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 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") refer to the Notes to Consolidated Financial Statements included in "Part I - Item 1. - Financial Statements" of this Form 10-Q.

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 the 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.

Basis of Presentation

Worthington Steel became an independent, publicly traded company on December 1, 2023, following its separation from Worthington Enterprises, formerly known as Worthington Industries, Inc.

Our consolidated financial statements include the accounts of Worthington Steel and its consolidated subsidiaries. On June 3, 2026, we completed the acquisition of a controlling equity interest in Kloeckner. Kloeckner's results are included in our consolidated financial statements beginning on the acquisition date, with the portion of Kloeckner not owned by us reflected as NCI. Our investment in our unconsolidated affiliate is accounted for using the equity method. Material intercompany accounts and transactions are eliminated. For additional information, see "Note 1 - Description of Business and Basis of Presentation" and "Note 2 - Acquisitions."

In connection with the Kloeckner Acquisition, the Company acquired certain Kloeckner business units that met the held-for-sale criteria as of the acquisition date, including the Kloeckner Disposal Group. Management has committed to a plan to sell the Kloeckner Disposal Group, and we expect the sale to be completed within one year of the acquisition date. The results of this Kloeckner Disposal Group are reported as discontinued operations in the accompanying interim consolidated financial statements for all periods presented. Unless otherwise indicated, the discussion and analysis of our results of operations included in this MD&A relates to continuing operations and excludes the results of discontinued operations. Prior-period amounts have been recast, as applicable, to conform to this presentation. For additional information, see "Note 18 - Discontinued Operations and Assets and Liabilities Held for Sale."

Business Overview and Strategy

Business Overview

We are one of North America's leading value-added metals processing and manufacturing companies. We partner with customers to deliver specialized, highly technical solutions across carbon flat-rolled steel, aluminum, stainless steel, long products, heavy plate and electrical steel to solve complex challenges across a broad range of industries.

On June 3, 2026, we completed the acquisition of a controlling equity interest in Kloeckner, a metals service center and processing company with operations primarily in the United States, Mexico, and Europe. The Kloeckner Acquisition significantly increased our

scale and broadened our product and service offerings, customer and end-market exposure and geographic footprint. Through Kloeckner, our capabilities now include a broader range of carbon steel products, as well as aluminum, stainless steel, and long products, together with value-added processing, fabrication and distribution services.

Our legacy Worthington Steel operations primarily provide value-added processing of carbon flat-rolled steel, electrical steel laminations and tailor welded solutions. We serve customers through a combination of direct sales, in which we purchase and take ownership of the material, and toll processing and other fee-based arrangements involving customer-owned material. The addition of Kloeckner materially expanded our metals service center and distribution activities and diversified our business beyond our historical product, end-market, and geographic concentrations.

We sell steel on a direct basis, whereby we are exposed to the risks and rewards of ownership of the material while in its possession. Additionally, we toll process material under a fee for service arrangement whereby we process customer-owned material. Our manufacturing facilities further benefit from the flexibility to scale between direct and tolling services based on demand dynamics throughout the year.

Our strategy is focused on providing differentiated, value-added solutions to our customers, driving operational excellence through the Worthington Business System, investing in attractive growth opportunities and maintaining disciplined capital allocation. Following the Kloeckner Acquisition, our near-term priorities include supporting Kloeckner's continued execution of its strategic initiatives, advancing integration planning and other collaborative activities permitted under applicable law, evaluating potential cost, operational and commercial opportunities that may be available if and when legally permissible, maintaining strong customer service and operational execution, and reducing acquisition-related debt.

Worthington Steel became an independent, publicly traded company on December 1, 2023, following its separation from Worthington Enterprises.

