What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-16 compared with 2020-08-14 · 85 added, 33 removed, 92 unchanged (56% of the section changed)

8 unchanged sentences

The Decatur facility previously operated a temper mill and a cut-to-length line but during the quarter ended June 30, 2020, the equipment was removed to allow the foundation to be prepared for a new stretcher leveler line that will be installed.

As part of the equipment removal, the cut-to-length line was sold for scrap resulting in anticipated proceeds of $30,957 and $2,688,381 of original cost being removed from machinery and equipment and accumulated depreciation of $2,657,424 being removed.

The temper mill was disassembled with the components being cleaned, cataloged and stored as the Company intends to sell the equipment.

Installation of the new equipment is expected to begin in October 2020 and commercial use is expected to start in February 2021.

The estimated total cost of this project is $5,800,000 with approximately $3,874,000 having been spent as of June 30, 2020.

Installation is expected to begin in December 2020 and commercial use is expected to start in February 2021.

The estimated total cost of this project is $7,200,000 with approximately $5,427,000 having been spent as of September 30, 2020 .

This estimated cost is greater than our previously disclosed cost of $5,800,000 due to additional components that have been added to the project to improve the efficiency and output of the equipment.

The new equipment will expand the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and will allow the Decatur facility to cut material that is up to ½” thick compared to the previous equipment’s capability of 5/16” thick.

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TTP has an API licensed pipe finishing facility that threads and couples oil country tubular goods and performs other services that are customary in the pipe finishing process.

The pipe finishing facility is currently idled due to market conditions.

TTP’s inventory consists of raw materials and finished goods.

Raw material inventory consists of hot-rolled steel coils that TTP will manufacture into pipe.

Finished goods inventory consists of pipe that TTP has manufactured and new mill reject pipe that TTP purchases from U.S.

Finished goods inventory consists of pipe that TTP has manufactured and new mill reject pipe that TTP purchased from U.S.

Steel Tubular Products, Inc.

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We have experienced a small number of cases within our workforce with each case being isolated with no spread to other employees.

We are pleased to report that all of those cases have successfully recovered and that we are not aware of any active cases as of the filing of this Form 10-Q.

Results of Operations

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

During the three months ended June 30, 2020 (the “2020 quarter”), sales, costs of goods sold and gross profit decreased $17,450,720, $16,236,150 and $1,214,570, respectively, compared to the amounts recorded during the three months ended June 30, 2019 (the “2019 quarter”).

Six Months Ended September 30, 2020 Compared to Six Months Ended September 30, 2019

During the six months ended September 30, 2020 (the “ 2020 period”), sales and costs of goods sold decreased $32,584,620 and $33,243,797, respectively, and gross profit increased $659,177 compared to the amounts recorded during the six months ended September 30, 2019 (the “ 2019 period”).

The decrease in sales was related to both a decline in tons sold and a decrease in the average per ton selling price.

Tons sold decreased from approximately 112,000 tons in the 2019 period to approximately 81,500 tons in the 2020 period.

The drop in volume was primarily attributable to economic impacts of COVID-19.

Discussion of the change in sales is expanded upon at the segment level in the following paragraphs.

Gross profit as a percentage of sales increased from approximately 1.0% in the 2019 period to approximately 2.8% in the 2020 period.

Our operating results are significantly impacted by the market price of hot-rolled steel coil.

Results for both the 2020 period and the 2019 period were negatively impacted by a declining steel price.

The 2020 period experienced additional challenges related to the COVID-19 pandemic.

Coil product segment sales for the 2020 period totaled $33,888,870 compared to $56,602,077 for the 2019 period.

For a more complete understanding of the average selling prices of goods sold, it is helpful to isolate sales generated from processing of customer owned material and sales generated from coil segment inventory.

Sales generated from processing of customer owned material totaled $390,034 for the 2020 period compared to $393,021 for the 2019 period.

Sales generated from coil segment inventory totaled $33,498,836 for the 2020 period compared to $56,209,056 for the 2019 period.

Inventory tons sold decreased from approximately 81,000 tons in the 2019 period to approximately 60,000 tons in the 2020 period.

The average per ton selling price related to these shipments decreased from approximately $695 per ton in the 2019 period to approximately $556 per ton in the 2020 period.

