gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like sales, marketing, R&D, and administrative overhead.
Earnings Per ShareWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Worthington’s EPS grew at an unimpressive 6.4% compounded annual growth rate over the last five years. This performance was better than its 19.7% annualized revenue declines but doesn’t tell us much about its day-to-day operations because its operating margin didn’t expand.
We can take a deeper look into Worthington’s earnings to better understand the drivers of its performance. A five-year view shows that Worthington has repurchased its stock, shrinking its share count by 8.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Worthington, its two-year annual EPS declines of 33.7% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q3, Worthington reported EPS at $0.50, down from $2.06 in the same quarter last year. This print missed analysts’ estimates. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.
Key Takeaways from Worthington’s Q3 Results We struggled to find many strong positives in these results. Its revenue and EPS fell short of Wall Street’s estimates as its Building Products segment underperformed. Overall, this was a mediocre quarter. The stock traded down 4.6% to $43.17 immediately following the results.
