8-K: Worthington Steel Q1 Fiscal 2026: Strong Start, Sitem Boost

Worthington Steel reports a strong start to fiscal 2026 with increased net sales and earnings, driven by disciplined execution and the Sitem Group acquisition, despite a soft market.

Summary

• Net sales increased 5% to $872.9 million for the first quarter of fiscal 2026, compared to $834.0 million in the prior year quarter.
• Operating income rose to $48.3 million, up from $43.4 million in the first quarter of fiscal 2025.
• Net earnings attributable to Worthington Steel increased to $36.8 million, compared to $28.4 million in the prior year quarter.
• Net earnings per diluted share attributable to Worthington Steel shareholders were $0.72, up from $0.56; adjusted net earnings per diluted share were $0.77, compared to $0.56.
• Adjusted EBIT was $54.9 million, an increase from $39.4 million in the prior year quarter.
• A quarterly cash dividend of $0.16 per common share was declared, payable on December 26, 2025, to shareholders of record on December 12, 2025.
• The acquisition of 52% of S.I.T.E.M. S.p.A. (Sitem Group) was completed on June 3, 2025, expanding global EV market reach.
• Achieved the safest quarter on record due to commitment to safety.
• Direct tons sold increased by 6% year-over-year, with the Sitem Group acquisition contributing approximately 1% of this increase.
• Toll volumes decreased 22% year-over-year, primarily due to softening demand from mill customers and the closure of the Cleveland, Ohio facility.
• Estimated pre-tax inventory holding gains were $5.6 million, a favorable change from an estimated $16.6 million inventory holding loss in the prior year quarter.
• Selling, general and administrative (SG&A) expense increased by $10.9 million, primarily due to the Sitem Group acquisition ($7.9 million, including a one-time bonus of $4.6 million).
• Net cash used in operating activities was $5.0 million, compared to net cash provided by operating activities of $54.6 million in the prior year quarter.
• Negative free cash flow was $34.4 million, compared to positive free cash flow of $33.1 million in the prior year quarter.
• Shareholders elected Jon J. Bowsher, Charles M. Chiappone, and Mary Schiavo as directors for three-year terms expiring in 2028.
• Shareholders approved the advisory resolution to approve the compensation of named executive officers.
• Shareholders ratified the selection of KPMG LLP as the independent registered public accounting firm for the fiscal year ending May 31, 2026.

Sentiment

Score: 8

Explanation: Worthington Steel delivered strong financial results for Q1 FY26, with significant increases in net sales, operating income, and net earnings, largely driven by disciplined execution and the strategic acquisition of Sitem Group. The company demonstrated impressive market share gains in the automotive sector and is making substantial progress on key electrical steel expansion projects in Canada and Mexico, which are critical for long-term growth in high-demand markets. The focus on AI-driven transformation and safety are also positive indicators. However, the quarter saw negative free cash flow and net cash used in operating activities, along with continued softness in certain end markets like agriculture and heavy trucks, and anticipated inventory holding losses in the next quarter. Despite these headwinds, the overall strategic positioning and Q1 performance are robust.

Positives

• Net sales increased 5% year-over-year to $872.9 million, demonstrating revenue growth.
• Operating income increased to $48.3 million from $43.4 million, indicating improved operational efficiency.
• Net earnings attributable to Worthington Steel rose to $36.8 million from $28.4 million, reflecting stronger profitability.
• Adjusted diluted EPS increased to $0.77 from $0.56, showcasing enhanced shareholder value.
• Adjusted EBIT increased to $54.9 million from $39.4 million, highlighting improved core earnings.
• Successfully completed the acquisition of 52% of Sitem Group, expanding global reach in the EV market and integrating advanced capabilities.
• Achieved the safest quarter on record, underscoring a strong commitment to employee well-being.
• Year-over-year volume growth was driven by disciplined execution despite a soft market.
• Automotive shipments increased by nearly 13% compared to the prior year, significantly outpacing the Detroit 3's 5% production increase, indicating substantial market share gains.
• The expansion of the Mexico facility for electrical steel laminations for EV traction motors is on schedule, with production starting in a few months and trials underway.
• The Canada facility for transformer cores is on schedule to start production in early calendar year 2026, with 50% of the additional capacity already filled by new business.
• Leveraging AI for transformation initiatives, including demand forecasting, predictive inventory optimization, predictive maintenance, and demand planning automation, is expected to provide cost savings and free up cash flow.
• Successful automation of back-office functions, saving significant hours in cash posting, IT access provisioning, and credit functions.
• Shareholders approved director elections, NEO compensation, and auditor ratification, indicating stable corporate governance.
• Declared a quarterly cash dividend of $0.16 per common share, returning value to shareholders.