Our operations are managed principally on a products and services basis with a single operating and single reportable segment. We own controlling interests in the following operating joint ventures: Spartan, TWB, WSCP, and Sitem Group. We also own a controlling interest in WSP, which became a nonoperating joint venture in October 2022, when we completed the divestiture of its remaining net assets. The net assets and operating results of these joint ventures are consolidated with the equity owned by the minority joint venture member shown as NCI or, in the case of Sitem Group, Redeemable NCI in our consolidated balance sheets, and the noncontrolling interests in net earnings and OCI are shown as net earnings or comprehensive income attributable to noncontrolling interests in our consolidated statements of earnings and consolidated statements of comprehensive income, respectively. Our remaining joint venture, Serviacero Worthington, is unconsolidated and accounted for using the equity method.

AI in Transformation

We continue to integrate commercially available AI technologies into our long-term transformation strategy. Through these efforts, we are evaluating and using AI tools to support internal analysis, automate certain routine tasks and assist employee decision-making. We continue to develop and refine AI solutions in areas such as predictive maintenance and intelligent reporting, which are intended to improve system connectivity and operational decision-making. Expanding the use of AI across operations and the back office may enable our teams to focus on the most value-driving aspects of their roles.

Recent Business Developments

On October 6, 2026, the Board declared a quarterly cash dividend of $0.16 per common share payable on December 28, 2026 to shareholders of record at the close of business on December 14, 2026.

Kloeckner Acquisition

On June 3, 2026, we completed our acquisition of a controlling interest in Kloeckner through a voluntary public takeover offer. Following the acquisition, we held a total of 60,710,791 Kloeckner shares, representing approximately 60.86% of Kloeckner's outstanding share capital. The total aggregate consideration for the tendered shares was €576.3 million (approximately $668.3 million). On June 15, 2026, we consummated the acquisition of an additional one million Kloeckner shares at €11 per share (approximately $12.7 million), increasing our total ownership to 61,710,791 Kloeckner shares representing approximately 61.87% of Kloeckner's outstanding share capital. Kloeckner's results are included in our consolidated financial statements beginning on the acquisition date, with the portion of Kloeckner not owned by us reflected as noncontrolling interests. For additional information, see "Note 2 - Acquisitions."

In connection with the Kloeckner Acquisition, on June 1, 2026, we incurred $1.4 billion of secured indebtedness consisting of $700.0 million aggregate principal amount of 7.750% Senior Secured Notes due 2033 (the "2033 Senior Notes"), which mature on June 1, 2033, and incurred $700.0 million of borrowings under a seven-year senior secured term loan B credit facility (the "Term Loan Facility"), which matures on June 1, 2033. Borrowings under the Term Loan Facility bear interest, at our option, at a rate per annum equal to Term

SOFR plus 4.00%, Daily Simple SOFR plus 4.00%, or the base rate plus 3.00%. The proceeds from the 2033 Senior Notes and Term Loan Facility, together with cash on hand, were used to fund the Kloeckner Acquisition, repay certain existing indebtedness of Worthington Steel and Kloeckner, pay related transaction fees and expenses, and for general working capital purposes.

On June 25, 2026, we entered into the 2031 Revolving Credit Facility, a new asset-based revolving credit facility in the aggregate principal amount of up to $550.0 million subject to borrowing base availability and other conditions, which refinanced and replaced our previous revolving credit facility. The 2031 Revolving Credit Facility matures on June 25, 2031, and borrowings bear interest at variable rates based on SOFR or a base rate, plus an applicable margin. The 2031 Revolving Credit Facility provides additional liquidity to support our working capital and general corporate requirements following the Kloeckner Acquisition. For additional information, see "Liquidity and Capital Resources" and "Note 8 - Debt."

Kloeckner Delisting

On July 15, 2026, we commenced the Delisting Tender Offer. The acceptance period ended on August 12, 2026, and Kloeckner's shares were delisted from the regulated market of the Frankfurt Stock Exchange effective August 12, 2026. Upon settlement of the Delisting Tender Offer, we acquired 242,446 additional Kloeckner shares for aggregate consideration of approximately €2.7 million ($3.2 million as of August 31, 2026), increasing our ownership interest to approximately 62.11%.

Domination and Profit and Loss Transfer Agreement

On September 8, 2026, subsequent to the end of the first quarter of fiscal 2027, Worthington Steel GmbH entered into a DPLTA with Kloeckner. The DPLTA is not currently effective. An extraordinary general meeting of Kloeckner shareholders to vote on approval of the DPLTA is expected to take place on October 23, 2026. Its effectiveness remains subject to the required shareholder approvals and registration with the commercial register at Kloeckner's registered seat and cannot occur before January 1, 2027.

If and when the DPLTA becomes effective, and subject to applicable law, Worthington Steel GmbH will be entitled to issue binding instructions to Kloeckner's management board, Kloeckner generally will be required to transfer its annual profits to Worthington Steel GmbH, and Worthington Steel GmbH generally will be required to absorb Kloeckner's annual losses. Until the DPLTA becomes effective, Kloeckner continues to operate subject to applicable German law, which limits certain actions we may take with respect to its operations.

Under the DPLTA, once effective, each outside Kloeckner shareholder will be entitled to elect either to tender its shares for cash compensation of €11.00 per share or to receive recurring annual compensation of €0.67 per share on a gross basis for each full fiscal year of Kloeckner. As a result, the initial exit compensation if all of the remaining outside shareholders tendered would be approximately €415.8 million (approximately $483.0 million), or the guaranteed annual compensation (gross) of €25.3 million (approximately $29.4 million) if all remained. The first guaranteed annual compensation is in calendar year 2028. The adequacy of both forms of compensation may be challenged by outside shareholders in appraisal proceedings under German law, which could result in higher compensation amounts. For additional information, see "Note 2 - Acquisitions."

Trends and Factors Impacting Our Performance

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:

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:

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.

Results of Operations

First Quarter - Fiscal 2027 Compared to Fiscal 2026

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:

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

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:

The decreases were partially offset by:

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:

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.

Liquidity and Capital Resources

Our primary ongoing requirements for cash are expected to be for working capital, capital expenditures, integration and transaction-related costs, dividend payments, debt service, potential payments to Kloeckner's remaining outside shareholders and other strategic initiatives. Following the Kloeckner Acquisition, our working capital requirements, consolidated indebtedness and debt service obligations have increased materially as a result of both the financing incurred in connection with the acquisition and certain preexisting Kloeckner indebtedness that remained outstanding following the acquisition.

Our primary sources of liquidity include cash and cash equivalents, cash generated from operating activities and available borrowings under the 2031 Revolving Credit Facility and other financing arrangements. Subsequent to the Kloeckner Acquisition, our debt profile provides for an increase in the number of available options for liquidity, with the material sources being the 2031 Revolving Credit Facility, ABL USA Facility, Swiss RCF, and German RCF. See "-Kloeckner Debt."

As of August 31, 2026, our cash and cash equivalents balance was $248.2 million, compared to cash and cash equivalents balance of $84.6 million at May 31, 2026. As of August 31, 2026, our total consolidated debt balance was $2,196.4 million, an increase of $1,939.6 million, compared to the total consolidated debt balance of $256.8 million at May 31, 2026. The increase is primarily due to the financing of the Kloeckner Acquisition and the consolidation of certain preexisting Kloeckner indebtedness.

In connection with the Kloeckner Acquisition, we incurred $1.4 billion of secured indebtedness consisting of $700.0 million aggregate principal amount of 2033 Senior Notes and $700.0 million of borrowings under the Term Loan Facility. On August 19, 2026, we made a $200.0 million voluntary principal repayment, reducing the outstanding principal balance. Following the repayment, $500.0 million was outstanding under the Term Loan Facility as of August 31, 2026. On June 25, 2026, we also entered into the $550.0 million 2031 Revolving Credit Facility, which replaced the 2028 Revolving Credit Facility that was terminated concurrently.

Additionally, we assumed the liabilities of Kloeckner as part of the acquisition and recorded Kloeckner's liabilities within our consolidated balance sheet. Kloeckner's debt obligations included various loans. For additional information, see below for the material impacts discussed below as well as a summary of the Kloeckner debt instruments assumed. See "-Kloeckner Debt."

