Worthington Steel, Inc.

Results of Operations

Fiscal 2026 Compared to Fiscal 2025

The tables throughout this section present, on a comparative basis, our results of operations for the past two fiscal years.

Net sales in fiscal 2026 were $3,443.8 million, an increase of $350.5 million, or 11%, compared to fiscal 2025. The increase was driven primarily by higher direct volumes, including the $165.7 million impact of the addition of Sitem Group and, to a lesser extent, higher average direct selling prices. Direct tons sold increased 6%, with legacy business increasing 5% and the remaining increase due to the addition of Sitem Group. Direct selling prices, excluding the impact of Sitem Group, increased 3% in fiscal 2026 compared to fiscal 2025. Toll processing net sales decreased 20% in fiscal 2026 compared to 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 as they required less outside processing to meet their production requirements. Toll selling prices increased 1% in fiscal 2026 compared to fiscal 2025. The mix of direct versus toll volumes was 64% to 36% in fiscal 2026, compared to 57% to 43% in fiscal 2025.

Gross Margin

Gross margin in fiscal 2026 was $403.3 million, an increase of $14.7 million, compared to fiscal 2025. The increase was primarily driven by higher direct spreads, and to a lesser extent, a $2.0 million favorable impact from Sitem Group, which was partially offset by lower toll spreads. Direct spreads increased by $49.0 million, primarily due to the $32.2 million impact of higher direct volume, as well as a $25.6 million change from $10.4 million in estimated inventory holding losses in fiscal 2025 compared to estimated holding gains of $15.2 million in fiscal 2026. These gains in direct spreads were partially offset by an $8.8 million unfavorable impact due to value-added market spread compression compared to the prior year. Toll spreads, down $30.6 million, were negatively impacted by $24.9 million due to lower volumes and $5.7 million due to an unfavorable change in toll price, primarily due to mix.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) in fiscal 2026 was $297.4 million, an increase of $65.8 million compared to fiscal 2025. The increase in SG&A expense included $19.0 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 closing of the Sitem Group acquisition. Professional and other fees increased $29.4 million in fiscal 2026 compared to fiscal 2025, excluding Sitem Group expenses, primarily attributable to $35.8 million of professional and other fees related to the Kloeckner Acquisition. Additionally, compared to fiscal 2025, compensation expense increased by $10.8 million, including a $3.8 million increase in incentive compensation.

Other Operating Items

Impairment of goodwill and long-lived assets in fiscal 2026 was driven by:

•

A pre-tax goodwill impairment charge of $53.8 million on goodwill and a pre-tax long-lived asset impairment charge of $58.4 million recorded in the fourth quarter of fiscal 2026 within the Electrical Steel reporting unit whose carrying amounts exceeded their estimated fair values. The impairments resulted from 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.

•

A pre-tax long-lived asset impairment charge of $1.5 million was recorded during the third quarter of fiscal 2026 related to certain internal-use software assets at Tempel Canada determined to have no value.

•

A pre-tax long-lived asset impairment charge of $0.6 million on certain machinery at our manufacturing facility in Taylor, Michigan.

Impairment of goodwill, long-lived assets, and other assets in fiscal 2025 was driven by:

•

Pre-tax impairment charges of $7.4 million were recorded during the third quarter of fiscal 2025. Due to the announced plans to combine WSCP’s Cleveland, Ohio toll processing manufacturing facility into its existing manufacturing facility in Twinsburg, Ohio, we recognized a $6.1 million pre-tax impairment charge on the disposal group assets. Additionally, we recognized a $1.3 million pre-tax impairment charge related to an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired.

Refer to “Note 5 – Goodwill, Long-Lived Assets, and Other Assets” for more information.

Restructuring and other (income) expense, net in fiscal 2026, was driven by the sale of substantially all remaining net assets of WSCP’s Cleveland toll processing manufacturing facility, which had been reported within assets held for sale in connection with the previously announced plan to consolidate operations into our Twinsburg, Ohio facility. These transactions resulted in pre-tax gains of $6.0 million and included finance lease assets, buildings and improvements, and machinery and equipment. Additionally, in fiscal 2026, we recorded a $1.0 million gain on the sale of an asset previously classified as held for sale.

Restructuring and other (income) expense, net in fiscal 2025 was driven by the $1.8 million of severance expense associated with a TWB voluntary retirement program (“VRP”), which is expected to accelerate the normal retirement attrition process and result in future cost savings. Additionally, in connection with the consolidation and closure of WSCP’s remaining Cleveland, Ohio toll processing manufacturing facility, we recognized $0.8 million in severance expense during fiscal 2025. Refer to “Note 6 – Restructuring and Other (Income) Expense, Net” for additional information.

