Quarterly Report for Quarter Ending August 31, 2026 (Form 10-Q)

- Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, all Note references contained in this MD&A refer to the Condensed Notes to Consolidated Financial Statements included in "Part I - Item 1. - Financial Statements" of this Form 10-Q. All amounts are presented in millions except common share and per common share amounts.

Introduction

The following discussion and analysis of market and industry trends, business developments, and the results of our operations and financial position should be read in conjunction with our consolidated financial statements and notes thereto included in "Part I - Item 1. - Financial Statements" of this Form 10-Q. The 2026 Form 10-K includes additional information about our business, operations and consolidated financial position and should be read in conjunction with this Form 10-Q. This MD&A is designed to provide a reader with material information relevant to an assessment of our financial condition and results of operations and to allow investors to view the Company from the perspective of management.

Business Overview

On September 15, 2026, we announced new names for our two operating segments that better reflect the markets they serve, the value they provide to customers and the evolution of our product portfolio. The Building Products segment is now Building Performance Solutions and the Consumer Products segment is now Trade & Specialty Solutions. The changes are to the segment names only and do not affect the composition of the operating segments or our historical financial results. For additional information, see "Note L - Segment Operations."

We are a designer and manufacturer of market-leading products and solutions serving building and specialty applications, organized around attractive end markets under two separate and distinct operating segments: Building Performance Solutions and Trade & Specialty Solutions. Our primary goal is to create value for our shareholders. Built on the successful foundation of the Worthington Business System, we apply a disciplined approach to capital deployment and seek to grow earnings by optimizing our operations and supply chain, developing and commercializing innovative products and applications, and pursuing strategic investments and acquisitions.

Our Building Performance Solutions business delivers essential engineered products that support performance across the building systems and climate and comfort applications. Serving primarily OEMs and distributors, offerings include pressurized containment products for heating, cooling, construction and water applications, HVAC components, metal roofing clips, ceiling suspension systems (Worthington Armstrong Venture) and light gauge metal-framing products (ClarkDietrich).

Our Trade & Specialty Solutions business provides market-leading products used by professional tradespeople and consumers across tools, portable propane and helium, and other specialty categories. Offerings include cutting, siding and roofing tools, drywall, concrete and masonry hand tools, drywall finishing tools, fuel and torches, specialty hand tools and instruments, camping gas cylinders and portable helium tanks. Sales to one customer in Trade & Specialty Solutions accounted for 10.2% of our consolidated net sales in the first quarter of fiscal 2027.

Activity outside of our two operating segments is presented within Other and Unallocated Corporate as described below.

Other includes our share of the equity income of two of our unconsolidated joint ventures, heiserTEC and Workhorse, and the related investments in these businesses.

Unallocated Corporate includes certain assets and liabilities (e.g., cash and cash equivalents and public debt) held at the corporate level as well as general corporate expenses that are not directly attributable to our business operations and are administrative in nature, such as public company and other governance-related costs that benefit the organization as a whole.

Demand Trends

General Economic Conditions

Demand for our products is closely tied to broader macroeconomic conditions and overall consumer and business sentiment. Shifts in inflation, interest rates, disposable income, and construction activity directly influence purchase behavior, capital investment, and distributor inventory management.

During the first quarter of fiscal 2027, we operated in a macroeconomic environment marked by decelerating growth, still-elevated inflation, and cautious consumer sentiment. GDP increased at an annualized rate of 1.5% in the second quarter of calendar 2026, down from 2.1% in the preceding quarter, indicating slower economic growth. The CPI held at 3.4% year over year in August 2026, unchanged from July 2026, and above the 2.9% pace a year earlier, as a renewed rise in gasoline prices tied to geopolitical conflict in the Middle East offset moderation elsewhere. Inflation remained below its most recent peak of 4.2% reached in May 2026 but stayed well above the Federal Reserve's 2% objective. During its September 2026 meeting, the Federal Reserve raised the target range by 25 basis points to a range of 3.75% to 4.00%, its first increase since 2023, citing persistently elevated inflation, and its projections indicated the potential for additional increases before the end of calendar year 2026. The average 30-year fixed mortgage rate remained elevated at 6.66% at the end of August 2026, relatively unchanged from 6.56% a year earlier.

