Worthington Steel, Inc.: Form 10-Q for the period ended Nov 30, 2023

Selected statements contained in this “Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) constitute “forward-looking statements” as that term is used in the PSLRA. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” in the beginning of this Form 10-Q and “Part I – Item 1A. – Risk Factors” of the Form 10.

Unless otherwise indicated, all Note references contained in this MD&A refer to the Notes to Combined Financial Statements included in “Part I – Item 1. – Financial Statements” of this Form 10-Q.

Unless the context otherwise requires, references to “Worthington Steel,” “we,” “us,” “our,” and the “Company” refer to (i) Worthington Enterprises, Inc.'s ("Worthington", "Worthington Industries, Inc.", or "Parent") steel processing business prior to the previously announced separation of the Company on December 1, 2023 (the “Separation”) as a carve-out business of Worthington with related combined financial statements and (ii) Worthington Steel and its subsidiaries following the Separation with related combined financial statements.

Introduction

The following discussion and analysis of market and industry trends, business developments, and the results of our operations and financial position, should be read in conjunction with our combined financial statements and notes thereto included in “Part I – Item 1. – Financial Statements” of this Form 10-Q. The Form 10 includes additional information about our business, operations and combined financial position and should be read in conjunction with this Form 10-Q. This MD&A is designed to provide a reader with material information relevant to an assessment of our financial condition and results of operations and to allow investors to view the Company from the perspective of management.

Basis of Presentation

Worthington Steel was formed as an Ohio corporation on February 28, 2023 for the purpose of receiving, pursuant to a reorganization, all of the outstanding equity interests of the Steel Processing business of Worthington Industries. On December 1, 2023, the Separation was completed through the Distribution, which is intended to be tax-free to Worthington Industries shareholders for U.S. federal income tax purposes. Following the Distribution, Worthington Steel became an independent, publicly traded company. For additional information, see “Note A – Worthington Steel Separation, Description of Business, and Basis of Presentation” and “Note Q – Subsequent Events.”

The accompanying combined financial statements have been prepared on a stand-alone, carve-out basis using the consolidated financial statements and accounting records of Parent. The combined financial statements reflect the operations of Worthington Steel, as historically managed, in accordance with U.S. GAAP. Our combined financial statements include allocations of certain general and administrative expense related to shared corporate functions. The allocations have been determined on a reasonable basis: however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operating independently of the Parent. Further, our combined financial statements may not be reflective of what our results of operations, comprehensive income, historical financial position, equity or cash flows might be in the future as a separate public company. Certain factors could impact the nature and amount of these public company costs, including finalization of our staffing and infrastructure needs. Following the Separation, pursuant to agreements with Parent, Worthington will continue to provide us some of the services related to these previously shared corporate functions on a transitional basis in exchange for agreed-upon fees, and we will incur other costs to replace the services and resources that are not provided by Worthington. As a separate public company, our total costs related to such support functions may differ from the costs that were historically allocated to us.

Anticipated additional costs are primarily for the following:

• additional personnel costs, including salaries, benefits and potential bonuses and stock-based compensation awards for staff additions to establish certain corporate functions historically supported by Parent and not covered by the transition services agreement; and
• corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees.

We expect the additional separate public company costs in excess of the costs that have been historically allocated to us could range between $10 million and $15 million per year. In addition to these separate public company costs, we expect to incur certain non-recurring costs as a result of the Separation.

We have historically been dependent on Parent for all of our working capital and financing requirements and, with the exception of cash held outside of the United States, we have participated in Parent’s centralized cash management and financing arrangements. Our financing transactions are reflected within equity as Net Worthington Enterprises, Inc. investment. Accordingly, none of Parent’s cash, cash equivalents or debt has been assigned to us. Prior to its June 2023 termination, borrowings outstanding under the AR Facility and related interest expense are included in our combined financial statements as one of our subsidiaries is the legal party to the arrangement.

