UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ___________ to ___________ |
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Commission File Number: |
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant’s telephone number, including area code) |
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
On October 8, 2024, the number of common shares, without par value, of the registrant issued and outstanding was
TABLE OF CONTENTS
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Item 1. |
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Consolidated Balance Sheets – August 31, 2024 and May 31, 2024 |
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5 |
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Condensed Notes to Consolidated and Combined Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING StatementS
Selected statements made by Worthington Steel, Inc. (“Worthington Steel” and, together with its consolidated subsidiaries, the “Company,” “we,” “us,” or “our”) contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”), including, without limitation, in “PART I – Item 1. – Note 5 – Contingent Liabilities and Commitments” and in “PART I – Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements,” as that term is used in the Private Securities Litigation Reform Act of 1995, as amended (the “PSLRA”). Forward-looking statements reflect the Company’s current expectations, estimates or projections concerning future results or events. These statements are often identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “should,” “would,” “intend,” “plan,” “will,” “likely,” “estimate,” “project,” “position,” “strategy,” “target,” “aim,” “seek,” “foresee,” or other similar words or phrases. These forward-looking statements include, without limitation, statements relating to:
ii
Because they are based on beliefs, estimates and assumptions, forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected. Any number of factors could affect actual results, including, without limitation, those that follow:
iii
The Company notes these risk factors for investors as contemplated by the PSLRA. Forward-looking statements should be construed in the light of such risks. It is impossible to predict or identify all potential risk factors. Consequently, readers should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Readers are cautioned not to place undue reliance on any forward-looking statements. Any forward-looking statements in this Form 10-Q are based on current information as of the date of this Form 10-Q, and the Company assumes no obligation to correct or update any forward-looking statements, whether as a results of new information, future developments or otherwise, except as required by applicable law.
iv
PART I. FINANCIAL INFORMATION
Item 1. – Financial Statements
WORTHINGTON STEEL, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
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(Unaudited) |
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August 31, |
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May 31, |
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2024 |
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2024 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, less allowances of $ |
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Inventories: |
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Raw materials |
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Work in process |
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Finished products |
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Total inventories |
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Income taxes receivable |
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Assets held for sale |
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Prepaid expenses and other current assets |
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Total current assets |
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Investment in unconsolidated affiliate |
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Operating lease assets |
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Goodwill |
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Other intangible assets, net of accumulated amortization of $ |
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Deferred income taxes |
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Other assets |
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Property, plant and equipment: |
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Land |
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Buildings and improvements |
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Machinery and equipment |
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Construction in progress |
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Total property, plant and equipment |
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Less: accumulated depreciation |
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Total property, plant and equipment, net |
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Total assets |
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$ |
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$ |
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Liabilities and equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Short-term borrowings |
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Accrued compensation, contributions to employee benefit plans and related taxes |
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Dividends payable |
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Other accrued items |
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Current operating lease liabilities |
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Income taxes payable |
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Total current liabilities |
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Other liabilities |
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Noncurrent operating lease liabilities |
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Deferred income taxes, net |
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Total liabilities |
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Preferred shares, par value; authorized – |
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Common shares, par value; authorized – |
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Additional Paid-in Capital |
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Retained Earnings |
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Accumulated other comprehensive income (loss), net of taxes of $( |
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Total Shareholders’ equity – controlling interest |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See condensed notes to consolidated and combined financial statements.
1
WORTHINGTON STEEL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EARNINGS
(In millions, except per common share amounts)
(Unaudited)
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Three Months Ended |
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August 31, |
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August 31, |
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2024 |
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2023 |
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Net sales |
$ |
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$ |
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expense |
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Impairment of long-lived assets |
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Separation costs |
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Operating income |
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Other income (expense): |
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Miscellaneous income (expense), net |
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Interest expense, net |
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Equity in net income of unconsolidated affiliate |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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Net earnings attributable to noncontrolling interests |
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Net earnings attributable to controlling interest |
$ |
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$ |
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Basic |
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Weighted average common shares outstanding(1) |
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Earnings per common share attributable to controlling interest |
$ |
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$ |
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Diluted |
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Weighted average common shares outstanding(2) |
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Earnings per common share attributable to controlling interest |
$ |
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$ |
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Common shares outstanding at end of period(1) |
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Cash dividends declared per common share |
$ |
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n/a |
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See condensed notes to consolidated and combined financial statements.
2
WORTHINGTON STEEL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
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Three Months Ended |
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August 31, |
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August 31, |
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2024 |
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2023 |
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Net earnings |
$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Foreign currency translation |
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( |
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Cash flow hedges |
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( |
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Other comprehensive income (loss) |
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( |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interests |
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Comprehensive income attributable to controlling interest |
$ |
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$ |
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See condensed notes to consolidated and combined financial statements.
3
WORTHINGTON STEEL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Three Months Ended |
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August 31, |
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August 31, |
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2024 |
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2023 |
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Operating activities: |
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Net earnings |
$ |
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$ |
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Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Impairment of long-lived assets |
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Benefit from deferred income taxes |
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( |
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Bad debt income |
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Equity in net income of unconsolidated affiliate, net of distributions |
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Net loss on sale of assets |
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Stock-based compensation |
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Changes in assets and liabilities: |
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Receivables |
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( |
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Inventories |
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( |
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Accounts payable |
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( |
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Accrued compensation and employee benefits |
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( |
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( |
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Other operating items, net |
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( |
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Net cash provided by (used in) operating activities |
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( |
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Investing activities: |
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Investment in property, plant and equipment |
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( |
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Net cash used in investing activities |
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( |
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Financing activities: |
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Transfers from the Former Parent, net |
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Repayment of short-term borrowings |
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( |
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( |
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Proceeds from revolving credit facility borrowings - swing loans |
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Repayment of revolving credit facility borrowings - swing loans |
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Payments for issuance of common shares, net of tax withholdings |
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( |
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Payments to noncontrolling interests |
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( |
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( |
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Dividends paid |
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( |
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Net cash provided by (used in) financing activities |
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Decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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See condensed notes to consolidated and combined financial statements.
4
WORTHINGTON STEEL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(In millions, except per common share amounts)
(Unaudited)
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Controlling Interest |
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Net |
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Accumulated |
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Investment |
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Other |
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Additional |
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by the |
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Comprehensive |
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Common Shares |
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Paid-in |
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Former |
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Income (Loss), |
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Retained |
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Noncontrolling |
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Shares |
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Amount |
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Capital |
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Parent |
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Net of Tax |
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Earnings |
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Total |
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Interests |
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Total |
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Balance at May 31, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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$ |
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Net earnings |
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- |
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- |
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- |
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- |
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- |
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Other comprehensive income |
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- |
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- |
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- |
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- |
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- |
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- |
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Common shares issued, net of withholding tax |
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- |
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( |
) |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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- |
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Dividends to noncontrolling interests |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
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( |
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Cash dividends declared ($ |
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- |
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- |
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- |
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- |
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- |
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( |
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( |
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- |
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( |
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Balance at August 31, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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$ |
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Controlling Interest |
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Net |
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Accumulated |
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Investment |
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Other |
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Additional |
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by the |
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Comprehensive |
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Common Shares |
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Paid-in |
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Former |
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Income (Loss), |
|
|
Retained |
|
|
|
|
|
Noncontrolling |
|
|
|
|
||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Parent |
|
|
Net of Tax |
|
|
Earnings |
|
|
Total |
|
|
Interests |
|
|
Total |
|
|||||||||
Balance at May 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Net earnings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
||||
Other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Transfers from the Former Parent, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|||
Dividends to noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Balance at August 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
See condensed notes to consolidated and combined financial statements.