Coil segment operations recorded operating profits of approximately $291,000 and $668,000 for the 2020 and 2019 periods, respectively.

Operating results for both the 2020 period and the 2019 period were negatively impacted by declining hot-rolled steel prices but the 2020 period was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic.

Compared to the average monthly sales volume for the fiscal year ended March 31, 2020 , April 2020 volume was down approximately 51%, May 2020 volume was down approximately 33%, June 2020 volume was down approximately 3%, July 2020 volume was down approximately 6%, August 2020 volume was down approximately 19% and September 2020 volume was down approximately 12%.

The coil segment sales volume has experienced a fairly rapid recovery during the 2020 period from the initial volume drop in April 2020.

We expect monthly volume for the third quarter of fiscal 2021 to remain slightly below the average monthly fiscal 2020 volume.

Coil segment sales volume for October 2020 was down approximately 10% compared to the fiscal 2020 monthly average.

The Company’s coil segment purchases its inventory from a limited number of suppliers.

Loss of any of these suppliers could have a material adverse effect on the Company’s business.

Tubular Segment

Tubular product segment sales for the 2020 period totaled $14,497,410 compared to $24,368,823 for the 2019 period.

Sales declined due to both a reduction in the volume sold and a decrease in the average selling price per ton.

Tons sold decreased from approximately 31,000 tons in the 2019 period to approximately 21,000 tons in the 2020 period.

The average per ton selling price related to these shipments decreased from approximately $787 per ton in the 2019 period to approximately $680 per ton in the 2020 period.

The tubular segment operations recorded operating losses of approximately $285,000 and $1,201,000 for the 2020 and 2019 periods, respectively.

Operating results for both the 2020 period and the 2019 period were negatively impacted by declining hot-rolled steel prices, but the 2020 period was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic and challenging conditions for the U.S.

energy industry.

Compared to the average monthly sales volume for the fiscal year ended March 31, 2020 , April 2020 volume was down approximately 4%, May 2020 volume was down approximately 36%, June 2020 volume was down approximately 27%, July 2020 volume was down approximately 20%, August 2020 volume was down approximately 51% and September 2020 volume was down approximately 25%.

The volume for April was supported by the segment fulfilling manufactured pipe orders that were received prior to the COVID-19 pandemic’s broad impact on the U.S.

The tubular segment volume has seen a challenging recovery with energy industry conditions being weak and, in recent months, additional challenges from increased imported pipe competition.

October 2020 volume was down approximately 18% compared to the fiscal 2020 monthly average.

Operating results for both the 2020 and 2019 periods were also negatively impacted by inventory write downs related to the segment's manufactured pipe inventory.

In the 2020 period there was a write down of $274,093 at June 30, 2020 and in the 2019 period there was a write down of $955,605 at September 30, 2019.

The Company’s tubular segment purchases its inventory from a limited number of suppliers.

Loss of any of these suppliers could have a material adverse effect on the Company’s business.

In March 2020, U.S.

Steel announced the idling of their Lone Star Tubular Operations which is our sole supplier of mill reject pipe.

At September 30, 2020 , we had approximately 30,500 tons of mill reject inventory which we believe to be approximately two years of inventory.

We expect the idling to have a negative impact on our operations as we eventually sell out of inventory.

General, Selling and Administrative Costs

During the 2020 period, general, selling and administrative costs increased $331,405 compared to the 2019 period.

The increase was related primarily to increased payroll, professional fees and restricted stock plan compensation expense.

The income tax benefit for the 2020 period decreased $73,009 from the benefit recorded in the 2019 period.

This decrease was related primarily to the smaller loss before taxes for the 2020 period compared to the 2019 period.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

During the three months ended September 30, 2020 (the “ 2020 quarter”), sales and costs of goods sold decreased $15,133,900, $17,007,647, respectively and gross profit increased $1,873,747 compared to the amounts recorded during the three months ended September 30, 2019 (the “ 2019 quarter”).

The decrease in sales was related to both a decline in tons sold and a decrease in the average per ton selling price.

Tons sold decreased from approximately 58,500 tons in the 2019 quarter to approximately 43,000 tons in the 2020 quarter.

1 unchanged sentence

Discussion of the change in sales is expanded upon at the segment level in the following paragraphs.