Negatives

• The overall macro environment remains mixed with limited visibility in several sectors, expected to persist in the near term.
• Total volume (tons) decreased 7% year-over-year to 928,866 tons.
• Toll volumes decreased 22% year-over-year, primarily due to softening demand from mill customers and the closure of the Cleveland, Ohio facility.
• The Ag market continues to experience challenges, with volumes down nearly 50% compared to the prior-year quarter.
• Heavy truck market shipments were down 7% year-over-year.
• Net cash used in operating activities was $5.0 million, a significant decrease from $54.6 million provided in the prior year quarter.
• Negative free cash flow of $34.4 million, compared to positive free cash flow of $33.1 million in the prior year quarter.
• Hot rolled coil market pricing experienced downward pressure, peaking at $950/ton in March and currently at approximately $800/ton.
• Expect estimated pre-tax inventory holding losses of $5 million to $10 million in the second quarter of fiscal 2026 due to lagging index-based pricing mechanisms.
• SG&A expense increased by $10.9 million, partly due to a one-time $4.6 million acquisition completion bonus for Sitem Group key individuals.
• A $0.01 per diluted share negative impact from a deemed dividend of redeemable noncontrolling interest due to Euro-dollar exchange rate changes.
• A $0.01 per diluted share tax expense associated with the disallowance of certain tax assets due to the Nagold facility contribution in the Sitem acquisition.

Risks

• Ability to successfully realize the anticipated benefits of the Separation from Worthington Enterprises, Inc.
• Effect of conditions in national and worldwide financial markets, including inflation, increases in interest rates, and economic recession.
• Impact of tariffs, trade restrictions, trade wars, and changes in trade regulations or relationships.
• Changing oil prices and/or supply.
• Product demand and pricing volatility, and changes in product mix, substitution, and market acceptance.
• Volatility or fluctuations in the pricing, quality, or availability of raw materials (particularly steel), supplies, transportation, utilities, and labor.
• Effects of sourcing and supply chain constraints.
• Outcome of adverse claims experience with respect to workers' compensation, product recalls or liability, or casualty events.
• Effects of facility closures and the consolidation of operations.
• Financial difficulties (including bankruptcy filings) of original equipment manufacturers, end-users, customers, suppliers, and joint venture partners.
• Failure to maintain appropriate levels of inventories.
• Ability to realize targeted expense reductions from headcount reductions, facility closures, and other cost reduction efforts.
• Ability to realize cost savings and operational, sales, and sourcing improvements and efficiencies from transformation initiatives on a timely basis.
• Overall success of, and the ability to integrate, newly acquired businesses and joint ventures, maintain and develop their customers, and achieve synergies.
• Ability to realize expected benefits of strategically deployed capital expenditures.
• Capacity levels and efficiencies within facilities, major product markets, and the industries in which the company participates.
• Effect of disruption in the business of suppliers, customers, facilities, and shipping operations due to adverse weather, casualty events, equipment breakdowns, labor shortages, utility interruptions, civil unrest, international conflicts (e.g., Russia's invasion of Ukraine), or terrorist activities.
• Changes in customer demand, inventories, spending patterns, product choices, and supplier choices.
• Risks associated with doing business internationally, including economic, political, and social instability, foreign currency exchange rate exposure, and acceptance of products in global markets.
• Ability to improve and maintain processes and business practices to keep pace with the economic, competitive, and technological environment.
• Effect of inflation, interest rate increases, economic recession, and potential adverse impacts from the Inflation Reduction Act of 2022.
• Deviation of actual results from estimates and/or assumptions used in the application of significant accounting policies.
• Level of imports and import prices in the company's markets.
• Impact of environmental laws and regulations or actions of regulatory agencies.
• Impact of increasing environmental, greenhouse gas emission, and sustainability regulations and considerations.
• Impact of judicial rulings and governmental regulations, both in the United States and abroad.
• Effect of healthcare laws in the United States and potential changes for such laws.
• Effect of tax laws in the United States and potential changes for such laws.
• Cyber security risks.
• Risks associated with artificial intelligence technologies.
• Effects of privacy and information security laws and standards.
• The cyclical nature of the steel industry.
• The company's safety performance.
• Effects of competition and price pressures from competitors.