5
WORTHINGTON STEEL, INC.
Condensed Notes to CONSOLIDATED AND COMBINED Financial Statements
(Unaudited)
Note 1 – Description of the Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation
The Separation
On December 1, 2023 (the “Distribution Date”) at 12:01 a.m., Eastern Time, Worthington Enterprises, Inc., then known as Worthington Industries, Inc. (the “Former Parent”) completed the spin-off its existing steel processing business, Worthington Steel, into a stand-alone publicly traded company. This was completed through the Separation, a tax-free pro rata distribution of
In connection with the Separation, Worthington Steel made a cash distribution to the Former Parent of $
Agreements with the Former Parent and Separation Costs
On November 30, 2023, in connection with the Separation, the Company entered into several agreements with the Former Parent that govern the relationship between the Former Parent and the Company following the Distribution, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Steel Supply Agreement, and Transition Services Agreement.
Direct and incremental costs incurred in connection with the Separation, including (a) fees paid to third parties for audit, advisory, and legal services to effect the Separation, (b) non-recurring employee-related costs, such as retention bonuses, and (c) non-recurring functional costs associated with shared corporate functions (collectively, the “Separation costs”) are presented separately in the Company’s consolidated and combined statements of earnings. Separation costs totaled $
Basis of Presentation – Unaudited Consolidated and Combined Financial Statements
The Company’s financial statements for the periods until the Separation on December 1, 2023, are combined financial statements prepared on a carve-out basis as discussed below. The Company’s financial statements for the periods beginning on and after December 1, 2023, are consolidated financial statements based on the reported results of Worthington Steel 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.
The accompanying consolidated and combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated and combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during all of the periods presented.
Basis of Presentation – Prior to Separation
Prior to the Separation on December 1, 2023, the Company operated as a business of the Former Parent. Accordingly, the combined historical financial statements for the periods presented prior to and as of November 30, 2023, are prepared on a “carve-out” basis.
The Company’s combined financial statements are prepared on a carve-out basis using the consolidated financial statements and accounting records of the Former Parent in accordance with GAAP. The Company’s combined financial statements include the historical operations that comprise its business and reflect significant assumptions and allocations as well as certain assets and liabilities that have historically been held at the Former Parent’s corporate level but are specifically identifiable or otherwise attributable to the Company.
6
The carve-out combined financial statements may not include all expenses that would have been incurred had it existed as a separate, stand-alone entity during the periods presented.
The income tax provision in the combined statements of earnings has been calculated as if the Company was operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operates. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of the Company’s actual tax balances prior to or subsequent to the Separation.
Transactions and accounts which have occurred within the Company have been eliminated, based on historical intracompany activity. The Former Parent’s net investment in the Company’s operations, including intercompany transactions between the Former Parent and the Company, are reflected as Net Investment by the Former Parent on the accompanying consolidated and combined financial statements.
The Company’s consolidated and combined financial statements include certain costs of doing business incurred by the Former Parent at the corporate level. These costs are for (1) certain corporate support functions provided on a centralized basis, including information technology, human resources, finance, and corporate operations, amongst others, (2) profit sharing and bonuses, and (3) respective surpluses and shortfalls of various planned insurance expenses. These costs are included in the consolidated and combined statements of earnings, primarily within selling, general and administrative expense (“SG&A”). These expenses were allocated to the Company on the basis of direct usage when identifiable, with the remaining allocated using related drivers associated with the nature of the business, such as, headcount or profitability, considering the characteristics of each respective cost. Management believes the assumptions regarding the allocation of the Former Parent’s general corporate expenses are reasonable.
All other third party-debt and related interest expense not directly attributable to the Company have been excluded from the consolidated and combined financial statements because it is not the legal obligor of the debt and the borrowings are not specifically identifiable to the Company. Additionally, as described in “Note 15 – Related Party Transactions,” debt and related interest expense between the Former Parent and TWB has been attributed to the Company, as the Company was both the legal obligor and directly benefited from the borrowings.
Additionally, the Former Parent incurred Separation costs that have been directly attributed to the Company to the extent incurred to its direct benefit and are presented separately in the Company’s consolidated and combined statements of earnings.
The Company’s consolidated and combined financial statements may not include all of the actual expenses that would have been incurred and may not reflect its consolidated and combined results of earnings, balance sheet, and cash flows had it operated as a stand-alone company during the periods presented. Management considers these cost allocations to be reasonably reflective of the Company’s utilization of the Former Parent’s corporate support services. Actual costs that would have been incurred if the Company had been a stand-alone company may have been different than these estimates during the periods presented.
The Former Parent utilized a centralized cash management program to manage cash for the majority of its entities. For entities that were enrolled in the program, all cash was swept into a cash pool. Accordingly, the cash and cash equivalents held by the Former Parent at the corporate level were not attributed to the Company for any of the periods presented. The Company’s foreign operations did not participate in the centralized cash management program. These cash amounts are specifically attributable to Worthington Steel and therefore are reflected in the accompanying consolidated balance sheets. Transfers of cash, both to and from the Former Parent’s centralized cash management program, are reflected as a component of Net Investment by the Former Parent on the accompanying consolidated balance sheets and as a financing activity on the accompanying consolidated and combined statements of cash flows.
Net Investment by the Former Parent
Net Investment by the Former Parent in the consolidated balance sheets and consolidated and combined statements of equity represents the Former Parent’s historical investment in the Company, the net effect of transactions with and allocations from the Former Parent, and the Company’s retained earnings. All transactions reflected in Net Investment by the Former Parent in the accompanying consolidated balance sheets have been considered as financing activities for purposes of the consolidated and combined statements of cash flows. For additional information, see “Basis of Presentation – Prior to Separation” above and “Note 15 – Related Party Transactions.”
7
Consolidated Subsidiaries and Investment in Unconsolidated Affiliate
The consolidated and combined financial statements include the accounts of Worthington Steel and its consolidated subsidiaries. Investments in unconsolidated affiliates are accounted for using the equity method. Material intercompany accounts and transactions are eliminated.
The Company owns controlling interests in the following
The Company owns a noncontrolling interest (
Organizational Structure and Operating Segment
The Company’s operations are managed principally on a products and services basis under a single group organizational structure. Following the Separation, the financial information reviewed by the Company’s Chief Operating Decision Maker (“CODM”) for the purpose of assessing performance and allocating resources has been presented as a single component, or operating segment, and comprises all of the Company’s operations. The Company’s CODM is Worthington Steel’s Chief Executive Officer (“CEO”).
