10-Q 1 ws-20240229.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 29, 2024

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number 001-41830

 

WORTHINGTON STEEL, INC.

(Exact name of registrant as specified in its charter)

 

Ohio

 

92-2632000

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 Old Wilson Bridge Road, Columbus, Ohio

 

43085

(Address of principal executive offices)

 

(Zip Code)

 

(614) 840-3462

(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

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Shares, Without Par Value

 

WS

 

New York Stock Exchange

 

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. Yes No

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). Yes No

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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

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 April 8, 2024, the number of common shares, without par value, of the registrant issued and outstanding was 50,383,242.

 


TABLE OF CONTENTS

 

Safe Harbor Statement

 

ii

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated and Combined Balance Sheets – February 29, 2024 and May 31, 2023

 

1

 

 

 

 

 

 

 

Consolidated and Combined Statements of Earnings – Three Months and Nine Months Ended February 29, 2024, and February 28, 2023

 

2

 

 

 

 

 

 

 

Consolidated and Combined Statements of Comprehensive Income – Three Months and Nine Months Ended February 29, 2024, and February 28, 2023

 

3

 

 

 

 

 

 

 

Consolidated and Combined Statements of Cash Flows – Three Months and Nine Months Ended February 29, 2024, and February 28, 2023

 

4

 

 

 

 

 

 

 

Condensed Notes to Consolidated and Combined Financial Statements

 

5

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

33

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

34

 

 

 

 

 

 

Item 1A.

Risk Factors

 

34

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

34

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

34

 

 

 

 

 

 

Item 5.

Other Information

 

35

 

 

 

 

 

 

Item 6.

Exhibits

 

35

 

 

 

Signatures

 

37

 

i


Safe Harbor Statement

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 F – 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:

future or expected cash positions, liquidity and ability to access financial markets and capital;
outlooks, strategies or business plans;
anticipated benefits of Worthington Enterprises, Inc.’s separation of its steel processing business into Worthington Steel as a stand-alone, publicly traded company on December 1, 2023 (the “Separation”);
expected financial and operational performance of, and future opportunities for, the Company following the Separation;
the tax treatment of the Separation transaction;
future or expected growth, growth potential, forward momentum, performance, competitive position, sales, volumes, cash flows, earnings, margins, balance sheet strengths, debt, financial condition or other financial measures;
pricing trends for raw materials and finished goods and the impact of pricing changes;
the ability to improve or maintain margins;
expected demand or demand trends for the Company or its markets;
additions to product lines and opportunities to participate in new markets;
expected benefits from transformation and innovation efforts;
the ability to improve performance and competitive position at the Company’s operations;
anticipated working capital needs, capital expenditures and asset sales;
anticipated improvements and efficiencies in costs, operations, sales, inventory management, sourcing and the supply chain and the results thereof;
projected profitability potential;
the ability to make acquisitions, form joint ventures and consolidated operations, and the projected timing, results, benefits, costs, charges and expenditures related to acquisitions, joint ventures, headcount reductions and facility dispositions, shutdowns and consolidations;
projected capacity and the alignment of operations with demand;
the ability to operate profitably and generate cash in down markets;
the ability to capture and maintain market share and to develop or take advantage of future opportunities, customer initiatives, new businesses, new products and new markets;
expectations for Company and customer inventories, jobs and orders;
expectations for the economy and markets or improvements therein;
expectations for generating improving and sustainable earnings, earnings potential, margins or shareholder value;
effects of judicial rulings, laws and regulations;
effects of the novel coronavirus (“COVID-19”) pandemic and the various responses of governmental and nongovernmental authorities thereto on economies and markets, and on the Company’s customers, counterparties, employees and third-party service providers; and
other non-historical matters.