Miscellaneous Income, Net

Miscellaneous income, net in fiscal 2026 was $16.6 million, an increase of $12.8 million compared to fiscal 2025. The increase was primarily due to:

•

Net investment income of $17.4 million related to our investment in Kloeckner equity securities, consisting of mark-to-market gains, dividend income, and other costs, recorded in miscellaneous income, net.

•

A $1.4 million gain recognized in the fourth quarter of fiscal 2026, primarily associated with a pension curtailment resulting from headcount reductions.

•

As a result of rulings in one of the jurisdictions in which Tempel operates, there was a $4.6 million increase in miscellaneous income, net, from fiscal 2025 to fiscal 2026. During fiscal 2025, there was $4.6 million of expense as a result of the recognition of tax indemnity payables associated with a final tax year favorable ruling and associated interest charge true-up due to an indemnification agreement with the former owners of Tempel.

The increases were partially offset by:

•

In fiscal 2026, we recognized a $2.4 million pre-tax mark-to-market loss on the economic (non-designated) cash flow derivative that was entered to hedge a portion of the expected purchase price of the outstanding shares of Kloeckner in connection with the Kloeckner Acquisition.

•

In fiscal 2025, we recognized a $4.0 million pre-tax mark-to-market gain on the economic (non-designated) cash flow derivative that was entered to hedge the purchase price for Sitem Group.

•

In fiscal 2025, the annuitization of a portion of the total projected benefit obligation of the inactive Tempel Steel Pension Plan resulted in a pre-tax, non-cash settlement gain of $2.7 million to accelerate a portion of deferred pension cost.

•

In fiscal 2025, we recognized a pre-tax gain of $1.5 million related to the sale of unused land in China.

Interest Expense, Net

Interest expense, net in fiscal 2026 was $28.4 million, an increase of $21.3 million compared to fiscal 2025. The increase was primarily due to $17.8 million of fees and costs associated with temporary financing arrangements entered into in connection with the Kloeckner Acquisition, including bridge financing commitment fees, related lender fees, and other financing costs. These costs primarily include amounts initially deferred during the period and subsequently recognized in interest expense, net, when the related bridge financing was no longer applicable, which was determined at the end of fiscal 2026. Additionally, interest related to Sitem Group debt, approximately $1.8 million, higher interest expense on the Credit Facility (due to higher average debt levels offset by lower average interest rates), and higher debt levels on the BDC loan contributed to the increase in fiscal 2026. These increases were offset by higher interest income, including the interest income from the net investment hedge. Refer to “Note 9 – Debt” for additional information.

Equity Income

Equity earnings at Serviacero Worthington in fiscal 2026 were $20.3 million, an increase of $15.9 million compared to fiscal 2025. The increase was due to higher direct spreads, including inventory holding gains, and favorable foreign currency exchange rate impacts during fiscal 2026. The increase was partially offset by lower volumes. We received cash distributions of $23.5 million from Serviacero Worthington during fiscal 2026 as compared to $12.8 million during fiscal 2025. Refer to “Note 4 – Investments” for additional information.

Income Taxes

Income tax expense in fiscal 2026 was $20.0 million, a decrease of $8.8 million from fiscal 2025. The decrease was due to lower pre-tax earnings and the tax impact of Tempel impairments in fiscal 2026, partially offset by the absence of a benefit recognized in fiscal 2025 related to 2008 and 2009 court rulings at Tempel Mexico and an increase in uncertain tax position reserves in fiscal 2026. Fiscal 2026 income tax expense reflected an estimated annual effective income tax rate (“ETR”) of 282.7% compared to 20.6% in fiscal 2025. Refer to “Note 14 – Income Taxes” for additional information.

Adjusted EBIT

We evaluate operating performance on the basis of adjusted earnings before interest and taxes (“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 of goodwill and long-lived assets 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 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. Non-cash impairment charges in fiscal 2026 were driven by: (1) pre-tax long-lived asset impairment charges of $58.4 million, of which $19.6 million was attributable to noncontrolling interest, related to certain asset groups within the Electrical Steel reporting unit; (2) a pre-tax goodwill impairment charge of $53.8 million, of which $9.5 million was attributable to noncontrolling interest, that fully impaired the goodwill assigned to the Electrical Steel reporting unit; (3) $0.6 million on certain machinery at our manufacturing facility in Taylor, Michigan; and (4) $1.5 million related to internal-use software module assets that were determined to have no value and written down to zero. Non-cash impairment charges in fiscal 2025 were due to (1) $1.3 million for an indefinite-lived in-process research and development intangible asset that was determined to be fully impaired and (2) $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. Refer to “Note 5 – Goodwill, Long-Lived Assets, and Other Assets”.

