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Worthington Steel, Inc. – Q1 Fiscal 2026 (Ended Aug 31, 2025) Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended August 31, 2025 (First Quarter of Fiscal 2026). Worthington Steel, Inc. is a premier value-added steel processor serving automotive, construction, and industrial markets. The quarter was significantly impacted by the acquisition of a 52% controlling interest in the Sitem Group (European electrical steel laminations) on June 3, 2025. The Company operates as a single reportable segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Driven by the inclusion of Sitem Group sales ($39.4 million), a 6% increase in direct tons sold, and slightly higher direct selling prices. This offset a 22% decline in toll volumes due to softening mill demand and the closure of the WSCP Cleveland facility.
• Margin Expansion: Gross margin improved primarily due to a $22.2 million favorable swing in inventory holding results (from a $16.6M loss in Q1 FY2025 to a $5.6M gain in Q1 FY2026) and higher direct spreads.
• Expense Increases: SG&A rose $10.9 million, largely due to Sitem Group integration costs and a $4.6 million one-time acquisition bonus. Interest expense increased slightly due to higher average debt levels.
• Cash Flow Volatility: Operating cash flow turned negative ($6.3M outflow) compared to a $54.6M inflow last year, driven by a $95.2M increase in working capital consumption (higher receivables and inventory) due to rising steel prices.
• Debt Structure: Total debt increased by $81.9 million, reflecting debt assumed in the Sitem acquisition ($48.8M) and a $21.6M draw on the Business Development Bank of Canada (BDC) loan for Canadian expansion.

Guidance, Outlook, and Risks

• Outlook: Management expects inventory holding losses of approximately $5.0 million to $10.0 million in Q2 FY2026 due to recent price declines in steel. The Company anticipates cash tax savings in FY2026 from the "One Big Beautiful Bill Act" (OBBBA) regarding bonus depreciation and R&D expenses.
• Capital Allocation: A quarterly dividend of $0.16 per share was declared on September 24, 2025. The Company maintains $279.6 million in availability under its $550 million Credit Facility.
• Key Risks:
  • Trade Policy: Ongoing uncertainty regarding U.S. tariffs on steel and aluminum (increased to 50% in June 2025) and potential reciprocal tariffs from other nations.
  • Raw Material Volatility: Exposure to fluctuating hot-rolled coil (HRC) prices and the ability to pass costs to customers.
  • Redeemable NCI: The Sitem acquisition includes put options for minority shareholders, classified as mezzanine equity ($97.7 million), which could require future cash outflows if redemption events occur.
  • Customer Concentration: The "Detroit Three" automakers represented 35% of net sales.

Investor Verification Checklist

• Sitem Integration: Verify the timeline for full operational integration and the realization of synergies from the Sitem Group acquisition.
• Working Capital Trends: Monitor the trajectory of inventory and receivables to ensure the Q1 cash outflow is not a structural shift but a cyclical response to steel price increases.
• Tariff Impact: Assess the specific exposure of the Company's supply chain to the new 50% steel tariffs and potential customer demand shifts.
• Debt Covenants: Confirm continued compliance with financial covenants, particularly the Net Financial Position to EBITDA ratios for the Sitem Group and the Credit Facility availability thresholds.
• Inventory Valuation: Review the Company's assessment of inventory holding gains/losses given the recent decline in HRC prices.