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:

the uncertainty of obtaining regulatory approvals in connection with the Separation, including rulings from the Internal Revenue Service;
the Company’s ability to successfully realize the anticipated benefits of the Separation;
the effect of conditions in national and worldwide financial markets, including inflation, increases in interest rates and economic recession, and with respect to the ability of financial institutions to provide capital;
the risks, uncertainties and impacts related to the COVID-19 pandemic – the duration, extent and severity of which are impossible to predict, including the possibility of future resurgence in the spread of COVID-19 or variants thereof – and the

ii


availability, effectiveness and acceptance of vaccines, and other actual or potential public health emergencies and actions taken by governmental authorities or others in connection therewith;
the effect of national, regional and global economic conditions generally and within major product markets, including significant economic disruptions from factors beyond our control like pandemics such as COVID-19, the actions taken in connection therewith and the implementation of related fiscal stimulus packages;
the impact of tariffs, the adoption of trade restrictions affecting the Company’s products or suppliers, a United States (“U.S.”) withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships;
changing commodity prices and/or supply;
product demand and pricing;
changes in product mix, product substitution and market acceptance of the Company’s products;
volatility or fluctuations in the pricing, quality or availability of raw materials (particularly steel), supplies, transportation, utilities, labor and other items required by operations (especially in light of the COVID-19 pandemic and Russia’s invasion of Ukraine);
effects of sourcing and supply chain constraints;
the outcome of adverse claims experience with respect to workers’ compensation, product recalls or product liability, casualty events or other matters;
effects of facility closures and the consolidation of operations;
the effect of financial difficulties, consolidation and other changes within the steel, automotive, construction and other industries in which the Company participates;
failure to maintain appropriate levels of inventories;
financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users and customers, suppliers, joint venture partners and others with whom the Company does business;
the ability to realize targeted expense reductions from headcount reductions, facility closures and other cost reduction efforts;
the ability to realize cost savings and operational, sales and sourcing improvements and efficiencies, and other expected benefits from transformation initiatives, on a timely basis;
the overall success of, and the ability to integrate, newly-acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies and other expected benefits and cost savings therefrom;
capacity levels and efficiencies, within facilities, within major product markets and within the industries in which the Company participates as a whole;
the effect of disruption in the business of suppliers, customers, facilities and shipping operations due to adverse weather, casualty events, equipment breakdowns, labor shortages, interruption in utility services, civil unrest, international conflicts (especially in light of Russia’s invasion of Ukraine), terrorist activities, or other causes;
changes in customer demand, inventories, spending patterns, product choices, and supplier choices;
risks associated with doing business internationally, including economic, political and social instability (especially in light of Russia’s invasion of Ukraine), foreign currency exchange rate exposure and the acceptance of the Company’s products in global markets;
the ability to improve and maintain processes and business practices to keep pace with the economic, competitive and technological environment;
the effect of inflation, interest rate increases and economic recession, which may negatively impact the Company’s operations and financial results;
deviation of actual results from estimates and/or assumptions used by the Company in the application of its significant accounting policies;
the level of imports and import prices in the Company’s markets;
the impact of environmental laws and regulations or the actions of the U.S. Environmental Protection Agency or similar regulators which increase costs or limit the Company’s ability to use or sell certain products;
the impact of increasing environmental, greenhouse gas emission and sustainability regulations or considerations;
the impact of judicial rulings and governmental regulations, both in the U.S. and abroad, including those adopted by the U.S. Securities and Exchange Commission (the “SEC”) and other governmental agencies as contemplated by the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;
the effect of healthcare laws in the U.S. and potential changes for such laws, which may increase the Company’s healthcare and other costs and negatively impact the Company’s operations and financial results;
the effect of tax laws in the U.S. and potential changes for such laws, which may increase the Company’s costs and negatively impact its operations and financial results;
cyber security risks;

iii


the effects of privacy and information security laws and standards;
the cyclical nature of the steel industry;
the Company’s safety performance; and
other risks described from time to time in the Company’s filings with the SEC, including those described in “Part I – Item 1A. – Risk Factors” of the Form 10-12B/A filed with the SEC on November 13, 2023 (the “Form 10”).