Consumer confidence weakened during the quarter. The Conference Board's Consumer Confidence Index fell to 89.4 in August 2026, its lowest level in seven months and down from 97.4 a year earlier, as elevated prices and gasoline costs weighed on household budgets, even as the labor market held steady with the unemployment rate at 4.1% in August 2026. We believe these dynamics, including persistent affordability pressure, elevated financing costs, and cautious discretionary spending, continued to weigh on both consumer and business sentiment during the first quarter of fiscal 2027. Within Trade & Specialty Solutions, inflation-driven cost consciousness influenced discretionary purchases and contributed to cautious buying patterns, while in Building Performance Solutions elevated financing costs constrained new construction demand. We expect demand across both operating segments to remain uneven in the near term. Other key end market trends are described below in the "End Market Trends" section.

Inventory Demand Cycles

Demand for our products is influenced by the inventory management strategies of our retail and distribution partners. Periods of customer destocking, when our customers reduce their own inventories, can lead to lower order volumes, even when consumer sell-through remains steady. Conversely, customers' restocking can temporarily elevate shipments above underlying end-user demand. As a result, shifts in customers' inventory levels can meaningfully impact our reported revenue and margin performance, particularly in Trade & Specialty Solutions, where a large volume of products flow through big box retailers.

During the first quarter of fiscal 2027, inventory levels at most key retailer and distributor customers within Trade & Specialty Solutions remained aligned with end-consumer demand, and replenishment activity generally mirrored point-of-sale trends, with no material build-up in our distribution or retail channels. However, Building Performance Solutions benefited from a load-in effect that began toward the end of fiscal 2025 and continued through the first nine months of fiscal 2026, driven by federal regulations requiring the use of A2L refrigerants in newly manufactured residential and commercial HVAC systems. As contractors, distributors, and dealers positioned inventory to adjust to the regulatory transition, order volumes were temporarily elevated above underlying demand. While this dynamic provided a near-term tailwind throughout most of fiscal 2026, it began to normalize in the fourth quarter of fiscal 2026, as channel inventories reached desired levels and the transition matured. As new and replacement HVAC systems utilizing A2L refrigerants continue to enter service, we expect the installed base to grow, supporting meaningful long-term opportunities for our business.

End Market Trends

We offer a wide range of products and services to a diverse, primarily domestic, customer base across several end markets, including U.S. residential and non-residential construction and repair/remodel, which collectively drive demand for the Building Performance Solutions segment. These same end markets also drive demand for the trade-focused products within our Trade & Specialty Solutions segment, including professional tools, torches and other contractor-focused products. Demand for the specialty products within Trade & Specialty Solutions, including portable propane and helium products, such as helium-filled balloon kits, is generally driven by the general health of the consumer, including the macroeconomic and geopolitical conditions discussed above.

We actively monitor the following publicly available economic data and select key indicators for our major end markets:

During the current year quarter, conditions across our key end markets remained soft and uneven, although residential construction showed tentative signs of stabilization late in the quarter. Single-family housing starts rebounded 7.6% in August 2026 to a seasonally adjusted annualized rate of 918,000, while total housing starts eased to 1.28 million, down 1.2% from a year earlier, as multifamily activity declined; authorized building permits totaled 1.39 million, up 3.5% year over year, pointing to a modestly firmer forward pipeline. Existing home sales, by contrast, slipped below 4 million for the first time since June 2025, easing 1.2% year over year to a 3.98 million annualized pace in August 2026, as elevated mortgage rates constrained turnover, and the median existing-home price rose to $429,100. Builder sentiment remained depressed, with the HMI at 35 in August 2026, up modestly from 32 a year earlier, but marking the 16th consecutive month below 40. In non-residential construction, the ABI registered 47.2 in August 2026, continuing to hold below the 50 mark that separates expanding from contracting billings, while the DMI stood at 282.0 in August 2026, up 4.2% from a year earlier though down slightly from July, supported by data center, healthcare, and institutional planning even as broader commercial activity stayed soft. Within repair and remodel, the latest LIRA projects year over year growth in homeowner improvement spending to decelerate from approximately 2.1% at mid-2026 to 0.5% by the second quarter of calendar 2027, reflecting flattening remodeling permits and persistently weak housing turnover. We believe near-term demand across our construction-facing end markets will remain constrained by the elevated rate environment, while the strengthening non-residential planning pipeline and the recurring purchase patterns of key product categories within our diversified portfolio may support overall volumes as we progress through fiscal 2027.

Factors Affecting Operating Costs

Raw Materials

Our largest raw material expenditures include cold rolled and hot rolled steel, aluminum, propane, and propylene. Fluctuations in the prices of these inputs have a direct impact on our cost of goods sold and overall financial performance. Our primary raw material and energy inputs are subject to significant price volatility driven by global supply-demand imbalances, tariffs, and other external factors. We manage this risk through a combination of supply contracts, forward purchasing, and selective hedging strategies designed to reduce near-term cost swings and support margin stability.

Steel: Steel is our most significant direct material cost across both Building Performance Solutions and Trade & Specialty Solutions. Steel prices continued the upward trend that began in the second half of fiscal 2026 and rose throughout the first quarter of fiscal 2027. Hot rolled steel prices averaged approximately $1,157 per ton during the first quarter of fiscal 2027, increasing from $1,120 per ton in June 2026 to $1,193 per ton in August 2026, compared to $834 per ton in August 2025. Cold rolled steel prices followed a similar trajectory, averaging $1,369 per ton during the first quarter of fiscal 2027 and increasing to approximately $1,415 per ton in August 2026, compared to $1,050 per ton in August 2025. In addition to higher benchmark prices, domestic steel availability was constrained, particularly for cold rolled steel, where lead times were extended and spot availability was limited. These conditions were most pronounced for highly specified products, for which qualified substitutes were not readily available in the spot market. We continue to work closely with our partners to protect existing supply and secure incremental tons. Our sourcing strategy is intended to mitigate near-term volatility associated with these pricing trends.

Aluminum: During the first quarter of fiscal 2027, aluminum costs were higher than the prior year quarter, reflecting higher global benchmark prices and elevated U.S. Midwest delivery premiums. The Section 232 tariffs on aluminum imports, which increased from 25% to 50% effective June 4, 2025, remained in effect throughout the quarter and continued to support elevated U.S. premiums, which held near the record levels reached earlier in calendar 2026. These costs affected aluminum-intensive components and finished good assemblies. Where possible, we mitigated these increases through strategic purchasing, but tariff-related cost pressure on aluminum is expected to persist through fiscal 2027.

Propane, propylene, and other gases: Propane and propylene costs were generally stable during the first quarter of fiscal 2027, supported by ample domestic supply conditions.

We continue to actively monitor commodity markets and maintain a diversified sourcing strategy to ensure continuity of supply and cost discipline. Our approach to material procurement supports margin stability and helps mitigate the impact of input price volatility on our results.

IEEPA Tariffs

In February 2026, the U.S. Supreme Court ruled that tariffs imposed under IEEPA on goods imported into the U.S. were unauthorized. Following this ruling, and effective on April 20, 2026, the U.S. Customs and Border Protection launched a platform for importers of record to begin IEEPA tariff refund requests, where eligible. Following the ruling, we submitted claims with U.S. Customs and Border Protection seeking refunds for tariffs previously paid. During the current year quarter, we recognized a net benefit of approximately $4.0 million related to these refunds in cost of goods sold and SG&A in our consolidated statements of earnings. Substantially all of our refund claim has been collected as of August 31, 2026.