In contemplation of our anticipated post-separation capital structure, the AR Facility was terminated in June 2023. No early termination or other similar fees or penalties were paid in connection with the termination. As part of the Separation, we replaced the terminated AR Facility with the new Credit Facility. See “Recent Business Developments” and “Note H – Debt” for additional information.

Net Worthington Enterprises, Inc. investment, which includes retained earnings, represents Worthington’s interest in the recorded net assets of us. All significant transactions between Parent and us have been properly accounted for in the accompanying combined financial statements as related party transactions. To the extent not expected to be settled in cash, these transactions are reflected in the accompanying combined statements of equity as transfers (to) from Parent, net and in the accompanying combined balance sheets within Net Worthington Enterprises, Inc. investment.

The effects of transactions with Parent are discussed further in “Note P – Related Party Transactions.”

Business Overview

We are one of North America’s premier value-added steel processors with the ability to provide a diversified range of products and services that span a variety of end markets. We maintain market leading positions in the North American carbon flat-rolled steel and tailor welded blank industries and are one of the largest global producers of electrical steel laminations. For nearly 70 years, we have been delivering high quality steel processing capabilities across a variety of end-markets including automotive, heavy truck, agriculture, construction, and energy. With the ability to produce customized steel solutions, we aim to be the preferred value-added steel processor in the markets we serve by delivering highly technical, customer specific solutions, while also providing advanced materials support and price risk management solutions to optimize customer supply chains. Our scale and operating footprint allow us to achieve an advantaged cost structure and service platform supported by a strategic operating footprint. We serve our customers primarily by processing flat-rolled steel coils, which we source primarily from various North American steel mills, into the precise type, thickness, length, width, shape, and surface quality required by customer specifications. We can sell steel on a direct basis, whereby we are exposed to the risk and rewards of ownership of the material while in our possession. Alternatively, we toll process steel under a fee for service arrangement whereby we process customer-owned material. Our manufacturing facilities further benefit from the flexibility to scale between direct and tolling services based on demand dynamics throughout the year.

Our operations are managed principally on a products and services basis under a single group organizational structure. We own controlling interests in the following consolidated operating joint ventures: Spartan, TWB, WSCP, and WSP, through October 2022 when we completed the divestiture of the remaining net assets of the WSP joint venture. The net assets and operating results of these joint ventures are consolidated with the equity owned by the minority joint venture member shown as “Noncontrolling interests” in our combined balance sheets, and the noncontrolling interest in net earnings and OCI shown as net earnings or comprehensive income attributable to noncontrolling interests in our combined statements of earnings and combined statements of comprehensive income (loss), respectively. Our remaining joint venture, Serviacero Worthington, is unconsolidated and accounted for using the equity method.

Recent Business Developments

• On November 16, 2023, we acquired Voestalpine Automotive Components Nagold GmbH & Co. KG, a facility in Nagold, Germany for net cash consideration of $21.0 million and the assumption of a $0.9 million pension liability. The acquisition establishes a footprint in Europe for Worthington Steel and allows us to capitalize on the growing EV and industrial motor markets in that region. See “Note M – Acquisitions” for additional information.
• On November 30, 2023, we entered into a multi-year senior secured revolving credit facility (the “Credit Facility”) scheduled to mature on November 30, 2028, with a group of lenders. The Credit Facility allows for borrowings of up to $550.0 million, to the extent secured by eligible accounts receivable and inventory balances at period end, which consist primarily of U.S. Dollar denominated account balances. Amounts drawn under the Credit Facility will have maturities of up to one year and will accrue interest at rates equal to an applicable margin over the SOFR Rate. We incurred approximately $2.7 million of issuance costs, of which $2.5 million will be amortized to interest expense over the expected five-year term and are reflected in other assets. As of November 30, 2023, $175.0 million was outstanding under the Credit Facility, of which $150.0 million was paid to Worthington Enterprises, Inc. on December 1, 2023, in connection with the Separation. See “Note H – Debt” for additional information.
• On December 1, 2023, Worthington Enterprises, Inc., made a pro rata distribution of 100% of the outstanding common shares of the Company to Worthington Enterprises, Inc. shareholders of record as of the close of business on November 21, 2023, in a separation that was generally intended to be tax-free to shareholders for U.S. federal income tax purposes. See “Note A – Worthington Steel Separation, Description of Business, and Basis of Presentation” for additional information.
• On December 1, 2023, the previously announced separation of the Company from Worthington Enterprises, Inc. (formerly known as Worthington Industries, Inc.) was completed, and the Company’s common shares began trading on the New York Stock Exchange under the ticker symbol “WS.” See “Note A – Worthington Steel Separation, Description of Business, and Basis of Presentation” for additional information.

