Worthington Steel, Inc.

The metals processing and service center industry is fragmented and highly competitive. Given the broad base of products and services we offer following the Kloeckner Acquisition, specific competitors vary based on the end market, product and service offering, geography, and customer requirements. Competition is primarily on the basis of price, product quality, value-added capabilities, service, and the ability to meet delivery requirements. Our pricing is affected by, among other factors, metals prices, the cost and availability of raw materials, transportation and shipping costs, foreign currency exchange rates, and general economic conditions in the markets in which we operate.

General Economic and Market Conditions

We sell our products and services to a diversified customer base across a broad range of end markets. Historically, sales of our legacy Worthington Steel operations have generally been strongest in our fiscal fourth quarter and weaker in our fiscal third quarter due principally to seasonal construction activity and customer plant shutdowns. The Kloeckner Acquisition materially changed our end-market composition, and, accordingly, the historical seasonality of our legacy Worthington Steel operations may not be indicative of the seasonality of our consolidated results. We do not believe backlog is a significant indicator of our business.

We use the following information to monitor our costs and demand in our major end markets:

(1)

Fiscal 2026 figures are based on revised actuals

(2)

CRU Hot-Rolled Coil (“HRC”) Index: period average

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S&P Global

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LME Zinc; period average

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NYMEX Henry Hub Natural Gas; period average

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Energy Information Administration; period average

Total volume (tons) from continuing operations increased by 109% compared to the prior year quarter. Excluding the impact of Kloeckner, direct tons sold increased by 3%.

The Kloeckner Acquisition significantly expanded our customer base and end-market exposure and, as a result, materially changed the composition of our consolidated net sales compared with the prior-year period. The breakdown of net sales by end market for the periods presented is illustrated below:

The change in our end-market mix compared with the prior-year period reflects, among other factors, the inclusion of Kloeckner beginning after the acquisition. Accordingly, the percentages presented for the three months ended August 31, 2026 are not directly comparable to the prior-year period.

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.

Automotive remains an important end market for our overall operations. As illustrated, Kloeckner has significant exposure to other end markets, which results in the overall diversification of the end markets as illustrated. However, Kloeckner maintains a healthy exposure to the automotive end market, particularly in North America. As a result, North American vehicle production, including production at the Detroit Three Automakers, continues to be an important indicator for our operations.

North American vehicle production and Detroit Three Automakers vehicle production both decreased 1% in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026. Excluding the impact of Kloeckner, direct shipments to the overall automotive market and to the Detroit Three Automakers increased by 4% and 1%, respectively, in the first quarter of fiscal 2027 as compared to the first quarter of fiscal 2026. Toll volumes decreased 8% in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026. The decrease in toll volumes was due to continued soft demand from mill customers.

Detroit Three Automakers represented 15% and 35% of our consolidated net sales during the first quarter of fiscal 2027 and fiscal 2026, respectively. Direct shipments to the Detroit Three Automakers in the first quarter of fiscal 2027 increased approximately 1%, compared to the first quarter of fiscal 2026. Over the same time period, Detroit Three Automakers reported a 1% decrease in production. Our automotive volume reflects resilient demand and our continued success in winning business.

The Kloeckner Acquisition substantially broadened our exposure to non-automotive end markets, while expanding our geographic footprint across the Americas, particularly in the southern U.S., and Europe. Our remaining net sales are to other markets such as agricultural, appliance & consumer goods, 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”) and, to a lesser extent, Eurozone gross domestic product growth (“Eurozone GDP”) are reasonable macroeconomic indicators for analyzing the demand of our end markets other than the automotive industry.

Recent U.S. GDP data indicates continued economic resilience through the first quarter of fiscal 2027 although recent U.S. labor market indicators have become more mixed since the end of the first quarter. Eurozone GDP also demonstrated positive growth, including greater than expected growth. While overall economic activity has remained resilient, continued uncertainty, including geopolitical developments and rising energy prices, contributed to elevated inflation and uneven demand conditions across industrial sectors.

