Worthington Steel Inc

The following table presents a review of the results of operations for the three months ended November 30, 2024, and November 30, 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 $739.0 million in the second quarter of fiscal 2025, down $69.0 million compared to the second quarter of fiscal 2024. The decrease was primarily due to lower volumes and direct selling prices. Direct tons sold decreased 5% and toll tons sold decreased 1% in the second quarter of fiscal 2025 compared to the prior year quarter. Direct selling prices decreased 4% in the second quarter of fiscal 2025 compared to the prior year quarter. The mix of direct versus toll volumes was 55% to 45% in the second quarter of fiscal 2025 compared to 56% to 44% in the prior year quarter.

Gross Margin

Gross margin increased $19.8 million over the prior year quarter to $80.0 million, primarily due to favorable direct spreads (sales less material costs), offset by lower volume. Direct spreads, up $31.1 million, were impacted by a $21.4 million favorable change from an estimated $34.8 million inventory holding loss in the second quarter of fiscal 2024 compared to estimated $13.4 million inventory holding loss in the second quarter of fiscal 2025.

Selling, General and Administrative Expense

SG&A increased $7.0 million over the prior year quarter primarily due to increased wage and benefit costs, incremental costs of being a stand-alone public company following the Separation, a $2.0 million increase in bad debt expenses, and an additional $2.0 million of professional fees associated with the Sitem Group Transaction.

Other Operating Items

Separation costs decreased by $14.9 million in the second 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 second 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 increased $3.2 million from the second quarter of fiscal 2024 primarily due to the annuitization of a portion of the total projected benefit obligation of the inactive Tempel Steel Pension Plan, which resulted in a pre-tax, non-cash settlement gain of $2.7 million to accelerate a portion of deferred pension cost and recognition of a pre-tax gain of $1.5 million related to the sale of unused land in China. Additionally, in the second quarter of fiscal 2025, foreign currency remeasurement losses were $0.7 million compared to foreign currency remeasurement gains of $0.2 million, primarily related to Tempel operations in Mexico, in the second quarter of fiscal 2024.

Interest Expense, Net

Interest expense, net increased $1.9 million from the second 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 second quarter of fiscal 2025 as compared to the prior year quarter due to the TWB Term Loan, which was 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 $4.7 million from the second quarter of fiscal 2024, driven by lower direct spreads in the current year quarter due to inventory holding gains in the prior year quarter not realized in the current year quarter, as well as unfavorable foreign currency exchange impacts.

Income Taxes

Income tax expense was $3.6 million in the second quarter of fiscal 2025 compared to an income tax benefit of $2.5 million in the second quarter of fiscal 2024. 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 29.9% 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)

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.

(2)

Pension settlement gain reflects the pension lift-out transaction to transfer a portion of the total projected benefit obligation of the Tempel pension plan to a third-party insurance company, which resulted in a pre-tax non-cash gain, is excluded as it is not part of our ongoing operations.

(3)

Gain on land sale reflects the sale of unused land on the campus of the Tempel China, which resulted in a pre-tax gain, is excluded as it is not part of our ongoing operations.

Adjusted EBIT in the second quarter of fiscal 2025 was up $7.7 million compared to the second quarter of fiscal 2024 primarily due to a $19.8 million increase in gross margin which was impacted by a $21.4 million favorable change from an estimated $34.8 million inventory holding loss in the second quarter of fiscal 2024 compared to an estimated $13.4 million inventory holding loss in the second quarter of fiscal 2025. The increase in gross margin was partially offset by a $7.0 million increase in SG&A as compared to the prior year quarter, which was driven by an increase in wage and benefit costs, incremental costs of being a stand-alone public company, an increase in bad debt expenses, and additional professional fees associated with the Sitem Group Transaction, and lower equity earnings at Serviacero Worthington.