Trends and Factors Impacting our Performance

The steel processing industry is fragmented and highly competitive. Given the broad base of products and services offered, specific competitors vary based on the target industry, product type, service type, size of program and geography. Competition is primarily on the basis of price, product quality and the ability to meet delivery requirements. Our processed steel products are priced competitively, primarily based on market factors, including, among other things, market pricing, the cost and availability of raw materials, transportation and shipping costs, and overall economic conditions in the U.S. and abroad.

General Economic and Market Conditions

We sell our products and services to a diverse customer base and a broad range of end markets. The breakdown of net sales by end market for the three months and six months ended November 30, 2023 and November 30, 2022 is illustrated below:

22

The automotive industry is one of the largest consumers of flat-rolled steel in North America, and thus the largest end market for us and our unconsolidated joint venture, Serviacero Worthington. North American vehicle production, primarily by Ford, General Motors and Stellantis North America (the “Detroit Three automakers”), is a leading indicator of automotive demand. While North American vehicle production was up in the second quarter of fiscal 2024, Detroit Three automakers vehicle production was down primarily due to the UAW strike, which began in mid-September and was not completely settled until early November.

Our remaining net sales are to other markets such as agricultural, appliance, construction, container, energy, heavy-truck, HVAC, and industrial electric motor, generator, and transformer. Given the many different products that make up our net sales and the wide variety of end markets we service, it is very difficult to isolate the key market indicators that drive this portion of our business. However, we believe that the trend in U.S. gross domestic product growth is a reasonable macroeconomic indicator for analyzing the demand of our end markets. A combination of rising interest rates and general economic uncertainty has affected demand in these end markets.

Inflation and government deficits and debt remain at high levels. Although inflationary pressures abated somewhat during the second quarter of fiscal 2024, as compared to the levels experienced throughout fiscal 2022 and fiscal 2023, they continue to negatively impact our business in the form of higher input and conversion costs as well as higher overall SG&A expense. The U.S. Federal Reserve has pushed interest rates to the highest level in more than 15 years in an attempt to slow growth and reduce inflation. High interest rates has had and could continue to have a negative impact on the economy and various end markets that we serve, as well as overall domestic steel demand.

We use the following information to monitor our costs and demand in our major end markets:

(1) 2022 figures are based on revised actuals

(2) CRU Hot-Rolled Index: period average

(3) IHS Global (S&P)

(4) LME Zinc; period average

(5) NYMEX Henry Hub Natural Gas; period average

(6) Energy Information Administration; period average

Sales to one automotive customer represented 14.9% and 16.6% of our combined net sales during the second quarter of fiscal 2024 and 2023, respectively. While our automotive business is largely driven by the production schedules of the Detroit Three automakers, our customer base is much broader and includes other domestic manufacturers and many of their suppliers.

Sales for most of our products are generally strongest in our fiscal fourth quarter when our facilities operate at seasonal peaks. Historically, sales have been weaker in our fiscal third quarter, primarily due to reduced seasonal activity in the building and construction industry, as well as customer plant shutdowns due to holidays, particularly in the automotive industry. We do not believe backlog is a significant indicator of our business.