Gross profit as a percentage of sales decreased from approximately 3.6% in the 2019 quarter to approximately 1.1% in the 2020 quarter.

Gross margin as a percentage of sales increased from a loss margin of approximately 2.0% in the 2019 quarter to a profit margin of approximately 4.4% in the 2020 quarter.

Our operating results are significantly impacted by the market price of hot-rolled steel coil.

Results for both the 2020 quarter and the 2019 quarter were negatively impacted by a declining steel price.

The 2020 quarter experienced additional challenges related to the COVID-19 pandemic.

Results for both the 2020 quarter and the 2019 quarter were negatively affected by the impact of declining steel prices.

However, steel prices started increasing in the middle of the 2020 quarter which sparked margin improvement, especially for the coil segment where margin typically responds quicker to fluctuations in steel prices.

Coil product segment sales for the 2020 quarter totaled $18,456,086 compared to $28,420,609 for the 2019 quarter.

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The average per ton selling price related to these shipments decreased from approximately $653 per ton in the 2019 quarter to approximately $548 per ton in the 2020 quarter.

Coil segment operations recorded an operating loss of approximately $459,000 for the 2020 quarter and an operating profit of approximately $345,000 for the 2019 quarter.

Operating results for both the 2020 quarter and the 2019 quarter were negatively impacted by declining hot-rolled steel prices but the 2020 quarter was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic.

Compared to the average monthly sales volume for the fiscal year ended March 31, 2020, April 2020 volume was down approximately 51%, May 2020 volume was down approximately 33% and June 2020 volume was down approximately 3%.

The coil segment experienced a rapid recovery in sales volume during the 2020 quarter, and we expect the recovery of monthly volumes to near fiscal 2020 volume levels to be sustained for the second quarter of fiscal 2021.

Coil segment sales volume for July 2020 was down approximately 6% compared to the fiscal 2020 monthly average and we expect similar volume for August 2020.

Coil segment operations recorded operating profits of approximately $751,000 and $324,000 for the 2020 and 2019 quarters, respectively.

Operating results for both the 2020 quarter and the 2019 quarter were negatively impacted by low margins associated with declines in hot-rolled steel prices.

However, margins did start to improve at the end of the 2020 quarter when hot-rolled steel pricing increased.

The 2020 quarter was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic.

The Company’s coil segment purchases its inventory from a limited number of suppliers.

5 unchanged sentences

The average per ton selling price related to these shipments decreased from approximately $755 per ton in the 2019 quarter to approximately $634 per ton in the 2020 quarter.

The tubular segment operations recorded operating profits of approximately $59,000 and $545,000 for the 2020 and 2019 quarters, respectively.

Operating results for both the 2020 quarter and the 2019 quarter were negatively impacted by declining hot-rolled steel prices, but the 2020 quarter was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic and challenging conditions for the U.S.

The tubular segment operations recorded operating losses of approximately $344,000 and $1,746,000 for the 2020 and 2019 quarters, respectively.

Operating results for both the 2020 quarter and the 2019 quarter were negatively impacted by declines in hot-rolled steel prices, but the 2020 quarter was impacted additionally by a decline in volume primarily related to impacts of the COVID-19 pandemic and challenging conditions for the U.S.

energy industry.

Compared to the average monthly sales volume for the fiscal year ended March 31, 2020, April 2020 volume was down approximately 4%, May 2020 was down approximately 36% and June 2020 was down approximately 27%.

The volume for April was supported by the segment fulfilling manufactured pipe orders that were received prior to the COVID-19 pandemic’s broad impact on the U.S.

The tubular segment has seen a slow but gradual improvement since May with this trend continuing into July, with monthly volume down 20% from the fiscal 2020 monthly average.

Energy industry conditions remain challenging and, in recent months, we have seen increased competition from imported pipe.

Operating results for the 2020 quarter were also negatively impacted by an inventory write down of $274,093 at June 30, 2020 related to the segment’s manufactured pipe inventory.

The write down was necessary due to the continued decline in steel prices and reduced product demand resulting in unadjusted inventory values that were in excess of net realizable values at and subsequent to June 30, 2020.

We expect tubular demand to remain soft during the second quarter of fiscal 2021.

Operating results for the 2019 quarter were also negatively impacted by an inventory write down of $955,605 at September 30, 2019 related to the segment’s manufactured pipe inventory.