The 2033 Senior Notes contain customary restrictive covenants, including incurrence-based restrictions on certain financing and capital allocation activities. As of August 31, 2026, we were in compliance with the applicable covenants, which are not currently expected to materially restrict our liquidity or access to capital. The Term Loan Facility contains customary affirmative and negative covenants, including restrictions on indebtedness, liens, investments, restricted payments, asset dispositions and certain other transactions. The Term Loan Facility does not contain a financial maintenance covenant, although certain permitted transactions are subject to incurrence-based financial tests. We were in compliance with the applicable covenants as of August 31, 2026.

Our ability to borrow under the 2031 Revolving Credit Facility is subject to a borrowing base and satisfaction of customary borrowing conditions. In addition, the 2031 Revolving Credit Facility requires us to maintain a minimum consolidated fixed charge coverage ratio only during certain periods based on excess availability. Certain other financing arrangements of Kloeckner and its subsidiaries also contain financial and other customary covenants and are subject to borrowing base limits. Our financing arrangements also contain customary covenants and restrictions that may limit certain financing, investing and other activities. As of August 31, 2026, we were in compliance with the applicable covenants under our financing arrangements.

At August 31, 2026, after accounting for the eligible borrowing bases, as applicable, availability under the 2031 Revolving Credit Facility, ABL USA Facility, Swiss RCF, and German RCF, was $418.4 million, $138.5 million, $55.7 million, and $46.4 million, respectively. See "-Kloeckner Debt."

During the first quarter of fiscal 2027, Stanzwerk AG entered into an Amended and Restated Standstill Agreement with UBS Switzerland AG maintaining the credit facility through August 31, 2028.

We believe our cash balances, cash expected to be generated from operating activities and available borrowing capacity under our revolving credit facilities and other borrowings provide adequate liquidity to fund our current operational needs, working capital requirements, capital expenditures, integration and transaction-related costs, debt service obligations and other current and long-term obligations and strategic initiatives. We may from time to time seek additional capital through debt or equity financings to refinance existing obligations, strengthen our liquidity or fund strategic initiatives. Our ability to access additional capital and the terms of any financing will depend on our financial performance, credit profile, prevailing interest rates, financial market and economic conditions and other factors, many of which are outside our control.

Although we successfully accessed the debt capital markets in connection with the Kloeckner Acquisition, our future ability to access the financial markets and the terms under which we may do so will depend on a number of factors, including our financial performance, credit profile, prevailing interest rates, financial market conditions, economic conditions and other factors, many of which are outside our control. There can be no assurance that additional debt or equity financing will be available on terms acceptable to us, if at all. Any additional debt financing could increase our interest expense, leverage and covenant obligations, and any additional equity financing could dilute the interests of our existing shareholders.

Our increased indebtedness has materially increased our interest and debt service requirements compared with prior periods, and the variable-rate Term Loan Facility exposes us to changes in market interest rates. We continue to prioritize debt reduction as part of our capital allocation strategy. For additional information, see "Note 8 - Debt."

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

Operating Activities

Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic and industry conditions. We rely on cash and short-term borrowings to meet cyclical increases in working capital needs. These needs generally rise during periods of economic expansion or higher raw material prices, requiring increased levels of inventory and accounts receivable. During economic slowdowns, or periods of declining raw material costs, working capital needs generally decrease as inventories and accounts receivable are reduced.

Net cash used in operating activities was $6.0 million during the three months ended August 31, 2026, compared to $6.3 million net cash used in operating activities during the three months ended August 31, 2025. Net operating cash flows were generally consistent between periods. Both periods reflected increased working-capital requirements associated with higher average inventory prices. Working-capital cash usage was lower in the current year period, but this was offset by changes in other operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $586.8 million during the three months ended August 31, 2026, compared to net cash used in investing activities of $29.6 million during the three months ended August 31, 2025. In the current year period, the main drivers of net cash used in investing activities were the Kloeckner Acquisition, and to a lesser extent, an increase in capital expenditures, partially offset by cash proceeds from asset sales. See "Note 2 - Acquisitions" for further information.