Concentration of Net Sales
The Company sells its products and services to a diverse customer base and a broad range of end markets. The automotive industry is the largest end market for the Company with sales representing
Preparation of Financial Statements Including the Use of Estimates
These unaudited consolidated and combined financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, which are of a normal and recurring nature except those which have been disclosed elsewhere in this Form 10-Q, necessary for a fair presentation of the consolidated and combined financial statements for these interim periods, have been included. Operating results for the first quarter of fiscal 2025 are not necessarily indicative of the results that may be expected for the entirety of fiscal 2025 or any other quarter. Refer to the consolidated and combined financial statements and notes thereto included in the 2024 Form 10-K for further information on the preparation of financial statements including the use of estimates.
The preparation of consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. Actual results could differ materially from those estimates.
Note 2 – Revenue Recognition
The Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration it expects to receive for those goods or services, including any variable consideration.
The Company generates revenue by processing steel to the precise type, thickness, length, width, shape, and surface quality required by customer specification. The Company can also toll process steel for steel mills, large end-users and service centers. Toll processing revenue is recognized over time. All other revenue is recognized at a point in time, generally upon shipment to the customer.
8
The following table summarizes net sales by product class for the periods presented:
|
Three Months Ended |
|
|||||
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
2024 |
|
|
2023 |
|
||
Product class |
|
|
|
|
|
||
Direct |
$ |
|
|
$ |
|
||
Toll |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
The following table summarizes the unbilled receivables at the dates indicated:
|
|
|
August 31, |
|
|
May 31, |
|
||
(In millions) |
Balance Sheet Classification |
|
2024(1) |
|
|
2024(1) |
|
||
Unbilled receivables |
Receivables |
|
$ |
|
|
$ |
|
||
|
Note 3 – Investment in Unconsolidated Affiliate
The Company owns a noncontrolling interest (
The Company did
The following tables summarize certain financial information of Serviacero Worthington as of the dates, and for the periods, presented:
|
August 31, |
|
|
May 31, |
|
||
(In millions) |
2024 |
|
|
2024 |
|
||
Cash and cash equivalents |
$ |
|
|
$ |
|
||
Other current assets |
|
|
|
|
|
||
Noncurrent assets |
|
|
|
|
|
||
Total assets |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Current liabilities |
|
|
|
|
|
||
Other noncurrent liabilities |
|
|
|
|
|
||
Equity |
|
|
|
|
|
||
Total liabilities and equity |
$ |
|
|
$ |
|
||
|
Three Months Ended |
|
|||||
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
2024 |
|
|
2023 |
|
||
Net sales |
$ |
|
|
$ |
|
||
Gross margin |
|
|
|
|
|
||
Operating income |
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
||
Income tax expense |
|
|
|
|
|
||
Net earnings |
|
|
|
|
|
||
The following table presents the net earnings of Serviacero Worthington attributable to the Company for the periods presented:
9
|
Three Months Ended |
|
|||||
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
2024 |
|
|
2023 |
|
||
Equity in net income of unconsolidated affiliate |
$ |
|
|
$ |
|
||
Note 4 – Impairment of Long-Lived Assets
Fiscal 2024
During the first quarter of fiscal 2023, the Company committed to plans to liquidate certain fixed assets at WSCP’s toll processing facility in Cleveland, Ohio. During the first quarter of fiscal 2024, in accordance with the applicable accounting guidance, the Company lowered the estimate of fair value less costs to sell to reflect the expected scrap value of the WSCP toll processing equipment to $
Note 5 – Contingent Liabilities and Commitments
Legal Proceedings
The Company is a defendant in certain legal proceedings that are incidental to its business. In the opinion of management, the outcome of these legal proceedings, which is not clearly determinable at the present time, individually and in the aggregate, would not have a material adverse effect on the Company, its consolidated financial position, future results of operation or cash flows. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company for the periods in which they are resolved.
Note 6 – Guarantees
The Company does not have guarantees that it believes are reasonably likely to have a material current or future effect on its consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Note 7 – Debt
The following table summarizes the Company’s debt outstanding at August 31, 2024, and May 31, 2024:
|
August 31, |
|
|
May 31, |
|
||
(In millions) |
2024 |
|
|
2024 |
|
||
Short-term borrowings and current maturities |
|
|
|
|
|
||
Revolving credit facility |
$ |
|
|
$ |
|
||
Total short-term borrowings and current maturities |
$ |
|
|
$ |
|
||
There were
The following table provides the maturities of long-term debt and short-term borrowings in the next five fiscal years and the remaining years thereafter as of August 31, 2024:
(In millions) |
|
|
|
Fiscal 2025 |
$ |
|
|
Fiscal 2026 |
|
|
|
Fiscal 2027 |
|
|
|
Fiscal 2028 |
|
|
|
Fiscal 2029 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
Revolving Credit Facility
On November 30, 2023, the Company entered into a senior secured revolving credit facility scheduled to mature on
10
by eligible accounts receivable and inventory balances at period end, which consist primarily of U.S. dollar denominated account balances. At August 31, 2024 and May 31, 2024, there were $
The Credit Facility permits borrowings under two types of borrowing mechanisms: (i) Term SOFR Rate Loans and (ii) a swing loan. The Term SOFR Rate Loans permit the Company to draw a specific principal amount for a defined maturity of up to
The swing loan permits the Company to draw on the Credit Facility at any time up to a maximum of the greater of (i) $
The Credit Facility is secured by a first priority lien (subject to permitted liens and certain other exceptions) on certain working capital assets of the Company and the guarantors, including accounts and inventory, but excluding intellectual property, real property and equity interests, and subject to customary exceptions.
The Company currently has 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.
As of August 31, 2024 and May 31, 2024, the weighted average interest rate on the outstanding interest-bearing debt under the Credit Facility was
Term Loan Facility with the Former Parent
On June 8, 2021, TWB entered into a $
The Former Parent’s note receivable associated with the TWB Term Loan was contributed to the Company in connection with the Separation on December 1, 2023. As a result, the TWB Term Loan balance was eliminated in consolidation following the Separation, which resulted in a
Other – Tempel China
Tempel controls a subsidiary in China (“Tempel China”), and Tempel China utilizes
One facility with capacity of CNY
11
Other – Tempel India
Tempel controls a subsidiary in India (“Tempel India”) which has
The standby letters of credit have an aggregate facility size of INR
Accounts Receivable Securitization
On June 29, 2023, the Company terminated the revolving trade accounts receivable securitization facility (the “AR Facility”) because it was no longer needed.
