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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-02-14 · 42 added, 105 removed, 64 unchanged (70% of the section changed)

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flat-roll products and tubular products.

The flat-roll segment was previously referred to as the coil segment.

The Company is now using flat-roll to describe the segment due to it being a more common term used in the Company's industry.

The flat-roll product segment consists of the operation of five hot-rolled coil processing facilities located in Hickman, Arkansas; Decatur, Alabama; East Chicago, Indiana; Granite City, Illinois and Sinton, Texas.

The facilities in Granite City and East Chicago were acquired on April 30, 2022 from Plateplus, Inc ("Plateplus").

More information about the Plateplus transaction can be found in Note B to the condensed consolidated financial statements.

The facility in Sinton is a newly constructed facility that commenced operations during October 2022.

The Hickman, Granite City and East Chicago facilities operate temper mills and cut-to-length lines.

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Both pipe mills are American Petroleum Institute (“API”) licensed to manufacture line pipe and oil country pipe and also manufacture pipe for structural purposes that meets other recognized industry standards.

TTP has a pipe finishing facility capable of applying threads and couplings to oil country tubular goods and performing other services that are customary in the pipe finishing process.

The pipe finishing facility is currently idled.

All of the tubular segment's revenue is generated from sales of Company owned inventory.

Results of Operations

Nine Months Ended December 31, 2023 Compared to Nine Months Ended December 31, 2022

During the nine months ended December 31, 2023 (the “ 2023 period”), sales and costs of goods sold decreased approximately $39.3 million and $42.4 million, respectively, and gross profit increased approximately $3.1 million compared to the amounts recorded during the nine months ended December 31, 2022 (the “ 2022 period”).

The decrease in sales was primarily related to a decline in the average selling price per ton partially offset by an increase in sales volume .

Sales volume for the 2023 period consisted of approximately 375,000 tons from inventory and another 72,000 tons of toll processing customer owned material compared to the 2022 period volume consisting of approximately 335,000 tons from inventory and 34,000 tons of toll processing .

The growth in sales volume was primarily related to the Sinton, TX facility operating for the full 2023 period compared to commencing operations during October 2022 of the 2022 period.

Gross profit increased from approximately $29.5 million for the 2022 period to approximately $32.6 million for the 2023 period.

Gross profit as a percentage of sales increased from approximately 7.0% for the 2022 period to approximately 8.5% for the 2023period.

Gross profit for the 2023 period included a recognized loss of approximately $0.4 million related to hedging activities while gross profit for the 2022 period included a recognized loss of approximately $3.0 million related to hedging activities.

Excluding the recognized hedging losses, gross profit related to physical material as a percentage of sales was approximately 8.6% for the 2023 period compared to approximately 7.6% for the 2022 period.

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

The Company experienced significant volatility in steel price during both the 2023 period and the 2022 period .

Entering the 2022 period, HRC prices experienced a sharp and abrupt increase in reaction to the Russian invasion of Ukraine increasing approximately 60% from March 2022 to April 2022.

HRC prices then declined approximately 60% until the middle of December 2022.

From late November 2022 until April 2023, domestic steel producers announced several rounds of price increases with HRC prices increasing approximately 95% during this time.

From the middle of April 2023 and until early October 2023, HRC prices declined approximately 45%.

From early October 2023 through the end of the 2023 period, HRC prices increased approximately 66%.

For both the 2023 and 2022 periods, the Company experienced significant increases in steel prices entering the periods with an inflection point in steel price occurring early in each period.

As a result both periods experienced similar margin dynamics with stronger margins for the first quarter followed by lower margins for the second quarter and entering the third quarter with margin improvement towards the end of the third quarter.

Flat-roll Segment

Flat-roll product segment sales for the 2023 period totaled approximately $352.1 million compared to approximately $372.8 million for the 2022 period.

For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any hedging related gains or losses that are captured in sales and any sales generated from processing or storage of customer owned material.

Flat-roll segment sales for the 2023 period were reduced by approximately $0.4 million for the recognition of hedging related losses.

Flat-roll segment sales for the 2022 period were reduced by approximately $3.0 million for the recognition of hedging related losses.

Sales generated from processing or storage of customer owned material totaled approximately $3.6 million for the 2023 period compared to approximately $1.0 million for the 2022 period.

Sales generated from flat-roll segment inventory, excluding the impact of any hedging related gains or losses, totaled approximately $348.9 million for the 2023 period compared to approximately $374.8 million for the 2022 period.

