Worthington Steel, Inc.

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

Net sales for the third quarter of fiscal 2026 were $769.8 million, an increase of $82.4 million, or 12%, compared to the third quarter of fiscal 2025. This increase was driven primarily by higher direct volumes and higher average direct selling prices. The increases were partially offset by lower toll volumes. Direct volumes increased by 4%, with the increase driven equally between the legacy business and the addition of Sitem Group. Direct selling prices increased 9% in the third quarter of fiscal 2026 compared to the prior year quarter driven by a 5% increase in the legacy business as well as the addition of Sitem Group. Toll volumes decreased 22% in the third quarter of fiscal 2026 compared to the prior year quarter. The decrease in toll volumes was due to a combination of closing the Cleveland-area Worthington Samuel Coil Processing (“WSCP”) facility in May 2025 as well as softening demand from mill customers. The mix of direct versus toll volumes was 63% to 37% in the third quarter of fiscal 2026 compared to 57% to 43% in the prior year quarter.

Gross Margin

Gross margin in the third quarter of fiscal 2026 was $76.1 million, a decrease of $5.1 million compared to the third quarter of fiscal 2025. The decrease was primarily driven by lower toll volumes and a $3.2 million unfavorable impact from Sitem Group, partially offset by higher direct spreads (defined as sales less material costs). Toll spreads, down $6.4 million, were negatively impacted by $6.0 million due to lower volumes and by $0.4 million due to an unfavorable change in toll mix. Direct spreads increased by $4.9 million due to higher direct volumes and a $3.3 million favorable change from an estimated $1.2 million inventory holding loss in the prior year quarter to an estimated $2.1 million inventory holding gain in the third quarter of fiscal 2026.

Selling, General and Administrative Expense

SG&A in the third quarter of fiscal 2026 was $77.5 million, an increase of $22.9 million compared to the third quarter of fiscal 2025. The increase in SG&A expense, which included $4.8 million related to Sitem Group, was primarily attributable to $15.4 million of professional fees related to the Proposed Acquisition.

Other Operating Items

Impairment of assets in the third quarter of fiscal 2026 was due to a pre-tax impairment charge of $1.5 million related to internal-use software module assets that were determined to have no value and written down to zero. Impairment of assets in the prior year quarter of $7.4 million were comprised of a (a) $1.3 million pre-tax impairment of an in-process research and development intangible asset and a (b) $6.1 million pre-tax impairment related to the consolidation of WSCP’s Cleveland toll processing manufacturing facility into its existing manufacturing facility in Twinsburg, Ohio. Refer to “Note 5 – Impairment of Assets” for additional information.

Restructuring and other income, net in the third quarter of fiscal 2026 was driven by the sales of substantially all of the remaining net assets of WSCP’s remaining Cleveland toll processing manufacturing facility, which were reported in assets held for sale prior to the sale. The sales resulted in pre-tax gains of $6.0 million and included finance lease assets and buildings and improvements, net, and machinery and equipment. Restructuring and other expense, net in the third quarter of fiscal 2025 was driven by TWB’s VRP, which is expected to accelerate the normal retirement attrition process and result in future cost savings. In connection with the VRP, we recognized $0.9 million in severance expenses during the third quarter of fiscal 2025. Refer to “Note 6 – Restructuring and Other (Income) Expense, Net” for additional information.

Miscellaneous Income (Expense), Net

Miscellaneous income, net in the third quarter of fiscal 2026 was $9.8 million, an increase of $9.6 million compared to the third quarter of fiscal 2025. The increase was primarily due to the unrealized gain of $9.1 million in the third quarter of fiscal 2026 of the economic (non-designated) cash flow derivative that was entered into to hedge a portion of the expected purchase price of the Proposed Acquisition. Additionally, in the third quarter of fiscal 2026, we recognized net unrealized gains on equity securities of $0.3 million. Refer to “Note 2 – Acquisitions” for additional information.

Interest Expense, Net

Interest expense, net in the third quarter of fiscal 2026 was $2.1 million, an increase of $0.7 million from the prior year quarter. The increase was primarily due to higher interest expense on the Credit Facility (due to higher average debt levels offset by lower average interest rates), higher debt levels on the BDC loan, and the interest expense related to the Sitem Group loans. These increases were offset by higher interest income, including the interest income from the net investment hedge. Refer to “Note 9 – Debt” and “Note 14 – Derivative Financial Instruments and Hedging Activities” for additional information.