Note 8 – Other Comprehensive Income (Loss)
The following table summarizes the tax effects on each component of OCI for the periods presented:
|
Three Months Ended |
|
|||||||||||||||||||||
|
August 31, 2024 |
|
|
August 31, 2023 |
|
||||||||||||||||||
(In millions) |
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
|
Before-Tax |
|
|
Tax |
|
|
Net-of-Tax |
|
||||||
Foreign currency translation |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Other comprehensive income (loss) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||||
Note 9 – Equity
In connection with the Separation, during the second quarter of fiscal 2024, the Company performed a stock split that resulted in
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) (“AOCI”) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
||||
|
|
Foreign |
|
|
Pension |
|
|
|
|
|
Other |
|
||||
|
|
Currency |
|
|
Liability |
|
|
Cash Flow |
|
|
Comprehensive |
|
||||
(In millions) |
|
Translation |
|
|
Adjustment |
|
|
Hedges |
|
|
Loss |
|
||||
Balance at May 31, 2024 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Reclassification adjustments to net earnings (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at August 31, 2024 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
12
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
||||
|
|
Foreign |
|
|
Pension |
|
|
|
|
|
Other |
|
||||
|
|
Currency |
|
|
Liability |
|
|
Cash Flow |
|
|
Comprehensive |
|
||||
(In millions) |
|
Translation |
|
|
Adjustment |
|
|
Hedges |
|
|
Loss |
|
||||
Balance at May 31, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Reclassification adjustments to net earnings (1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at August 31, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
The consolidated and combined statement of earnings classification of amounts reclassified to net income include:
Note 10 – Income Taxes
The Company’s effective income tax rate was
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items and excludes any impact from the inclusion of net earnings attributable to noncontrolling interests in the consolidated and combined statements of earnings. Net earnings attributable to noncontrolling interests are a result of the Company’s consolidated joint ventures. The net earnings attributable to the noncontrolling interests in the U.S. operations of the Company’s consolidated joint ventures do not generate tax expense to the Company since the investors are taxed directly based on the earnings attributable to the investors. The tax expense of TWB’s wholly owned foreign subsidiaries is reported in the consolidated and combined income tax expense. Management is required to estimate the annual effective income tax rate based upon its forecast of annual pre-tax income for domestic and foreign operations. The Company’s actual effective income tax rate for fiscal 2025 could be materially different from the forecasted rate as of August 31, 2024.
Note 11 – Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share attributable to controlling interest for the periods presented:
|
Three Months Ended |
|
|||||
|
August 31, |
|
|
August 31, |
|
||
(In millions, except per common share amounts) |
2024 |
|
|
2023 |
|
||
Numerator (basic & diluted): |
|
|
|
|
|
||
Net earnings attributable to controlling interest - |
|
|
|
|
|
||
income available to common shareholders |
$ |
|
|
$ |
|
||
Denominator: |
|
|
|
|
|
||
Basic earnings per common share attributable to |
|
|
|
|
|
||
controlling interest – weighted average common shares |
|
|
|
|
|
||
Effect of dilutive securities |
|
|
|
|
|
||
Diluted earnings per common share attributable to |
|
|
|
|
|
||
controlling interest – adjusted weighted average common shares |
|
|
|
|
|
||
|
|
|
|
|
|
||
Basic earnings per common share attributable to controlling interest |
$ |
|
|
$ |
|
||
Diluted earnings per common share attributable to controlling interest |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Anti-dilutive non-qualified stock options and restricted common share awards(1) |
|
|
|
|
|
||
|
13
Earnings per common share was calculated based on the weighted-average number of common shares outstanding. Earnings per diluted common share included the weighted-average effect of dilutive restricted common shares and non-qualified stock options on the weighed-average shares outstanding. Prior to the third quarter of fiscal 2024, earnings per common share was based on the
Note 12 – Acquisitions
Fiscal 2024
Voestalpine Automotive Components Nagold GmbH & Co. KG (Voestalpine Nagold)
On
The information included in the preliminary allocation of the purchase price was derived using estimates of the fair value and useful lives of the assets acquired. As a result of final purchase accounting adjustments, the total purchase consideration was updated. The purchase consideration consisted of $
The purchase price includes the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value. The purchase price also includes strategic benefits specific to the Company, which resulted in a purchase price in excess of the fair value of the identifiable net assets. The goodwill resulting from the acquisition will be deductible for income tax purposes.
The results of operations of Voestalpine Nagold have been included in the consolidated and combined statements of earnings since the date of acquisition. Proforma results, including the acquired business since the beginning of fiscal 2023, would not be materially different from the reported results.
Note 13 – Derivative Financial Instruments and Hedging Activities
The Company utilizes derivative financial instruments to primarily manage exposure to certain risks related to its ongoing operations. The primary risks managed through the use of derivative financial instruments are commodity price risk and foreign currency exchange risk. While certain of the Company’s derivative financial instruments are designated as hedging instruments, the Company also enters into derivative financial instruments that are designed to hedge a risk, but are not designated as hedging instruments and, therefore, do not qualify for hedge accounting. These derivative financial instruments are adjusted to current fair value through earnings at the end of each period.
Commodity Price Risk Management – The Company is exposed to changes in the price of certain commodities, including steel, zinc and other raw materials, and the Company’s utility requirements. The Company’s objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, the Company enters into derivative financial instruments to manage the associated price risk.
Foreign Currency Exchange Risk Management – The Company conducts business in several major international currencies and is, therefore, subject to risks associated with changing foreign currency exchange rates. The Company uses foreign currency forward contracts to protect against exchange rate movements for forecasted cash flows, primarily operating expenses denominated in currencies other than the functional currency. Such contracts limit exposure to both favorable and unfavorable foreign currency exchange rate fluctuations. The translation of foreign currencies into U.S. dollars also subjects the Company to exposure related to fluctuating foreign currency exchange rates; however, derivative financial instruments are not used to manage this risk.
14
The Company is exposed to counterparty credit risk on all of its derivative financial instruments. Accordingly, the Company has established and maintains strict counterparty credit guidelines. The Company has credit support agreements in place with certain counterparties to limit the Company’s credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. The Company does not have significant exposure to any one counterparty, and management believes the overall risk of loss is remote and, in any event, would not be material.
Refer to “Note 14 – Fair Value” for additional information regarding the accounting treatment for the Company’s derivative financial instruments, as well as how fair value is determined.
The following table summarizes the fair value of the derivative financial instruments and the respective lines in which they were recorded in the consolidated balance sheet at August 31, 2024:
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
||||||
|
|
Balance |
|
|
|
|
Balance |
|
|
|
||
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
||
(In millions) |
|
Location |
|
Value |
|
|
Location |
|
Value |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
||
Commodity contracts |
|
Receivables |
|
$ |
|
|
Accounts payable |
|
$ |
|
||
Commodity contracts |
|
Other assets |
|
|
|
|
Other liabilities |
|
|
|
||
Subtotal |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Foreign currency exchange contracts |
|
Receivables |
|
|
|
|
Accounts payable |
|
|
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
||
Commodity contracts |
|
Receivables |
|
$ |
|
|
Accounts payable |
|
$ |
|
||
Commodity contracts |
|
Other assets |
|
|
|
|
Other liabilities |
|
|
|
||
Subtotal |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Foreign currency exchange contracts |
|
Receivables |
|
|
|
|
Accounts payable |
|
|
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Total derivative financial instruments |
|
|
|
$ |
|
|
|
|
$ |
|
||
GAAP permits an entity to present derivative financial instruments assets and liabilities on a net basis on the balance sheet, provided a right of offset exists and/or when they are subject to a master netting arrangement. The Company’s policy is to record derivative financial instruments on a net basis where the Company has an executed master netting arrangement with counterparties as well as where the right of offset exists. The amounts in the table above reflect the fair value of the derivative financial instruments on a net basis where allowable under master netting arrangements. Had these amounts been recognized on a gross basis, the impact would have been a $
15
The following table summarizes the fair value of the derivative financial instruments and the respective lines in which they were recorded in the consolidated balance sheet at May 31, 2024:
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
||||||
|
|
Balance |
|
|
|
|
Balance |
|
|
|
||
|
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
||
(In millions) |
|
Location |
|
Value |
|
|
Location |
|
Value |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
||
Commodity contracts |
|
Receivables |
|
$ |
|
|
Accounts payable |
|
$ |
|
||
Commodity contracts |
|
Other assets |
|
|
|
|
Other liabilities |
|
|
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
||||
Commodity contracts |
|
Receivables |
|
$ |
|
|
Accounts payable |
|
$ |
|
||
Commodity contracts |
|
Other assets |
|
|
|
|
Other liabilities |
|
|
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Total derivative financial instruments |
|
|
|
$ |
|
|
|
|
$ |
|
||
The amounts in the table above reflect the fair value of the derivative financial instruments on a net basis where allowable under master netting arrangements. Had these amounts been recognized on a gross basis, the impact would have been a $
Cash Flow Hedges
The Company enters into derivative financial instruments to hedge its exposure to changes in cash flows attributable to commodity price and foreign currency exchange rate fluctuations associated with certain forecasted transactions. These derivative financial instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on each of these derivative financial instruments is reported as a component of OCI and reclassified into earnings in the same line associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative financial instrument is recognized in earnings immediately.