The average per ton selling price related to these shipments decreased from approximately $1,222 per ton in the 2022 period to approximately $995 per ton in the 2023 period.

Flat-roll segment s ales volume for the 2023 period consisted of approximately 351,000 tons from inventory and another 72,000 tons of toll processing customer owned material compared to the 2022 period volume consisting of approximately 306,500 tons from inventory and 34,000 tons of toll processing .

The growth in sales volume was primarily related to the Sinton, TX facility operating for the full 2023 period compared to commencing operations during October 2022 of the 2022 period.

Flat-roll segment operations recorded operating profits of approximately $23.6 million and $15.7 million for the 2023 period and 2022 period, respectively.

The operating profit for the 2023 period includes a recognized loss on hedging activities of approximately $0.4 million while the 2022 period operating profit included a recognized loss on hedging activities of approximately $3.0 million.

The Company’s flat-roll 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 2023 period totaled approximately $31.9 million compared to approximately $50.5 million for the 2022 period.

Tubular segment sales for the 2023 period and 2022 period were not impacted by any hedging related gains or losses.

Sales decreased due to a decrease in the average selling price per ton, accompanied by a decline in the volume sold.

The average per ton selling price decreased from approximately $1,785 per ton in the 2022 period to approximately $1,319 per ton in the 2023 period.

Tons sold decreased from approximately 28,500 tons in the 2022 period to approximately 24,000 tons in the 2023 period.

The tubular segment recorded operating profits of approximately $2.2 million and $6.1 million for the 2023 period and 2022 period, respectively.

The 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.

General, Selling and Administrative Costs

During the 2023 period, selling, general and administrative costs decreased approximately $0.7 million compared to the 2022 period.

This decrease is primarily related to the 2022 period containing one-time costs associated with the Plateplus transaction with this decrease being partially offset by increased payroll and benefits expense in the 2023 period associated with a higher employee count.

Income taxes decreased from a provision for the 2022 period of approximately $4.6 million to a provision for the 2023 period of approximately $3.8 million .

This decrease was primarily related to the lower earnings before income tax for the 2023 period.

The income tax provision as a percentage of earnings before tax was approximately 23.4% and 23.6% for the 2023 period and 2022 period , respectively.

For both periods, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state income taxes in the provision.

Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022

During the three months ended December 31, 2023 (the “ 2023 quarter”), sales increased approximately $4.1 million, costs of goods sold decreased approximately $0.2 million, and gross profit increased approximately $4.3 million compared to the amounts recorded during the three months ended December 31, 2022 (the “ 2022 quarter”).

The increase in sales was primarily related to an increase in sales volume partially offset by a decrease in the average selling price per ton.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

During the three months ended June 30, 2024 (the “ 2024 quarter”), sales, costs of materials and gross margin decreased approximately $22.7 million, $11.8 million and $10.9 million , respectively, compared to the amounts recorded during the three months ended June 30, 2023 (the “ 2023 quarter”).

The decrease in sales was associated with both a decline in sales volume and a decrease in the average selling price per ton.

Sales volume for the 2024 quarter consisted of approximately 119,000 tons from inventory and another 24,000 tons of toll processing customer owned material compared to the 2023 quarter volume consisting of approximately 129,000 tons from inventory and 24,000 tons of toll processing.

The growth in sales volume was primarily related to the increased production at the Company's Sinton, TX facility which commenced operations in October 2022.

Gross profit increased from approximately $6.1 million for the 2022 quarter to approximately $10.4 million for the 2023 quarter.

Gross profit as a percentage of sales increased from approximately 5.5% for the 2022 quarter to approximately 9 .0% for the 2023 quarter.

Gross profit for the 2022 quarter included a recognized loss of approximately $0.9 million related to hedging activities, while the 2023 quarter gross profit was not impacted by any hedging activities.

Excluding the recognized hedging losses, gross profit related to physical material as a percentage of sales was approximately 6 .2% for the 2022 quarter.

Our operating results are significantly impacted by the market price of HRC.

The Company experienced an inflection point in HRC price during the 2023 quarter with prices increasing approximately 66% from early October 2023 and through the end of the 2023 quarter.

As a result, the Company experienced considerable physical margin improvement in the second half of the 2023 quarter.

In the 2022 quarter, HRC price declined approximately 22% until rising in the second half of December 2022.

With the prevailing downward price trend during the 2022 quarter the Company experienced lower physical margins.

The decline in sales volume for the 2024 quarter was related to a combination of challenging conditions for some of our customers and extended planned downtime for equipment upgrades and maintenance at the Company's Sinton and Decatur facilities.