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 AND COMBINED BALANCE SHEETS

(In millions, except share amounts)

 

 

 

(Unaudited)

 

 

 

 

 

 

February 29,

 

 

May 31,

 

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

60.8

 

 

$

32.7

 

Receivables, less allowances of $1.8 and $2.6 at February 29, 2024 and May 31, 2023, respectively

 

 

468.8

 

 

 

468.0

 

Inventories:

 

 

 

 

Raw materials

 

 

157.1

 

 

 

173.9

 

Work in process

 

 

175.8

 

 

 

164.1

 

Finished products

 

 

75.3

 

 

 

76.8

 

Total inventories

 

 

408.2

 

 

 

414.8

 

Income taxes receivable

 

 

6.2

 

 

 

4.3

 

Assets held for sale

 

 

1.8

 

 

 

3.4

 

Prepaid expenses and other current assets

 

 

77.1

 

 

 

57.7

 

Total current assets

 

 

1,022.9

 

 

 

980.9

 

Investment in unconsolidated affiliate

 

 

130.3

 

 

 

114.6

 

Operating lease assets

 

 

72.2

 

 

 

75.3

 

Goodwill

 

 

79.7

 

 

 

78.6

 

Other intangible assets, net of accumulated amortization of $43.7 and $38.9 at February 29, 2024
     and May 31, 2023, respectively

 

 

78.6

 

 

 

83.4

 

Deferred income taxes

 

 

5.8

 

 

 

6.3

 

Other assets

 

 

12.1

 

 

 

10.9

 

Property, plant and equipment:

 

 

 

 

 

 

Land

 

 

39.1

 

 

 

37.6

 

Buildings and improvements

 

 

176.8

 

 

 

168.6

 

Machinery and equipment

 

 

892.2

 

 

 

847.5

 

Construction in progress

 

 

48.9

 

 

 

20.3

 

Total property, plant and equipment

 

 

1,157.0

 

 

 

1,074.0

 

Less: accumulated depreciation

 

 

709.6

 

 

 

659.6

 

Total property, plant and equipment, net

 

 

447.4

 

 

 

414.4

 

Total assets

 

$

1,849.0

 

 

$

1,764.4

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

407.3

 

 

$

402.2

 

Short-term borrowings

 

 

147.2

 

 

 

2.8

 

Accrued compensation, contributions to employee benefit plans and related taxes

 

 

46.7

 

 

 

31.9

 

Dividends payable

 

 

8.5

 

 

 

-

 

Other accrued items

 

 

15.3

 

 

 

15.6

 

Current operating lease liabilities

 

 

6.7

 

 

 

5.9

 

Income taxes payable

 

 

13.7

 

 

 

-

 

Current maturities of long-term debt due to Former Parent

 

 

-

 

 

 

20.0

 

Total current liabilities

 

 

645.4

 

 

 

478.4

 

Other liabilities

 

 

38.2

 

 

 

33.6

 

Noncurrent operating lease liabilities

 

 

68.4

 

 

 

71.7

 

Deferred income taxes, net

 

 

26.7

 

 

 

26.1

 

Total liabilities

 

 

778.7

 

 

 

609.8

 

Preferred shares, without par value; authorized – 1,000,000 shares February 29, 2024 and no shares at
    May 31, 2023;
no shares issued or outstanding

 

 

-

 

 

 

-

 

Common shares, without par value; authorized – 150,000,000 shares at February 29, 2024; issued
     and outstanding
49,294,494 shares and 100 shares at February 29, 2024 and May 31, 2023, respectively

 

 

-

 

 

 

-

 

Additional Paid-in Capital

 

 

903.0

 

 

 

-

 

Retained Earnings

 

 

40.9

 

 

 

-

 

Net Investment by the Former Parent

 

 

-

 

 

 

1,031.1

 

Accumulated other comprehensive income (loss), net of taxes of $(1.5) and $(2.6) at
    February 29, 2024 and May 31, 2023, respectively

 

 

(6.3

)

 

 

(2.1

)

Total Shareholders’ equity – controlling interest

 

 

937.6

 

 

 

1,029.0

 

Noncontrolling interests

 

 

132.7

 

 

 

125.6

 

Total equity

 

 

1,070.3

 

 

 

1,154.6

 

Total liabilities and equity

 

$

1,849.0

 

 

$

1,764.4

 

 

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)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Net sales

$

805.8

 

 

$

780.7

 

 

$

2,519.6

 

 

$

2,723.7

 

Cost of goods sold

 

685.7

 

 

 

717.5

 

 

 

2,210.8

 

 

 

2,537.4

 

Gross margin

 

120.1

 

 

 

63.2

 

 

 

308.8

 

 

 

186.3

 

Selling, general and administrative expense

 

52.8

 

 

 

49.7

 

 

 

160.7

 

 

 

147.7

 