The following table summarizes the Company’s cash flow hedges outstanding at August 31, 2024:
|
|
Notional |
|
|
|
|
(In millions) |
|
Amount |
|
|
Maturity Date |
|
Commodity contracts |
|
$ |
|
|
– |
|
Foreign currency exchange contracts |
|
$ |
|
|
– |
|
The following table summarizes the Company’s cash flow hedges outstanding at May 31, 2024:
|
|
Notional |
|
|
|
|
(In millions) |
|
Amount |
|
|
Maturity Date |
|
Commodity contracts |
|
$ |
|
|
– |
|
16
The following table summarizes the loss recognized in OCI and the gain (loss) reclassified from AOCI into net earnings for derivative financial instruments designated as cash flow hedges for the periods presented:
(In millions) |
|
Loss |
|
|
Location of Gain (Loss) |
|
Gain (Loss) Reclassified |
|
||
For the three months ended August 31, 2024: |
|
|
|
|
|
|
|
|
||
Commodity contracts |
|
$ |
( |
) |
|
Cost of goods sold |
|
$ |
( |
) |
Foreign currency exchange contracts |
|
|
( |
) |
|
Cost of Goods Sold/SG&A |
|
|
|
|
|
$ |
( |
) |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
||
For the three months ended August 31, 2023: |
|
|
|
|
|
|
|
|
||
Commodity contracts |
|
$ |
( |
) |
|
Cost of goods sold |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
$ |
|
||
The estimated net amount of the losses recognized in AOCI at August 31, 2024, expected to be reclassified into net earnings within the succeeding 12 months is $
Economic (Non-designated) Hedges
The Company enters into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative financial instruments are adjusted to current market value at the end of each period through gain (loss) recognized in earnings.
The following table summarizes the Company’s economic (non-designated) derivative financial instruments outstanding at August 31, 2024:
|
|
Notional |
|
|
|
|
(In millions) |
|
Amount |
|
|
Maturity Date(s) |
|
Commodity contracts |
|
$ |
|
|
– |
|
The following table summarizes the Company’s economic (non-designated) derivative financial instruments outstanding at May 31, 2024:
|
|
Notional |
|
|
|
|
(In millions) |
|
Amount |
|
|
Maturity Date(s) |
|
Commodity contracts |
|
$ |
|
|
– |
|
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:
|
|
|
|
Gain (Loss) Recognized |
|
|||||
|
|
|
|
In Earnings for the |
|
|||||
|
|
|
|
Three Months Ended |
|
|||||
|
|
Location of Gain (Loss) |
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
|
Recognized in Earnings |
|
2024 |
|
|
2023 |
|
||
Commodity contracts |
|
Cost of goods sold |
|
$ |
( |
) |
|
$ |
|
|
Total |
|
|
|
$ |
( |
) |
|
$ |
|
|
17
Note 14 – Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities that the reporting entity can assess at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability and that are significant to the fair value of the assets and liabilities (i.e., allowing for situations in which there is little or no market activity for the asset or liability at the measurement date).
Recurring Fair Value Measurements
At August 31, 2024, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
||||
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
||||
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
||||
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
||||
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Totals |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (1) |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Total assets |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (1) |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Total liabilities |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
18
At May 31, 2024, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
||||
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
||||
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
||||
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
||||
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Totals |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (1) |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Total assets |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (1) |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Total liabilities |
|
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
|
Non-Recurring Fair Value Measurements
At August 31, 2024 and May 31, 2024, there were
The fair value of non-derivative financial instruments, including cash and cash equivalents, receivables, income taxes receivable, other assets, accounts payable, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities, approximate carrying value due to their short-term nature.
The remaining carrying value of debt was $
Note 15 – Related Party Transactions
Prior to the Separation, the Company was managed and operated in the normal course of business by the Former Parent. Transactions through November 30, 2023, between the Former Parent and the Company have been accounted for as related party transactions in the accompanying consolidated and combined financial statements, as described below.
Subsequent to the Separation, transactions between the Former Parent and the Company were accounted for under GAAP, including those subject to agreements entered into with the Former Parent. See “Note 1 – Description of Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation” for additional information. The material related party transactions have been disclosed below.
Allocation of General Corporate Costs
The Company had historically operated as part of the Former Parent and not as a stand-alone company. Prior to the Separation, certain support functions were provided to the Company on a centralized basis from the Former Parent, including information technology, human resources, finance, and corporate operations, amongst others, profit sharing and bonuses, and respective surpluses and shortfalls of various planned insurance expenses. For purposes of these consolidated and combined financial statements, these corporate and other shared costs have been attributed to the Company on the basis of direct usage when identifiable, with the remainder allocated on the basis of headcount or profitability, considering the characteristics of each respective cost. Management believes the assumptions regarding the allocation of the Former Parent’s general corporate expenses are reasonable. Nevertheless, the consolidated and combined financial statements may not include all of the actual expenses that would have been incurred and may not reflect consolidated and combined results of operations, financial position and cash flows had it been a stand-alone public company during the periods presented. Substantially all of the allocated corporate costs are included in SG&A in the consolidated and combined statements of earnings.
19
The Company’s allocated expenses from the Former Parent, which are substantially recorded in SG&A in the consolidated and combined statements of earnings, were $
Following the Separation, the Company independently incurs expenses as a stand-alone company and corporate expenses from the Former Parent are no longer allocated to the Company; therefore, no related amounts were reflected on the Company's consolidated and combined financial statements for the three months ended August 31, 2024.
Attribution of Separation Costs
Separation costs that were incurred by the Former Parent that were directly attributed to the Company to the extent incurred to its direct benefit are presented separately in the consolidated and combined statements of earnings.
Following the Separation, the Company incurred incremental costs related to the Separation, which are reflected on the Company's consolidated and combined statements of earnings. See “Note 1 – Description of Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation” for additional information.