Gross margin was approximately $18.1 million for the 2024 quarter compared to approximately $29.1 million for the 2023 quarter.

Gross margin is calculated as net sales minus cost of materials sold.

Gross margin as a percentage of sales was approximately 15.8% for the 2024 quarter compared to approximately 21.2% for the 2023 quarter.

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

Entering the 2023 quarter, HRC prices had increased approximately 95% from November 2022 to April 2023.

As a result, the Company experienced strong physical margins during the 2023 quarter.

Entering the 2024 quarter, HRC prices were on a predominately declining trend dropping approximately 40% from January 2024 through the end of the 2024 quarter.

As a result, the Company experienced compressed physical margins during the 2024 quarter.

The Company utilizes HRC futures to partially manage exposure to commodity price risk.

The Company recognized hedging related gains of approximately $5.4 million in the 2024 quarter compared to hedging activities having a neutral impact on the 2023 quarter results.

Flat-roll Segment

Flat-roll product segment sales for the 2024 quarter totaled approximately $103.4 million compared to approximately $125.2 million for the 2023 quarter.

Flat-roll segment sales for the 2022 quarter were reduced by approximately $0.9 million for the recognition of hedging related losses, while 2023 quarter sales were not impacted by any hedging related gains or losses.

For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any sales generated from processing or storage of customer owned material.

Sales generated from processing or storage of customer owned material totaled approximately $1.6 million for the 2024 quarter compared to approximately $1.2 million for the 2023 quarter.

Sales generated from flat-roll segment inventory, excluding the impact of any hedging related gains or losses, totaled approximately $105.4 million for the 2023 quarter compared to approximately $100.8 million for the 2022 quarter.

The average per ton selling price related to these shipments increased from approximately $949 per ton in the 2022 quarter to approximately $960 per ton in the 2023 quarter.

Sales generated from flat-roll segment inventory totaled approximately $101.8 million for the 2024 quarter compared to approximately $124.0 million for the 2023 quarter.

The average per ton selling price related to these shipments decreased from approximately $1,038 per ton in the 2023 quarter to approximately $932 per ton in the 2024 quarter.

Sales volume for the 2024 quarter consisted of approximately 109,000 tons from inventory and another 24,000 tons of toll processing customer owned material compared to the 2023 quarter volume consisting of approximately 120,000 tons from inventory and 24,000 tons of toll processing.

The growth in sales volume was primarily related to the increased production at the Company's Sinton, TX facility which commenced operations in October 2022.

Flat-roll segment operations recorded operating profits of approximately $2.7 million and $11.8 million for the 2024 quarter and 2023 quarter, respectively.

The operating profit for the 2022 quarter included a recognized loss on hedging activities of approximately $0.9 million, while operating profit for the 2023 quarter was not impacted by any hedging related gains or losses.

The Company’s flat-roll segment purchases its inventory from a limited number of suppliers.

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Tubular product segment sales for the 2024 quarter totaled approximately $11.2 million compared to approximately $12.1 million for the 2023 quarter.

Tubular segment sales for the 2023 quarter and 2022 quarter were not impacted by any hedging related gains or losses.

Sales decreased due to a decrease in the average selling price per ton, partially offset by an increase in the volume sold.

The average per ton selling price decreased from approximately $1,648 per ton in the 2022 quarter to approximately $1,164 per ton in the 2023 quarter.

Tons sold increased from approximately 7,000 tons in the 2022 quarter to approximately 8,000 tons in the 2023 quarter.

The tubular segment recorded an operating loss of approximately $0.1 million for the 2023 quarter compared to recording operating profit of approximately $0.7 million for the 2022 quarter.

Sales decreased due primarily to a decrease in the average selling price per ton from approximately $1,358 per ton for the 2023 quarter to approximately $1,140 per ton for the 2024 quarter.

Sales volume was comparable between period with approximately 10,000 tons sold in the 2024 quarter compared to approximately 9,000 tons sold in the 2023 quarter.

The tubular segment recorded an operating loss of approximately $1.2 million for t he 2024 quarter compared to recording operating profit of approximately $2.3 million for the 2023 quarter.

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

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During the 2024 quarter, selling, general and administrative costs decreased approximately $1.4 million compared to the 2023 quarter.

This decrease is primarily related to decreased payroll and benefits expense in the 2023 quarter.

This decrease is primarily related to lower incentive compensation expense due to the lower earnings in the 2024 quarter.

Income taxes decreased from a provision for the 2023 quarter of approximately $2.6 million to a provision for the 2024 quarter of approximately $0.7 million.

