Worthington Steel, Inc.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated and combined financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Critical accounting estimates are defined as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations. Although actual results historically have not deviated significantly from those determined using our estimates, our financial position or results of operations could be materially different if we were to report under different conditions or to use different assumptions in the application of such estimates. The following accounting estimates are considered to be the most critical to us, as these are the primary areas where financial information is subject to our estimates, assumptions and judgment in the preparation of our consolidated and combined financial statements.

Impairment of Goodwill and Other Indefinite-Lived Long-Lived Assets

Critical estimate: Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that impairment may be present. Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimation of the fair value of each reporting unit. A reporting unit is defined as either an operating segment or one level below an operating segment. Our operations are organized as a single component, or operating segment, and therefore one reportable segment. Our reporting units, which are one level below our single operating segment, consist of: (1) Flat-Rolled Steel Processing; (2) Electrical Steel; and (3) Laser Welding.

For goodwill and indefinite-lived intangible assets, we either first perform a qualitative assessment to determine whether a quantitative impairment test is necessary or we may elect to proceed directly to a quantitative test. The qualitative assessment considers the totality of relevant events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, financial performance and other entity- and asset-specific factors. If, based on our qualitative assessment, we conclude that it is not more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset, as applicable, is less than its carrying amount, a quantitative impairment test is not required. If we elect to bypass the qualitative assessment or conclude that it is more likely than not that the applicable fair value is less than the carrying amount, we perform a quantitative impairment test. For goodwill, the quantitative test compares the fair value of each reporting unit with assigned goodwill to its carrying amount, including goodwill, and an impairment loss is recognized for the amount by which the carrying amount exceeds fair value, limited to the amount of goodwill assigned to the reporting unit. For indefinite-lived intangible assets, the quantitative test compares the fair value of each asset, or applicable unit of accounting, with its carrying amount, and an impairment loss is recognized for any excess of carrying amount over fair value.

Assumptions and judgments: When performing a qualitative assessment, judgment is required when considering relevant events and circumstances that could affect the fair value of the indefinite-lived intangible asset or reporting unit to which goodwill is assigned. Management considers whether events and circumstances such as a change in strategic direction and changes in business climate would impact the fair value of the indefinite-lived intangible asset or reporting unit to which goodwill is assigned. If a quantitative analysis is required, assumptions are required to estimate the fair value to compare against the carrying value. Fair value is determined by using valuation techniques appropriate in the circumstances, which may include income and market approaches. Significant assumptions that form the basis of fair value can include discount rates, underlying forecast assumptions and royalty rates. These assumptions are forward-looking and can be affected by future economic and market conditions.

During the third quarter of fiscal 2026, we determined that certain internal-use software assets associated with a project at Tempel Canada were impaired. We determined that it was no longer probable that the software being developed would be completed and placed in service. As the assessment for impairment for uncompleted software is performed at the module level, the assets associated with specific modules of the internal-use software assets were determined to have no value and were written down to zero, which resulted in a pre-tax impairment charge of $1.5 million for assets previously recorded in construction in progress.

During the fourth quarter of fiscal 2026, we identified indicators of impairment related to our Electrical Steel reporting unit, including weaker-than-expected demand in certain end markets, lower forecasted volumes and profitability, increased foreign competition, delayed customer program launches, and revised expectations regarding future cash flows. As a result, we performed a quantitative impairment test for the Electrical Steel reporting unit.

The fair value of the Electrical Steel reporting unit was estimated using an income approach. The income approach was based on a discounted cash flow model using management’s current projections of revenue, operating margins, capital expenditures, working capital requirements, terminal growth rates, and discount rates. The fair value measurement was classified within Level 3 of the fair value hierarchy because it included significant unobservable inputs. The key assumptions used in the fair value calculation were projected cash flows and the discount rate, which represent unobservable Level 3 inputs. These assumptions are forward-looking and could be affected by changes in market demand, competitive conditions, customer program timing, steel pricing, input costs, operating performance, capital costs and broader economic conditions. Actual results may differ from those assumed in our forecasts. Refer to “Note 5 – Goodwill, Long-Lived Assets, and Other Assets” for additional information regarding the valuation methodology, significant unobservable inputs and impairment charges recognized.

