10-Q: Worthington Steel Q1 Earnings Rise on Sitem Acquisition, Direct Sales

Worthington Steel, Inc. reported increased net earnings and sales for the first quarter of fiscal 2026, driven by the Sitem Group acquisition and higher direct volumes, despite a decline in overall tonnage.

Summary

• Net sales increased by $38.9 million to $872.9 million in the first quarter of fiscal 2026, up from $834.0 million in the prior year quarter.
• Net earnings attributable to Worthington Steel rose to $36.8 million ($0.72 diluted EPS) in Q1 FY26, compared to $28.4 million ($0.56 diluted EPS) in Q1 FY25.
• Gross margin increased by $14.8 million to $115.2 million (13.2% of net sales) in Q1 FY26, from $100.4 million (12.0% of net sales) in Q1 FY25.
• Operating income increased to $48.3 million in Q1 FY26 from $43.4 million in Q1 FY25.
• Equity income from unconsolidated affiliate Serviacero Worthington significantly increased to $6.4 million in Q1 FY26 from $1.3 million in Q1 FY25.
• Total volume (tons) decreased by 7% year-over-year, from 994,093 tons to 928,866 tons.
• Direct tons sold increased by 6%, with the Sitem Group acquisition contributing approximately 1% of this increase.
• Toll volumes decreased by 22%, primarily due to softening demand from mill customers and the closure of WSCP's Cleveland, Ohio facility.
• The Sitem Group acquisition, completed on June 3, 2025, contributed $39.4 million in net sales and a net loss attributable to Worthington Steel of $3.0 million during Q1 FY26.
• Selling, general and administrative (SG&A) expenses increased by $10.9 million to $67.9 million, largely due to the Sitem Group acquisition ($7.9 million, including a $4.6 million one-time bonus).
• The company expects inventory holding losses of approximately $5.0 million to $10.0 million in the second quarter of fiscal 2026 due to recent steel price declines.

Sentiment

Score: 7

Explanation: The company demonstrated solid earnings growth and strategic expansion through the Sitem Group acquisition, which positions it well in the electrical steel laminations market. Strong performance in direct automotive sales and improved equity income are positive indicators. However, the significant decline in overall volume, particularly in toll processing and agricultural markets, along with anticipated inventory holding losses in the near term, suggest some operational headwinds. The strategic investments and AI deployment are positive long-term indicators.

Positives

• Net earnings attributable to Worthington Steel increased by $8.4 million to $36.8 million.
• Diluted earnings per share increased by $0.16 to $0.72 per share.
• Gross margin improved by $14.8 million, with direct spreads showing a $23.0 million favorable change, moving from an estimated $16.6 million inventory holding loss in the prior year to a $5.6 million gain in the current quarter.
• Equity income from Serviacero Worthington increased significantly by $5.1 million, driven by higher direct spreads and favorable foreign currency exchange impacts.
• Direct tons sold increased by 6%, indicating strong performance in core direct sales.
• Successfully acquired 52% of S.I.T.E.M. S.p.A. (Sitem Group), expanding global electrical steel laminations production.
• Won market share in the automotive sector, with direct shipments to the overall automotive market and Detroit Three Automakers increasing by 17%.
• Deployment of commercially available AI technologies for productivity enhancement and internal decision-making.
• The U.S. Federal Reserve lowered the benchmark interest rate subsequent to quarter-end, which is expected to lower rates on the Credit Facility.
• Expected cash tax savings in fiscal year 2026 due to the One Big Beautiful Bill Act (OBBBA) provisions for bonus depreciation and domestic R&D expense.

