Worthington Steel Q1 FY2027 Earnings: Kloeckner Drives Revenue, Deal Costs Weigh on EPS

Worthington Steel (NYSE: WS) reported fiscal Q1 2027 net sales of $2.7266 billion, up 212% from $872.9 million, while diluted EPS from continuing operations attributable to controlling interest swung to a $0.14 loss from earnings of $0.73. The quarter ended August 31, 2026, included Kloeckner for the first time, adding $1.7727 billion of sales but also bringing acquisition costs and purchase-accounting effects. Free cash flow deteriorated to negative $69.0 million as capital expenditure rose to $63.0 million.

Core Earnings Data

Reported sales growth came primarily from the consolidation of Kloeckner. Excluding the acquisition’s impact, net sales increased $81.0 million, or 9%, to $953.9 million, supported by higher direct volumes and selling prices.

Profit expanded far less than revenue. Operating income increased by $7.7 million, but acquisition-related expenses and other adjustments contributed to a GAAP net loss, while adjusted EPS also declined year over year.

Adjusted EBITDA includes the full results of consolidated operations, including noncontrolling interests, and prior periods were recast to match this presentation. EPS is attributable to Worthington Steel’s controlling interest. Unless otherwise specified, the results cover continuing operations and exclude the Kloeckner disposal group classified as discontinued operations.

Business and Operating Performance

Kloeckner changed the scale and business mix of Worthington Steel. Consolidated volume rose to 1.94 million tons from 928,866 tons, while legacy Worthington Steel volume was 921,234 tons, about 1% below the prior-year period. The consolidated mix shifted to 77% direct and 23% toll volume from 63% and 37%, respectively.

Within the legacy business, direct tons increased 3% and direct selling prices rose 6%, lifting direct sales by $81.7 million. Toll volume declined 8%, while toll pricing increased 6%, resulting in a $0.7 million decrease in toll-processing sales. The legacy mix consequently moved toward direct business, at 66% of volume compared with 63% one year earlier.

Worthington Steel held approximately 62.11% of Kloeckner after completing the majority acquisition and subsequent delisting tender offer. The companies entered into a Domination and Profit and Loss Transfer Agreement after quarter-end, but it remains subject to shareholder approval and commercial-register registration and cannot become effective before January 1, 2027. Until then, Kloeckner continues to operate independently.

Kloeckner Added Operating Profit, but Deal Items Turned the Bottom Line Negative

Kloeckner contributed $144.0 million of gross margin and increased consolidated operating income by $24.2 million. However, its gross margin included an approximately $43 million inventory fair-value step-up associated with purchase accounting. Excluding Kloeckner, gross margin increased only $2.0 million, while operating income declined $16.5 million.

The legacy operating-income decline was mainly caused by a $17.6 million increase in SG&A expenses. Professional fees rose $18.6 million, primarily because of the Kloeckner acquisition, offsetting the benefit of higher direct spreads. Manufacturing expenses also increased $11.1 million, largely because of higher wages and benefits.

Below the operating line, the largest per-share adjustments were $0.37 of Kloeckner acquisition-related expenses, a $0.24 Kloeckner securities investment loss and a $0.11 deferred tax asset adjustment. The listed adjustments reconciled the reported loss of $0.14 per share to adjusted earnings of $0.57 per share. Even after those adjustments, EPS remained below the prior-year figure of $0.77.

Cash Flow and Balance Sheet

Operating activities used $6.0 million of cash, little changed from the $6.3 million used a year earlier. Capital expenditure increased to $63.0 million from $29.4 million, causing negative free cash flow to widen to $69.0 million from $35.7 million.

Worthington Steel ended the quarter with $248.2 million of cash and cash equivalents and $2.1964 billion of total debt, resulting in net debt of $1.9482 billion. The board also declared a quarterly dividend of $0.16 per share, payable December 28, 2026, to shareholders of record on December 14, 2026.

Risks Investors Need to Watch

• Integration and operating-control timing: The agreement intended to support closer control of Kloeckner still requires approval and registration. Delays could affect the timing of integration and value capture.
• Leverage and cash generation: Net debt ended the quarter at $1.9482 billion, while free cash flow was negative $69.0 million. Future cash conversion and capital spending will be important for assessing balance-sheet progress.
• Legacy cost pressure: Higher professional fees and manufacturing expenses more than offset the legacy business’s modest gross-margin improvement. Legacy adjusted EBITDA declined to $75.1 million from $78.8 million despite 9% sales growth.
• Purchase accounting and acquisition costs: The $43 million inventory fair-value step-up and other deal-related items reduced reported profitability and make near-term comparisons with prior periods less direct.
• Disposal execution: Kloeckner businesses classified as held for sale are expected to be sold within one year of the acquisition, making the timing and completion of that process another point to monitor.

Summary

Worthington Steel’s fiscal Q1 2027 was primarily an acquisition-driven quarter: Kloeckner more than tripled reported revenue and added operating profit, but purchase accounting, transaction expenses and investment-related losses pushed GAAP EPS negative. The legacy business benefited from higher direct volume and pricing, though higher costs and weaker toll volume constrained profitability. The next key measures are integration progress, adjusted earnings, cash generation and the company’s ability to manage its acquisition-related debt load.