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 and secured independent debt financing in the form of the Credit Facility. 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.

Our primary ongoing requirements for cash are expected to be for working capital, funding of acquisitions, dividend payments, debt redemptions and capital expenditures. We believe that our sources of liquidity, including our cash balances, the funds generated by our operating activities and the funds accessible to us through the Credit Facility, are adequate to fund our operations for the next 12 months and for the foreseeable future and will allow us to meet our current and long-term obligations and strategic initiatives. However, there can be no assurances that our current sources of liquidity and capital resources will continue to be sufficient for our needs or 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.

During fiscal 2024 we generated $199.5 million of cash from operating activities, and we used $123.2 million of cash in investing activities, which primarily related to $103.4 million invested in property, plant and equipment and $21.0 million used for our acquisition of Voestalpine Nagold. Cash proceeds from the Credit Facility were used towards the $150.0 million distribution to the Former Parent on December 1, 2023 as well as to fund other operating activities. This debt financing activity was a part of our overall debt activity, which resulted in $145.2 million in overall cash proceeds from short-term borrowings during the fiscal 2024. Additionally, prior to the Separation, we transferred $47.6 million to the Former Parent under their centralized cash management program. The following table summarizes our consolidated and combined cash flows for the periods presented:

We believe we have access to adequate resources to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, and working capital, to the extent not funded by cash provided by operating activities, for at least 12 months and for the foreseeable future thereafter. These resources include cash and cash equivalents and unused borrowing capacity available on the Credit Facility.

Although we do not currently anticipate a need, we believe that we could access the financial markets to be in a position to sell long-term debt or equity securities. However, the continuation of uncertain economic conditions and heightened interest rate environment could create volatility in the financial markets, which may impact our ability to access capital and the terms under which we can do so. We will continue to monitor the economic environment and its impact on our operations and liquidity needs.

We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. While we believe we currently have adequate capital, should we seek additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs.

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 $199.5 million during fiscal 2024 compared to $315.0 million in fiscal 2023, a decrease of $115.5 million. This change was primarily due to a $154.9 million reduction in cash from net operating working capital (accounts receivable, inventories, and accounts payable) and a $25.2 million increase in undistributed earnings from an unconsolidated affiliate, partially offset by a $70.4 million increase in overall net earnings. The reduction in cash from net operating working capital is primarily due to the nearly $700 per ton decrease in steel prices from fiscal 2022 to fiscal 2023 resulting in a $143.2 million release of operating working capital in fiscal 2023 as compared with modest steel price movement from fiscal 2023 to fiscal 2024 resulting in an $11.7 million increase in operating working capital.

Investing Activities

Net cash used in investing activities was $123.2 million during fiscal 2024 compared to $22.2 million in fiscal 2023. Net cash used in investing activities in fiscal 2024 included capital expenditures of $103.4 million. Additionally, we paid $21.0 million, net of cash acquired, for the acquisition of Voestalpine Nagold in fiscal 2024. See “Note O – Acquisitions” for further information. Net cash used in investing activities in fiscal 2023 resulted from capital expenditures of $45.5 million, partially offset by proceeds from the sale of our WSP Jackson, Michigan facility and other long-lived assets. The increase in capital expenditures from fiscal 2023 to fiscal 2024 was primarily related to strategic expansions in our electrical steel operations in Mexico and Canada to service the automotive and transformer markets.

Capital expenditures reflect cash used for investment in property, plant and equipment and are presented below (this information excludes cash flows related to acquisition and divestiture activity) for each of the prior three fiscal years:

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. However, there can be no assurance 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 if required. We estimate our annual maintenance capital needs to be between approximately $35.0 million and $40.0 million.

Financing Activities

Net cash used in financing activities was $68.8 million in fiscal 2024 compared to $280.2 million in fiscal 2023. The decrease in cash used in 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 the repayment of other debt. In fiscal 2024, transfers to the Former Parent equaled $47.6 million as compared to $199.8 million in fiscal 2023. Fiscal 2024 included net short-term borrowings of $145.2 million, primarily from our Credit Facility to fund the $150.0 million distribution to the Former Parent.

Revolving credit facility – We entered into the Credit Facility on November 30, 2023, immediately prior to the Separation. 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 May 31, 2024, we were in compliance with the financial covenants of the Credit Facility. The Credit Facility does not include credit rating triggers. There were $148.0 million outstanding borrowings drawn against the Credit Facility on May 31, 2024, leaving a borrowing capacity of $402.0 million, subject to the eligible borrowing base, available for use. Under the Credit Facility, we may extend borrowings up to the maturity date subject to the eligible borrowing base.

Common shares –Prior to the Separation, our common shares were owned by the Former Parent. After the Separation was completed as described in “Note J – Equity”, there were 49.3 million shares issued and outstanding. On December 1, 2023, the common shares began trading on the NYSE under the ticker symbol “WS.”

During fiscal 2024 and following the Separation, we declared cash dividends totaling $0.32 per common share at a quarterly rate of $0.16 per common share. Prior to the Separation, the Former Parent was the sole owner of Worthington Steel.

On June 26, 2024, during the first quarter of fiscal 2025, the Board declared a quarterly cash dividend of $0.16 per common share payable on September 27, 2024, to the shareholders of record at the close of business on September 13, 2024.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends, provided that no event of default exists under the Credit Facility and it meets the minimum availability threshold thereunder. 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.

Recently Issued Accounting Standards

There were no new material accounting standards adopted during fiscal 2024 that impacted our consolidated and combined financial statements as disclosed in this Form 10-K.

We are currently evaluating the effect on our consolidated and combined financial statements of the adoption of two new accounting pronouncements.

Environmental

We do not believe that compliance with environmental laws has or will have a material effect on our capital expenditures, future results of operations or financial position or competitive position.