Worthington Steel Inc

The following table presents a review of the results of operations for the three months ended August 31, 2024, and August 31, 2023.

(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 $834.0 million in the first quarter of fiscal 2025, down $71.8 million, compared to the first quarter of fiscal 2024. The decrease was primarily due to a 6% decrease in direct selling prices and a 4% decrease in direct tons sold in the first quarter of fiscal 2025 compared to the prior year quarter. This was partially offset by more favorable mix within toll tons sold. The mix of direct versus toll volumes was 56% to 44% in the first quarter of fiscal 2025 and the prior year quarter.

Gross Margin

Gross margin decreased $28.1 million over the prior year quarter to $100.4 million, primarily due to unfavorable direct spreads (sales less material costs) and lower direct volume. Direct spreads, excluding the Voestalpine Nagold acquisition, down $23.8 million, were impacted by a $32.1 million unfavorable change from an estimated $15.5 million inventory holding gain in the first quarter of fiscal 2024 compared to estimated $16.6 million inventory holding loss in the first quarter of fiscal 2025. The impact of lower direct volumes was largely offset by improved mix within toll processing in the current year quarter compared with the prior year quarter.

Selling, General and Administrative Expense

SG&A increased $3.2 million over the prior year quarter primarily due to increased wage and benefit costs as well as costs of being a stand-alone company following the Separation.

Other Operating Items

Impairment of long-lived assets in the first quarter of fiscal 2024 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 toll processing facility in Cleveland, Ohio. Refer to “Note 4 – Impairment of Long-Lived Assets” for additional information.

Separation costs decreased by $3.6 million in the first quarter of fiscal 2025 as the Separation was finalized on December 1, 2023, which was the first day of the third quarter of fiscal 2024. No additional Separation costs are expected subsequent to fiscal 2024, and no additional Separation costs were recognized in the first quarter of fiscal 2025. Refer to “Note 1 – Description of Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation” for additional information.

Miscellaneous Income (Expense), Net

Miscellaneous income (expense), net decreased $6.8 million from the prior year quarter primarily due to $4.4 million of expense related to the first quarter fiscal 2025 recognition of a tax indemnity payable to the former owners of Tempel Steel Company (“Tempel”) associated with the final favorable ruling in a pre-acquisition tax matter in one of the jurisdictions in which Tempel operates. Additionally, in the first quarter of fiscal 2025, foreign currency remeasurement losses were $0.5 million compared to foreign currency remeasurement gains of $1.9 million, primarily related to Tempel and TWB operations in Mexico, in the first quarter of fiscal 2024.

Interest Expense, Net

Interest expense increased $2.1 million from the first quarter of fiscal 2024, 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. This was partially offset by a reduction in interest expense in the first quarter of fiscal 2025 as compared to the prior year quarter due to the outstanding short-term borrowings under the AR Facility, which was terminated in June 2023, as well as the TWB Term Loan, which was subsequently contributed to the Company in connection with the Separation on December 1, 2023. Refer to “Note 7 – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington decreased $7.7 million from the first quarter of fiscal 2024, driven by lower direct volume, lower direct spreads, and unfavorable foreign currency exchange impacts.

Income Taxes

Income tax expense was $4.0 million in the first quarter of fiscal 2025 compared to $17.0 million in the first quarter of fiscal 2024. The decrease in income tax expense was primarily driven by lower pre-tax earnings and the recognition of a discrete $4.4 million net tax benefit related to pre-acquisition tax matters at Tempel. The income tax expense in the current quarter resulted in an effective tax rate of 12.3%, compared to 22.6% for the prior year quarter. For additional information regarding our income taxes, refer to “Note 10 – 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 charge in the prior year period was driven by 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 in the prior year quarter. A more detailed discussion of our impairment activity can be found elsewhere in this MD&A as well as in “Note 4 – Impairment of Long-Lived Assets.”

(2)

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.

(3)

Income tax benefit and indemnification payable adjustments reported in Miscellaneous income (expense), net and income tax expense related to an indemnification agreement with the former owners of Tempel as a result of a current quarter favorable 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 rulings by tax authorities regarding events that occurred through the acquisition date.

Adjusted EBIT in the first quarter of fiscal 2025 was down $41.1 million compared to the first quarter of fiscal 2024 primarily due to a $28.1 million decrease in gross margin which was impacted by a $32.1 million unfavorable change from an estimated $15.5 million inventory holding gain in the first quarter of fiscal 2024 compared to estimated $16.6 million inventory holding loss in the first quarter of fiscal 2025. Additionally, adjusted EBIT was negatively impacted by lower equity earnings at Serviacero Worthington, which decreased $7.7 million, and a $3.2 million increase in SG&A expense, primarily associated with incremental labor and other incremental public company stand-alone costs.