Seasonality

Net sales in both Building Performance Solutions and Trade & Specialty Solutions tend to be stronger in our third and fourth fiscal quarters. In Building Performance Solutions, this seasonality is generally driven by weather conditions, customer business cycles, and the timing of renovation and new construction projects, while in Trade & Specialty Solutions, it is driven by our facilities performing at seasonal peaks, matching consumer demand.

Results of Operations

The tables throughout this section present, on a comparative basis, our consolidated results of operations for the periods presented. For a discussion of the non-GAAP financial measures presented in the following table, as well as a reconciliation of the differences between each non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP, refer to the "Use of Non-GAAP Financial Measures and Definitions" section preceding Part I, Item 1 of this Form 10-Q.

Net Sales

The following table provides a breakdown of our consolidated net sales by operating segment for the periods indicated:

Gross Profit

Gross profit for the current year quarter increased $8.6 million, or 10.4%, over the prior year quarter to $90.9 million, primarily driven by the net benefit of IEEPA tariff refunds and higher net sales, partially offset by higher conversion costs, primarily in the cooling and construction business within Building Performance Solutions.

SG&A

SG&A increased $6.6 million, or 9.3%, from the prior year quarter, due primarily to the addition of LSI. As a percentage of net sales, SG&A was down from 23.2% in the prior year quarter to 22.4%.

Restructuring and Other Expense, Net

Restructuring and other expense, net in both periods consisted primarily of employee severance and transaction costs related to acquisitions and divestitures.

Other Non-Operating Items

Miscellaneous income in the current year quarter was driven by a pre-tax gain of $4.0 million related to an earnout arrangement associated with the sale of our former oil and gas products business, which was divested in January 2021.

Interest expense, net increased $2.0 million in the current year quarter primarily due to lower interest income generated from cash on hand.

Equity Income

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Equity income increased $3.9 million over the prior year quarter to $40.6 million, driven by higher contributions from WAVE and ClarkDietrich, up $2.7 million and $1.5 million, respectively.

Income Tax Expense

Income tax expense was $13.0 million in the current year quarter compared to $10.9 million in the prior year quarter. The increase was primarily driven by higher pre-tax earnings.

Adjusted EBITDA

The following table provides a summary of adjusted EBITDA, a non-GAAP financial measure, by reportable operating segment and on a consolidated basis, along with the respective percentage of net sales for each reportable operating segment and on a consolidated basis. See the "Use of Non-GAAP Financial Measures and Definitions" section preceding Part I, Item 1 of this Form 10-Q for additional information regarding our use of non-GAAP financial measures. A reconciliation from earnings before income taxes to adjusted EBITDA is provided in "Note L - Segment Operations."

Liquidity and Capital Resources

During the current year quarter, we generated $66.7 million of cash from operating activities, invested $12.8 million in property, plant and equipment, paid $18.2 million to repurchase 335,000 common shares, and paid dividends of $9.4 million on the common shares.

The following table summarizes our consolidated cash flows for the periods presented:

We believe we have access to adequate resources to meet the needs of our existing businesses for normal operating costs, mandatory capital expenditures, debt redemptions, dividend payments, and working capital, to the extent not funded by cash provided by operating activities, for at least 12 months and for the foreseeable future thereafter. These resources include cash and cash equivalents and unused committed lines of credit under our Credit Facility, which had a total of $500.0 million of borrowing capacity available as of August 31, 2026. On August 31, 2026, we amended and restated our Credit Facility to extend its maturity from September 27, 2028 to August 31, 2031, while maintaining aggregate commitments of $500.0 million.

Although we do not currently anticipate a need, we believe that we could access the financial markets to sell long-term debt or equity securities. However, the continuation of uncertain economic conditions, including those caused by a high interest rate environment, could create volatility in the financial markets, which may impact our ability to access capital and the terms under which we can do so.

