Worthington Steel, Inc.

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

Net sales for the first quarter of fiscal 2027 were $2,726.6 million, an increase of $1,853.7 million, or 212%, compared to the first quarter of fiscal 2026. The Kloeckner Acquisition contributed $1,772.7 million to net sales in the first quarter of fiscal 2027.

Excluding the impact of Kloeckner, net sales increased $81.0 million or 9% compared to the prior year quarter. This $81.0 million increase was driven primarily by higher direct volumes, and, to a lesser extent, higher average direct selling prices. Direct net sales increased $81.7 million. Direct tons sold increased by 3% and direct selling prices increased 6% in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026. Toll processing net sales decreased $0.7 million, or 2%, in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026. Toll volumes decreased 8% and toll selling prices increased 6% in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026.

The consolidated mix of direct versus toll volumes was 77% to 23% in the first quarter of fiscal 2027 compared to 63% to 37% in the first quarter of fiscal 2026.

Gross Margin

Gross margin in the first quarter of fiscal 2027 was $261.2 million, an increase of $146.0 million compared to the first quarter of fiscal 2026.

Excluding the impact of Kloeckner, gross margin increased $2.0 million compared to the prior year quarter. The increase was primarily driven by higher direct spreads (calculated as sales less material costs), partially offset by higher manufacturing expenses and lower toll spreads. Direct spreads increased by $13.9 million primarily due to the $7.6 million impact of higher direct volumes and a $6.5 million favorable change, which resulted from an estimated $5.6 million inventory holding gain in the prior year quarter to an estimated $12.1 million inventory holding gain in the first quarter of fiscal 2027. The gains in direct spreads were partially offset by $0.2 million due to value-added market spread compression compared to the prior year quarter. Toll spreads decreased $0.9 million. Manufacturing expenses increased $11.1 million, primarily related to increased wages and benefits.

Selling, General and Administrative Expense

SG&A in the first quarter of fiscal 2027 was $208.8 million, an increase of $140.9 million compared to the first quarter of fiscal 2026.

Excluding the impact of Kloeckner, SG&A increased by $17.6 million. The $17.6 million increase in SG&A was primarily attributable to an increase of $18.6 million in professional fees related to the Kloeckner Acquisition.

In the first quarter of fiscal 2026, SG&A included a one-time bonus of $4.6 million paid to key individuals at the Sitem Group as a result of the successful closing of the Sitem Group acquisition.

Other Operating Items

Restructuring and other income, net in the first quarter of fiscal 2027 was driven by:

•

The aggregate gains on the sales of Kloeckner fixed assets in Louisiana and Switzerland that were sold subsequent to the Kloeckner Acquisition and related to various pre-acquisition restructuring programs, partially offset by additional restructuring costs resulted in net restructuring income of $3.6 million.

Restructuring and other income, net in the first quarter of fiscal 2026 was driven by:

•

A $1.0 million gain on the sale of an asset that was reported within assets held for sale due to the previously announced plans to combine WSCP’s toll processing manufacturing facility in Cleveland, Ohio, into its existing manufacturing facility in Twinsburg, Ohio.

Refer to “Note 5 – Restructuring and Other (Income) Expense, Net” for additional information.

Miscellaneous Income (Expense), Net

Miscellaneous expense, net in the first quarter of fiscal 2027 was $10.5 million, an unfavorable change of $10.7 million compared to the miscellaneous income, net of $0.2 million in the first quarter of fiscal 2026. The change was primarily due to:

•

Immediately prior to the Acquisition Date, the previously held Kloeckner shares were accounted for as an equity security investment. We remeasured this previously held equity interest to fair value as of the acquisition date, resulting in a loss of $15.5 million for the first quarter of fiscal 2027.

•

We incurred $2.8 million of expense related to the Company’s fair value hedge of foreign currency risk on a Euro-denominated loan, reflecting losses from changes in the fair value of the cross-currency swap and foreign currency remeasurement of the hedged portion of the loan.

•

The addition of Kloeckner during the first quarter of fiscal 2027 resulted in incremental foreign currency remeasurement loss of $2.0 million.

•

We recognized a $0.9 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.

The decreases were partially offset by:

•

A $1.2 million gain recognized in the first quarter of fiscal 2027, primarily associated with a pension curtailment resulting from headcount reductions.

•

In connection with the acquisition of Kloeckner, we assumed various defined benefit pensions plans. On a consolidated basis, excluding the pension curtailment, we recognized $5.3 million in net periodic pension and other postretirement benefit income within miscellaneous income (expense) in the first quarter of fiscal 2027.

•

The addition of Kloeckner during the first quarter of fiscal 2027 resulted in incremental miscellaneous income of $3.6 million, including from incremental income from the Kloeckner Funds.

Interest Expense, Net

Interest expense, net in the first quarter of fiscal 2027 was $38.8 million, an increase of $35.9 million from the prior year quarter. Our debt profile changed materially as a result of the Kloeckner Acquisition, including new debt incurred to finance the acquisition and indebtedness assumed in the acquisition. As a result, our overall borrowing costs have substantially increased from the prior year period. Our new debt profile contains a mix of fixed and variable rate debt. For additional information, see “Liquidity and Capital Resources” and “Note 8 – Debt.”