(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 fiscal 2025, we announced plans to combine WSCP’s Cleveland toll processing manufacturing facility into WSCP’s existing manufacturing facility in Twinsburg, Ohio. In fiscal 2026, 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, of which $2.6 million was attributable to noncontrolling interest, and included finance lease assets and buildings and improvements, net, and machinery and equipment. In fiscal 2025, TWB announced a VRP. In connection with the VRP, we recognized $1.0 million in severance expenses during fiscal 2025, which is recorded in restructuring and other (income) expense, net and excludes the noncontrolling interest portion of restructuring and other (income) expense, net of $0.8 million. Additionally, in connection with the consolidation and closure of WSCP’s remaining Cleveland, Ohio toll processing manufacturing facility, we recognized $0.5 million in severance expense during fiscal 2025, which is recorded in restructuring and other (income) expense, net, and excludes the noncontrolling interest portion of restructuring and other (income) expense, net of $0.3 million. Refer to “Note 6 – Restructuring and Other (Income) Expense, Net” for additional information.

(3)

Kloeckner purchase derivative represents 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 shares of Kloeckner in connection with the Kloeckner 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 our operating performance as it reflects non-operational activity.

(4)

Kloeckner acquisition-related expenses consists of the acquisition-related costs incurred in connection with the Kloeckner Acquisition, consisting primarily of advisory, legal, accounting, valuation, regulatory and other professional fees, as well as certain integration expenses, and are expensed to SG&A, as incurred, in accordance with GAAP. 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 assessment of performance excluding the impact of transaction-specific activities.

(5)

Kloeckner securities investment income, net reflects the impact associated with our investment in Kloeckner equity securities, consisting of mark-to-market gains, dividend income, and other costs, recorded in miscellaneous income, net. Management excludes these items from adjusted results to improve comparability of our operating performance across periods.

(6)

Pension adjustments relate to pension-related impacts associated with discrete events impacting our pension plans, reported in miscellaneous income, net, including a $1.4 million gain, of which $0.7 million was attributable to noncontrolling interest, recognized in fiscal 2026, primarily associated with a pension curtailment resulting from headcount reductions. The fiscal 2025 gain related to a settlement resulting from a pension lift-out transaction to transfer a portion of the total projected benefit obligation of the pension plan to a third-party insurance company. The exclusion from adjusted results facilitates period-to-period comparability of our operating performance as these gains reflect discrete pension-related events.

(7)

Sitem Group acquisition completion bonus payment consists of the one-time bonus payment paid to key individuals upon the successful acquisition closing of Sitem Group and excludes the noncontrolling interest portion of $1.6 million. The acquisition completion bonus payment was included within SG&A expense.

(8)

Gain on Sitem Group purchase derivative consists of the mark-to-market gain on the economic (non-designated) foreign currency exchange contract entered into related to the purchase price for Sitem Group, which resulted in a pre-tax gain in miscellaneous income, net, and is excluded as it is not part of our ongoing operations.

(9)

Tax indemnification adjustments reported in miscellaneous income, net, related to an indemnification agreement with the former owners of Tempel. These adjustments are the result of a fiscal 2025 favorable tax ruling and an interest charge true-up. 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.

(10)

Gain on land sale reflects the sale of unused land on the campus of Tempel China, which resulted in a pre-tax gain reported in miscellaneous income, 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.

(11)

Other loss, net, reflects the following fiscal 2026 items reported in miscellaneous income, net, which are excluded as they are not part of ongoing operations:

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.

Adjusted EBIT in fiscal 2026 was $161.1 million, an increase of $12.0 million compared to fiscal 2025. The increase was primarily due to a $15.9 million increase in equity earnings at Serviacero Worthington, a $14.7 million increase in gross margin and a $6.5 million reduction in earnings attributable to noncontrolling interests, primarily due to losses associated with Sitem Group. The increase was partially offset by the adjusted increase in SG&A of $25.4 million, including the $14.4 million impact of Sitem Group, compared to fiscal 2025.

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, have 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 a loss becomes probable and reasonably estimable.