Impairment of long-lived assets

 

-

 

 

 

-

 

 

 

1.4

 

 

 

0.3

 

Restructuring and other income, net

 

-

 

 

 

-

 

 

 

-

 

 

 

(4.2

)

Separation Costs

 

1.0

 

 

 

4.0

 

 

 

19.5

 

 

 

12.0

 

Operating income

 

66.3

 

 

 

9.5

 

 

 

127.2

 

 

 

30.5

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous income (expense), net

 

0.1

 

 

 

1.3

 

 

 

1.6

 

 

 

2.4

 

Interest expense, net

 

(2.9

)

 

 

(0.5

)

 

 

(3.6

)

 

 

(2.7

)

Equity in net income of unconsolidated affiliate

 

2.9

 

 

 

(0.2

)

 

 

15.7

 

 

 

3.5

 

Earnings before income taxes

 

66.4

 

 

 

10.1

 

 

 

140.9

 

 

 

33.7

 

Income tax expense

 

14.0

 

 

 

0.8

 

 

 

28.5

 

 

 

5.6

 

Net earnings

 

52.4

 

 

 

9.3

 

 

 

112.4

 

 

 

28.1

 

Net earnings attributable to noncontrolling interests

 

3.4

 

 

 

3.9

 

 

 

10.9

 

 

 

8.3

 

Net earnings attributable to controlling interest

$

49.0

 

 

$

5.4

 

 

$

101.5

 

 

$

19.8

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding(1)

 

49.3

 

 

 

49.3

 

 

 

49.3

 

 

 

49.3

 

Earnings per common share attributable to controlling interest

$

0.99

 

 

$

0.11

 

 

$

2.06

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding(2)

 

50.3

 

 

 

49.3

 

 

 

49.6

 

 

 

49.3

 

Earnings per common share attributable to controlling interest

$

0.98

 

 

$

0.11

 

 

$

2.05

 

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding at end of period(1)

 

49.3

 

 

 

49.3

 

 

 

49.3

 

 

 

49.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

0.16

 

 

n/a

 

 

$

0.16

 

 

n/a

 

 

 

 

(1)
Prior to the third quarter of fiscal 2024, reported Weighted average common shares outstanding (Basic) and Common shares outstanding at end of period reflects the basic shares at the Separation. This share amount is being utilized for the calculation of basic earnings per share for periods presented prior to the Separation.

 

(2)
Prior to the third quarter of fiscal 2024, reported Weighted average common shares outstanding (Diluted) reflects the basic shares at the Separation. This share amount is being utilized for the calculation of diluted earnings per share for periods presented prior to the Separation.

 

 

See condensed notes to consolidated and combined financial statements.

2


WORTHINGTON STEEL, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Net earnings

$

52.4

 

 

$

9.3

 

 

$

112.4

 

 

$

28.1

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(0.4

)

 

 

0.1

 

 

 

(0.7

)

 

 

(5.9

)

Cash flow hedges

 

(6.7

)

 

 

24.6

 

 

 

(3.5

)

 

 

13.8

 

Other comprehensive income (loss)

 

(7.1

)

 

 

24.7

 

 

 

(4.2

)

 

 

7.9

 

Comprehensive income

 

45.3

 

 

 

34.0

 

 

 

108.2

 

 

 

36.0

 

Comprehensive income attributable to noncontrolling interests

 

3.4

 

 

 

3.9

 

 

 

10.9

 

 

 

8.3

 

Comprehensive income attributable to controlling interest

$

41.9

 

 

$

30.1

 

 

$

97.3

 

 

$

27.7

 

 

See condensed notes to consolidated and combined financial statements.