We routinely monitor current operational requirements, financial market conditions, and credit relationships and we may choose to seek additional capital by issuing new debt and/or equity securities to strengthen our liquidity or capital structure. Should we seek additional capital, there can be no assurance that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing shareholders and/or increase our interest costs. We may also from time to time seek to retire or repurchase our outstanding debt through cash purchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transaction may or may not be material.

Operating Activities

Certain of our diversified end markets are cyclical, and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We use operating cash flow and, when appropriate, short-term borrowings to manage normal fluctuations in working capital needs. These needs generally arise during periods of increased economic activity or increasing raw material prices, requiring higher levels of inventory and accounts receivable. During economic slowdowns or periods of decreasing raw material costs, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable.

Net cash provided by operating activities was $66.7 million during the current year quarter, up $25.7 million over the prior year quarter, driven by higher net earnings and more favorable changes in operating working capital, including accounts receivable, inventory, and accounts payable.

Investing Activities

Net cash used by investing activities was $14.1 million during the current year quarter compared to $105.4 million in the prior year quarter. Net cash used by investing activities during the current year quarter was driven primarily by capital expenditures, including $3.2 million related to ongoing facility modernization projects, and $2.4 million of acquisition-related payments, partially offset by $1.0 million of proceeds from asset sales. Net cash used by investing activities during the prior year quarter was primarily driven by cash paid to acquire the outstanding equity interests in Elgen.

Investment activities are largely discretionary and future investment activities could be reduced significantly, or eliminated, as economic conditions warrant. We assess acquisition opportunities as they arise, and any such opportunities may require additional financing. However, there can be no assurance that any such opportunities will arise, that any such acquisition opportunities will be consummated, or that any additional financing will be available on satisfactory terms if required.

Financing Activities

Net cash used by financing activities was $25.2 million during the current year quarter, compared to $18.6 million in the prior year quarter. During the current year quarter, we paid $18.2 million to repurchase 335,000 common shares and paid dividends of $9.4 million on the common shares.

Common shares - On September 22, 2026, the Board declared a quarterly dividend of $0.20 per common share payable on December 29, 2026, to shareholders of record at the close of business on December 15, 2026.

On March 24, 2021, the Board authorized the repurchase of up to 10,000,000 common shares. At August 31, 2026, a total of 4,230,000 common shares remained available for repurchase under the authorization, which is not subject to a fixed expiration date. The common shares may be repurchased under this authorization from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations. Repurchases may be made on the open market or through privately negotiated transactions.

Long-term debt and short-term borrowings - As of August 31, 2026, we were in compliance with the financial covenants of our short-term and long-term debt agreements. Our debt agreements do not include credit rating triggers or material adverse change provisions. There were no outstanding borrowings drawn against the Credit Facility at August 31, 2026, leaving the full borrowing capacity of $500.0 million available for use.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends. Dividends are declared at the discretion of the Board. The Board reviews the dividend quarterly and establishes the dividend rate based upon our consolidated financial condition, results of operations, capital requirements, current and projected cash flows, business prospects, and other relevant factors. While we have paid a dividend every quarter since becoming a public company in 1968, there is no guarantee that payments of dividends will continue in the future.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and related disclosure, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to use judgment and 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 the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate our estimates, including those related to our valuation of receivables, inventories, intangible assets, accrued liabilities, income and other tax accruals, contingencies and litigation, and business combinations. We base our estimates on historical experience, current trends and other factors that we believe to be relevant and reasonable under the circumstances at the time the estimate was made. 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 that reflect our significant judgments and uncertainties that could potentially result in materially different results under different assumptions and conditions. Although actual results historically have not deviated significantly from those determined using our estimates, our consolidated 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 accounting policies. We believe that our estimates, assumptions, and judgments are reasonable in that they were based on information available when the estimates, assumptions and judgments were made. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from those implied by our assumptions and estimates. Our critical accounting estimates have not significantly changed from those discussed in "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" of the 2026 Form 10-K.