Excluding the impact of Kloeckner, Construction direct volumes decreased 9%, whereas Machinery & Equipment direct volumes increased 28% in the first quarter of fiscal 2027 compared to the first quarter of fiscal 2026. The decrease in Construction was primarily due to increased competition and tight steel availability, which limited our ability to quote short-term contract business that more than offset data center construction demand. The increase in Machinery & Equipment was primarily due to an increase in the level of shipments out of Sitem Group, which due to the one-month reporting lag, was included in our consolidated results for an additional month during this quarter. On a quarterly basis, this increase would only be expected to occur during this reporting period.

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 maintained the benchmark interest rate during the first quarter of fiscal 2027; however, in September 2026, subsequent to the end of the first quarter of fiscal 2027, the U.S. Federal Reserve raised the benchmark federal funds rate by 25 basis points to a target rate of 3.75% to 4.00%. Similarly, the European Central Bank (“ECB”), maintained a similar view on inflation with its targeted rate of 2%. In June 2026, the ECB increased its three key ECB interest rates, and then did so again in September 2026, subsequent to the end of the first quarter of fiscal 2027.

Both the U.S. Federal Reserve and the ECB increases were in response to the elevated inflation that has been running above the targeted rates for an extended period of time. Our debt profile has transformed as a result of the Kloeckner Acquisition, including new debt to finance the acquisition as well as indebtedness assumed as part of 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. With the increase in the benchmark interest rate, we will see an increased burden from higher borrowing costs on the variable rate debt to the extent we have outstanding borrowings on those instruments.

Industry Developments

Trade policy continues to have a significant effect on the metals industry, including metals pricing, import levels, sourcing decisions and customer demand. In June 2025, the U.S. government increased tariffs on most steel and aluminum imports to 50% under Section 232 of the Trade Expansion Act of 1962 (“Section 232”). During calendar year 2026, the U.S. government further modified the application of Section 232 tariffs, including changes to the valuation and tariff treatment of certain steel, aluminum and derivative products. These trade policy decisions may have contributed to reduced import competition and tighter supply conditions for certain metals in the U.S., which have contributed to increases in certain domestic metals prices. 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. Tariffs can increase the cost of imported metals and metal products, affect customer sourcing and purchasing decisions and contribute to volatility in metals prices and supply chains. The impact varies depending on the products we purchase and sell, their country of origin, the markets in which we operate and our ability to reflect changes in material costs in customer pricing.

As a result, our customers’ supply chain decisions may abruptly shift, potentially impacting our financial performance. Evidence collected by the U.S. government suggests that imports of steel decreased meaningfully year-over-year, but have stabilized in recent months. U.S. Department of Commerce data, which contains preliminary data, reflects the average import tonnage of U.S. import of flat (carbon and alloy) steel mill products decreased approximately 20% in the trailing 12 month ended August 31, 2026, compared to trailing 12 month ended August 31, 2025, whereas the average increased approximately 4% in the first quarter of fiscal 2027 compared to the first quarter of 2026.

After the Kloeckner Acquisition, developments in European trade policy have also become more relevant to our business, including the European Union’s steel import measures that may affect steel availability, sourcing patterns and pricing in certain European markets.

While lower imports of steel may put upward pressure on U.S. 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.

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, including, but not limited to, supply and demand, trade policy, raw material and energy costs, and geopolitical developments. 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.

After the Kloeckner Acquisition, we purchase and maintain inventories of a broader range of steel and other metal products. However, the HRC continues to be the most significant driver of our raw material costs and selling prices. 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 first quarter of fiscal 2027, steel prices continued their upward rise that began during the second half of fiscal 2026. Excluding the impact of Kloeckner, direct spreads increased by $13.9 million primarily due to higher direct volumes, and to a lesser extent, a $6.5 million favorable change 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. With the recent upward steel price movements, we expect inventory holding gains to be between $10.0 million and $15.0 million in the second quarter of fiscal 2027.

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:

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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.