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. Capital expenditures were $63.0 million during the three months ended August 31, 2026, compared to $29.4 million during the three months ended August 31, 2025. Following the Kloeckner Acquisition, our current planning estimate for combined capital expenditures is $160.0 million to $180.0 million for fiscal 2027, with the timing of project spending influencing where we finish within that range. Following DPLTA effectiveness, we will review capital priorities across the consolidated business.

Financing Activities

Net cash provided by financing activities was $735.6 million during the three months ended August 31, 2026, compared to net cash provided by financing activities of $21.0 million during the three months ended August 31, 2025.

Financing activities during the three months ended August 31, 2026 primarily reflected $1.4 billion of proceeds from the issuance of the 2033 Senior Notes and borrowings under the Term Loan Facility in connection with the Kloeckner Acquisition. These proceeds were partially offset by the repayment of certain existing indebtedness of Worthington Steel and Kloeckner, including the $200.0 million voluntary repayment under the Term Loan Facility. Financing activities also included €13.7 million ($15.9 million) used to acquire additional Kloeckner shares after obtaining control, including shares acquired in connection with the Delisting Tender Offer, and $8.2 million of dividends paid to holders of our common shares during the current year period compared to $8.1 million in the prior year period. Payments to noncontrolling interests during the current year period totaled $10.5 million compared to none in the prior year period.

Following the Kloeckner Acquisition, our consolidated debt includes the 2033 Senior Notes, Term Loan Facility and certain preexisting Kloeckner indebtedness that remained outstanding following the acquisition. Our increased indebtedness has materially increased our interest and debt service requirements compared with prior periods, and our variable-rate borrowings expose us to changes in market interest rates. We continue to prioritize debt reduction as part of our capital allocation strategy.

Standstill Agreement - Sitem Group - During the first quarter of fiscal 2027, Stanzwerk AG entered into an Amended and Restated Standstill Agreement with UBS Switzerland AG maintaining the credit facility through August 31, 2028. Stanzwerk AG was in compliance with these covenants as of August 31, 2026.

For additional information on our outstanding debt and other borrowing arrangements, see "Note 8 - Debt."

Common shares - On October 6, 2026, the Board declared a quarterly cash dividend of $0.16 per common share payable on December 28, 2026, to shareholders of record at the close of business on December 14, 2026.

There were no common shares purchased by Worthington Steel during the period presented as part of publicly announced plans or programs.

Redeemable NCI - While redemption events are contingent, the existence of these features could require us to use available cash, debt capacity, or other resources to satisfy our obligations in the future. We continuously monitor our liquidity profile to ensure adequate capacity to fund potential redemptions, although no such obligations were triggered during the three months ended August 31, 2026.

Material Cash Requirements

Our material cash requirements include working capital, capital expenditures, interest and principal payments on indebtedness, dividends and other contractual and strategic commitments.

We, through the acquisition of Kloeckner, have an asset-based revolving credit facility that matures in July 2027, under which $465.0 million was outstanding as of August 31, 2026. The 2031 Revolving Credit Facility provides for committed incremental revolving capacity intended to facilitate the addition of certain Kloeckner U.S. operations and the repayment of this facility, subject to the satisfaction of specified conditions. We expect to address the July 2027 maturity through this arrangement or other available financing sources. For additional information, see "Note 8 - Debt."

On September 8, 2026, subsequent to the end of the first quarter, Worthington Steel GmbH entered into a domination and profit and loss transfer agreement with Kloeckner. The DPLTA is not currently effective and remains subject to the required shareholder approvals and registration with the applicable commercial register.

If and when the DPLTA becomes effective, each outside Kloeckner shareholder will be entitled to elect either to tender its shares for cash compensation of €11.00 per share or to receive recurring annual compensation of €0.67 per share on a gross basis for each full Kloeckner fiscal year. The compensation amounts may be challenged in appraisal proceedings under German law and could be increased. Accordingly, the amount and timing of future cash requirements associated with the DPLTA will depend on, among other factors, whether and when the DPLTA becomes effective, shareholder elections and the outcome of any appraisal proceedings.

