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 increased 1% in the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025, while the Detroit Three Automakers vehicle production increased 3% in the third quarter of fiscal 2026 compared to the third 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. Recent U.S. GDP data indicates moderating economic growth through the third quarter of fiscal 2026. While overall economic activity has remained resilient, the pace of growth has slowed compared to earlier periods due to ongoing geopolitical uncertainty and uneven demand across industrial sectors. Consistent with these trends, we have observed variability in demand across our non-automotive end markets during the third quarter of fiscal 2026. While certain end markets have shown signs of stabilization, others continue to experience softer conditions, consistent with the more moderate pace of U.S. GDP growth.

Total volume (tons) decreased by 7% compared to the prior year quarter. Direct tons sold increased by 4%, with the increase driven equally between the legacy business and the addition of Sitem Group. Direct shipments to the overall automotive market and to the Detroit Three Automakers increased by 10% and 13%, respectively, in the third quarter of fiscal 2026 as compared to the third quarter of fiscal 2025. Toll volumes decreased 22% in the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025. The decrease in toll volumes was due to a combination of closing the Cleveland-area WSCP facility in May 2025, as well as softening demand from mill customers.

Detroit Three Automakers represented 33% and 32% of our consolidated net sales during the third quarter of fiscal 2026 and fiscal 2025, respectively. Direct shipments to the Detroit Three Automakers in the third quarter of fiscal 2026 increased approximately 13%, compared to the third quarter of fiscal 2025, which significantly outpaced the reported 3% growth in the Detroit Three Automakers production for the same period. Similar to second quarter of fiscal 2026, the increase in automotive volume reflects share gains from new programs plus the impact of a key automotive OEM customer returning to a more normal build schedule after curtailing production in fiscal 2025. Agriculture volume and container volume were up 9% and 11%, respectively, in the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025. The increase in agriculture volume was primarily due to improved OEM equipment demand. These gains were offset by softness in other markets, with energy, construction, service center, and heavy truck volumes down 22%, 7%, 21%, and 12%, respectively, in the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025. The decrease in energy was largely driven by a decline in project-based solar programs, whereas construction and service center saw increased competition. Heavy truck continues to see ongoing market weakness.

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.

Throughout fiscal 2026, U.S. inflation rates have remained stable relative to the peaks observed in recent years, but remain above the U.S. Federal Reserve targeted rate of 2%. The U.S. Federal Reserve lowered the benchmark interest rate once during the third quarter of fiscal 2026. The benchmark interest rate cut was in response to increased labor market downside risks (such as higher unemployment and lower hiring momentum) and cooling growth, while inflation was expected to ease. As a result, borrowing costs have generally decreased, and we expect to continue to benefit from lower 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 (“Section 232”). While exemptions for certain allied countries remain, 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. While the February 2026 U.S. Supreme Court ruling on International Emergency Economic Powers Act does not repeal Section 232 tariffs on steel and aluminum, the decision increases overall tariff-related marketplace volatility. As a result, our customers’ supply chain decisions may abruptly shift, potentially impacting our financial performance. While tariffs have been a reality for some time, the potential for tariff changes has caused some continued trepidation in markets, including the metals markets. Recent evidence suggests that imports of steel have decreased. While lower imports of steel may put upward pressure on domestic steel and steel products prices, the ultimate impact 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 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. Industry consolidation in recent years has reduced the number of steel suppliers, and further consolidation could make it more difficult or costly to obtain alternate supply in the event of a disruption.

The market price of our products is closely correlated to the price of HRC, which is largely driven 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. Prices fell slightly from the first quarter of fiscal 2026 to the second quarter of fiscal 2026, before increasing in the third quarter of fiscal 2026. The average price of HRC for fiscal 2026 remains higher than the same period of fiscal 2025. 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. With the recent upward steel price movements, we expect inventory holding gains to be between $15.0 million to $20.0 million in the fourth 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 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.