Worthington Steel, Inc.: Form 10-Q for the period ended Feb 28, 2025

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

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 consolidated and combined financial statements and notes thereto included in “Part I – Item 1. – Financial Statements” of this Form 10-Q. The 2024 Form 10-K includes additional information about our business, operations and consolidated 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 the Former Parent. On December 1, 2023, the Separation was completed and Worthington Steel became an independent, publicly traded company. Our financial statements for the periods until the Separation on December 1, 2023, are combined financial statements prepared on a carve-out basis. Our financial statements for the periods beginning on and after December 1, 2023, are consolidated financial statements based on our reported results as a stand-alone company. Accordingly, the third quarter of fiscal 2024, and thereafter, included consolidated and combined financial statements, whereas all prior periods included combined financial statements. For additional information, see “Note 1 – Description of Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation.”

Business Overview

We are one of North America’s premier value-added metals 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 specified solutions, while also providing advanced materials support. Our scale and strategic operating footprint allow us to achieve an advantaged cost structure and service platform. 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 sell steel on a direct basis, whereby we are exposed to the risk and rewards of ownership of the material while in our possession. Additionally, 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 operating joint ventures: Spartan, TWB, and WSCP. We also own a controlling interest in WSP, which became a nonoperating joint venture in October 2022, when we completed the divestiture of its remaining net assets. 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 consolidated balance sheets, and the noncontrolling interest in net earnings and OCI is shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated and combined statements of earnings and consolidated and combined statements of comprehensive income, respectively. Our remaining joint venture, Serviacero Worthington, is unconsolidated and accounted for using the equity method.

Recent Business Developments

• We continued to progress on our definitive agreement to acquire a controlling equity stake in the Sitem Group. The Sitem Group produces electric motor laminations and accessory products for automotive and industrial applications in Europe. We have received regulatory approval and expect to close in early fiscal 2026.
• On March 19, 2025, the Board declared a quarterly cash dividend of $0.16 per common share payable on June 27, 2025 to shareholders of record at the close of business on June 13, 2025.

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 nine months ended February 28, 2025, and February 29, 2024, is illustrated below:

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, including Ford, General Motors and Stellantis North America (the “Detroit Three Automakers”), is a leading indicator of automotive demand. North American vehicle production was down 9% in the third quarter of fiscal 2025 compared to the third quarter of fiscal 2024, while the Detroit Three Automakers vehicle production was down 15% in the third quarter of fiscal 2025 compared to the third quarter of fiscal 2024.

Our remaining net sales are to other markets such as agricultural, appliance, construction, container, energy, heavy truck, HVAC, 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 serve, 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 (“U.S. GDP”) is a reasonable macroeconomic indicator for analyzing the demand of our end markets other than the automotive industry. U.S. GDP has shown moderate growth, while the U.S Federal Reserve recently decided to keep the benchmark interest rate the same after its action to lower the benchmark interest rate in December 2024.

Total volume (tons) decreased 11% compared to the prior quarter, with our toll shipments down 15% and shipments to the automotive market down 3% 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. Detroit Three Automakers represented 32% and 30% of our consolidated and combined net sales during the third quarter of fiscal 2025 and fiscal 2024, respectively. Similar to the second quarter of fiscal 2025, the decrease in automotive volume was primarily due to deeper-than-expected production cuts at one of the Detroit Three Automakers as it attempted to right size its inventory levels and adjust its commercial strategy. However, it appears this Detroit Three Automaker is making progress to replenish their supply chains in anticipation of improvements in sales. The impact of reduced shipments in the third quarter of fiscal 2025 to this Detroit Three Automaker was partially offset by increases in shipments to other customers within the automotive market. We have won new programs and increased our share in the automotive market. We are beginning to see the volume impact of some of those new programs as these platforms will continue to ramp up over the next several quarters.

During the first, second and third quarters of fiscal 2025, U.S. inflation rates were generally lower as compared to the rates experienced over the past two fiscal years and have to some extent stabilized, however, the U.S. inflation rate remains above the U.S. Federal Reserve targeted rate of 2%. To combat the higher inflation rate, the U.S. Federal Reserve lowered benchmark interest rates three times during fiscal 2025, with the most recent in December 2024. As a result, borrowing costs have generally decreased, and we have benefited from lower rates on our Credit Facility.

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

(1) Fiscal 2024 figures are based on revised actuals

(2) CRU Hot-Rolled Coil (“HRC”) Index: period average

(3) S&P Global

(4) LME Zinc; period average

(5) NYMEX Henry Hub Natural Gas; period average

(6) Energy Information Administration; period average

The following table summarizes the concentration percentage of consolidated or combined net sales for the periods presented:

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 automotive 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 primary steel producers. 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 able to pass future price increases in raw materials to our customers, this could positively affect our financial results leading to inventory holding gains. To the extent we are unable to pass future price increases in raw materials to our customers, 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 already in our inventory to complete orders for which the selling prices have decreased, which results in inventory holding losses. Declining steel prices could also require us to write-down the value of our inventories to reflect current market pricing. Further, the number of steel 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 or the alternative supply may only be available at a premium.