If the DPLTA becomes effective, Kloeckner generally will also be required to transfer its annual profits to Worthington Steel GmbH, while Worthington Steel GmbH generally will be required to absorb Kloeckner's annual losses, subject to applicable law and the terms of the DPLTA.

Refer to "Recent Business Developments," "Note 8 - Debt" and "Note 19 - Subsequent Events" for additional information.

Dividend Policy

We currently have no material contractual or regulatory restrictions on the payment of dividends, provided that the applicable conditions and limitations under our debt agreements are satisfied, including applicable restrictions on restricted payments and, under the 2031

Revolving Credit Facility, minimum availability requirements. 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. There is no guarantee that we will continue the payments of dividends in the future or that any dividends declared by the Board in the future will be similar in amount or timing to any dividends previously declared by the Board.

Kloeckner Debt

In connection with the Kloeckner Acquisition, we assumed the liabilities of Kloeckner and recorded Kloeckner's liabilities within our consolidated balance sheet. Kloeckner's debt obligations include various loans and credit facilities, which, subsequent to the Kloeckner Acquisition, provide additional sources of liquidity. The material Kloeckner debt instruments assumed are summarized below.

Kloeckner's Syndicated Revolving Credit Facility

On May 23, 2013, Kloeckner entered into a syndicated revolving credit facility agreement (the "German RCF") with Commerzbank Aktiengesellschaft as agent. On May 8, 2026, Kloeckner entered into a fifth amendment and restatement agreement, which reduced total commitments under the facility to €150.0 million (approximately USD $174.3 million as of August 31, 2026) and extended the maturity to June 3, 2028. The German RCF also permits ancillary facilities (including overdraft, guarantee, bonding, documentary or stand-by letter of credit, short term loan and foreign exchange facilities) in an aggregate amount of up to €50.0 million. Borrowings under the German RCF bear interest at a rate per annum equal to EURIBOR for the relevant interest period (subject to a 0.00% floor) plus a margin of 3.50%. Kloeckner is required to pay a commitment fee of 1.225% per annum on each lender's undrawn commitments, payable quarterly in arrears. The German RCF contains financial covenants requiring Kloeckner to maintain (i) a gearing ratio, defined as consolidated net debt to consolidated equity, of no more than 1.50x, (ii) consolidated equity of at least €500.0 million and (iii) compliance with a borrowing base, which would require that outstanding loans and other applicable amounts may not exceed a borrowing base determined principally by reference to eligible receivables and inventory, net of certain priority obligations. A breach of the gearing ratio or minimum consolidated equity covenant, or a borrowing base shortfall, may result in a mandatory prepayment obligation. The foregoing summary of the German RCF is qualified in its entirety by reference to the Fifth Amendment and Restatement Agreement, a copy of which is filed as an exhibit to this Form 10-Q.

Kloeckner's Swiss Syndicated Revolving Credit Facility

On January 7, 2025, Debrunner Koenig AG, the holding company of Kloeckner's Swiss country organization, entered into an unsecured syndicated loan agreement (the "Swiss RCF") with Zürcher Kantonalbank as agent and the lenders from time to time party thereto. The Swiss RCF provides capacity of up to CHF 200.0 million (approximately USD $247.4 million as of August 31, 2026) which may be increased once by up to CHF 50.0 million, subject to lender participation, and matures on January 7, 2029. The facility is available in CHF and EUR (up to €50.0 million) and provides Debrunner Koenig AG and its subsidiaries with funds for general corporate purposes. Borrowings under the Swiss RCF bear interest at a rate per annum equal to compounded SARON for CHF and EURIBOR for EUR for the relevant interest period plus a margin of up to 3.30% depending on the net leverage ratio of the Swiss subgroup. The foregoing summary of the Swiss RCF is qualified in its entirety by reference to the Credit Agreement (Kreditvertrag), dated as of January 7, 2025, an English translation of which is filed as an exhibit to this Form 10-Q.