Impact of Raw Material Prices

Our principal raw material is flat-rolled steel, including electrical steel, which we purchase in coils from integrated steel mills and mini-mills. The steel industry as a whole has been cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. This volatility can significantly affect our steel costs. In an environment of increasing prices for steel and other raw materials, competitive conditions may impact how much of the price increases we can pass on to our customers. To the extent we are unable to pass on to our customers future price increases in raw materials, our financial results could be adversely affected. Also, if steel prices decrease, in general, competitive conditions may impact how quickly we must reduce our prices to our customers, and we could be forced to use higher-priced raw materials to complete orders for which the selling prices have decreased. Declining steel prices could also require us to write-down the value of our inventories to reflect current market pricing. Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and consolidation may continue. Accordingly, if delivery from a major steel supplier is disrupted, it may be more difficult to obtain an alternative supply than in the past.

The market price of our products is closely related to the price of Hot Rolled Coil (HRC). The price of benchmark HRC is primarily affected by the demand for steel and the cost of raw materials. Steel prices declined throughout most of fiscal 2023 before increasing significantly in the fourth quarter of fiscal 2023 on production cuts at major steel mills and the replenishment of inventories in major end markets, then decreased again in the first and second quarters of fiscal 2024. The decline in steel prices in fiscal 2024 resulted in estimated inventory holding losses of $19.3 million during the six months ended November 30, 2023.

To manage our exposure to market risk, we attempt to negotiate the best prices for steel and to competitively price products and services to reflect the fluctuations in market prices. Derivative financial instruments have been used to manage a portion of our exposure to fluctuations in the cost of certain steel. These contracts covered periods commensurate with known or expected exposures throughout the periods presented. The derivative financial instruments were executed with highly rated financial institutions.

The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2024 (first and second quarter), fiscal 2023, and fiscal 2022:

(1) CRU Hot-Rolled Index, period average

No matter how efficient, our operations, which use steel as a raw material, create some amount of scrap. The expected price of scrap compared to the price of the steel raw material is factored into pricing. Generally, as the price of steel increases, the price of scrap increases by a similar amount. When increases in scrap prices do not keep pace with the increases in the price of the steel raw material, it can have a negative impact on our margins.

Results of Operations

Second Quarter – Fiscal 2024 Compared to Fiscal 2023

The following table presents a review of results for the three months ended November 30, 2023 and November 30, 2022.

(In millions, except volume and per common share amounts)

(1) On December 1, 2023, there were approximately 49.3 million shares of Worthington Steel common stock outstanding following the Distribution. The computation of basic and diluted earnings per common share for all periods through November 30, 2023 was calculated using this same number of common shares outstanding since no Worthington Steel equity awards were outstanding as of the Distribution Date and is net of Net earnings attributable to noncontrolling interest which is fully associated with continuing operations.

Net sales totaled $808.0 million in the second quarter of fiscal 2024, down $60.4 million, compared to the second quarter of fiscal 2023, primarily due to lower average selling prices, partially offset by higher direct volumes. The mix of direct versus toll tons processed was 56% to 44% in the second quarter of fiscal 2024, compared to 55% to 45% in the prior year quarter. Excluding the impact of the prior year divestiture of the remaining WSP toll processing facility in Jackson, Michigan, toll volumes were up 6%.

Gross Margin

(In millions)

Gross margin increased $25.7 million over the prior year quarter to $60.2 million, due primarily to favorable direct spreads, including an $18.3 million favorable change from $53.1 million in estimated inventory holding losses in the second quarter of fiscal 2023 compared to estimated holding losses of $34.8 million in the second quarter of fiscal 2024.

Selling, General and Administrative Expense

(In millions)

SG&A expense increased $3.4 million over the prior year quarter primarily due to increased wages and profit sharing.