Future Outlook

Management is cautiously optimistic despite continued uncertainty in the market, expecting this to persist for the near term. They project the automotive market to finish the year at a 15 million unit build rate and hope for further market recovery in 2026 with potential interest rate cuts. The company anticipates normal seasonality for volumes in Q2 FY26, with volumes typically 3-4% below Q1. They expect direct sale volume to remain in the 60-65% range and toll volume in the 35-40% range. Management expects to generate estimated pre-tax inventory holding losses of $5 million to $10 million in the second quarter of fiscal 2026 due to lagging index-based pricing mechanisms and downward pressure on hot rolled coil prices. The capital expenditure forecast for Fiscal 2026 remains at $100 million, with a potential revision after reviewing Sitem's capex priorities. They are bullish on electrification projects in Canada and Mexico, expecting little material impact from Section 232 tariffs on electrical steel laminations and transformer cores.

Management Comments

• "Worthington Steel is off to a strong start in fiscal 2026 driven by disciplined execution in a soft market, resulting in year-over-year volume growth." Geoff Gilmore, President and CEO.
• "This quarter reflects the strength of our base business, our teams ability to adapt in a dynamic market and the benefits of our transformation mindset." Geoff Gilmore, President and CEO.
• "We are especially pleased to welcome the Sitem team into the Worthington Steel family this quarter. Together, we are building on 70 years of industrial heritage while positioning ourselves for long-term growth." Geoff Gilmore, President and CEO.
• "Through training, continuous improvement and the commitment of every Worthington Steel employee, we achieved our safest quarter on record." Geoff Gilmore, President and CEO.
• "The macro environments remain mixed — visibility is limited in several sectors, and we expect this to persist for the near term. That said, we are cautiously optimistic despite continued uncertainty in the market." Geoff Gilmore, President and CEO.
• "In Canada, we remain on schedule to start production in early calendar year 2026, expanding our ability to support the ever-growing need for electricity in the United States with transformer cores. Transformers remain in short supply and the market is expected to grow by up to seven percent per year over the next decade." Geoff Gilmore, President and CEO.
• "The expansion of our facility in Mexico will begin production in just a few months and trials are currently underway. This facility will supply electrical steel laminations for traction motors in hybrid and electric vehicles as the electrification of transportation continues." Geoff Gilmore, President and CEO.
• "With the close of our Sitem acquisition, we’ve expanded our reach in the global EV market and are now integrating Sitem’s automation and toolmaking capabilities to strengthen our competitiveness across our electrical steel platform." Geoff Gilmore, President and CEO.
• "We are using AI to gain insight, assess strategies and automate low-value tasks. We are testing use cases like predictive maintenance and intelligent reporting and we are confident about the gains we will see over time." Geoff Gilmore, President and CEO.
• "I believe our culture of continuous improvement through the Transformation, combined with our Golden Rule of treating people the way we want to be treated, is our secret weapon." Geoff Gilmore, President and CEO.
• "Our priorities are clear; generate strong free cash flow, invest in the high-return opportunities, and pursue M&A that creates strategic value." Geoff Gilmore, President and CEO.
• "Worthington Steel is operating with a clear strategy, a culture of execution and continuous improvement, and a deep bench of talent. That’s a powerful combination — and I believe it sets us apart." Geoff Gilmore, President and CEO.
• "Our earnings per share include a 1 cent negative impact, shown as a deemed dividend on the redeemable non-controlling interest, due to a change in the redeemable value primarily associated with the dollar to Euro exchange rate." Tim Adams, VP & CFO.
• "Given that many of our contracts use lagging index-based pricing mechanisms, we expect to generate inventory holding losses in the second quarter of Fiscal 2026. We estimate those losses could be approximately 5 to 10 million dollars as compared with the 5.6 million dollars of estimated holding gains in the current quarter." Tim Adams, VP & CFO.
• "When end-market demand picks back up, we expect our toll processing volumes to increase. However, as we discussed in prior quarters, in normal market conditions, we expect to see a decrease of approximately 100,000 annual toll processing tons primarily as a result of the WSCP consolidation from Cleveland to Twinsburg." Tim Adams, VP & CFO.
• "Our cap ex forecast for Fiscal 2026 remains at 100 million dollars. Our disciplined approach to capital is aligned with long-term priorities to support growth and customer needs even in uncertain times. We may revise our capex estimate next quarter once we complete our review of Sitem’s capex priorities." Tim Adams, VP & CFO.
• "Still bullish on electrification and on both of those projects that you referenced in Canada and Mexico. As far as electrical steel laminations and transformer cores being included in the 232 derivatives, Phil, we've seen little impact. We don't think we're going to see any material impact going forward. The customers are paying or are willing to pay the tariffs." Geoff Gilmore, President and CEO.
• "I think going forward, Martin, I think our direct sale volume is probably going to be in that 60% to 65% range and toll will then be 35% to 40%." Tim Adams, VP & CFO.
• "I think you're going to see markets kind of -until there's more clarity and some of this uncertainty goes away on tariffs and other things, I think you're going to see these markets just kind of move along as they have been." Tim Adams, VP & CFO.

