Worthington Steel, Inc.

The following table presents a review of the results of operations for the periods presented:

Net sales totaled $872.9 million in the first quarter of fiscal 2026, up $38.9 million compared to the first quarter of fiscal 2025. The increase was driven primarily by the inclusion of the Sitem Group, higher direct volumes, and to a lesser extent, slightly higher average direct selling prices. The increases were partially offset by lower toll volumes as well as slightly lower average toll selling prices. Direct tons sold increased by 6%, of which the Sitem acquisition accounted for approximately 1% of the increase, and toll volumes decreased 22% in the first quarter of fiscal 2026 compared to the prior year quarter. The decrease in toll volumes was primarily related to softening demand from mill customers as well as lower volumes out of WSCP due to the closure of the toll processing manufacturing facility in Cleveland, Ohio. Direct selling prices increased 1% and toll selling prices decreased 3% in the first quarter of fiscal 2026 compared to the prior year quarter. The mix of direct versus toll volumes was 63% to 37% in the first quarter of fiscal 2026 compared to 56% to 44% in the prior year quarter.

Gross Margin

Gross margin increased $14.8 million over the prior year quarter to $115.2 million, primarily due to higher direct spreads and higher direct volumes, partially offset by lower toll processing gross margin. Direct spreads, up $23.0 million, were impacted by a $22.2 million favorable change from an estimated $16.6 million inventory holding loss in the prior year quarter to an estimated $5.6 million inventory holding gain in the first quarter of fiscal 2026. Higher direct volumes favorably impacted gross margin by $4.6 million. Toll margins, down $11.0 million, were impacted by an $8.1 million unfavorable impact due to lower volumes and a $2.9 million unfavorable change in toll mix.

Selling, General and Administrative Expense

SG&A increased $10.9 million over the prior year quarter primarily due to the acquisition of the Sitem Group, which reported $7.9 million of SG&A expenses in the first quarter of fiscal 2026, including a one-time bonus of $4.6 million paid to key individuals at the Sitem Group as a result of the successful closing of the Sitem Group acquisition. The remaining incremental increase in SG&A expense was primarily attributable to an increase in compensation partially offset by a decrease in benefits expenses.

Other Operating Items

Restructuring and other (income), net in the first quarter of fiscal 2026 was driven by the $1.0 gain on the sale of an asset that was reported within assets held for sale due to the previously announced plans to combine WSCP’s toll processing manufacturing facility in Cleveland, Ohio, into its existing manufacturing facility in Twinsburg, Ohio. Refer to “Note 4 – Restructuring and Other (Income), Net” for additional information.

Miscellaneous Income (Expense), Net

Miscellaneous income (expense), net increased $6.1 million from the first quarter of fiscal 2025 primarily due to $4.4 million of expense related to the first quarter fiscal 2025 recognition of a tax indemnity payable to the former owners of Tempel associated with the final favorable ruling in a pre-acquisition tax matter in one of the jurisdictions in which Tempel operates. Additionally, we recorded foreign currency remeasurement gains of $0.2 million in the first quarter of fiscal 2026 as compared to foreign currency remeasurement losses of $1.9 million in the prior year quarter, primarily related to exchange rate movements in Mexico.

Interest Expense, Net

Interest expense, net increased $0.3 million from the first quarter of fiscal 2025, primarily due to higher average debt levels as a result of higher borrowings from the Credit Facility and from the debt assumed in the Sitem Group acquisition. This was offset by lower expense on the Credit Facility due to lower average interest rates. Refer to “Note 7 – Debt” for additional information.

Equity Income

Equity income at Serviacero Worthington increased $5.1 million from the first quarter of fiscal 2025, driven by higher direct spreads, including inventory holding gains, as well as favorable foreign currency exchange impacts.

Income Taxes

Income tax expense was $13.4 million in the first quarter of fiscal 2026 compared to $4.0 million in the first quarter of fiscal 2025. The increase in income tax expense was primarily driven by higher pre-tax earnings and the recognition of a $4.4 million tax benefit related to a pre-acquisition tax matter at Tempel in the prior year quarter. The income tax expense in the current quarter resulted in an effective tax rate of 26.6%, compared to 12.3% 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), net, but may also exclude other items, as described below, that management believes are not reflective of, and thus should not be included when evaluating the performance of our ongoing operations. Adjusted EBIT is used by management to evaluate operating performance and engage in financial and operational planning, because we believe that this financial measure provides additional perspective on the performance of our ongoing operations. Additionally, management believes these non-GAAP financial measures provide useful information to investors because they allow for meaningful comparisons and analysis of trends in our businesses and enable investors to evaluate operations and future prospects in the same manner as management.

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

(1)

Restructuring activities consist of established programs that are not part of our ongoing operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions). In the third quarter of fiscal 2025, we announced plans to combine WSCP’s toll processing manufacturing facility in Cleveland, Ohio, into its existing manufacturing facility in Twinsburg, Ohio. In the first quarter of fiscal 2026, we recognized a $0.6 million gain on the sale of an asset, excluding the impact of noncontrolling interest, that was reported within assets held for sale. Refer to “Note 4 – Restructuring and Other (Income), Net.”

(2)

Tax indemnification adjustments reported in miscellaneous income (expense), net, related to an indemnification agreement with the former owners of Tempel. This adjustment is the result of a first quarter fiscal 2025 favorable tax ruling in one of the jurisdictions in which Tempel operates. The indemnification agreement, which was entered into with the former Tempel owners at the time the Company acquired Tempel, provides protection to the Company from rulings by tax authorities through the acquisition date.

(3)

Acquisition completion bonus payment consists of the one-time bonus payment paid to key individuals upon the successful acquisition closing of the Sitem Group reported in SG&A expense. The acquisition completion bonus payment, excluding the impact of noncontrolling interest, is excluded as it is not part of our ongoing operations.

Adjusted EBIT in the first quarter of fiscal 2026 was up $15.5 million compared to the first quarter of fiscal 2025 primarily due to a $14.8 million increase in gross margin and higher equity income from Serviacero Worthington, partially offset by an increase in SG&A expense.