The market price of our products is closely related to the price of HRC. The price of benchmark HRC is primarily affected by the demand for steel and the cost of raw materials. Over fiscal 2024, Steel prices declined in the first, second and fourth quarters and more than offset the increase in prices in the third quarter, which resulted in the fiscal 2024 average price being lower as compared to fiscal 2023. Steel prices declined during the first quarter of fiscal 2025, but largely stabilized during the second quarter of fiscal 2025. During the third quarter of fiscal 2025, prices began to rise slightly and direct spreads were impacted by an estimated inventory loss of $1.2 million as compared to an estimated $19.3 million inventory holding gain in the third quarter of fiscal 2024. During the early portion of the fourth quarter of fiscal 2025, HRC prices experienced a more significant increase (approximately $200 in March 2025), primarily as a result of U.S. tariffs on steel and aluminum announced in February 2025. With the recent increase in market pricing, we expect inventory holding gains in the fourth quarter of fiscal 2025.

To manage our exposure to market risk, we attempt to negotiate the best prices for commodities 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 our raw materials; steel is the most significant. 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 HRC steel during fiscal 2025 (first, second, and third quarters), fiscal 2024, and fiscal 2023:

(1) CRU HRC 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 and vice versa. 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.

Foreign Exchange Rate Risk

Although the substantial majority of our business activity takes place in the U.S., we derive a portion of our revenues and earnings from operations in foreign countries. Our foreign currency exposure primarily consists of the Canadian dollar, Mexican peso, Chinese yuan, Indian rupee, and Euro through our operations in Canada, Mexico, China, India, and Germany, respectively. We have exposure to exchange rate fluctuations, both due to translation and transaction exposures. Translation exposures arise from measuring income statements of foreign subsidiaries with functional currencies other than the U.S. dollar. Transaction exposures involve impacts from 1) input costs that are denominated in currencies other than the local reporting currency and 2) revaluation of working capital balances denominated in currencies other than the functional currency. We have experienced negative foreign exchange impacts, particularly in the second and third quarters of fiscal 2025, due to the weakening of certain foreign currencies versus the U.S. dollar, which have impacted net earnings and cash flows. In response to the devaluation of foreign currencies (including those deemed highly inflationary), any lags or inability (due to government restrictions) to implement price increases or the negative impacts of such actions may lead to a decline in our net earnings and cash flows.

Results of Operations

Third Quarter – Fiscal 2025 Compared to Fiscal 2024

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

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

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

(In millions)

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

(In millions)

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

(In millions)

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

(In millions)

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

(In millions)

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

(In millions)

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

(In millions)

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:

(In millions)

34

(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.

Year-to-Date – Fiscal 2025 Compared to Fiscal 2024

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

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

(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

(In millions)

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

(In millions)

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

(In millions)

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

(In millions)

36

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

(In millions)

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

(In millions)

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

(In millions)

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:

(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 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.

Liquidity and Capital Resources

Historically, we financed our working capital requirements through cash flows from operating activities and arrangements with the Former Parent. Upon completion of the Separation, we ceased such arrangements with the Former Parent and secured independent debt financing in the form of the Credit Facility. Our capital structure, long-term commitments, and liquidity sources have thus changed from our prior practices. Our ability to fund our operating needs is dependent upon our ability to continue to generate positive cash flow from operations, and on our ability to maintain our debt financing on acceptable terms.

Our primary ongoing requirements for cash are expected to be for working capital, funding of acquisitions, dividend payments, debt redemptions and capital expenditures. We believe that our sources of liquidity, including our cash balances, the funds generated by our operating activities and the funds accessible to us through the Credit Facility, are adequate to fund our operations for the next 12 months and for the foreseeable future and will allow us to meet our current and long-term obligations and strategic initiatives. However, there can be no assurances that our current sources of liquidity and capital resources will continue to be sufficient for our needs or that we will be able to obtain additional debt or equity financing on acceptable terms in the future. 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.

During the nine months ended February 28, 2025, we generated $176.4 million of cash from operating activities and invested $84.9 million in property, plant and equipment. Additionally, we made net debt repayments of $38.0 million under the Credit Facility, and we paid dividends of $23.9 million. The following table summarizes our consolidated and combined cash flows for the periods presented.

(In millions)

We believe we have access to adequate resources to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, and working capital, to the extent not funded by cash provided by operating activities, for at least 12 months and for the foreseeable future thereafter. These resources include cash and cash equivalents and unused borrowing capacity available on the Credit Facility.

We believe we could access the financial markets to be in a position to sell long-term debt or equity securities. However, the continuation of uncertain economic conditions and a heightened interest rate environment could create volatility in the financial markets, which may impact our ability to access capital and the terms under which we can do so. We will continue to monitor the economic environment and its impact on our operations and liquidity needs.

We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. While we believe we currently have adequate capital, should we seek additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs.