Net Sales to the Former Parent
Prior to the Separation, the Company’s net sales to the Former Parent were considered sales on a carve-out basis, and were included within the net sales within the combined statements of earnings. Net sales to the Former Parent totaled $
Following the Separation, the majority of the Company’s net sales to the Former Parent are subject to the long-term Steel Supply Agreement and are included within the net sales within the consolidated statement of earnings. Net sales to the Former Parent totaled $
Due to/from the Former Parent
Cash was managed centrally prior to the Separation, so long-term intercompany financing arrangements were used to fund expansion or certain working capital needs. Excluding the TWB Term Loan discussed in “Note 7 – Debt”, debt resulting from these long-term intercompany financing arrangements has been reflected in Net Investment by the Former Parent within equity as applicable in fiscal 2024.
The Former Parent’s note receivable associated with the TWB Term Loan, which matured in annual installments through
The corresponding interest expense, which accrued at a rate of
As of August 31, 2024 and May 31, 2024, the outstanding accounts receivable balance with the Former Parent equaled $
Net Investment by the Former Parent
Prior to the Separation, related party transactions between the Former Parent and the Company have been included within Net Investment by the Former Parent in the combined balance sheet in the periods presented as these related party transactions were part of the centralized cash management program and were not settled in cash. Net Investment by the Former Parent in the combined balance sheet and combined statements of equity represents the Former Parent’s historical investment in the Company, the net effect of transactions with and allocations from the Former Parent, and the Company’s retained earnings.
Net transfers from/(to) the Former Parent, excluding the $
20
|
|
Three Months Ended |
|
|
|||||
|
|
August 31, |
|
|
August 31, |
|
|
||
(In millions) |
|
2024 |
|
|
2023 |
|
|
||
Total net transfers from/(to) the Former Parent per consolidated and combined changes in equity |
|
$ |
|
|
$ |
|
|
||
Less: depreciation expense allocated from the Former Parent |
|
|
|
|
|
|
|
||
Less: stock-based compensation |
|
|
|
|
|
|
|
||
Total net transfers from/(to) the Former Parent per consolidated and combined statement of cash flows |
|
$ |
|
|
$ |
|
|
||
Note 16 – Subsequent Events
On September 25, 2024, Worthington Steel's Board of Directors (the “Board”) declared a quarterly cash dividend of $
21
Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index |
Page |
|
|
|
|
|
22 |
|
|
|
|
|
22 |
|
|
|
|
|
22 |
|
|
|
|
|
23 |
|
|
|
|
|
23 |
|
|
|
|
|
25 |
|
|
|
|
|
25 |
|
|
|
|
|
28 |
|
|
|
|
|
30 |
|
|
|
|
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 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 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,
22
which became a non-operating 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 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 (loss), respectively. Our remaining joint venture, Serviacero Worthington, is unconsolidated and accounted for using the equity method.
Recent Business Development
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 ended August 31, 2024, and August 31, 2023 is illustrated below:
|
|
Three months ended |
|
|||||
|
|
August 31, |
|
|
August 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Automotive |
|
|
51 |
% |
|
|
54 |
% |
Construction |
|
|
11 |
% |
|
|
11 |
% |
Machinery & Equipment |
|
|
9 |
% |
|
|
9 |
% |
Agriculture |
|
|
4 |
% |
|
|
4 |
% |
Heavy Trucks |
|
|
4 |
% |
|
|
6 |
% |
Other |
|
|
21 |
% |
|
|
16 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
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, as well as the Detroit Three Automakers vehicle production, was down in the first quarter of fiscal 2025 compared to the same period in 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 in the face of sustained, elevated interest rates.
The previously seen inflationary pressures largely subsided during the first quarter of fiscal 2025, as compared to the levels experienced over the past fiscal years. Nonetheless, the elevated interest rates over the first quarter of fiscal 2025 contributed to high borrowing costs. The U.S. Federal Reserve lowered the benchmark interest rate subsequent to the ending of the first quarter of fiscal 2025 in response to fading inflation. Thus, the impacts of such a decision were not reflected in our first quarter of 2025 results, as we had not yet benefited from the recent lowering of the benchmark interest rate.
23
We use the following information to monitor our costs and demand in our major end markets:
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
|
|
|||
|
|
2024 |
|
|
2023 (1) |
|
|
Inc/ (Dec) |
|
|||
U.S. GDP (% growth year-over-year) |
|
|
3.1 |
% |
|
|
2.2 |
% |
|
|
0.9 |
% |
Hot-Rolled Steel ($ per ton) (2) |
|
$ |
690 |
|
|
$ |
879 |
|
|
$ |
(189 |
) |
Detroit Three Auto Build (000's vehicles) (3) |
|
|
1,548 |
|
|
|
1,768 |
|
|
|
(220 |
) |
No. America Auto Build (000's vehicles) (3) |
|
|
3,708 |
|
|
|
3,979 |
|
|
|
(271 |
) |
Zinc ($ per pound) (4) |
|
$ |
1.27 |
|
|
$ |
1.09 |
|
|
$ |
0.18 |
|
Natural Gas ($ per mcf) (5) |
|
$ |
2.38 |
|
|
$ |
2.57 |
|
|
$ |
(0.19 |
) |
On-Highway Diesel Fuel Prices ($ per gallon) (6) |
|
$ |
3.72 |
|
|
$ |
4.02 |
|
|
$ |
(0.30 |
) |
Sales to one automotive customer represented 13.3% and 16.5% of our consolidated and combined net sales during the first quarter of fiscal 2025 and fiscal 2024, respectively. Sales to the Detroit Three automakers represented 32.1% and 33.9% of our consolidated and combined net sales during the first quarter of fiscal 2025 and fiscal 2024, 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 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 on to our customers future price increases in raw materials, this could positively affect our financial results resulting in inventory holding gains. 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 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 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. Steel prices declined in the first and second quarters of fiscal 2024 before increasing in the third quarter and again declining in the fourth quarter. Over fiscal 2024, the decreases in prices in the first, second and fourth quarters 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 pricing continued to decline during the first quarter of fiscal 2025, resulting in estimated inventory holding losses of $16.6 million. With the recent price declines, we expect inventory holding losses will continue in the second quarter of fiscal 2025, but at a lesser extent compared to the first quarter of fiscal 2025.
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 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.
24
The following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2025 (first quarter), fiscal 2024, and fiscal 2023:
|
|
Fiscal Year |
|
|||||||||
(Dollars per ton) (1) |
|
2025 |
|
|
2024 |
|
|
2023 |
|
|||
1st Quarter |
|
$ |
690 |
|
|
$ |
879 |
|
|
$ |
978 |
|
2nd Quarter |
|
N/A |
|
|
$ |
747 |
|
|
$ |
742 |
|
|
3rd Quarter |
|
N/A |
|
|
$ |
1,030 |
|
|
$ |
720 |
|
|
4th Quarter |
|
N/A |
|
|
$ |
809 |
|
|
$ |
1,116 |
|
|
Annual Avg. |
|
$ |
690 |
|
|
$ |
866 |
|
|
$ |
889 |
|
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
First Quarter – Fiscal 2025 Compared to Fiscal 2024
The following table presents a review of the results of operations for the three months ended August 31, 2024, and August 31, 2023.