3


WORTHINGTON STEEL, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

52.4

 

 

$

9.3

 

 

$

112.4

 

 

$

28.1

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

15.9

 

 

 

17.0

 

 

 

49.2

 

 

 

52.4

 

Impairment of long-lived assets

 

-

 

 

 

-

 

 

 

1.4

 

 

 

0.3

 

Benefit from deferred income taxes

 

(0.9

)

 

 

(0.1

)

 

 

(1.1

)

 

 

(0.3

)

Bad debt expense (income)

 

(0.2

)

 

 

2.3

 

 

 

(0.6

)

 

 

3.6

 

Equity in net income of unconsolidated affiliate, net of distributions

 

(2.9

)

 

 

10.2

 

 

 

(15.7

)

 

 

6.5

 

Net gain on sale of assets

 

-

 

 

 

-

 

 

 

(0.4

)

 

 

(3.8

)

Stock-based compensation

 

2.2

 

 

 

2.7

 

 

 

8.3

 

 

 

7.5

 

Changes in assets and liabilities, net of impact of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

(52.1

)

 

 

9.6

 

 

 

4.4

 

 

 

123.6

 

Inventories

 

(34.9

)

 

 

34.3

 

 

 

13.4

 

 

 

179.4

 

Accounts payable

 

45.5

 

 

 

14.6

 

 

 

(4.4

)

 

 

(161.5

)

Accrued compensation and employee benefits

 

4.4

 

 

 

(1.0

)

 

 

1.7

 

 

 

(6.5

)

Other operating items, net

 

15.3

 

 

 

19.3

 

 

 

(4.7

)

 

 

6.4

 

Net cash provided by operating activities

 

44.7

 

 

 

118.2

 

 

 

163.9

 

 

 

235.7

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Investment in property, plant and equipment

 

(22.4

)

 

 

(10.8

)

 

 

(58.6

)

 

 

(36.4

)

Proceeds from sale of assets, net of selling costs

 

-

 

 

 

-

 

 

 

0.8

 

 

 

23.2

 

Acquisitions, net of cash acquired

 

-

 

 

 

-

 

 

 

(21.0

)

 

 

-

 

Net cash used in investing activities

 

(22.4

)

 

 

(10.8

)

 

 

(78.8

)

 

 

(13.2

)

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Distribution to the Former Parent in connection with the Separation

 

(150.0

)

 

 

-

 

 

 

(150.0

)

 

 

-

 

Transfers from (to) Former Parent

 

3.8

 

 

 

(99.5

)

 

 

(47.6

)

 

 

(138.7

)

Proceeds from (repayment of) short-term borrowings

 

(45.0

)

 

 

(1.3

)

 

 

127.2

 

 

 

(44.4

)

Proceeds from revolving credit facility borrowings - swing loans

 

142.6

 

 

 

-

 

 

 

142.6

 

 

 

-

 

Repayment of revolving credit facility borrowings - swing loans

 

(125.4

)

 

 

-

 

 

 

(125.4

)

 

 

-

 

Principal payments on long-term obligations

 

-

 

 

 

(5.0

)

 

 

-

 

 

 

(15.0

)

Payments to noncontrolling interests

 

(1.9

)

 

 

-

 

 

 

(3.8

)

 

 

(11.8

)

Net cash used in financing activities

 

(175.9

)

 

 

(105.8

)

 

 

(57.0

)

 

 

(209.9

)

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(153.6

)

 

 

1.6

 

 

 

28.1

 

 

 

12.6

 

Cash and cash equivalents at beginning of period

 

214.4

 

 

 

31.1

 

 

 

32.7

 

 

 

20.1

 

Cash and cash equivalents at end of period

$

60.8

 

 

$

32.7

 

 

$

60.8

 

 

$

32.7

 

 

See condensed notes to consolidated and combined financial statements.

4


WORTHINGTON STEEL, INC.

Condensed Notes to CONSOLIDATED AND COMBINED Financial Statements

(Unaudited)

 

Note A – Description of the Business, The Separation, Agreements with the Former Parent and Separation Costs, and Basis of Presentation

 

Description of the Business

 

The Company is one of North America’s premier value-added steel processors with the ability to provide a diversified range of products and services that span a variety of end markets. The Company maintains 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, the Company has been delivering high quality steel processing capabilities across a variety of end-markets including automotive, heavy truck, agriculture, construction, and energy. The Company serves its customers primarily by processing flat-rolled steel coils, which is sourced primarily from various North American steel mills, into the precise type, thickness, length, width, shape, and surface quality required by customer specifications. The Company sells steel on a direct basis, whereby it is exposed to the risk and rewards of ownership of the material while in its possession. Additionally, the Company toll processes steel under a fee for service arrangement whereby it processes customer-owned material. The Company’s manufacturing facilities further benefit from the flexibility to scale between direct and tolling services based on demand dynamics throughout the year.

