Worthington Steel, Inc.

Results of Operations

Fiscal 2025 Compared to Fiscal 2024

The tables throughout this section present, on a comparative basis, our results of operations for the past two fiscal years.

(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 $3,093.3 million in fiscal 2025, down $337.3 million compared to fiscal 2024, primarily due to lower direct selling prices and unfavorable volumes. Direct selling prices were down approximately 6%. Overall volume decreased 213,621 tons, or 5% from fiscal 2024 to fiscal 2025. Direct tons sold decreased 4%, while toll tons sold decreased 7% compared to fiscal 2024. The mix of direct versus toll volumes was 57% to 43% in fiscal 2025, compared to 56% to 44% in fiscal 2024.

Gross Margin

Gross margin decreased $51.2 million over the prior year to $388.6 million, primarily due to lower volume (direct and toll) and, to a lesser extent, unfavorable direct spreads between sales price and material costs. Direct volumes, down 4% compared to the fiscal 2024, reduced gross margin by $36.8 million, whereas toll volumes, down 7%, compared to the fiscal 2024, negatively impacted gross margin by $6.9 million. Direct spreads, down $6.1 million, were unfavorably impacted by a $7.0 million change from $3.4 million in estimated inventory holding losses in fiscal 2024 compared to estimated holding losses of $10.4 million in fiscal 2025.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) increased $7.2 million over the prior year primarily due to increased wage and benefit costs and $4.6 million of professional fees associated with the Sitem Group Transaction.

Other Operating Items

Impairment of assets in fiscal 2025 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 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 another WSCP toll processing facility in Cleveland, Ohio. Refer to “Note 4 – Goodwill and Other Assets” for additional information.

Restructuring and other expense, net in fiscal 2025 was driven by the $1.8 million of severance expense associated with a TWB voluntary retirement program (“VRP”), which is expected to accelerate the normal retirement attrition process and result in future cost savings. Additionally, in connection with the consolidation and closure of WSCP’s remaining Cleveland, Ohio toll processing manufacturing facility, the Company recognized $0.8 million in severance expense during fiscal 2025. Refer to “Note 5 – Restructuring and Other (Income) Expense, Net” for additional information.

Separation costs decreased by $19.5 million in fiscal 2025 as the Separation was finalized on December 1, 2023. No additional Separation costs are expected after 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, Net

Miscellaneous income, net decreased $1.5 million from the prior year primarily due an indemnification agreement with the former owners of Tempel. As a result of rulings in one of the jurisdictions in which Tempel operates, there was a $7.4 million decrease in miscellaneous income, net from fiscal 2024 to fiscal 2025. During fiscal 2025, there was $4.6 million of expense as a result of the recognition of tax indemnity payables associated with a final tax year favorable ruling and associated interest charge true-up. In contrast, during fiscal 2024, there was $2.8 million of income related to the fiscal 2024 recognition of a tax indemnity receivable associated with a final tax year unfavorable ruling. The indemnification agreement, which was entered into with the former Tempel owners at the time the Company acquired Tempel, provides protection to the Company from rulings by tax authorities through the acquisition date. Additionally, there was a $2.5 million change in foreign currency remeasurements as there were foreign currency remeasurement losses of $1.6 million in fiscal 2025 compared to foreign currency remeasurement gains of $0.9 million in fiscal 2024, primarily related to Tempel and TWB operations in Mexico.

The decrease from fiscal 2024 was offset by three primary items. First, in fiscal 2025, there was a $4.0 million pre-tax gain mark-to-market gain on the economic (non-designated) foreign currency exchange contract entered into related to the purchase price for Sitem Group. Second, 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. Finally, we recognized a pre-tax gain of $1.5 million related to the sale of unused land in China.

Interest Expense, Net

Interest expense increased $1.1 million from fiscal 2024, primarily due to higher average debt levels associated with borrowings under the Credit Facility during fiscal 2025 as compared to fiscal 2024. During fiscal 2024, the Credit Facility, which was entered into November 30, 2023, was 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. Refer to “Note 8 – Debt” for additional information.

Equity Income

Equity earnings at Serviacero Worthington decreased $18.0 million over fiscal 2024 due to lower direct spreads, primarily related to the impact of reduced inventory holding gains, lower direct volume, and unfavorable exchange rate movements during fiscal 2025. We received cash distributions of $12.8 million from Serviacero Worthington during fiscal 2025 as compared to $2.0 million during fiscal 2024. Refer to “Note 3 – Investment in Unconsolidated Affiliate” for additional information.

Income Taxes

Income tax expense decreased $17.3 million from fiscal 2024 due to lower pre-tax earnings, 2008 and 2009 court rulings at Tempel Mexico, offset by a one-time item in fiscal 2024 for non-deductible executive compensation. Fiscal 2025 income tax expense reflected an estimated annual effective income tax rate of 20.6% versus 23.0% in fiscal 2024. Refer to “Note 13 – Income Taxes” for additional information.

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 fiscal 2025 were driven by 1) an indefinite-lived in-process research and development intangible asset, representing acquired research and development projects that are not yet completed and for which no determinable useful life exists at this time, 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 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 at another WSCP former toll processing facility in Cleveland, Ohio, and excludes the noncontrolling interest portion of impairment of assets of $0.5 million. Refer to “Note 4 – Goodwill and Other 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 $1.0 million in severance expenses during fiscal 2025, which is recorded in restructuring and other expense, net, and excludes the noncontrolling interest portion of restructuring and other expenses, net of $0.8 million. Additionally, in connection with the consolidation and closure of WSCP’s remaining Cleveland, Ohio toll processing manufacturing facility, the Company recognized $0.5 million in severance expense during fiscal 2025, which is recorded in restructuring and other expense, net, and excludes the noncontrolling interest portion of restructuring and other expenses, net of $0.3 million. Refer to “Note 5 – Restructuring and Other Income, Net” for additional information.

(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 adjustments reported in miscellaneous income, net, related to an indemnification agreement with the former owners of Tempel. These adjustments are the result of a first quarter fiscal 2025 favorable tax ruling, a fourth quarter fiscal 2025 interest charge true-up, and a fourth quarter fiscal 2024 unfavorable 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 the Company acquired Tempel, provides protection to the Company from rulings by tax authorities 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 gain, is excluded as it is not part of our ongoing operations.

(6)

Tempel owns a subsidiary in China (“Tempel China”). 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.

(7)

Gain on Sitem Group purchase derivative reflects the mark-to-market gain on the economic (non-designated) foreign currency exchange contract entered into related to the purchase price for Sitem Group, which resulted in a pre-tax gain in miscellaneous income, net, and is excluded as it is not part of the Company’s ongoing operations.

Adjusted EBIT was down $75.3 million over the prior year, primarily due to a $51.2 million decrease in gross margin, an $18.0 million decrease in equity earnings at Serviacero Worthington, and a $7.2 million increase in SG&A compared to fiscal 2024.