Worthington Steel, Inc.

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 periods presented is illustrated below:

The automotive industry is one of the largest consumers of flat-rolled steel in North America, and thus the largest end market for us and our unconsolidated joint venture, Serviacero Worthington. North American vehicle production, including production at the Detroit Three Automakers, is a leading indicator of automotive demand. North American vehicle production was up 3% in the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025, while the Detroit Three Automakers vehicle production was up 5% in the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025.

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 growth has moderated during the first quarter of fiscal 2026. The slight pull back in U.S. GDP that was observed in economic data earlier in calendar 2025, which is largely attributable to an unusual amount of imports in response to the announced tariffs by the U.S. government, has reversed in recent economic data. During the second calendar quarter 2025, there was a decrease in imports and an increase in consumer spending. Thus, when normalizing for such events, the U.S. GDP appears to be maintaining its steady growth.

Total volume (tons) decreased 7% compared to the prior year quarter. Direct tons sold increased by 6%, of which the Sitem Group acquisition accounted for approximately 1% of the increase. Direct shipments to the overall automotive market and to the Detroit Three Automakers both increased by 17% in the first quarter of fiscal 2026 as compared to the first quarter of fiscal 2025. Toll volumes decreased 22% in the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025, 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.

Detroit Three Automakers represented 35% and 32% of our consolidated net sales during the first quarter of fiscal 2026 and fiscal 2025, respectively. Similar to the past few quarters, we have won share in the automotive market. The new programs continue to ramp up and volumes have increased across the board. The increases in automotive were partially offset by reductions in the agricultural markets, where shipments were down 49%, in the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025. The decrease in the agricultural markets is due to a continued softness in the agricultural equipment market. The market is seeing weakening demand for agricultural equipment due to a reluctance by farmers making new capital investments primarily as the result of higher borrowing costs and general uncertainty in farm income expectations.

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

While our automotive business is largely driven by the production schedules of the Detroit Three Automakers, our customer base is much broader and includes other domestic automotive manufacturers and many of their suppliers.

During the first quarter of fiscal 2026, U.S. inflation rates have largely stabilized compared to the peaks seen in recent years, however, the U.S. inflation rate remains somewhat elevated above the U.S. Federal Reserve targeted rate of 2%. During the first quarter of fiscal 2026, the U.S. Federal Reserve held the benchmark interest rate steady. However, the U.S. Federal Reserve lowered the benchmark interest rate subsequent to the ending of the first quarter of fiscal 2026 in response to slowing job gains, combined with low unemployment and stable inflation. Thus, the impacts of such a decision were not reflected in our first quarter of fiscal 2026 results, as we had not yet benefited from the recent lowering of the benchmark interest rate. However, the lowering of the benchmark rate is expected to lower the rates on our Credit Facility.

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

(1)

Fiscal 2025 figures are based on revised actuals

(2)

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

(3)

S&P Global

(4)

LME Zinc; period average

(5)

NYMEX Henry Hub Natural Gas; period average

(6)

Energy Information Administration; period average

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.

Industry Developments

In 2025, the U.S. government continued to modify its tariff policy, including those related to imports of steel and aluminum among other items such as automobiles and automotive parts as well as universal tariffs. In June 2025, the U.S. government announced tariff increases to steel and aluminum from 25% to 50% under section 232 of the Trade Expansion Act. While exemptions for certain allied countries remain in place, many prior country-specific exemptions have expired or are undergoing renegotiation. Other governments, including the Chinese government, have responded with reciprocal tariffs on U.S. imports. Additional measures from the U.S. government as well as other foreign governments have occurred since that time, however, many of the measures on steel and aluminum have remained in place. The scope and duration of these tariffs continue to evolve, which creates sustained uncertainty in global trade policy. As a result, our customers’ supply chain decisions may abruptly shift, potentially impacting our financial performance. The ultimate impact the tariffs will have on our financial position, results of operations, and cash flows remains to be determined.

In July 2025, the U.S. government enacted the One Big Beautiful Bill Act (“OBBBA”) into law, which ushers in a broad set of changes to the U.S. law and regulatory environments. The ultimate impact the OBBBA will have on our financial position, results of operations, and cash flows remains to be determined. However, we expect to realize cash tax savings in fiscal year 2026 due to the bonus depreciation and domestic research and development expense provisions. There is currently no expected material impact to tax expense.

Impact of Raw Material Prices

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

The market price of our products is closely related to the price of HRC. The price of benchmark HRC is primarily affected by the demand for steel and the cost of raw materials. During the fourth quarter of fiscal 2025, steel prices continued their rise before falling slightly in the first quarter of fiscal 2026. 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. With the recent price declines, we expect inventory holding losses to be between approximately $5.0 million and $10.0 million in the second quarter of fiscal 2026.

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

The following table presents the average quarterly market price per ton of HRC steel for the periods presented:

(1)

CRU HRC Index: period average

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