Kloeckner's U.S. ABL Facility

On November 16, 2020, Kloeckner Metals Corporation and certain of its subsidiaries entered into an asset-based lending credit agreement (the "ABL USA Facility") with Bank of America, N.A. as administrative agent and collateral agent, and the lenders from time to time party thereto. On July 14, 2022, the ABL USA Facility was amended and extended, with a maturity date in July 2027. On December 19, 2022, the ABL USA Facility was amended to increase the capacity thereunder to $650.0 million. The ABL USA Facility is secured by a continuing lien on all personal property of each obligor under the facility, including, among other things, a lien on stock issued by the borrowers and certain subsidiaries, inventories and accounts receivable. The ABL USA Facility includes base rate loans and Term SOFR loans. Base rate loans bear interest at a base rate in effect from time to time plus a margin of up to 0.50%. Term SOFR loans bear interest at a rate per annum equal to Term SOFR for the relevant interest period plus a margin of up to 1.50%. The foregoing summary of the ABL USA Facility is qualified in its entirety by reference to the Loan and Security Agreement, as amended, copies of which are filed as exhibits to this Form 10-Q.

Kloeckner's German ABS Program

Kloeckner maintains an asset-backed securitization program in Europe (the "ABS Germany Program") under which eligible trade receivables originated by its subsidiary Kloeckner Metals Germany GmbH are sold to a securitization vehicle and financed through arrangements with Commerzbank Aktiengesellschaft. The program, which originally comprised further subsidiaries of Kloeckner as sellers of trade receivables and additional co-founders, has been amended and extended from time to time, and on May 8, 2026 was reduced to €60.0 million (approximately USD $69.7 million as of August 31, 2026), with one international bank providing the receivables financing under the ABS Program to one German subsidiary of Kloeckner. The ABS Germany Program matures on July 25, 2028 and provides Kloeckner with funds for refinancing of trade receivables. Borrowings under the ABS Germany Program bear interest at three-month EURIBOR plus a margin of 1.30% per annum. The ABS Germany Program contains customary termination provisions, including certain receivables performance thresholds related to dilution, delinquency and default ratios, and includes financial covenants that, to the extent applicable, are consistent with those under the German RCF. The foregoing summary of the ABS Germany Program is qualified in its entirety by reference to the Exit and Amendment and Restatement Agreement, a copy of which is filed as an exhibit to this Form 10-Q.

Kloeckner's Mexico ABL Facility

On September 4, 2024, Kloeckner Metals Service Centers de Mexico, S. de R.L. de C.V. entered into an asset-based lending credit agreement (the "ABL Mexico Facility") with Banco Santander México, S.A. as administrative agent and collateral agent, and the lenders from time to time party thereto. The ABL Mexico Facility provides capacity of up to $115.0 million and matures on September 4, 2027. The ABL Mexico Facility is secured by inventories and accounts receivable. Borrowings under the ABL Mexico Facility bear interest at a rate per annum equal to Term SOFR for the relevant interest period plus a margin of up to 2.45% depending on the leverage ratio of the Mexican subgroup. The foregoing summary of the ABL Mexico Facility is qualified in its entirety by reference to the Loan and Security Agreement, as amended, copies of which are filed as exhibits to this Form 10-Q.

Kloeckner Shareholder Loan

In May 2026, Kloeckner, as the borrower, entered into an unsecured revolving loan agreement with Worthington Steel, as the lender, pursuant to which, effective as of the closing of the Kloeckner Acquisition, Worthington Steel agreed to provide revolving loans to Kloeckner to finance the working capital needs of Kloeckner and its subsidiaries. The initial maximum principal amount of the Kloeckner Shareholder Loan is €200 million. In the event that Kloeckner loses access to the German RCF and/or its ABS Germany Program as a result of any event caused by or attributable to Worthington Steel, the maximum aggregate principal amount of the Kloeckner Shareholder Loan may be increased to up to €400 million. The Kloeckner Shareholder Loan bears interest at an interest rate of EURIBOR plus a margin of 3.0%. The Kloeckner Shareholder Loan matures in 2031.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated 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, 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 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 historical results 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. 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.