Other Operating Items

(In millions)

Restructuring activity in the prior year quarter was driven by gains realized from the sale of long-lived assets, including a $3.9 million pre-tax gain related to the sale of WSP’s facility in Jackson, Michigan.

Miscellaneous Income, Net

(In millions)

Miscellaneous income was relatively flat compared to the prior year quarter.

Interest Expense, Net

(In millions)

Interest expense decreased $0.7 million from the second quarter of fiscal 2023, primarily due to lower average debt levels associated with a reduction in long-term debt with Parent. Refer to “Note H – Debt” for additional information.

Equity Income

(In millions)

Equity income at Serviacero Worthington increased $1.9 million from the second quarter of fiscal 2023, driven by improved direct spreads and, to a lesser extent, higher direct volume, partially offset by higher manufacturing expenses.

Income Taxes

(In millions)

Income tax benefit was $2.5 million in the current year period compared to income tax benefit of $5.5 million in the prior year period. The decrease in tax benefit was driven by higher pre-tax earnings. The tax benefit in the current quarter resulted in an effective tax rate of 29.9%, compared to 25.9% for the prior year quarter. For additional information regarding our income taxes, refer to “Note K – 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 (loss) attributable to controlling interest. Adjusted EBIT 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 a non-GAAP financial measure and is used by management to evaluate operating performance, engage in financial and operational planning and determine incentive compensation 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 (loss) attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:

(In millions)

(1) 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). The net gain recognized in the second quarter of fiscal 2023 resulted primarily from the sale of

WSP’s facility in Jackson, Michigan, and excludes the noncontrolling interest portion of restructuring and other income, net of $1.8 million in the prior year period.

(2) Reflects the attribution to us of direct and incremental costs incurred by Parent in connection with the planned separation. These costs have been directly attributed to us to the extent incurred to our direct benefit, and include third-party advisory fees, certain non-recurring employee-related costs and non-recurring costs associated with the separation of shared corporate functions.

Adjusted EBIT in the second quarter of fiscal 2024 was up $21.5 million over the second quarter of fiscal 2023 primarily due to favorable direct spreads, including $18.3 million associated with the quarter-over-quarter favorable change in estimated inventory holding losses, and, to a lesser extent, higher equity earnings at Serviacero Worthington, which were up $1.9 million.

Six Months Year-to-Date – Fiscal 2024 Compared to Fiscal 2023

The following table presents a review of results for the six months ended November 30, 2023 and November 30, 2022.

(In millions, except volume and per common share amounts)

(1) On December 1, 2023, there were approximately 49.3 million shares of Worthington Steel common stock outstanding following the Distribution. The computation of basic and diluted earnings per common share for all periods through November 30, 2023 was calculated using this same number of common shares outstanding since no Worthington Steel equity awards were outstanding as of the Distribution Date and is net of Net earnings attributable to noncontrolling interest which is fully associated with continuing operations.

Net sales totaled $1,713.8 million in the current year period, down $229.2 million from the prior year period, driven primarily by lower average selling prices due to lower year-over-year steel market prices. The mix of direct versus toll tons processed was 56% to 44% in the current period, compared to 57% to 43% in the prior year period.

Gross Margin

(In millions)

Gross margin increased $65.6 million over the prior year period to $188.7 million, primarily due to favorable direct spreads, including an estimated $35.3 million favorable change from $54.6 million estimated inventory holding losses in the prior year period to estimated losses of $19.3 million in the current year period.

Selling, General and Administrative Expense

(In millions)

SG&A expense increased $9.9 million over the prior year period primarily due to higher healthcare and other benefit-related costs, and higher profit sharing.

Other Operating Items

(In millions)

Impairment of long-lived assets in both the current year period and 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 our former WSCP toll processing facility in Cleveland, Ohio. Refer to “Note D – Impairment of Long-Lived Assets” for additional information.

Restructuring activity in the prior year period was driven by gains realized from the sale of long-lived assets, including a $3.9 million pre-tax gain related to the sale of WSP’s facility in Jackson, Michigan.