Based on this analysis, we determined that the carrying amount of the Electrical Steel reporting unit exceeded the fair value. Accordingly, a pre-tax goodwill impairment charge of $53.8 million was recorded within impairment of goodwill on the consolidated and combined income statements. The impairment charge represented all goodwill assigned to the Electrical Steel reporting unit. Given the goodwill assigned to the Electrical Steel reporting unit was fully impaired, reasonably possible changes in the discount rate or other key valuation assumptions would not have resulted in an additional goodwill impairment charge for that reporting unit. We will continue to monitor the Electrical Steel reporting unit and its related long-lived asset groups for changes in facts and circumstances that could result in additional impairment charges in future periods.

We also evaluated the Flat-Rolled Steel Processing and Laser Welding reporting units for impairment based on certain qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, operating performance, forecasted cash flows, capital expenditure requirements, product mix and market-based indicators. Based on those assessments, we determined that it was not more likely than not that the fair values of the Flat-Rolled Steel Processing and Laser Welding reporting units were less than their respective carrying amounts. Accordingly, no quantitative goodwill impairment test was required for those reporting units.

The impairment indicators identified for the Electrical Steel reporting unit were specific to that reporting unit’s exposure to electrification-related end markets, including EV applications. The Flat-Rolled Steel Processing and Laser Welding reporting units serve different end markets and applications, including broader steel processing, automotive production, tailor welded blanks, and automotive lightweighting applications. As a result, we did not identify similar adverse changes in demand, expected cash flows, or operating performance for those reporting units.

Impairment of Definite-Lived Long-Lived Assets

Critical estimate: We review long-lived assets to be held and used, including property, plant and equipment and intangible assets with finite useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group, as applicable, may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability is assessed by comparing the carrying amount of the asset or asset group with the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If the undiscounted cash flows equal or exceed the carrying amount, the asset or asset group is considered recoverable and no impairment loss is recognized. If the carrying amount exceeds the undiscounted cash flows, an impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value.

Assumptions and judgments: When performing the comparison of the sum of the undiscounted cash flows of the asset or asset group to its respective carrying amount, judgment is required when forming the basis for underlying cash flow forecast assumptions. Management considers whether events and circumstances such as a change in strategic direction and changes in business climate would impact the recoverability of the definite-lived long-lived asset or asset group. If the asset or asset group is not recoverable based on the undiscounted cash flow comparison, assumptions are required to estimate the fair value and measure any impairment loss. Significant assumptions that form the basis of fair value can include discount rates and other underlying forecast assumptions. These assumptions are forward-looking and can be affected by future economic and market conditions.

During the second quarter of fiscal 2026, the net asset value on certain machinery at our manufacturing facility in Taylor, Michigan, was lowered to $0.5 million, resulting in a pre-tax impairment charge of $0.6 million.

During fiscal 2026, we identified impairment indicators within the Electrical Steel reporting unit. These indicators included weakened demand in certain end markets, particularly industrial motors in both Europe and the United States, due to increased foreign competition, and in automotive, some delayed program launches, which negatively impacted the expected future cash flows of the related asset groups. These conditions resulted in revised expectations regarding future demand and cash flows for certain asset groups within the Electrical Steel reporting unit.

As a result, we performed a recoverability test for the affected asset groups by comparing the carrying amounts of the asset groups to the undiscounted cash flows expected to result from their use and eventual disposition. For asset groups whose carrying amounts were not recoverable, we measured impairment losses as the excess of the carrying amounts over their estimated fair values. The estimated fair values of the affected long-lived asset groups were determined using a discounted cash flow method, market approach, cost approach, or combination thereof, which included significant unobservable inputs, including forecasted volumes, operating margins, capital expenditure requirements, working capital assumptions, discount rates, replacement cost assumptions, and/or expected proceeds from asset dispositions. These fair value measurements were classified within Level 3 of the fair value hierarchy. As a result of this analysis, we recognized a pre-tax impairment charge of $58.4 million related to long-lived assets within impairment of long-lived assets and other assets in the consolidated and combined statements of earnings. The impairment charges were allocated to the long-lived assets within the respective asset groups on a pro rata basis, subject to the limitation that no individual long-lived asset was reduced below its determinable fair value. Refer to “Note 5 – Goodwill, Long-Lived Assets, and Other Assets” for additional information regarding the valuation methodology, significant unobservable inputs and impairment charges recognized.