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
Increase/ |
|
|||
(In millions, except volume and per common share amounts) |
|
2024 |
|
|
2023 |
|
|
(Decrease) |
|
|||
Volume (tons) |
|
|
994,093 |
|
|
|
1,023,545 |
|
|
|
(29,452 |
) |
Net sales |
|
$ |
834.0 |
|
|
$ |
905.8 |
|
|
$ |
(71.8 |
) |
Operating income |
|
|
43.4 |
|
|
|
69.7 |
|
|
|
(26.3 |
) |
Equity income |
|
|
1.3 |
|
|
|
9.0 |
|
|
|
(7.7 |
) |
Net earnings attributable to controlling interest |
|
|
28.4 |
|
|
|
58.5 |
|
|
|
(30.1 |
) |
Earnings per diluted common share attributable to controlling interest (1) |
|
$ |
0.56 |
|
|
$ |
1.19 |
|
|
$ |
(0.63 |
) |
Net sales totaled $834.0 million in the first quarter of fiscal 2025, down $71.8 million, compared to the first quarter of fiscal 2024. The decrease was primarily due to a 6% decrease in direct selling prices and a 4% decrease in direct tons sold in the first quarter of fiscal 2025 compared to the prior year quarter. This was partially offset by more favorable mix within toll tons sold. The mix of direct versus toll volumes was 56% to 44% in the first quarter of fiscal 2025 and the prior year quarter.
Gross Margin
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
August 31, |
|
|
% of |
|
|
August 31, |
|
|
% of |
|
|
Increase/ |
|
|||||
(In millions) |
|
2024 |
|
|
Net sales |
|
|
2023 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Gross margin |
|
$ |
100.4 |
|
|
|
12.0 |
% |
|
$ |
128.5 |
|
|
|
14.2 |
% |
|
$ |
(28.1 |
) |
Gross margin decreased $28.1 million over the prior year quarter to $100.4 million, primarily due to unfavorable direct spreads (sales less material costs) and lower direct volume. Direct spreads, excluding the Voestalpine Nagold acquisition, down $23.8 million, were impacted by a $32.1 million unfavorable change from an estimated $15.5 million inventory holding gain in the first quarter of fiscal 2024 compared to estimated $16.6 million inventory holding loss in the first quarter of fiscal 2025. The impact of lower direct volumes was largely offset by improved mix within toll processing in the current year quarter compared with the prior year quarter.
25
Selling, General and Administrative Expense
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
August 31, |
|
|
% of |
|
|
August 31, |
|
|
% of |
|
|
Increase/ |
|
|||||
(In millions) |
|
2024 |
|
|
Net sales |
|
|
2023 |
|
|
Net sales |
|
|
(Decrease) |
|
|||||
Selling, general and administrative expense |
|
$ |
57.0 |
|
|
|
6.8 |
% |
|
$ |
53.8 |
|
|
|
5.9 |
% |
|
$ |
3.2 |
|
SG&A increased $3.2 million over the prior year quarter primarily due to increased wage and benefit costs as well as costs of being a stand-alone company following the Separation.
Other Operating Items
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
Increase/ |
|
|||
(In millions) |
|
2024 |
|
|
2023 |
|
|
(Decrease) |
|
|||
Impairment of long-lived assets |
|
$ |
- |
|
|
$ |
1.4 |
|
|
$ |
(1.4 |
) |
Separation costs |
|
|
- |
|
|
|
3.6 |
|
|
|
(3.6 |
) |
Impairment of long-lived assets in the first quarter of fiscal 2024 was driven by changes in the estimated fair market value less cost to sell related to ongoing efforts to divest certain production equipment of our former toll processing facility in Cleveland, Ohio. Refer to “Note 4 – Impairment of Long-Lived Assets” for additional information.
Separation costs decreased by $3.6 million in the first 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 additional Separation costs were recognized in the first quarter of 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
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
Increase/ |
|
|||
(In millions) |
|
2024 |
|
|
2023 |
|
|
(Decrease) |
|
|||
Miscellaneous income (expense), net |
|
$ |
(5.9 |
) |
|
$ |
0.9 |
|
|
$ |
(6.8 |
) |
Miscellaneous income (expense), net decreased $6.8 million from the prior year quarter 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 Steel Company (“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 first quarter of fiscal 2025, foreign currency remeasurement losses were $0.5 million compared to foreign currency remeasurement gains of $1.9 million, primarily related to Tempel and TWB operations in Mexico, in the first quarter of fiscal 2024.
Interest Expense, Net
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
Increase/ |
|
|||
(In millions) |
|
2024 |
|
|
2023 |
|
|
(Decrease) |
|
|||
Interest expense, net |
|
$ |
2.6 |
|
|
$ |
0.5 |
|
|
$ |
2.1 |
|
Interest expense increased $2.1 million from the first quarter of fiscal 2024, primarily due to higher average debt levels associated with the borrowings under the Credit Facility utilized to fund the $150.0 million distribution to the Former Parent. This was partially offset by a reduction in interest expense in the first quarter of fiscal 2025 as compared to the prior year quarter due to the outstanding short-term borrowings under the AR Facility, which was terminated in June 2023, as well as the TWB Term Loan, which was subsequently contributed to the Company in connection with the Separation on December 1, 2023. Refer to “Note 7 – Debt” for additional information.
26
Equity Income
|
|
Three Months Ended |
|
|||||||||
|
|
August 31, |
|
|
August 31, |
|
|
Increase/ |
|
|||
(In millions) |
|
2024 |
|
|
2023 |
|
|
(Decrease) |
|
|||
Serviacero Worthington |
|
$ |
1.3 |
|
|
$ |
9.0 |
|
|
$ |
(7.7 |
) |
Equity income at Serviacero Worthington decreased $7.7 million from the first quarter of fiscal 2024, driven by lower direct volume, lower direct spreads, and unfavorable foreign currency exchange impacts.
Income Taxes
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
August 31, |
|
|
Effective |
|
|
August 31, |
|
|
Effective |
|
|
Increase/ |
|
|||||
(In millions) |
|
2024 |
|
|
Tax Rate |
|
|
2023 |
|
|
Tax Rate |
|
|
(Decrease) |
|
|||||
Income tax expense |
|
$ |
4.0 |
|
|
|
12.3 |
% |
|
$ |
17.0 |
|
|
|
22.6 |
% |
|
$ |
(13.0 |
) |
Income tax expense was $4.0 million in the first quarter of fiscal 2025 compared to $17.0 million in the first quarter of fiscal 2024. The decrease in income tax expense was primarily driven by lower pre-tax earnings and the recognition of a discrete $4.4 million net tax benefit related to pre-acquisition tax matters at Tempel. The income tax expense in the current quarter resulted in an effective tax rate of 12.3%, compared to 22.6% for the prior year quarter. For additional information regarding our income taxes, refer to “Note 10 – 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), 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:
|
|
Three Months Ended |
|
|||||
|
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Net earnings attributable to controlling interest (GAAP) |
|
$ |
28.4 |
|
|
$ |
58.5 |
|
Interest expense, net |
|
|
2.6 |
|
|
|
0.5 |
|
Income tax expense |
|
|
4.0 |
|
|
|
17.0 |
|
EBIT (non-GAAP) |
|
|
35.0 |
|
|
|
76.0 |
|
Impairment of long-lived assets (1) |
|
|
- |
|
|
|
0.9 |
|
Separation costs (2) |
|
|
- |
|
|
|
3.6 |
|
Tax indemnification adjustment (3) |
|
|
4.4 |
|
|
|
- |
|
Adjusted EBIT (non-GAAP) |
|
$ |
39.4 |
|
|
$ |
80.5 |
|
27
Adjusted EBIT in the first quarter of fiscal 2025 was down $41.1 million compared to the first quarter of fiscal 2024 primarily due to a $28.1 million decrease in gross margin which was impacted by a $32.1 million unfavorable change from an estimated $15.5 million inventory holding gain in the first quarter of fiscal 2024 compared to estimated $16.6 million inventory holding loss in the first quarter of fiscal 2025. Additionally, adjusted EBIT was negatively impacted by lower equity earnings at Serviacero Worthington, which decreased $7.7 million, and a $3.2 million increase in SG&A expense, primarily associated with incremental labor and other incremental public company stand-alone costs.
