WS — Q1 2026 (Fiscal Q1 2027) Financial Report Analysis

Overview

Worthington Steel's first quarter of fiscal 2027 (the three months to August 31, 2026) is the first one that includes Kloeckner, the German metals distributor it took control of on June 3, 2026. Net sales roughly tripled to $2,726.6 million from $872.9 million, but the company swung to a net loss of $10.0 million ($0.20 per diluted share) from a $36.8 million profit ($0.73) a year earlier. The loss comes from deal costs, a write-down on Kloeckner shares it already owned, a 13-fold jump in interest expense on the money borrowed to buy Kloeckner, and a quarter in which tax ate the whole pre-tax profit. Strip out the one-time deal items and adjusted EBIT, management's preferred profit measure, rose 41% to $78.5 million. Kloeckner supplied $27.9 million of that, and the legacy business's share fell.

At a glance

• $1,772.7 million of the $2,726.6 million in sales came from Kloeckner. Without it, sales grew 9% to about $953.9 million, on 3% more steel sold directly and 6% higher selling prices.
• Interest expense went from $2.9 million to $38.8 million. Total debt is now $2,196.4 million against $256.8 million at May 31, 2026. Paying for that debt is now the biggest single claim on operating profit ($56.0 million this quarter).
• Adjusted EBIT excluding Kloeckner fell $4.9 million, even though steel prices rose. Higher wages and foreign-currency losses outweighed a $2.0 million gain in gross margin, so the legacy business got slightly less profitable this quarter.

The numbers

Worthington Steel's fiscal year ends May 31. This quarter is fiscal Q1 2027, which the site files as Q1 2026 because the quarter ended in calendar 2026. The year-ago quarter does not include Kloeckner, so most consolidated growth rates below mainly show the effect of the acquisition, not underlying growth.

Operating margin is the share of sales left after the costs of running the business, before interest and tax. Adjusted EBIT is earnings before interest and tax with deal costs, restructuring and similar one-off items taken out.

Takeaway: The deal made Worthington Steel about three times bigger, but per dollar of sales the new business earns far less. Kloeckner turned $1,772.7 million of sales into $27.9 million of adjusted EBIT (about 1.6%), while the legacy business made about 5.3%. All of it now has to cover roughly $39 million of quarterly interest. Whether the acquisition pays off depends on raising Kloeckner's margin and paying down debt, and neither had started to show up by the end of this quarter.

What Kloeckner changed

Worthington Steel bought steel coils from mills and processed them (cutting, slitting, coating, welding) for mostly automotive customers. It earned money in two ways: direct sales, where it buys the steel and resells it processed and earns the "spread" between its selling price and material cost, and toll processing, where it charges a fee to process steel the customer still owns. Kloeckner is mainly a metals service center: it stocks and distributes a much wider range of products (carbon steel, aluminum, stainless, long products) across the US, Mexico and Europe. That is a lower-margin, higher-volume business.

The mix shift is clear in the filing:

The company now depends much less on Detroit's production schedules and is more tied to US and European industrial activity. Management says Eurozone GDP is now an indicator it watches; Eurozone growth was 1.0% in the quarter, down from 1.4% a year earlier.

Deal mechanics. Worthington paid €11.00 per share in a takeover offer. The tendered shares cost €576.3 million (about $668.3 million), giving it 60.86% of Kloeckner together with shares it already held. Further purchases and a delisting offer (Kloeckner left the Frankfurt Stock Exchange on August 12, 2026) raised that to about 62.11%. The other ~38% belongs to outside shareholders. Their share of Kloeckner's profit is deducted as "noncontrolling interests," which is one reason net earnings attributable to Worthington are below total net earnings.

The legacy business on its own

The filing separates out the pre-Kloeckner business, which gives the best like-for-like view:

• Sales up $81.0 million (9%). Direct tons sold rose 3% and direct selling prices rose 6%, helped by steel prices (hot-rolled coil averaged $1,152/ton vs $857). Toll processing sales slipped $0.7 million: toll volume fell 8% on "continued soft demand from mill customers."
• Gross margin up only $2.0 million. Direct spreads improved by $13.9 million, of which $6.5 million came from a bigger inventory holding gain: when steel prices rise, metal bought earlier at lower prices is sold at the new higher prices. The gain was an estimated $12.1 million, against $5.6 million a year ago. Manufacturing expenses rose $11.1 million, "primarily related to increased wages and benefits."
• End markets: direct shipments to automotive rose 4% even though North American vehicle production fell 1%. Construction volumes fell 9%, which management attributes to competition and tight steel supply limiting short-term contract work. Machinery & equipment rose 28%, but the filing says this is mostly a reporting-calendar effect at its Sitem Group subsidiary (an extra month included this quarter), "only expected to occur during this reporting period."
• Adjusted EBIT fell $4.9 million: a $2.8 million wage-related rise in overhead and $2.3 million more miscellaneous expense (currency losses, lower income from the Serviacero Worthington joint venture) outweighed the $2.0 million gross-margin gain. On our arithmetic, legacy adjusted EBIT was about $50.6 million on $953.9 million of sales, or 5.3%, compared with 6.4% a year ago.