The Company’s tubular segment purchases its inventory from a limited number of suppliers.

2 unchanged sentences

Steel announced the idling of their Lone Star Tubular Operations which is our sole supplier of mill reject pipe.

At June 30, 2020, we had approximately 31,000 tons of mill reject inventory which we believe to be approximately two years of inventory.

At September 30, 2020 , we had approximately 30,500 tons of mill reject inventory which we believe to be approximately two years of inventory.

We expect the idling to have a negative impact on our operations as we eventually sell out of inventory.

1 unchanged sentence

During the 2020 quarter, general, selling and administrative costs increased $148,039 compared to the 2019 quarter.

Approximately $78,000 of this increase is due to the reclassification of some payroll costs that were previously classified as part of costs of goods sold and now classified under general and administrative costs.

The remaining increase was related primarily to increased professional fees and restricted stock plan compensation expense.

Income taxes in the 2020 quarter decreased $352,267 from the amount recorded in the 2019 quarter.

This decrease was related primarily to the decrease in earnings before taxes for the 2020 quarter compared to the 2019 quarter.

The increase was related primarily to increased payroll, professional fees and restricted stock plan compensation expense.

The income tax benefit for the 2020 quarter decreased $425,276 from the benefit recorded in the 2019 quarter.

This decrease was related primarily to the smaller loss before taxes for the 2020 quarter compared to the 2019 quarter.

During August 2020 hot-rolled steel pricing started to rise and has continued a significant increase of approximately 60% as of the filing date of this Form 10-Q.

Our coil segment margins started improving late in the second quarter and have continued to improve during the third quarter.

Our tubular segment margins do not respond as quickly to the fluctuations in steel price but we have started to see improved margins for our manufactured pipe sales during November 2020.

In general, we expect solid margins for the third quarter.

We expect both coil segment and tubular segment sales volumes for the third quarter to be comparable to those of the second quarter with the potential to be slightly less due to typical seasonality associated with the holidays and fewer shipping days.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company’s current ratio was 16.2 at June 30, 2020 and 6.8 at March 31, 2020.

Working capital was $54,394,416 at June 30, 2020 and $55,566,158 at March 31, 2020.

During the three months ended June 30, 2020, the Company maintained assets and liabilities at levels it believed were commensurate with operations.

The Company’s current ratio was 9.0 at September 30, 2020 and 6.8 at March 31, 2020 .

Working capital was $51,947,484 at September 30, 2020 and $55,566,158 at March 31, 2020 .

During the six months ended September 30, 2020 , the Company maintained assets and liabilities at levels it believed were commensurate with operations.

Changes in balance sheet amounts occurred in the ordinary course of business.

Cash decreased from operating activities and the purchase of property, plant and equipment partially offset by a cash inflow from financing associated with a Paycheck Protection Program loan discussed in more detail below.

Cash increased primarily from operating activities and from Paycheck Protection Program loan proceeds with these increases being partially offset by the purchase of property, plant and equipment, payment of cash dividends and the repurchase of common stock.

The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

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While the Company plans to apply for forgiveness of the PPP Loan in accordance with the requirements and limitations under the CARES Act, the PPP Flexibility Act and the Small Business Administration regulations and requirements, no assurance can be given that all or any portion of the PPP Loan will be forgiven.

As of the filing date of this Form 10-Q, the Company was waiting to receive an invitation from the Bank to submit an application for forgiveness.

On June 25, 2020, our Board of Directors authorized a share repurchase program under which the Company may repurchase up to 1,062,067 shares of the Company’s outstanding common stock through June 30, 2023, which equates to 15% of the Company’s outstanding shares of common stock as of June 25, 2020.

During the September 30, 2020 quarter we repurchased 67,281 shares at a total cost of $410,221.

Repurchases under the program may be made from time to time at the Company’s discretion and may be made in open market transactions, through block trades, in privately negotiated transactions and pursuant to any trading plan that may be adopted by the Company’s management in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or otherwise.

The timing and actual number of shares repurchased pursuant to the program will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities.

The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be modified, suspended or discontinued at any time.

The Company believes that its current cash position along with cash flows from operations and borrowing capability due to its financial position are adequate to fund its expected cash requirements for the next 12 months.

23 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis