Worthington Steel Inc

The following table presents a review of results for the three months ended November 30, 2023 and November 30, 2022.

(1)

On December 1, 2023, there were approximately 49.3 million shares of Worthington Steel common stock outstanding following the Distribution. The computation of basic and diluted earnings per common share for all periods through November 30, 2023 was calculated using this same number of common shares outstanding since no Worthington Steel equity awards were outstanding as of the Distribution Date and is net of Net earnings attributable to noncontrolling interest which is fully associated with continuing operations.

Net sales totaled $808.0 million in the second quarter of fiscal 2024, down $60.4 million, compared to the second quarter of fiscal 2023, primarily due to lower average selling prices, partially offset by higher direct volumes. The mix of direct versus toll tons processed was 56% to 44% in the second quarter of fiscal 2024, compared to 55% to 45% in the prior year quarter. Excluding the impact of the prior year divestiture of the remaining WSP toll processing facility in Jackson, Michigan, toll volumes were up 6%.

Gross Margin

Gross margin increased $25.7 million over the prior year quarter to $60.2 million, due primarily to favorable direct spreads, including an $18.3 million favorable change from $53.1 million in estimated inventory holding losses in the second quarter of fiscal 2023 compared to estimated holding losses of $34.8 million in the second quarter of fiscal 2024.

Selling, General and Administrative Expense

SG&A expense increased $3.4 million over the prior year quarter primarily due to increased wages and profit sharing.

Other Operating Items

Restructuring activity in the prior year quarter was driven by gains realized from the sale of long-lived assets, including a $3.9 million pre-tax gain related to the sale of WSP’s facility in Jackson, Michigan.

Miscellaneous Income, Net

Miscellaneous income was relatively flat compared to the prior year quarter.

Interest Expense, Net

Interest expense decreased $0.7 million from the second quarter of fiscal 2023, primarily due to lower average debt levels associated with a reduction in long-term debt with Parent. Refer to “Note H – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington increased $1.9 million from the second quarter of fiscal 2023, driven by improved direct spreads and, to a lesser extent, higher direct volume, partially offset by higher manufacturing expenses.

Income Taxes

Income tax benefit was $2.5 million in the current year period compared to income tax benefit of $5.5 million in the prior year period. The decrease in tax benefit was driven by higher pre-tax earnings. The tax benefit in the current quarter resulted in an effective tax rate of 29.9%, compared to 25.9% for the prior year quarter. For additional information regarding our income taxes, refer to “Note K – Income Taxes.”

Adjusted EBIT

We evaluate operating performance on the basis of adjusted earnings before interest and taxes (“adjusted EBIT”). EBIT, a non-GAAP financial measure, is calculated by adding interest expense and income tax expense to net earnings (loss) attributable to controlling interest. Adjusted EBIT excludes impairment and restructuring expense (income), but may also exclude other items, as described below, that management believes are not reflective of, and thus should not be included when evaluating the performance of our ongoing operations. Adjusted EBIT is a non-GAAP financial measure and is used by management to evaluate operating performance, engage in financial and operational planning and determine incentive compensation because we believe that this financial measure provides additional perspective on the performance of our ongoing operations. Additionally, management believes these non-GAAP financial measures provide useful information to investors because they allow for meaningful comparisons and analysis of trends in our businesses and enable investors to evaluate operations and future prospects in the same manner as management.

The following table provides a reconciliation of net earnings (loss) attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:

(1)

Restructuring activities consist of established programs that are not part of our ongoing operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions). The net gain recognized in the second quarter of fiscal 2023 resulted primarily from the sale of

WSP’s facility in Jackson, Michigan, and excludes the noncontrolling interest portion of restructuring and other income, net of $1.8 million in the prior year period.

(2)

Reflects the attribution to us of direct and incremental costs incurred by Parent in connection with the planned separation. These costs have been directly attributed to us to the extent incurred to our direct benefit, and include third-party advisory fees, certain non-recurring employee-related costs and non-recurring costs associated with the separation of shared corporate functions.

Adjusted EBIT in the second quarter of fiscal 2024 was up $21.5 million over the second quarter of fiscal 2023 primarily due to favorable direct spreads, including $18.3 million associated with the quarter-over-quarter favorable change in estimated inventory holding losses, and, to a lesser extent, higher equity earnings at Serviacero Worthington, which were up $1.9 million.