Worthington Steel Inc

Historically, we financed our working capital requirements through cash flows from operating activities and arrangements with the Former Parent. Upon completion of the Separation, we ceased such arrangements with the Former Parent. Our capital structure, long-term commitments, and liquidity sources have thus changed from our prior practices. Our ability to fund our operating needs is dependent upon our ability to continue to generate positive cash flow from operations, and on our ability to maintain our debt financing on acceptable terms. We have secured debt financing independent from the Former Parent given the debt financing of the Former Parent is no longer accessible following the Separation. Management believes that our cash balances, the funds generated by our operating activities, as well as the funds accessible to us through our debt facilities provide the appropriate liquidity needed to meet our current and long-term obligations, including our strategic initiatives. However, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future. A more detailed description regarding our capital structure changes can be found elsewhere in this MD&A as well as in the “Financing Activities” section below.

Our primary ongoing requirements for cash will be for working capital, funding of acquisitions, and capital expenditures. We believe that our sources of liquidity are adequate to fund our operations for the next 12 months and for the foreseeable future.

During the nine months ended February 29, 2024, we generated $163.9 million of cash from operating activities, invested $58.6 million in property, plant and equipment and used $21.0 million in an acquisition. On November 30, 2023, we received cash proceeds of $175.0 million from the Credit Facility, of which $150.0 million was used to fund the distribution to the Former Parent on December 1, 2023. This debt financing activity was a part of our overall debt activity, which resulted in $144.4 million in overall cash proceeds from the Credit Facility during the nine months ended February 29, 2024. Additionally, we transferred $47.6 million to the Former Parent. The following table summarizes our consolidated and combined cash flows for the periods presented.

Operating Activities

Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices, requiring higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.

Net cash provided by operating activities was $163.9 million during the nine months ended February 29, 2024, compared to $235.7 million during the nine months ended February 28, 2023. This change was primarily due to a $128.1 million reduction in cash from net operating working capital (accounts receivable, inventories, and accounts payable), driven by the reduction in average steel prices over the prior year period, and a $22.2 million increase in undistributed earnings from unconsolidated affiliate, partially offset by a $84.3 million increase in overall net earnings.

Investing Activities

Net cash used in investing activities was $78.8 million during the nine months ended February 29, 2024, compared to $13.2 million during the nine months ended February 28, 2023. A primary driver of net cash used in investing activities in both the current year and prior year periods was the result of capital expenditures, which equaled $58.6 million during the nine months ended February 29, 2024 and $36.4 million during the nine months ended February 28, 2023. Additionally, we paid $21.0 million, net of cash acquired, for the acquisition of Voestalpine in the current year period. See Note M – “Acquisitions” for further information. The prior year period included $23.2 million proceeds from sale of assets, primarily related to proceeds from the divesture of WSP's facility in Jackson, Michigan.

Investment activities are largely discretionary and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and any such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisition opportunities will be consummated, or that any needed additional financing will be available on satisfactory terms or at all if required.

Financing Activities

Net cash used in financing activities was $57.0 million during the nine months ended February 29, 2024, compared to net cash used in financing activities of $209.9 million during the nine months ended February 28, 2023. The decrease in cash used by financing activities was primarily due to lower transfers to the Former Parent in connection with the centralized cash management program utilized prior to the Separation and repayment of other debt. The current year period included increased net short-term borrowings of $144.4 million, primarily from our Credit Facility (see the “Revolving credit facility” section below) to fund the $150.0 million distribution to the Former Parent.

As part of the Separation, the Former Parent made a contribution of certain assets and liabilities, including cash and cash equivalents of $3.8 million to Worthington Steel.

Revolving credit facility – On November 30, 2023, we entered into the Credit Facility. The Credit Facility allows for borrowings of up to $550.0 million, to the extent secured by eligible accounts receivable and inventory balances at period end, which consist primarily of U.S. Dollar denominated account balances. Individual amounts drawn under the Credit Facility will have interest periods of up to six months and will accrue interest at rates equal to an applicable margin over the applicable Term SOFR Rate, plus a SOFR adjustment. We incurred approximately $2.7 million of issuance costs, of which $2.5 million will be amortized to interest expense over the five-year Credit Facility term and are reflected in other assets. As of November 30, 2023, $175.0 million was outstanding under the Credit Facility, of which $150.0 million was paid to the Former Parent on December 1, 2023, in connection with the Separation.

As of February 29, 2024, we were in compliance with the financial covenants of our financial debt agreements. Our debt agreements do not include credit rating triggers. There were $147.2 million outstanding borrowings drawn against our Credit Facility at February 29, 2024. Under the Credit Facility, we may extend current borrowings up to the maturity date subject to the eligible borrowing base.

On March 21, 2024, the Board declared a quarterly dividend of $0.16 per common share payable on June 28, 2024, to shareholders of record at the close of business on June 14, 2024.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated and combined financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. There is no guarantee that we will continue the payments of dividends in the future or that any dividends declared by the Board in the future will be similar in amount or timing to any dividends previously declared by the Board.