 

Fiscal Periods

The Company’s fiscal year and fourth quarter ends on May 31, with “fiscal 2023” ended on May 31, 2023, and “fiscal 2024” ending on May 31, 2024. The Company’s other quarterly periods end on the final day of August (first quarter), November (second quarter) and February (third quarter).

 

The Separation

 

On September 29, 2022, Worthington Enterprises, Inc., then known as Worthington Industries, Inc. (the “Former Parent”) announced its intention to spin off its existing steel processing business, Worthington Steel, into a stand-alone publicly traded company. This was completed through a tax-free pro rata distribution of 100% of the common shares of Worthington Steel (the “Separation”) to holders of record of Worthington Enterprises, Inc. common shares as of the close of business on November 21, 2023, (the “Record Date”). Each holder of record of Worthington Enterprises, Inc. common shares received one common share of Worthington Steel for every one Worthington Enterprises, Inc. common share held at the close of business on the Record Date (the “Distribution”). The Separation was completed on December 1, 2023, (the “Distribution Date”), at 12:01 a.m., Eastern Time. In connection with the Separation, Worthington Steel made a cash distribution to the Former Parent of $150.0 million from the issuances of certain debt (see Note H – Debt). Additionally, as part of the Separation, the Former Parent made a contribution of certain assets and liabilities, including $3.8 million of cash and cash equivalents, to Worthington Steel. The Former Parent retained no ownership interest in Worthington Steel following the Separation. Also on December 1, 2023, Worthington Steel’s common shares began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “WS.”

 

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 $1.0 million and $4.0 million during the third quarter of fiscal 2024 and third quarter of fiscal 2023, respectively, and $19.5 million and $12.0 million during the nine months ended February 29, 2024 and nine months ended February 28, 2023, respectively.

 

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,

5


the third quarter of fiscal 2024 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. 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 carve-out 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 carve-out.

 

Transactions and accounts which have occurred within the Company have been eliminated, based on historical intracompany activity. The Former Parent’s net investment in these 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 P – Related Party Transactions,” debt and related interest expense between the Former Parent and TWB has been attributed to the Company, as the Company is 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 and combined 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

6


accompanying consolidated and combined 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 and combined balance sheets and in “Note J – Changes in 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 and combined 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 P – Related Party Transactions.”

 

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 three operating joint ventures: Spartan Steel Coating, L.L.C. (“Spartan”) (52%); TWB Company, L.L.C. (“TWB”) (55%); and Worthington Samuel Coil Processing, L.L.C. (“WSCP”) (63%). The Company also owned a controlling interest (51%) in Worthington Specialty Processing (“WSP”), which became a non-operating joint venture on October 31, 2022, when its remaining net assets were sold. These joint ventures are consolidated with the equity owned by the other joint venture members shown as noncontrolling interests in the Company’s consolidated and combined balance sheets, and their portions of net earnings and other comprehensive income (loss) (“OCI”) shown as net earnings or comprehensive income attributable to noncontrolling interests in the Company’s consolidated and combined statements of earnings and comprehensive income, respectively.

 

The Company owns a noncontrolling interest (50%) in one unconsolidated joint venture: Serviacero Planos, S. de R.L. de C.V. (“Serviacero Worthington”). The investment in the Company’s unconsolidated affiliate is accounted for using the equity method. See further discussion of the Company’s unconsolidated affiliate in “Note C – Investment in Unconsolidated Affiliate.”

 

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, including Serviacero Worthington, with sales representing 50% of its consolidated net sales for the third quarter of fiscal 2024 and 52% of its combined net sales for the third quarter of fiscal 2023, and 52% and 49% of its consolidated and combined net sales for the nine months ended February 29, 2024 and February 28, 2023, respectively. Sales to one automotive customer represented 13.2% and 17.6% of its consolidated net sales for the third quarter of fiscal 2024 and the third quarter of fiscal 2023, respectively, and 15.0% and 16.1% of its consolidated and combined net sales for the nine months ended February 29, 2024 and February 28, 2023, respectively.

 

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 third quarter of fiscal 2024 are not necessarily indicative of the results that may be expected for the entirety of fiscal 2024 or any other quarter. For further information, refer to the consolidated and combined financial statements and notes thereto included in the Form 10.

