Worthington Steel, Inc.

The following table presents a review of the results of operations for the three months ended February 28, 2025, and February 29, 2024.

Net sales totaled $687.4 million in the third quarter of fiscal 2025, down $118.4 million compared to the third quarter of fiscal 2024. The decrease was primarily due to lower volumes and lower direct selling prices. Direct tons sold decreased 7% and toll tons sold decreased 15% in the third quarter of fiscal 2025 compared to the prior year quarter. Toll volumes were down primarily with our steel mill customers as they required less outside processing to meet their production requirements. Direct selling prices decreased 8% in the third quarter of fiscal 2025 compared to the prior year quarter. The mix of direct versus toll volumes was 57% to 43% in the third quarter of fiscal 2025 compared to 55% to 45% in the prior year quarter.

Gross Margin

Gross margin decreased $38.9 million over the prior year quarter to $81.2 million, primarily due to unfavorable direct spreads (sales less material costs), and, to a lesser extent lower volume. Direct spreads, down $22.5 million, were impacted by a $20.5 million unfavorable change from an estimated $19.3 million inventory holding gain in the third quarter of fiscal 2024 compared to estimated $1.2 million inventory holding loss in the third quarter of fiscal 2025.

Selling, General and Administrative Expense

SG&A increased $1.8 million over the prior year quarter primarily due to an additional $1.3 million of professional fees associated with the Sitem Group Transaction and increased wage and benefit costs.

Other Operating Items

Impairment of assets in the third quarter of fiscal 2025 included the recognition of a $1.3 million pre-tax impairment charge related to an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired. Additionally, due to the announced plans to combine WSCP’s Cleveland, Ohio toll processing manufacturing facility into its existing manufacturing facility in Twinsburg, Ohio, we recognized a $6.1 million pre-tax impairment charge on the disposal group assets. Refer to “Note 4 – Impairment of Assets” for additional information.

Restructuring and other expense, net in the third quarter of fiscal 2025 was driven by TWB’s VRP, which is expected to accelerate the normal retirement attrition process and result in future cost savings. In connection with the VRP, we recognized $0.9 million in severance expenses during the third quarter of fiscal 2025.

Separation costs decreased by $1.0 million in the third 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 Separation costs were recognized in 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 $0.1 million from the third quarter of fiscal 2024 primarily due to lower foreign currency remeasurement losses, including foreign currency exchange contracts related to economic (non-designated) derivative financial instruments, in the third quarter of fiscal 2025.

Interest Expense, Net

Interest expense, net decreased $1.5 million from the third quarter of fiscal 2024, primarily due to lower average debt levels and lower average interest rates associated with the borrowings under the Credit Facility. Refer to “Note 8 – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington decreased $2.9 million from the third quarter of fiscal 2024, driven by lower volumes and unfavorable foreign currency exchange impacts.

Income Taxes

Income tax expense was $5.0 million in the third quarter of fiscal 2025 compared to $14.0 million in the third quarter of fiscal 2024. The decrease in income tax expense was primarily driven by lower pre-tax earnings. The income tax expense in the current quarter resulted in an effective tax rate of 26.7%, compared to 22.2% for the prior year quarter. For additional information regarding our income taxes, refer to “Note 11 – 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), net, 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 the third quarter of fiscal 2025 were driven by 1) an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired and 2) our plans to combine WSCP’s Cleveland, Ohio toll processing manufacturing facility into its existing manufacturing facility in Twinsburg, Ohio, and excludes the noncontrolling interest portion of impairment of assets of $2.8 million. For additional information regarding impairment activity, refer to “Note 4 – Impairment of 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). In third quarter of fiscal 2025, TWB announced a VRP. In connection with the VRP, we recognized $0.9 million in severance expenses during the third quarter of fiscal 2025, which is recorded in restructuring and other expense, net, and excludes the noncontrolling interest portion of restructuring and other expenses, net of $0.4 million. For additional information regarding restructuring activities, refer to “Note 5 – Restructuring and Other Expense, Net.”

(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.

Adjusted EBIT in the third quarter of fiscal 2025 was down $41.6 million compared to the third quarter of fiscal 2024 primarily due to a $38.9 million decrease in gross margin which was impacted by a $20.5 million unfavorable change from an estimated $19.3 million inventory holding gain in the third quarter of fiscal 2024 compared to an estimated $1.2 million inventory holding loss in the third quarter of fiscal 2025 and lower volume. Additionally, there was a $1.8 million increase in SG&A as compared to the prior year quarter, which was driven by an increase in wage and benefit costs and professional fees associated with the Sitem Group Transaction, and lower equity earnings at Serviacero Worthington.