Worthington Steel Inc

The following table presents a review of the results of operations for the three months ended February 29, 2024, and February 28, 2023.

(1)

On December 1, 2023, there were approximately 49.3 million Worthington Steel common shares 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 $805.8 million in the third quarter of fiscal 2024, up $25.1 million, compared to the third quarter of fiscal 2023, primarily due to higher average selling prices and, to a lesser extent, higher volumes. The mix of direct versus toll volumes was 55% to 45% in the third quarter of fiscal 2024, compared to 56% to 44% in the prior year quarter.

Gross Margin

Gross margin increased $56.9 million over the prior year quarter to $120.1 million, due primarily to favorable direct spreads and higher volume. Direct spreads, up $52.9 million, benefited from a $45.9 million change from $26.6 million in estimated inventory holding losses in the third quarter of fiscal 2023 compared to estimated holding gains of $19.3 million in the third quarter of fiscal 2024.

Selling, General and Administrative Expense

SG&A increased $3.1 million over the prior year quarter primarily due to increased compensation and benefit costs as a result of being a stand-alone company.

Other Operating Items

Separation Costs decreased by $3.0 million in the third quarter of fiscal 2024 as the Separation was finalized on December 1, 2023.

Miscellaneous Income, Net

Miscellaneous income decreased $1.2 million from the prior year quarter primarily due to a reduction in foreign currency remeasurement gains generated by Tempel’s operations in Mexico and Canada.

Interest Expense, Net

Interest expense increased $2.4 million from the third quarter of fiscal 2023, primarily due to higher average debt levels associated with the borrowings under the Credit Facility utilized to fund the $150.0 million distribution to the Former Parent. Refer to “Note H – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington increased $3.1 million from the third quarter of fiscal 2023, driven by higher direct volume and improved direct spreads.

Income Taxes

Income tax expense was $14.0 million in the current year period compared to $0.8 million in the prior year period. The increase in income tax expense was primarily driven by higher pre-tax earnings. The income tax expense in the current quarter resulted in an effective tax rate of 22.2%, compared to 13.1% for the prior year quarter. The prior year quarter was favorably impacted by certain discrete tax adjustments. 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 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 and engage in financial and operational planning 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 attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:

(1)

Reflects the attribution to us of direct and incremental costs incurred in connection with the 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 third quarter of fiscal 2024 was up $56.2 million over the third quarter of fiscal 2023 primarily due to favorable direct spreads. Direct spreads, up $52.9 million, benefited from a $45.9 million favorable change from an estimated $26.6 million inventory holding loss in the prior year quarter to an estimated $19.3 million inventory holding gain in the current year quarter.