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 $176.4 million during the nine months ended February 28, 2025, compared to $163.9 million net cash provided by operating activities during the nine months ended February 29, 2024. This change was primarily due to a $48.7 million increase in cash from net operating working capital (accounts receivable, inventories, and accounts payable), driven by the reduction in average steel prices over the prior year period. Additionally, we received dividends totaling $12.8 million from Serviacero Worthington in the current year period as compared to $0 in the prior year period. These increases were partially offset by the reduction of $13.8 million related to accrued compensation and employee benefits due to the paydown of those related liabilities, as well as lower overall net earnings.

Investing Activities

Net cash used in investing activities was $83.8 million during the nine months ended February 28, 2025, compared to $78.8 million during the nine months ended February 29, 2024. In the current year period, the driver of net cash used in investing activities was primarily related to capital expenditures, which were substantially related to the previously announced strategic expansions of our electrical steel operations in Mexico and Canada to service the automotive and transformer markets, respectively, as well as certain other assets. In the prior year period, we paid $21.0 million, net of cash acquired, for the acquisition of Voestalpine Nagold. See Note 13 – “Acquisitions” for further information.

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. However, there can be no assurance 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. We estimate our annual maintenance capital needs to be between approximately $35.0 million and $40.0 million.

Financing Activities

Net cash used in financing activities was $69.5 million during the nine months ended February 28, 2025, compared to net cash used in financing activities of $57.0 million during the nine months ended February 29, 2024. The increase in net cash used in financing activities in the current year period was primarily due to $23.9 million of dividends paid to shareholders of our common shares. No dividends to shareholders of our common shares were paid during the prior year period as the first dividend declared after the Separation was paid in March 2024. The current year period included net short-term repayments of $38.0 million under our Credit Facility (see the “Revolving credit facility” section below). In the prior year period, there were net short-term borrowings of $144.4 million from our Credit Facility, which were primarily to fund the $150.0 million distribution to the Former Parent.

Revolving credit facility – We entered into the Credit Facility on November 30, 2023, immediately prior to the Separation. 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. Individual amounts drawn under the Credit Facility will have interest periods of up to six months and will accrue interest at rates equal to an applicable margin over the applicable term SOFR Rate, plus a SOFR adjustment. We incurred approximately $2.7 million of issuance costs, of which $2.5 million will be amortized to interest expense over the five-year Credit Facility term and are reflected in other assets.

As of February 28, 2025, we were in compliance with the financial covenants of the Credit Facility. The Credit Facility does not include credit rating triggers. There were $110.0 million outstanding borrowings drawn against the Credit Facility at February 28, 2025, leaving a borrowing capacity of $440.0 million, subject to the eligible borrowing base, available for use. At February 28, 2025 and May 31, 2024, the available borrowing capacity was $217.1 million and $307.6 million, respectively. Under the Credit Facility, we may extend borrowings up to the maturity date subject to the eligible borrowing base.

Canadian Government Regional Economic Growth Loan – Tempel Canada entered into a loan through the Canadian Government’s Regional Economic Growth Innovation program and received the first distribution of CAD $3.2 million (approximately USD $2.2 million, which is 90% of the total available through the program) during the third quarter of fiscal 2025. The loan is interest free and is for an amount of up to CAD $3.5 million. The loan, which is at 0% interest, is scheduled to be paid off in sixty equal installments beginning April 1, 2027, with the final payment due March 1, 2032. There were no debt issuance costs associated with the loan.

Common shares – Prior to the Separation, our common shares were owned by the Former Parent. After the Separation was completed as described in “Note 10 – Equity”, there were 49.3 million shares issued and outstanding. On December 1, 2023, the common shares began trading on the NYSE under the ticker symbol “WS.”

On March 19, 2025, the Board declared a quarterly cash dividend of $0.16 per common share payable on June 27, 2025, to shareholders of record at the close of business on June 13, 2025.

There were no common shares purchased by Worthington Steel during the period presented as part of publicly announced plans or programs.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends provided that no event of default exists under the Credit Facility and it meets the minimum availability threshold thereunder. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. There is no guarantee that we will continue the payments of dividends in the future or that any dividends declared by the Board in the future will be similar in amount or timing to any dividends previously declared by the Board.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated and combined financial statements, which have been prepared in accordance with GAAP. The preparation of these 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 our financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience, current trends and other factors that we believe to be relevant and reasonable under the circumstances at the time the estimate was made. 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 estimates 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 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 estimates. Our critical accounting estimates have not significantly changed from those discussed in “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of the 2024 Form 10-K.

Market risks have not materially changed from those disclosed in “Part II – Item 7A. – Quantitative and Qualitative Disclosures About Market Risk” of the 2024 Form 10-K.

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 the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q (the quarterly period ended February 28, 2025). Based on that evaluation, Worthington Steel’s principal executive officer and principal financial officer have concluded that such disclosure controls and procedures designed at the reasonable assurance level and 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

There were no changes that occurred during the period covered by this Form 10-Q (the quarterly period ended February 28, 2025) in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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 2024 Form 10-K 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 2024 Form 10-K. These risk factors should be read carefully when 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 2024 Form 10-K could materially affect our business, consolidated and 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 2024 Form 10-K 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, consolidated financial condition and/or future results.