Worthington Steel Inc

Results of Operations

Fiscal 2024 Compared to Fiscal 2023

The tables throughout this section present, on a comparative basis, our results of operations for the past two fiscal years.

(1)

On December 1, 2023, there were approximately 49.3 million 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 (a) using this same number of common shares outstanding since no Worthington Steel equity awards were outstanding as of the Separation Date and (b) net of Net earnings attributable to noncontrolling interest as such interest is fully associated with continuing operations.

Net sales totaled $3,430.6 million in fiscal 2024, down $177.1 million compared to fiscal 2023. While volume increased 52,798 tons, or 1.3% from fiscal 2023 to fiscal 2024, net sales decreased primarily due to lower direct selling prices, which were down approximately 6%. This was partially offset by a more favorable mix within toll processing. The mix of direct versus toll volumes was 56% to 44% in fiscal 2024, compared to 57% to 43% in fiscal 2023.

Gross Margin

Gross margin increased $103.3 million over the prior year to $439.8 million, primarily due to favorable direct spreads between sales price and material costs, and, to a lesser extent a more favorable mix within toll processing. Direct spreads, up $93.9 million, benefited from a $45.2 million change from $48.7 million in estimated inventory holding losses in fiscal 2023 compared to estimated holding losses of $3.4 million in fiscal 2024. The favorable mix within toll processing was due to increased galvanized and tailor welded blank toll processing volume in fiscal 2024 as compared to fiscal 2023.

Selling, General and Administrative Expense

SG&A increased $23.6 million over the prior year primarily due to increased wage and benefit costs as a result of being a stand-alone company, and, to a lesser extent, increased incentive compensation.

Other Operating Items

Impairment of long-lived assets in both fiscal 2024 and prior year was driven by changes in the estimated fair market value less cost to sell related to ongoing efforts to divest certain production equipment of our former WSCP toll processing facility in Cleveland, Ohio and idled equipment at the manufacturing facility in Taylor, Michigan. Refer to “Note D – Goodwill and Other Long-Lived Assets” for additional information.

Restructuring activity in the prior year period 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. Refer to “Note E – Restructuring and Other Income, Net” for additional information.

Separation costs increased by $2.0 million to $19.5 million in fiscal 2024 as the Separation was finalized on December 1, 2023. No additional Separation costs are expected after fiscal 2024. Refer to “Note A – Description of Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation” for additional information.

Miscellaneous Income, Net

Miscellaneous income, net increased $1.6 million from the prior year period primarily due to $2.8 million of income related to the fiscal 2024 recognition of a tax indemnity receivable from the former owners of Tempel Steel Company (“Tempel”) associated with the final unfavorable ruling in a pre-acquisition tax matter in one of the jurisdictions in which Tempel operates, partially offset by a reduction in foreign currency remeasurement gains at Tempel’s operations in Mexico and Canada.

Interest Expense, Net

Interest expense increased $3.0 million from 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, partially offset by a reduction in interest expense associated with the TWB Term Loan. Refer to “Note H – Debt” for additional information.

Equity Income

Equity earnings at Serviacero Worthington increased $14.7 million over the prior year period driven by improved direct spreads, primarily related to the impact of favorable inventory holding gains, and, to a lesser extent, higher direct volume. We received cash distributions of $2.0 million from Serviacero Worthington during fiscal 2024.

Income Taxes

Income tax expense increased $17.1 million from fiscal 2023 due to higher pre-tax earnings and the recognition of a $2.8 million tax expense related to a pre-acquisition income tax matter at Tempel. Fiscal 2024 income tax expense reflected an estimated annual effective income tax rate of 23.0% versus 25.0% in fiscal 2023. For additional information regarding our income taxes, refer to “Note M – 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, a non-GAAP financial measure, 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 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)

Impairment charges are excluded because they do not occur in the ordinary course of our ongoing business operations, are inherently unpredictable in timing and amount, and are non-cash, so their exclusion facilitates the comparison of historical, current and forecasted financial results. Non-cash impairment charges in both periods were driven by idled equipment at the manufacturing facility in Taylor, Michigan and changes in the estimated fair market value less cost to sell related to ongoing efforts to divest certain production equipment at WSCP’s former toll processing facility in Cleveland, Ohio, and excludes the noncontrolling interest portion of impairment of long-lived assets of $0.5 million and $0.2 million in the fiscal 2024 and fiscal 2023, respectively. A more detailed discussion of our impairment activity can be found elsewhere in this MD&A as well as in “Note D – Goodwill and Other Long-Lived Assets.”

(2)

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 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.

(3)

Separation costs reflect the 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 employee-related costs and non-recurring costs associated with the separation of shared corporate functions.

(4)

Income tax expense and indemnification receivable adjustment reported in Miscellaneous income, net related to an indemnification agreement with the former owners of Tempel as a result of an unfavorable tax ruling in one of the jurisdictions in which Tempel operates. The indemnification agreement, which was entered into with the former Tempel owners at the time we acquired Tempel, provides protection to us from unfavorable rulings by tax authorities through the acquisition date.

Adjusted EBIT was up $88.3 million over the prior year, primarily due to favorable direct spreads, up $93.9 million, including an estimated $45.2 million favorable change in estimated inventory holding losses and, to a lesser extent, a $14.7 million increase in equity earnings at Serviacero Worthington, partially offset by a $23.6 million increase in SG&A compared to fiscal 2023.

Fiscal 2023 Compared to Fiscal 2022

For a comparison and discussion of our results of operations and financial condition for fiscal 2023 and fiscal 2022, see “Item 2. Financial Information” in our Amendment No. 2 to Form 10 filed with the SEC on November 13, 2023 (the “Form 10”) incorporating the information in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Fiscal 2023 Compared to Fiscal 2022” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Fiscal 2023 Compared to Fiscal 2022” sections of the Information Statement filed as Exhibit 99.1 to the Form 10.