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 three months ended August 31, 2024, we generated $54.6 million of cash from operating activities and invested $21.5 million in property, plant and equipment. Additionally, we made net debt repayments of $25.8 million under the Credit Facility, and we paid dividends of $8.0 million. The following table summarizes our consolidated and combined cash flows for the periods presented.
|
|
Three Months Ended |
|
|||||
|
|
August 31, |
|
|
August 31, |
|
||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Net cash provided by (used in) operating activities |
|
$ |
54.6 |
|
|
$ |
(20.7 |
) |
Net cash used in investing activities |
|
|
(21.5 |
) |
|
|
(17.3 |
) |
Net cash provided by (used in) financing activities |
|
|
(37.3 |
) |
|
|
32.7 |
|
Decrease in cash and cash equivalents |
|
|
(4.2 |
) |
|
|
(5.3 |
) |
Cash and cash equivalents at beginning of period |
|
|
40.2 |
|
|
|
32.7 |
|
Cash and cash equivalents at end of period |
|
$ |
36.0 |
|
|
$ |
27.4 |
|
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.
Although we do not currently anticipate a need, we believe that 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.
28
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 $54.6 million during the three months ended August 31, 2024, compared to $20.7 million net cash used in operating activities during the three months ended August 31, 2023. This change was primarily due to an $88.7 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. This was offset by a $29.9 million decrease in net earnings.
Investing Activities
Net cash used in investing activities was $21.5 million during the three months ended August 31, 2024, compared to $17.3 million during the three months ended August 31, 2023. The driver of net cash used in investing activities in both the current year and prior year periods was capital expenditures. The increase in capital expenditures in the current year quarter compared with the prior year quarter was 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.
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 $37.3 million during the three months ended August 31, 2024, compared to net cash provided by financing activities of $32.7 million during the three months ended August 31, 2023. In the prior year quarter in connection with the centralized cash management program utilized prior to the Separation, we received cash from the Former Parent to fund working capital requirements. The current year quarter included net short-term repayments of $25.8 million under our Credit Facility (see the “Revolving credit facility” section below) and $8.0 million of dividends paid to shareholders of our common shares.
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 August 31, 2024, we were in compliance with the financial covenants of the Credit Facility. The Credit Facility does not include credit rating triggers. There were $122.2 million outstanding borrowings drawn against the Credit Facility at August 31, 2024, leaving a borrowing capacity of $427.8 million, subject to the eligible borrowing base, available for use. Under the Credit Facility, we may extend borrowings up to the maturity date subject to the eligible borrowing base.
Common shares – Prior to the Separation, our common shares were owned by the Former Parent. After the Separation was completed as described in “Note 9 – 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 September 25, 2024, the Board declared a quarterly dividend of $0.16 per common share payable on December 27, 2024, to shareholders of record at the close of business on December 13, 2024.
29
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 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 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.
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Item 3. – Quantitative and Qualitative Disclosures About Market Risk
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.
Item 4. – Controls and Procedures
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 August 31, 2024). 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 August 31, 2024) 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.
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PART II. OTHER INFORMATION
Item 1. – Legal Proceedings
We are involved in various judicial and administrative proceedings, as both plaintiff and defendant, arising in the ordinary course of business. We do not believe that any such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial position, results of operation or cash flows.
Item 1A. – Risk Factors
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 or at 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 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 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.
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no equity securities of Worthington Steel sold by Worthington Steel during the period covered by this Form 10-Q, that were not registered under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
Common shares withheld to cover tax withholding obligations in connection with the vesting of restricted stock awards and performance share awards are treated as common share repurchases. Those withheld common shares are not considered common share repurchases under an authorized common share repurchase plan. The table below provides information regarding common shares withheld from our employees to satisfy minimum statutory tax withholding obligations arising from the vesting of restricted common shares. The presentation of the table below and related footnote represents full common share amounts.
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Total Number of |
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Common Shares |
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Purchased as |
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Maximum Number of |
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Total Number |
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Average Price |
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Part of Publicly |
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Common Shares that |
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of Common |
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Paid per |
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Announced |
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May Yet Be |
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Shares |
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Common |
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Plans or |
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Purchased Under the |
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Period |
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Purchased |
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Share |
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Programs (1) |
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Plans or Programs (2) |
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June 1-30, 2024 |
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42,538 |
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$ |
30.70 |
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- |
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- |
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July 1-31, 2024 |
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23,783 |
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32.29 |
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- |
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- |
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August 1-31, 2024 |
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- |
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- |
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- |
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- |
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Total |
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66,321 |
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$ |
31.27 |
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- |
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Item 3. – Defaults Upon Senior Securities
Not applicable.
Item 4. – Mine Safety Disclosures
Not applicable.
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Item 5. – Other Information
During the first quarter of fiscal 2025, no director or officer (as defined under Rule 16a-1 of the Exchange Act)
Item 6. – Exhibits
Exhibit |
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Description of Exhibit |
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Location |
2.1 |
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Separation and Distribution Agreement, dated November 30, 2023, between Worthington Enterprises, Inc. and Worthington Steel, Inc. |
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3.1 |
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Amended Articles of Incorporation of Worthington Steel, Inc. |
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3.2 |
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Amended Regulations of Worthington Steel, Inc. |
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31.1 |
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Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Executive Officer) |
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31.2 |
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Rule 13a - 14(a) / 15d - 14(a) Certifications (Principal Financial Officer) |
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32.1 |
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Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS |
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Inline XBRL Instance Document |
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The instance document does not appear in the Interactive Date File because its XBRL tabs are imbedded within the Inline XBRL document. |
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101.SCH# |
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Inline XBRL Taxonomy Extension Schema Document With Embedded Linkbase Documents |
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Submitted electronically herewith |
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104 |
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Cover Page Interactive Data File |
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The cover page from this Form 10-Q, formatted in Inline XBRL is included within the Exhibit 101 attachments |
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# Attached as Exhibit 101 to this Quarterly Report on Form 10-Q of Worthington Steel are the following documents formatted in Inline XBRL (Extensible Business Reporting Language):
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WORTHINGTON STEEL, INC. |
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Date: October 15, 2024 |
By: |
/s/ Timothy A. Adams |
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Timothy A. Adams, |
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Vice President and Chief Financial Officer |
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(On behalf of the Registrant as Duly Authorized Officer and as Principal Financial Officer) |
34