 

7


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 B – Revenue Recognition

The following table summarizes net sales by product class for the periods presented:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

(In millions)

2024

 

 

2023

 

 

2024

 

 

2023

 

Product class

 

 

 

 

 

 

 

 

 

 

 

Direct

$

763.3

 

 

$

745.5

 

 

$

2,402.6

 

 

$

2,616.0

 

Toll

 

42.5

 

 

 

35.2

 

 

 

117.0

 

 

 

107.7

 

Total

$

805.8

 

 

$

780.7

 

 

$

2,519.6

 

 

$

2,723.7

 

 

The following table summarizes revenue that has been recognized over time for the periods presented:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

(In millions)

2024

 

 

2023

 

 

2024

 

 

2023

 

Steel processing – toll

$

42.5

 

 

$

35.2

 

 

$

117.0

 

 

$

107.7

 

 

The following table summarizes the unbilled receivables at the dates indicated:

 

 

 

 

February 29,

 

 

May 31,

 

(In millions)

Balance Sheet Classification

 

2023(1)

 

 

2023(1)

 

Unbilled receivables

Receivables

 

$

4.6

 

 

$

3.7

 

 

 

(1)
There were no contract assets at either of the dates indicated above.

 

Note C – Investment in Unconsolidated Affiliate

 

The Company owns a noncontrolling interest (50%) in one unconsolidated joint venture, Serviacero Worthington. The Company accounts for its investment in Serviacero Worthington using the equity method of accounting. Serviacero Worthington provides steel processing services, such as pickling, blanking, slitting, multi-blanking and cutting-to-length, to customers in a variety of industries including automotive, appliance and heavy equipment.

 

The Company did not receive any distributions from Serviacero Worthington during the nine months ended February 29, 2024. The Company received distributions from Serviacero Worthington totaling $10.0 million during the nine months ended February 28, 2023.

The following tables summarize the financial information of Serviacero Worthington as of the dates, and for the periods, presented:

 

 

February 29,

 

 

May 31,

 

(In millions)

2024

 

 

2023

 

Cash and cash equivalents

$

10.9

 

 

$

12.2

 

Other current assets

 

259.3

 

 

 

238.2

 

Noncurrent assets

 

58.1

 

 

 

58.9

 

Total assets

$

328.3

 

 

$

309.3

 

 

 

 

 

 

Current liabilities

 

63.5

 

 

 

70.8

 

Other noncurrent liabilities

 

5.3

 

 

 

5.4

 

Equity

 

259.5

 

 

 

233.1

 

Total liabilities and equity

$

328.3

 

 

$

309.3

 

 

8


 

 

Three Months Ended

 

 

Nine Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

(In millions)

2024

 

 

2023

 

 

2024

 

 

2023

 

Net sales

$

137.3

 

 

$

114.9

 

 

$

452.6

 

 

$

434.9

 

Gross margin

 

10.8

 

 

 

(4.3

)

 

 

50.7

 

 

 

11.7

 

Operating income (loss)

 

7.4

 

 

 

(7.2

)

 

 

40.5

 

 

 

3.3

 

Depreciation and amortization

 

1.1

 

 

 

1.1

 

 

 

3.2

 

 

 

3.3

 

Interest expense

 

 

 

 

0.2

 

 

 

 

 

 

0.3

 

Income tax expense (benefit)

 

0.3

 

 

 

(4.6

)

 

 

7.3

 

 

 

(2.0

)

Net earnings (loss)

 

5.8

 

 

 

(0.4

)

 

 

31.3

 

 

 

7.0

 

 

Note D – Impairment of Long-Lived Assets

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. In accordance with the applicable accounting guidance, the net assets were recorded at the lower of net book value or fair market value less costs to sell, resulting in a pre-tax impairment charge of $0.3 million.

No impairment charges were recorded during the second quarter or third quarter of fiscal 2023.

During the first quarter of fiscal 2024, we lowered the estimate of fair value less costs to sell to reflect the expected scrap value of the WSCP toll processing equipment to $0.2 million, resulting in a pre-tax impairment charge of $1.4 million.

No impairment charges were recorded during the second quarter or third quarter of fiscal 2024.

 

Note E – Restructuring and Other Income, Net