Equity Income

Equity income at Serviacero Worthington increased $3.5 million from the prior year quarter, driven primarily by higher direct spreads, including inventory holding gains, and to a lesser extent, favorable foreign currency exchange impacts. The increase was partially offset by lower volumes.

Income Taxes

Income tax expense was $3.5 million in the third quarter of fiscal 2026 compared to $5.0 million in the prior year quarter. The decrease in income tax expense was primarily driven by lower pre-tax earnings in the current quarter. The income tax expense in the current quarter resulted in an ETR of 25.6%, compared to 26.7% for the prior year quarter. Refer to “Note 12 – Income Taxes” for additional information.

Adjusted EBIT

We evaluate operating performance on the basis of earnings before interest and taxes (“EBIT”), as adjusted for certain items (“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 an 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)

Impairment charges are excluded because they do not occur in the ordinary course of our ongoing business operations, are inherently unpredictable in timing and amount, and are non-cash, so their exclusion facilitates the comparison of historical, current and forecasted financial results. Impairment of assets in the third quarter of fiscal 2026 was due to a pre-tax impairment charge of $1.5 million related to internal-use software module assets that were determined to have no value and written down to zero. There was no noncontrolling interest impact for this impairment charge. Impairment of assets in the third quarter of fiscal 2025 was driven by a) $1.3 million impairment of an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired and b) a $6.1 million impairment related to the consolidation of WSCP’s Cleveland toll processing manufacturing facility into its existing manufacturing facility in Twinsburg, Ohio, excluding the $2.8 million noncontrolling interest portion of impairment of assets. Refer to “Note 5 – Impairment of Assets” for additional information.

(2)

Restructuring activities consist of established programs that are not part of our ongoing operations, such as divestitures, closing or consolidating facilities, employee severance (including rationalizing headcount or other significant changes in personnel), and realignment of existing operations (including changes to management structure in response to underlying performance and/or changing market conditions). These restructuring activities are excluded to facilitate period-to-period comparability of our operating performance. In the third quarter of fiscal 2025, we announced plans to combine WSCP’s toll processing manufacturing facility in Cleveland facility into its Twinsburg, Ohio facility. In the third quarter of fiscal 2026, we sold substantially all of the remaining net assets of WSCP’s Cleveland facility, which were reported in assets held for sale prior to the sale. The sales resulted in pre-tax gains of $6.0 million, excluding the impact of noncontrolling interest of $2.2 million, and included finance lease assets and buildings and improvements, net, and machinery and equipment. In the third quarter of fiscal 2025, in connection with the TWB’s announced VRP, we recognized $0.9 million in severance expenses, which is recorded in restructuring and other (income) expense, net, and excludes the noncontrolling interest portion of restructuring and other (income) expense, net of $0.4 million. Refer to “Note 6 – Restructuring and Other (Income) Expense, Net.”

(3)

Kloeckner purchase derivative consists of the change in the fair value of an economic (non-designated) cash flow derivative that was entered into to hedge a portion of the expected purchase price of the outstanding Kloeckner Shares in connection with the Proposed Acquisition. The change in the fair value is recorded in miscellaneous income (expense), net, and it is excluded from adjusted results to facilitate period-to-period comparability of the Company’s operating performance as it reflects non-operational activity.

(4)

Kloeckner acquisition-related expenses consist of the acquisition-related costs incurred in connection with the Proposed Acquisition, consisting primarily of advisory, legal, accounting, valuation and other professional fees, as well as certain integration expenses, and are expensed as incurred within SG&A expense. Exclusion of these costs is appropriate because they are directly attributable to a specific strategic transaction that management expects to be transformative to our portfolio, scale and long-term operating profile and are not reflective of our ongoing operating performance for the periods presented. Exclusion facilitates period-over-period comparisons, and to assess performance excluding the impact of transaction-specific activities.

Adjusted EBIT in the third quarter of fiscal 2026 was down $5.3 million compared to the third quarter of fiscal 2025 primarily due to a $5.1 million decrease in gross margin and an increase in SG&A, partially offset by higher equity income from Serviacero Worthington.