Negatives

• Total volume (tons) decreased by 7% compared to the prior year quarter.
• Toll volumes decreased significantly by 22%, unfavorably impacting gross margin by $8.1 million due to lower volumes and $2.9 million due to unfavorable toll mix.
• The Sitem Group acquisition contributed a net loss attributable to Worthington Steel of $3.0 million in Q1 FY26.
• Selling, general and administrative (SG&A) expenses increased by $10.9 million, partly due to a one-time $4.6 million bonus related to the Sitem Group acquisition.
• Agricultural market shipments were down 49% due to continued softness in agricultural equipment demand, higher borrowing costs, and general uncertainty in farm income expectations.
• U.S. GDP growth moderated during the first quarter of fiscal 2026.
• Anticipated inventory holding losses of $5.0 million to $10.0 million in the second quarter of fiscal 2026 due to recent steel price declines.
• Net cash used in operating activities was $6.3 million, a decrease from $54.6 million provided in the prior year, primarily due to a $95.2 million increase in cash consumed by net operating working capital.
• Interest expense increased by $0.3 million due to higher average debt levels from Credit Facility borrowings and debt assumed in the Sitem Group acquisition.

Risks

• Volatility in commodity prices (steel, zinc, other raw materials) and supply chain constraints can significantly affect costs and profitability, with potential for inventory holding losses if price increases cannot be passed to customers or if prices decline.
• Competition based on price, product quality, and delivery requirements, along with market factors, can impact product pricing and sales.
• Dependence on the automotive industry and specific large customers (e.g., Detroit Three Automakers) means a significant loss or decrease in business from these customers could materially adversely affect financial results.
• General national and worldwide financial market conditions, including inflation, interest rate increases, and economic recession, can impact product demand, access to capital, and overall financial performance.
• Ongoing modifications to U.S. government tariff policy (e.g., 25% to 50% increase on steel and aluminum) and reciprocal tariffs from other governments create sustained uncertainty in global trade, potentially impacting customer supply chain decisions and financial performance.
• The existence of put options held by minority investors in the Sitem Group could require the company to use available cash, debt capacity, or other resources to satisfy future redemption obligations, potentially increasing volatility in retained earnings and additional paid-in capital.
• Involvement in various legal proceedings, with outcomes not clearly determinable, could result in costs differing materially from recorded estimates.
• Cybersecurity risks, including breaches and disruptions to information technology infrastructure, could adversely affect operations.
• The cyclical nature of the steel industry can lead to fluctuations in raw material availability and pricing.
• Increasing environmental, greenhouse gas emission, and sustainability regulations could increase costs or limit the company's ability to use or sell certain products.

Future Outlook

The company expects inventory holding losses of approximately $5.0 million to $10.0 million in the second quarter of fiscal 2026 due to recent steel price declines. The recent lowering of the U.S. Federal Reserve benchmark interest rate is anticipated to reduce rates on the Credit Facility. Worthington Steel also expects to realize cash tax savings in fiscal year 2026 from the One Big Beautiful Bill Act (OBBBA) provisions for bonus depreciation and domestic research and development expense, with no material impact to tax expense. No additional material severance expenses are expected in fiscal 2026 or beyond from announced consolidation plans. The remaining portions of the FED DEV and AMIC loans are expected to be received upon project completion and spending progression, respectively. The ultimate impact of tariffs and the OBBBA on financial performance remains to be determined, and the actual effective income tax rate for fiscal 2026 could differ from the forecasted rate. Annual maintenance capital needs are estimated between $40.0 million and $45.0 million, excluding capacity expansions and technology upgrades.

Management Comments

• Adding AI to our transformation toolbox, both in operations and the back office, will allow our teams to focus on the critical portion of their job that drives the most value for our business.
• We believe that the trend in U.S. gross domestic product growth (U.S. GDP) is a reasonable macroeconomic indicator for analyzing the demand of our end markets other than the automotive industry.
• Similar to the past few quarters, we have won share in the automotive market. The new programs continue to ramp up and volumes have increased across the board.
• 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.

