Worthington Steel, Inc.

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

(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 $2,260.4 million in the current year period, down $259.2 million from the prior year period. The decrease was primarily due to lower volumes and lower direct selling prices. Direct tons sold decreased 5% and toll tons sold decreased 6% in the current year period compared to the prior year period. Direct selling prices decreased 6% in the current year period compared to the prior year period. The mix of direct versus toll volumes was 56% to 44% in both the current year period and the prior year period.

Gross Margin

Gross margin decreased $47.2 million over the prior year period to $261.6 million, primarily due to lower direct volume and, to a lesser extent, unfavorable direct spreads (sales less material costs) in the current year period compared with the prior year period. Direct volumes, down 5% compared with the prior year period, unfavorably impacted gross margin by $34.6 million. Direct spreads, down $11.6 million, were impacted by a $31.2 million unfavorable change from zero estimated inventory holding losses in the prior year period to estimated $31.2 million inventory holding losses in the current period.

Selling, General and Administrative Expense

SG&A increased $12.0 million over the prior year period primarily due to increased wage and benefit costs, incremental costs of being a stand-alone public company following the Separation, a $2.5 million increase in bad debt expenses, and $3.3 million of professional fees associated with the Sitem Group Transaction.

Other Operating Items

Impairment of assets in the current year period was driven by 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. Impairment of assets 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 of WSCP’s former toll processing facility in Cleveland, Ohio. 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 current year period.

Separation costs decreased by $19.5 million in the prior year period 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 the current year period. 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 $3.5 million from the prior year period 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 associated with the final favorable ruling in a pre-acquisition tax matter in one of the jurisdictions in which Tempel operates. Additionally, in the current year period foreign currency remeasurement losses were $2.5 million compared to foreign currency remeasurement gains of $0.5 million in the prior year period, primarily related to Tempel and TWB operations in Mexico.

The decreases from the prior year period were offset by the annuitization of a portion of the total projected benefit obligation of the inactive Tempel Steel Pension Plan, resulting in a pre-tax, non-cash settlement gain of $2.7 million to accelerate a portion of deferred pension cost. Additionally, we recognized a pre-tax gain of $1.5 million sale of unused land in China.

Interest Expense, Net

Interest expense, net increased $2.5 million from the prior year period primarily due to higher average debt levels associated with borrowings under the Credit Facility utilized to fund the $150.0 million distribution to the Former Parent in connection with the Separation. This was partially offset by a reduction of interest expense associated with the TWB Term Loan, which was contributed to us in connection with the Separation on December 1, 2023, as well as by the reduction in interest expense in the current year period as compared to the prior year period due to the outstanding short-term borrowings under the AR Facility, which was terminated in June 2023. Refer to “Note 8 – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington decreased $15.3 million over the prior year period driven by lower volume and lower direct spreads in the current year period due to inventory holding gains in the prior year period not realized in the current year period, as well as unfavorable foreign currency exchange impacts.

Income Taxes

Income tax expense was $12.6 million for the current year period compared to $28.5 million for the prior year period. The decrease in income tax expense was driven by lower pre-tax earnings and the recognition of a $4.4 million net tax benefit related to pre-acquisition matters at Tempel. Income tax expense in the current year period resulted in an effective tax rate of 18.7% compared to 21.9% for the prior year period. For additional information regarding our income taxes, refer to “Note 11 – Income Taxes.”

Adjusted EBIT

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 current year period 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. 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 assets of $0.5 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 the current year period, TWB announced a VRP. In connection with the VRP, the Company recognized $0.9 million in severance expenses during the current year period, 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.

(4)

Tax indemnification adjustment reflects the 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 first quarter fiscal 2025 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.

(5)

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 charge, is excluded as it is not part of our ongoing operations.

(6)

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

Adjusted EBIT was down $75.0 million compared to the prior year period primarily due to a $47.2 million decrease in gross margin, $15.3 million decrease in equity earnings at Serviacero Worthington, and a $12.0 million increase in SG&A compared to the prior year period.