The impairment indicators identified for the Electrical Steel reporting unit were specific to that reporting unit’s exposure to electrification-related end markets, including EV applications. The Flat-Rolled Steel Processing and Laser Welding reporting units serve different end markets and applications, including broader steel processing, automotive production, tailor welded blanks, and automotive lightweighting applications. As a result, we did not identify similar adverse changes in demand, expected cash flows, or operating performance for those reporting units.

Income Taxes

Critical estimate: We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and deferred tax liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We evaluate the deferred tax assets to determine whether it is more likely than not that some, or a portion, of the deferred tax assets will not be realized, and provide a valuation allowance as appropriate. Changes in existing tax laws or rates could significantly impact the estimate of our tax liabilities. Significant judgment is required in estimating our income tax provision, assessing the realizability of deferred tax assets, evaluating valuation allowances and measuring uncertain tax positions.

GAAP contains a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and for which actual outcomes may differ from forecasted outcomes. Our policy is to include interest and penalties related to uncertain tax positions in income tax expense.

Assumptions and judgments: Significant judgment is required in determining our tax expense and in evaluating our tax positions. Tax benefits from uncertain tax positions that are recognized in our consolidated financial statements are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Valuation allowances are recorded if it is more likely than not that some portion of the deferred income tax assets will not be realized. In evaluating the need for a valuation allowance, we consider various factors, including the expected level of future taxable income and available tax planning strategies. Any changes in judgment about the valuation allowance are recorded through Income tax expense and are based on changes in facts and circumstances regarding realizability of deferred tax assets.

We have reserves for income taxes and associated interest and penalties that may become payable in future years as a result of audits by taxing authorities. It is our policy to record these in income tax expense. While we believe the positions taken on previously filed tax returns are appropriate, we have established the tax and interest reserves in recognition that various taxing authorities may challenge our positions. These reserves are analyzed periodically, and adjustments are made as events occur to warrant adjustment to the reserves, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, and release of administrative guidance or court decisions affecting a particular tax issue. We have provided for the amounts we believe will ultimately result from these changes; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Such differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

During fiscal 2026, income tax estimates were affected by the Sitem Group acquisition, including the recognition and measurement of acquired deferred tax assets and liabilities, the tax effects of purchase accounting adjustments, the tax treatment of goodwill and identifiable intangible assets. We recorded valuation allowances of $11.0 million, of which $3.3 million related to acquired entities, and $7.7 million related to current year changes in management’s estimates of realizability, primarily relating to net operating loss carryforwards, interest carryforward and other deductible temporary differences. We further recognized $2.6 million associated with gross uncertain tax positions.

See “Note 14 – Income Taxes” for further information.

Employee Pension Plans

Critical estimate: Defined benefit pension and other post-employment benefit (“OPEB”) plan obligations are remeasured at least annually as of reporting period end based on the present value of projected future benefit payments for all participants for services rendered to date. The measurement of projected future benefits is dependent on the provisions of each specific plan, demographics of the group covered by the plan and other key measurement assumptions. The funded status of these benefit plans, which represents the difference between the benefit obligation and the fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each fiscal year. Net periodic benefit cost is included in other income (expense) in our consolidated and combined statements of earnings, except for the service cost component, which is recorded in SG&A.

Assumptions and judgments: Certain actuarial assumptions used in developing the pension and post-retirement accounting estimates include expected long-term rate of return on plan assets, discount rates, projected health care cost trend rates, cost of living adjustments, and mortality rates. We believe discount rates and expected return on assets are the most critical assumptions. The discount rates used to measure plan liabilities as of the measurement date are determined individually for each plan. The discount rates are determined by matching the projected cash flows used to determine the plan liabilities to the projected yield curve of high-quality corporate bonds available at the measurement date.

In developing future long-term return expectations for our benefit plans’ assets, we formulate views on the future economic environment. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields, and spreads. We also consider expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Net periodic benefit costs, including service cost, interest cost, and expected return on assets, are determined using assumptions regarding the benefit obligation and the fair value of plan assets as of the beginning of each fiscal year.