Industry Context

The steel industry is experiencing mixed macro environments with limited visibility, characterized by downward pressure on hot rolled coil pricing despite increased tariffs on imported steel. The automotive market, however, shows resilience, with a projected 15 million unit build rate for the year, and the company is gaining market share. The demand for electrical steel, driven by the global transition to electric vehicles, data center growth, and grid modernization, remains strong, with the transformer market expected to grow by up to 7% annually over the next decade. Conversely, the agricultural and heavy truck markets are facing challenges, and toll processing volumes are down due to softer overall market conditions and facility consolidation. The company's strategic investments in electrical steel and AI-driven transformation initiatives position it to capitalize on long-term growth trends in electrification and operational efficiency, differentiating it within a cyclical industry.

Comparison to Industry Standards

• Automotive shipments increased by nearly 13% year-over-year, significantly outperforming the Detroit 3's production increase of approximately 5%, indicating substantial market share gains.
• The transformer market is expected to grow by up to 7% per year over the next decade, and the company's Canada facility has already secured enough new business to fill 50% of its additional capacity, suggesting strong alignment with market demand.
• The company's direct sale volume mix of 63% (compared to 56% in the prior year) and expected 60-65% going forward, compared to toll processing, indicates a strategic shift towards higher-value-added direct sales, which is generally a positive trend for metals processors.
• The company's ability to maintain strong gross margins and adjusted EBIT despite a 'soft market' and declining hot rolled coil prices (from $950/ton to $800/ton) suggests effective inventory management and contract strategies compared to industry peers who might be more exposed to commodity price volatility.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders: Positive impact from increased earnings, adjusted EPS, and the declared quarterly dividend of $0.16 per share. Stable corporate governance was affirmed through director elections and approval of executive compensation and auditors. Negative impact from negative free cash flow and potential inventory holding losses in the next quarter.
• Employees: Positive impact from achieving the safest quarter on record and the company's 'people-first Philosophy.' Sitem Group employees received a one-time acquisition completion bonus. AI initiatives are expected to free up employees from repetitive tasks, potentially increasing job fulfillment.
• Customers: Positive impact from increased direct volumes, market share gains in automotive, and the company's focus on delivering customized solutions and expanding electrical steel capabilities to meet growing demand.
• Suppliers: Continued strong relationships with multiple mill sources, ensuring no anticipated interruptions in supply chains despite market events.
• Creditors: Net debt increased over the sequential quarter primarily due to increases in working capital, but the company maintains a strong balance sheet and ample liquidity.

Next Steps

• Continue ramping up new automotive programs.
• Begin production in the Mexico electrical steel facility in just a few months, with trials currently underway.
• Start production in the Canada electrical steel facility in early calendar year 2026.
• Continue to identify, launch, and advance AI-driven pilots for demand forecasting, inventory optimization, predictive maintenance, and demand planning automation.
• Continue applying transformation to back-office functions to automate tasks and improve efficiency.
• Review Sitem's capital expenditure priorities and potentially revise the fiscal 2026 capex estimate.
• Engage in the upcoming contract season to pursue further automotive market share opportunities for the next calendar year.

Key Dates

Recommendation

Worthington Steel demonstrated robust financial performance in Q1 FY26, exceeding prior year results in net sales, operating income, and adjusted EPS, despite a challenging market. The strategic acquisition of Sitem Group and significant market share gains in the automotive sector highlight effective execution and competitive strength. The company's substantial investments in high-growth electrical steel markets (EV and transformer cores) are well-timed to capitalize on long-term electrification and infrastructure trends, with projects on schedule and new business already secured. While negative free cash flow and anticipated inventory holding losses in the near term present some headwinds, the underlying business strength, disciplined management, and clear growth strategy, including AI-driven transformation, position Worthington Steel for continued value creation. The declared dividend further signals confidence. For a seasoned investor, the company's strategic positioning in critical growth areas, combined with its operational agility and strong Q1 performance, makes it an attractive 'buy' despite short-term market uncertainties.

Keywords

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