Miscellaneous Income, Net

(In millions)

Miscellaneous income was relatively flat compared to the prior year quarter.

Interest Expense, Net

(In millions)

Interest expense, net decreased $1.5 million over the prior year period due to lower average debt levels associated with a reduction in long-term debt with Parent. Refer to “Note H – Debt” for additional information.

Equity Income

(In millions)

Equity earnings at Serviacero Worthington increased $9.1 million over the prior year period driven by improved direct spreads and higher volume, partially offset by higher manufacturing expenses.

Income Taxes

(In millions)

Income tax expense was $14.5 million for the current year period compared to $4.8 million for the prior year period. The increase in income tax expense was driven by higher pre-tax earnings. Income tax expense in the current year period resulted in an effective tax rate of 21.6% compared to 24.9% for the prior year period. For additional information regarding our income taxes, refer to “Note K – Income Taxes."

Adjusted EBIT

The following table provides a reconciliation of net earnings (loss) attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:

(In millions)

(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 both periods were driven by changes in the estimated fair market value less cost to sell related to ongoing efforts to divest certain production equipment of our WSCP joint venture’s former toll processing facility in Cleveland, Ohio, and excludes the noncontrolling interest portion of impairment of long-lived assets of $0.5 million and $0.2 million in the current year period and prior year period, respectively. A more detailed discussion of our impairment activity can be found elsewhere in this MD&A as well as in “Note D – Impairment of Long-Lived 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). The net gain recognized in the second quarter of fiscal 2023 resulted primarily from the sale of WSP’s facility in Jackson, Michigan, and excludes the noncontrolling interest portion of restructuring and other income, net of $1.8 million in the prior year period.

(3) Reflects the attribution to us of direct and incremental costs incurred by Parent in connection with the planned 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 was up $60.0 million over the prior year period due primarily to favorable direct spreads, including $35.3 million associated with the year-over-year favorable change in estimated inventory holding losses, and, to a lesser extent, a $9.1 million increase in equity earnings at Serviacero Worthington, partially offset by a $9.9 million increase in SG&A expense compared to the prior year period.

Liquidity and Capital Resources

Historically, we financed our working capital requirements through cash flows from operating activities and arrangements with our Parent. Upon completion of the Separation, we ceased such arrangements with our Parent. Our capital structure, long-term commitments, and liquidity sources will thus change from our prior practices. A more detailed description regarding our capital structure changes can be found elsewhere in this MD&A as well as in the “Financing Activities” section below.

Our primary ongoing requirements for cash will be for working capital, funding of acquisitions, and capital expenditures. We believe that our sources of liquidity are adequate to fund our operations for the next 12 months and for the foreseeable future.

During the six months ended November 30, 2023, we generated $119.2 million of cash from operating activities, invested $36.2 million in property, plant and equipment and used $21.0 million in an acquisition. We received cash proceeds of $175.0 million related to the Credit Facility, of which $150.0 million was used to fund the distribution to Worthington Enterprises, Inc. on December 1, 2023. Additionally, we transferred $51.4 million to Worthington Enterprises, Inc. The following table summarizes our combined cash flows for the periods presented.

(In millions)

Operating Activities

Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of increased economic activity or increasing raw material prices, requiring higher levels of inventory and accounts receivable. During economic slowdowns, or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.

Net cash provided by operating activities was $119.2 million during the six months ended November 30, 2023, compared to $117.5 million during the six months ended November 30, 2022. This change was primarily due to a $41.2 million increase in overall net earnings between periods, offset by a $28.1 million reduction in cash from net operating working capital (accounts receivable, inventories, and accounts payable) and a $9.1 million increase in undistributed earnings from unconsolidated affiliate over the prior year six-month period.

