Worthington Steel, Inc.

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

Net sales in the current year period were $2,514.6 million, an increase of $254.2 million, or 11%, compared to the prior year period. The increase was driven primarily by higher direct volumes and, to a lesser extent, higher average direct selling prices. The increases were partially offset by lower toll volumes as well as slightly lower average toll selling prices driven by product mix. Direct volumes increased by 7%, of which the Sitem acquisition accounted for approximately 1% of the increase, and toll volumes decreased 23% in the current year period compared to the prior year period. The decrease in toll volumes was due to a combination of closing the WSCP Cleveland toll processing facility in May 2025 as well as softening demand from mill customers. Direct selling prices increased 5% and toll selling prices decreased 2% in the current year period compared to the prior year period. The mix of direct versus toll volumes was 64% to 36% in the current year period compared to 56% to 44% in the prior year period.

Gross Margin

Gross margin in the current year period was $284.5 million, an increase of $22.9 million compared to the prior year period. The increase was primarily driven by higher direct spreads and higher direct volumes, partially offset by lower toll volumes. Direct spreads, up $55.6 million, were impacted by a $31.7 million favorable change from an estimated $31.2 million inventory holding loss in the prior year period to an estimated $0.5 million inventory holding gain in the current year period. Higher direct volumes favorably impacted gross margin by $28.3 million. Toll spreads, down $28.2 million, were negatively impacted by $20.9 million due to lower volumes and a $7.3 million unfavorable change in toll mix. Manufacturing expenses were up $4.6 million due to increased direct volume and inflationary pressures, partially offset by lower costs due to the closure of the WSCP Cleveland toll processing facility in May 2025.

Selling, General and Administrative Expense

SG&A in the current year period was $216.3 million, an increase of $43.6 million compared to the prior year period. The increase in SG&A expense included $14.8 million related to Sitem Group, which includes a one-time bonus of €4.0 million ($4.6 million) paid to key individuals at Sitem Group as a result of the successful closing of the Sitem Group acquisition. Professional fees increased $15.6 million from the prior year period, primarily attributable to $20.3 million of professional fees related to the proposed acquisition of Kloeckner. Additionally, compared to the prior year period, compensation expense increased by $12.4 million.

Other Operating Items

Impairment of assets in the current year period was comprised of a pre-tax impairment charges of (a) $0.6 million related to certain machinery at our manufacturing facility in Taylor, Michigan, and (b) $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 period was comprised of pre-tax asset impairment charges of (a) $1.3 million related to an in-process research and development intangible asset and (b) $6.1 million 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 current year period 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 $7.0 million in the current year period 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 current year period was $9.9 million, an increase of $11.8 million compared to the prior year period. 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.

Additionally, excluding the impact of the economic (non-designated) cash flow derivative described above, there were foreign currency remeasurement gains of $0.4 million in the current year period versus foreign currency remeasurement losses of $2.5 million in the prior year period, primarily related to exchange rate movements in Mexico offset by exchange rate movements in Canada and Europe.

The increase in miscellaneous income (expense), net was also due to $4.4 million of expense, in the first quarter of fiscal 2025, as a result of the 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. That reduction in expense was partially offset in the prior year period as we recognized a pre-tax gain of $1.5 million on the sale of unused land in China, as well as a pre-tax, non-cash settlement gain of $2.7 million that accelerated a portion of deferred pension cost due to the annuitization of a portion of the total projected benefit obligation of the inactive Tempel Employees Pension Plan.

Interest Expense, Net

Interest expense, net in the current year period was $7.7 million, an increase of $1.6 million from the prior year period. 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 $16.3 million from the prior year period, primarily due to higher direct spreads, including inventory holding gains, and favorable foreign currency exchange impacts. The increase was partially offset by lower volumes.

Income Taxes

Income tax expense was $21.1 million for the current year period compared to $12.6 million for the prior year period. The increase in income tax expense was primarily driven by higher pre-tax earnings in the current period and the recognition of a $4.4 million tax benefit related to a pre-acquisition tax matter at Tempel in the prior year period. The income tax expense in the current period resulted in an ETR of 24.2% compared to 18.7% for the prior year period. For additional information regarding our income taxes, refer to “Note 12 – Income Taxes.”

Adjusted EBIT

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 current year period was due to pre-tax impairment charges of (a) $0.6 million on certain machinery at our manufacturing facility in Taylor, Michigan and (b) $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 these impairment charges. Impairment of assets in the prior year period were due to pre-tax impairment charges of (a) $1.3 million for an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired and (b) $6.1 million related to our plans to combine 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 Cleveland toll processing manufacturing facility into WSCP’s existing manufacturing facility in Twinsburg, Ohio. In the current year period, we sold substantially all of the remaining net assets of WSCP’s 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 $7.0 million, excluding the impact of noncontrolling interest of $2.6 million, and included finance lease assets and buildings and improvements, net, and machinery and equipment. In the third quarter of fiscal 2025, TWB announced a VRP. In connection with the VRP, we recognized $0.9 million in severance expenses during the third quarter of fiscal 2025, which is recorded in restructuring and other (income) expense, net, and excludes the noncontrolling interest portion of restructuring and other expenses, net of $0.4 million. Refer to “Note 6 – Restructuring and Other (Income) Expense, Net.”

(3)

Tax indemnification adjustment reflects tax and indemnification adjustments reported in income tax expense and 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 we acquired Tempel, provides protection to us from rulings by tax authorities through the acquisition date.

(4)

Pension settlement gain reflects the pension lift-out transaction to transfer a portion of the total projected benefit obligation of the Tempel Employees Pension Plan to a third-party insurance company, which resulted in a pre-tax non-cash gain reported in miscellaneous income (expense), net, and is excluded from adjusted results to facilitate period-to-period comparability of our operating performance as it reflects a discrete settlement event.

(5)

Gain on land sale reflects the sale of unused land on the campus of the Tempel China, which resulted in a pre-tax gain reported in miscellaneous income (expense), net, and is excluded from adjusted results to facilitate period-to-period comparability of our operating performance as it reflects the non-operational disposal of real property.

(6)

Acquisition completion bonus payment consists of the one-time bonus payment paid to key individuals upon the successful acquisition closing of Sitem Group reported in SG&A and excludes the impact of noncontrolling interest.

(7)

Other loss, net, consists of the following items reported in miscellaneous income (expense), net, which are excluded from adjusted results to facilitate period-to-period comparability of our operating performance:

o

Net insured loss incurred for damage as a result of a small, quickly contained fire at Tempel Canada. We recognized a $0.5 million pre-tax loss equal to the amount of the insurance deductible.

o

Environmental reserve settlement pre-tax gain of $0.2 million recognized by Tempel Canada as the result of a prior indemnification from the former owners of the Canadian facility.

(8)

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.

(9)

Kloeckner acquisition-related expenses consist of the acquisition-related 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. Kloeckner acquisition-related expenses were $15.4 million and $4.9 million for the third quarter of fiscal 2026 and the second quarter of fiscal 2026, respectively.

Adjusted EBIT in the current year period was up $27.4 million compared to the prior year period primarily due to a $22.9 million increase in gross margin and higher equity income from Serviacero Worthington, partially offset by an increase in SG&A expense.

Legal Proceedings and Contingencies

We are currently involved in a dispute relating to the import of steel across international borders. Based on currently available information, we believe a loss is not probable and therefore has not recorded a reserve. We estimate that a reasonably possible loss could range from $2.0 million to $4.0 million. We will continue to monitor the dispute and will record a reserve if settlement in the dispute becomes probable.