Holding all other factors constant, a decrease in the discount rate by 0.25% would have increased the projected benefit obligation at May 31, 2026, by approximately $2.8 million. Also, holding all other factors constant, a decrease in the expected long-term rate of return on plan assets by 0.25% would have increased fiscal 2026 pension expense by approximately $0.2 million.

See “Note 13 – Employee Retirement Plans” for further information.

Business Combinations

Critical estimate: We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires significant judgments and estimates and the use of valuation techniques when market value is not readily available. For the valuation of intangible assets acquired in a business combination, we typically use an income approach. The purchase price allocated to the intangible assets is based on unobservable assumptions, inputs and estimates, including but not limited to, forecasted revenue growth rates, projected expenses, discount rates, customer attrition rates, royalty rates, and useful lives.

Assumptions and judgments: Significant assumptions, which vary by the class of asset or liability, are forward-looking and could be affected by future economic and market conditions. We engage third-party valuation specialists who review our critical assumptions and prepare the calculation of the fair value of acquired intangible assets in connection with significant business combinations. The excess of the purchase price over the fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

During fiscal 2026, Tempel completed the acquisition of a 52% ownership interest in Sitem Group. The preliminary purchase price allocation required significant estimates and assumptions related to the valuation of acquired tangible assets, identifiable intangible assets, right-of-use assets and lease liabilities, deferred taxes, pension and other postretirement obligations, debt, redeemable noncontrolling interests and residual goodwill. The identifiable intangible assets acquired included customer relationships, technological know-how, a favorable right-of-use lease asset and software. The valuation of these assets required management to estimate, among other items, forecasted revenue growth, customer attrition, operating margins, royalty rates, replacement cost, discount rates and useful lives. During fiscal 2026, we finalized the valuation of the assets acquired and liabilities assumed and recognized certain net financial position adjustments and tax-related measurement period adjustments resulting from changes in the underlying calculations.

On June 3, 2026, subsequent to fiscal 2026, we completed the acquisition of a majority interest in Kloeckner. Because the acquisition closed after May 31, 2026, the related acquisition accounting did not affect our fiscal 2026 consolidated balance sheet. However, the acquisition is expected to require significant estimates in future periods, including the identification and valuation of acquired assets and assumed liabilities, fair value measurement of any previously held equity interests, identifiable intangible assets, deferred taxes, debt and financing arrangements, noncontrolling interests and goodwill.

See “Note 2 – Acquisitions” and “Note 21 – Subsequent Events” for further information.

Redeemable noncontrolling interest

Critical estimate: Redeemable noncontrolling interests are initially recorded at their issuance-date, or acquisition date, fair value. After initial measurement, redeemable noncontrolling interests that are currently redeemable, or probable of becoming redeemable, are adjusted to the greater of (i) current redemption value or (ii) carrying amount. Any remeasurement of the redeemable noncontrolling interest is accounted for as a deemed dividend of redeemable noncontrolling interest and recorded as an adjustment to retained earnings, which also reduces earnings available to common shareholders for the calculation of earnings per common share.

Assumptions and judgments: The determination of whether redemption is probable requires significant judgment, including evaluating contractual terms, market conditions, and the intent of minority holders. If redemption becomes probable, the carrying amount is adjusted to redemption value, which could increase volatility in retained earnings and additional paid-in capital in future periods. The redemption value is updated at least annually based on a third-party valuation. For interim periods, we update the valuation on a roll-forward approach unless events or circumstances indicate that a material change has occurred, in which case a reassessment is performed.

During fiscal 2026, in connection with the Sitem Group acquisition, we entered into arrangements with certain minority interest holders that provide redemption rights that could require us to purchase the minority holders’ remaining interests upon the occurrence of specified events. As the redemption features are not solely within our control, the related interests are classified outside permanent equity as redeemable noncontrolling interests.

The redemption value is based on specified financial metrics and valuation assumptions. The estimate may be affected by changes in Sitem Group’s actual or forecasted earnings, working capital, debt, applicable valuation multiples, foreign currency exchange rates, discount rates and other market participant assumptions. Changes in the estimated redemption value are recorded as adjustments to retained earnings, or in the absence of retained earnings, additional paid-in capital, and may reduce earnings available to common shareholders for purposes of earnings per share.

See “Note 2 – Acquisitions” and “Note 11 – Equity and Mezzanine Equity” for further information.