Investing Activities

Net cash used in investing activities was $56.4 million during the six months ended November 30, 2023, compared to $2.4 million during the six months ended November 30, 2022. Net cash used by investing activities in both the current year and prior year periods was the result of capital expenditures. Additionally, we paid $21.0 million, net of cash acquired, for the acquisition of Voestalpine in the current year period. See Note M – “Acquisitions” for further information. The prior year period included $23.2 million proceeds from sale of assets, primarily related to proceeds from the divesture of WSP's facility in Jackson, Michigan.

Investment activities are largely discretionary and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and any such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisition opportunities will be consummated, or that any needed additional financing will be available on satisfactory terms or at all if required.

Financing Activities

Net cash provided by financing activities was $118.9 million during the six months ended November 30, 2023, compared to net cash used in financing activities of $104.1 million during the six months ended November 30, 2022. The increase in cash provided by financing activities was driven by the $175.0 million related to the Credit Facility (see the “Revolving credit facility” section below) during November 2023. This increase was offset by higher transfers to Worthington Enterprises, Inc. as well as by the payment of other long-term obligations and payments to noncontrolling interests.

Revolving credit facility – On November 30, 2023, we entered into the Credit Facility. The Credit Facility allows for borrowings of up to $550.0 million, to the extent secured by eligible accounts receivable and inventory balances at period end, which consist primarily of U.S. Dollar denominated account balances. Amounts drawn under the Credit Facility will have maturities of up to one year and will accrue interest at rates equal to an applicable margin over the SOFR Rate. We incurred approximately $2.7 million of issuance costs, of which $2.5 million will be amortized to interest expense over the expected five-year term and are reflected in other assets. As of November 30, 2023, $175.0 million was outstanding under the Credit Facility, of which $150.0 million was paid to Worthington Enterprises, Inc. on December 1, 2023, in connection with the Separation.

As of November 30, 2023, we were in compliance with the financial covenants of our financial debt agreements. Our debt agreements do not include credit rating triggers or material adverse change provisions. There were $175.0 million outstanding borrowings drawn against our Credit Facility at November 30, 2023, leaving a borrowing capacity of $375.0 million, subject to the eligible borrowing base, available for future use. Under the Credit Facility, the Company may extend current borrowings up to the maturity date subject to the eligible borrowing base.

On December 20, 2023, the Board of Directors declared a quarterly dividend of $0.16 per common share payable on March 28, 2024, to shareholders of record on March 14, 2024.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our combined financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. There is no guarantee that payments of dividends will continue in the future in a similar manner as the Parent, Worthington Enterprises, Inc.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our combined financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these combined financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting policies are defined as those that reflect our significant judgments and uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our combined financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such policies. Our critical accounting policies have not significantly changed from those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of the Form 10.

Market risks have not materially changed from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk” of the Form 10.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that Worthington Steel files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including Worthington Steel’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, under the supervision of and with the participation of Worthington Steel’s principal executive officer and principal financial officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q (the quarterly period ended November 30, 2023). Based on that evaluation, Worthington Steel’s principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective at a reasonable assurance level as of the end of the quarterly period covered by this Form 10-Q.

Changes in Internal Control Over Financial Reporting

Following the Separation, new corporate and governance functions, such as finance, tax, information technology, human resources, treasury and legal, have been implemented to meet all regulatory requirements for a standalone public company. Apart from the foregoing changes, there were no changes that occurred during the second quarter of fiscal 2024 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “PART I – Item 1A. – Risk Factors” of the Form 10 filed with the SEC on November 14, 2023, and available at www.sec.gov (http://www.sec.gov) or at www.worthingtonsteel.com (http://www.worthingtonsteel.com), we included a detailed discussion of our risk factors. Our risk factors have not changed significantly from those disclosed in the Form 10. These risk factors should be read carefully in connection with evaluating our business and investments in the common shares and in connection with the forward-looking statements and other information contained in this Form 10-Q. Any of the risks described in the Form 10 could materially affect our business, combined financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in the Form 10 are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, combined financial condition and/or future results.