Industry Context

The steel processing industry is fragmented and highly competitive, with key competitive factors being price, product quality, and delivery capabilities. The automotive industry remains the largest end market for flat-rolled steel in North America, with North American vehicle production showing a 3% increase and Detroit Three Automakers production up 5% in Q1 FY26. U.S. GDP growth moderated but appears to be maintaining steady growth when normalizing for unusual import/consumer spending shifts. The agricultural equipment market is experiencing weakening demand due to higher borrowing costs and uncertainty in farm income. U.S. inflation rates have largely stabilized but remain above the Federal Reserve's 2% target, though a post-quarter interest rate cut is expected to benefit the company. Evolving U.S. government tariff policies on steel and aluminum continue to create uncertainty in global trade, potentially impacting customer supply chain decisions.

Comparison to Industry Standards

• The company maintains market-leading positions in the North American carbon flat-rolled steel and tailor welded blank industries.
• It is one of the largest global producers of electrical steel laminations.
• The company's scale allows it to achieve an advantaged cost structure and service platform supported by a strategic operating footprint.

Corporate Governance

Legal Proceedings

• The company is a defendant in certain legal proceedings incidental to its business. Management believes the outcome of these proceedings, individually and in the aggregate, would not have a material adverse effect on the company's consolidated financial position, future results of operations, or cash flows.
• A liability has been recorded for anticipated costs, including legal defense costs, but the possibility exists that actual costs could differ materially from recorded estimates.

Related Party Transactions

• Net sales to the Former Parent (Worthington Enterprises, Inc.) totaled $18.2 million for the three months ended August 31, 2025, up from $15.9 million in the prior year quarter.
• The outstanding accounts receivable balance with the Former Parent was $10.6 million as of August 31, 2025, compared to $9.2 million at May 31, 2025.
• These transactions are subject to agreements entered into with the Former Parent following the Separation.

Stakeholder Impact

• Shareholders: Benefited from increased net earnings and EPS, and a continued quarterly cash dividend. Potential for dilution if new equity is issued.
• Employees: Severance payments were made for a TWB voluntary retirement program and WSCP Cleveland facility consolidation. A one-time bonus of $4.6 million was paid to key individuals at the Sitem Group.
• Customers: Continued focus on providing high-quality steel processing capabilities and customized solutions. Potential impact from evolving tariffs and supply chain shifts.
• Creditors: Increased debt levels due to acquisitions and capital expenditures, but the company maintains adequate liquidity and compliance with debt covenants.
• Suppliers: Subject to volatility in raw material prices and potential supply chain constraints.

Next Steps

• Continue execution of transformation strategy through the deployment of AI technologies.
• Receive the remaining 10% of the FED DEV loan upon project completion.
• Receive the remaining 80% of the AMIC Loan in steps as project spending progresses.
• Monitor the economic environment and its impact on operations and liquidity needs.
• Potentially seek additional capital by issuing new debt and/or equity securities to strengthen liquidity or capital structure.
• The Board of Directors will review the dividend quarterly and establish the dividend rate.
• Finalize the valuation of acquired tangible assets and liabilities, identification and valuation of residual goodwill, and tax effects of acquired assets and assumed liabilities for the Sitem Group acquisition.
• Evaluate the impact of new FASB guidance (ASU 2024-03 and ASU 2023-09) on related disclosures.

Key Dates

Recommendation

Worthington Steel demonstrated solid earnings growth and strategic expansion through the Sitem Group acquisition, which positions it well in the electrical steel laminations market. The company's strong performance in direct automotive sales and improved equity income are positive indicators. However, the significant decline in overall volume, particularly in toll processing and agricultural markets, along with anticipated inventory holding losses in the near term, suggest some operational headwinds. The increased debt levels for strategic investments are manageable given current liquidity, but the cyclical nature of the steel industry and evolving tariff policies introduce uncertainty. A 'Hold' recommendation reflects the balance between these positive strategic moves and financial improvements against the operational challenges and market volatility, suggesting investors maintain their current position while monitoring future developments.

Keywords

Steel processing, Flat-rolled steel, Automotive industry, Electrical steel laminations, Tailor welded blanks, SEC filing, 10-Q, Financial results, Acquisition, Sitem Group, Inventory holding gains, Equity income, Capital expenditures, Debt, Tariffs, AI in manufacturing, Dividend, Corporate governance