What the headline numbers hide

• The GAAP loss is mostly one-off items, but not all of it. The adjustments from GAAP to adjusted EBIT this quarter were: $21.4 million of Kloeckner acquisition costs (legal, advisory, valuation fees; $22.6 million in total before the minority share), a $15.5 million loss from revaluing the Kloeckner shares Worthington held before the deal to the €11.00 offer price, a $0.9 million loss on a hedge for the purchase price, minus a $2.6 million restructuring gain (sales of Kloeckner property in Louisiana and Switzerland) and a $0.6 million pension gain. None of these should recur at this size. Interest expense is not on that list, and it will recur.
• A 100.7% tax rate. Income tax was $12.1 million on $12.0 million of pre-tax earnings. The company says this came from lower pre-tax earnings "partially offset by tax effects associated with the acquisition of Kloeckner." Several of the deal costs probably do not reduce taxable income, but the filing does not break this down. Treat this as a distorted quarter, not a new normal tax rate.
• Cash conversion: nothing came in from operations. Operating cash flow was -$6.0 million, about the same as -$6.3 million a year ago. The company says both quarters needed more working capital as inventory got more expensive. With steel prices up 34%, more cash is tied up in stock. Capital spending more than doubled to $63.0 million from $29.4 million.
• Debt. The deal was financed with $700.0 million of 7.75% secured notes due 2033 and a $700.0 million term loan (SOFR + 4.00%, a floating rate), plus the debt Kloeckner already carried. $200.0 million of the term loan was repaid on August 19, leaving $500.0 million. Total debt was $2,196.4 million and cash $248.2 million at quarter end. As a rough check (our calculation, not the company's), quarterly adjusted EBITDA of $111.0 million is about $444 million a year, which puts net debt at about 4.4 times annual earnings before interest, tax, depreciation and amortization. This quarter's EBITDA includes Kloeckner for about 89 of 92 days, so the ratio is slightly overstated. Because the term loan floats, the Federal Reserve's 25-basis-point rate rise in September 2026 (noted in the filing) raises its cost directly.
• A maturity to watch. A Kloeckner asset-based credit line with $465.0 million outstanding matures in July 2027. Management expects to refinance it through the new $550.0 million 2031 revolving facility "or other available financing sources."
• Discontinued operations. Some Kloeckner units are classified as held for sale and reported separately. They lost $4.9 million this quarter ($3.0 million of it Worthington's share), which is the gap between the $(0.14) continuing EPS and the $(0.20) total.
• No buyback effect. Diluted share count was 50.0 million against 50.6 million and no shares were repurchased, so share count did not move EPS.
• A fairer comparison. The filing's unaudited pro forma figures, which show the two companies as if combined from June 2025, give sales of $2,726.6 million vs $2,516.8 million (+8.3%) and net earnings from continuing operations of $23.1 million ($0.46 per share) vs a $12.0 million loss. The pro forma excludes this quarter's deal costs and the share remeasurement. It is the company's own unaudited calculation, but it does suggest the combined business is earning more than it was a year ago.

What comes next

• Control of Kloeckner is still limited. On September 8, 2026, Worthington signed a domination and profit-and-loss transfer agreement (DPLTA) with Kloeckner. This is a German legal arrangement that would let Worthington direct Kloeckner's management and take its profits (and absorb its losses) directly. Kloeckner shareholders vote on it on October 23, 2026, and it cannot take effect before January 1, 2027. Until then, German law limits how far Worthington can integrate the two businesses, so cost savings are unlikely to show up before calendar 2027.
• Paying out the minority shareholders. Once the DPLTA is in effect, outside Kloeckner shareholders can either sell to Worthington at €11.00 per share (about €415.8 million, or $483.0 million, if all of them sell) or keep their shares and receive €0.67 per share each year (about $29.4 million a year if none sell), starting in 2028. Either option is a further cash commitment, and the filing warns that appraisal proceedings could push the amount higher.
• Guidance. Management expects inventory holding gains of $10 million to $15 million in fiscal Q2, similar to this quarter's $12.1 million, because steel prices are still rising. It plans $160 million to $180 million of capital spending for fiscal 2027 and says it will "prioritize debt reduction." The quarterly dividend stays at $0.16 per share.
• Our view. Under the one-off charges, the combined company's operating profit is growing, mainly because it is larger. The legacy business's margin is slipping, Kloeckner's margin is thin, and interest ($38.8 million) now takes about 70% of operating income ($56.0 million). With $500 million of floating-rate debt, rising rates, a 2027 refinancing and a possible payment of up to $483 million to minority shareholders, this is a more indebted company than it was a year ago, earning a lower margin. Three things will decide whether the deal works: Kloeckner's adjusted EBIT margin moving up from about 1.6%, the term loan being paid down further, and the DPLTA being approved on October 23. High steel prices help in the meantime through inventory gains, but those gains would turn into losses if prices fall.