The increase was primarily due to interest expense on the 2033 Senior Notes and the Term Loan Facility entered into in the first quarter of fiscal 2027, and the interest expense on the Kloeckner debt instruments assumed as part of the acquisition. Due to the Kloeckner Acquisition, we entered into the 2031 Revolving Credit Facility and terminated the 2028 Revolving Credit Facility. In the first quarter of fiscal 2027, as a result of the termination, the remaining costs of the 2028 Revolving Credit Facility that were initially deferred were recognized in interest expense, net. Interest expense, net, also increased, to a lesser extent, due to a higher average debt balance on the BDC Loan during the first quarter of fiscal 2027 compared to the prior year quarter.

These increases were offset by higher interest income, including from interest income from excess cash held prior to the settlement of the Delisting Tender Offer, and to a lesser extent, the interest income from the net investment hedges. For additional information, see “Liquidity and Capital Resources,” “Note 8 – Debt,” and “Note 14 – Derivative Financial Instruments and Hedging Activities.”

Equity Income

Equity income at Serviacero Worthington decreased $1.1 million from the prior year quarter, driven primarily by lower volumes and unfavorable foreign currency exchange impacts. The decrease was partially offset by favorable market spread expansion, including inventory holding gains.

Income Taxes

Income tax expense was $12.1 million in the first quarter of fiscal 2027 compared to $13.4 million in the prior year quarter. The decrease in income tax expense was primarily driven by lower pre-tax earnings in the current quarter, partially offset by tax effects associated with the acquisition of Kloeckner. The income tax expense in the current quarter resulted in an ETR of 100.7%, compared to 26.6% for the prior year quarter. Refer to “Note 11 – Income Taxes” for additional information.

Adjusted EBIT and Adjusted EBITDA

We evaluate operating performance on the basis of earnings before interest and taxes (“EBIT”), as adjusted for certain items (“adjusted EBIT”) and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”). EBIT, a non-GAAP financial measure, is calculated by adding interest expense and income tax expense to net earnings (loss) from continuing operations 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 EBITDA, a non-GAAP financial measure, is calculated by adding depreciation and amortization expense to adjusted EBIT. Adjustments attributable to noncontrolling interests are added back from adjusted EBIT to reflect the consolidated results.

Adjusted EBIT and adjusted EBITDA are used by management to evaluate operating performance and engage in financial and operational planning because we believe these financial measures provide 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 (loss) from continuing operations attributable to controlling interest (the most comparable GAAP financial measure) to adjusted EBIT for the periods presented:

(1)

Amount includes both controlling and noncontrolling interests’ portions for this adjustment.

(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. Restructuring activities in first quarter of fiscal 2027 were driven by: aggregate gains on the sales of Kloeckner fixed assets in Louisiana and Switzerland that were sold subsequent to the Kloeckner Acquisition that were part of various pre-acquisition restructuring programs as well as additional costs that partially offset the gains, which equaled $3.6 million, of which $1.0 million was attributable to noncontrolling interests. Restructuring activities in first quarter of fiscal 2026 were driven by: a $1.0 million gain, of which $0.4 million was attributable to noncontrolling interests, on the sale of an asset that was reported within assets held for sale due to the previously announced plans to combine WSCP’s toll processing manufacturing facility in Cleveland, Ohio, into its existing manufacturing facility in Twinsburg, Ohio. Refer to “Note 5 – Restructuring and Other (Income) Expense, Net.”

(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 consist 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. The first quarter of fiscal 2027 includes $0.3 million attributable to noncontrolling interests.

(5)

Kloeckner securities investment income (loss), net reflects the impact associated with our investment in Kloeckner equity securities, consisting of mark-to-market gains/losses, dividend income from the holding of Kloeckner equity securities prior to the closing of the Kloeckner Acquisition, impacts of previously held equity interests as a result of the Kloeckner Acquisition, and other costs, recorded in miscellaneous income (expense), net. Management excludes these items from adjusted results to improve comparability of the Company’s operating performance across periods. During the first quarter of fiscal 2027, as a result of the closing of the Kloeckner Acquisition, we remeasured the previously held equity interest in Kloeckner equity securities to €11.00 per share, resulting in a remeasurement loss of $15.5 million.

(6)

Pension adjustments relate to pension-related impacts associated with discrete events impacting our pension plans, reported in miscellaneous income, net, including a $1.2 million gain, of which $0.6 million was attributable to noncontrolling interest, recognized in the first quarter of fiscal 2027, associated with a pension curtailment resulting from headcount reductions. 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)

Amount represents the total, aggregated amount of the noncontrolling interests’ portions of items noted above

Adjusted EBIT in the first quarter of fiscal 2027 was $78.5 million, up $23.0 million compared to the first quarter of fiscal 2026. The increase was primarily due to the contribution of Kloeckner of $27.9 million. Excluding the contribution of Kloeckner, adjusted EBIT decreased $4.9 million, primarily as a $2.8 million wage-related increase in SG&A, a $2.3 million increase in miscellaneous expense, primarily related to foreign currency losses and lower equity income from Serviacero Worthington, more than offset the $2.0 million increase in gross margin.

Adjusted EBITDA in the first quarter of fiscal 2027 was $111.0 million, up $32.2 million compared to the first quarter of fiscal 2026. The increase was primarily due to the contribution of Kloeckner of $36.0 million. The change in adjusted EBITDA was primarily driven by the same factors impacting adjusted EBIT, as well as slightly higher depreciation and amortization expense excluding Kloeckner.

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 loss is reasonably possible and 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 and reasonably estimable.