This decrease was primarily related to lower earnings before taxes for the 2023 quarter and adjustment to interim tax estimates during the 2023 quarter.

The income tax provision as a percentage of earnings before tax was approximately 5.9% and 23.9% for the three months ended December 31, 2023 and 2022, respectively.

For the 2023 quarter, the effective tax rate differed from the federal statutory rate due primarily to the adjustment of tax estimates mentioned above.

For the 2022 quarter, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state income taxes in the provision.

This decrease was primarily related to lower earnings before taxes for the 2024 quarter.

The income tax provision as a percentage of earnings before tax was approximately 22.2% and 25.0% for the three months ended June 30, 2024 and 2023, respectively.

For the three months ended June 30, 2024 , the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision with this impact partially reduced by the tax effect of restricted stock vesting during the quarter.

For the three months ended June 30, 2023 , the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company’s current ratio was 3.1 at December 31, 2023 and 3.2 at March 31, 2023 .

Working capital was approximately $116.3 million at December 31, 2023 and $98.6 million at March 31, 2023 .

During the nine months ended December 31, 2023, the Company maintained assets and liabilities at levels it believed were commensurate with operations.

The Company’s current ratio amounted to 4.2 a t June 30, 2024 and 3.1 at March 31, 2024 .

Working capital was approximately $123.6 million at June 30, 2024 and $116.0 million at March 31, 2024 .

During the three months ended June 30, 2024, 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 and restricted cash increased due primarily to cash generated from operating activities and cash drawn on the Company's credit facility being greater than cash used for investing activities.

T he Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

Cash and restricted cash decreased due primarily to cash used in operating activities and investing activities exceeding cash provided by financing activities.

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

The Company has a $150 million asset-based lending facility ("ABL Facility") which matures on May 19, 2026 and is secured by substantially all of the assets of the Company.

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If certain conditions precedent are satisfied, the ABL facility may be increased by up to an aggregate of $25 million, in minimum increments of $5 million.

At December 31, 2023, the Company had a balance of approximately $46.0 million under the ABL Facility with an applicable interest rate of 7.5%.

At December 31, 2023, the Company's applicable borrowing base calculation supported access to approximately $106.1 million of the ABL Facility.

At June 30, 2024, the Company had a balance of approximately $46.1 million under the ABL Facility with an applicable interest rate of 7.5%.

At June 30, 2024, the Company's applicable borrowing base calculation supported access to approximately $112.4 million of the ABL Facility.

As of the filing date of this Form 10-Q, the Company had borrowings of approximately $50.6 million outstanding under the ABL Facility and the Company's most recent borrowing base calculation provided access to approximately $120.2 million of the ABL Facility.

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Hedging decisions are intended to protect the value of the Company's inventory and produce more consistent financial results over price cycles.

The Company recognized a loss related to futures designated for hedge accounting of approximately $0.4 million for the nine months ended December 31, 2023 with all of this recognition occurring during the first fiscal quarter ended June 30, 2023.

For the three months ended December 31, 2023, the Company recognized a loss related to economic hedges of risk of approximately $4.1 million.

For the nine months ended December 31, 2023, the Company recognized a gain related to economic hedges of risk of approximately $0.7 million.

With MTM accounting treatment it is possible that hedging related gains or losses might be recognized in a different fiscal quarter than the corresponding improvement or contraction in our physical margins.

The Company experienced an inflection point in steel prices during the quarter ended December 31, 2023 with both HRC price and the futures prices increasing.

This resulted in physical margins improving in the second half of the quarter with this margin improvement being partially offset by hedging losses.

The Company expects to recognize the appreciation of its inventory value through increased physical margins on fiscal fourth quarter sales.

See Note H for additional information related to the Company's hedging activities.

The Company expects to conclude fiscal year March 31, 2024 with a strong fourth fiscal quarter characterized by solid margins associated with a considerable increase in HRC price entering the fourth quarter.

Sales volume for the fourth quarter of fiscal 2024 is expected to be slightly higher than the third quarter volume.

The Company recognized a gain of approximately $5.4 million in the 2024 quarter related to it hedging activities with all of this being classified as economic hedges of risk.

With MTM accounting treatment it is possible that hedging related gains or losses might be recognized in a different fiscal quarter or fiscal year than the corresponding improvement or contraction in our physical margins.

See Note G for additional information related to the Company's hedging activities.

The Company expects sales volume for its second quarter of fiscal 2025 to be similar to the sales volume for the first quarter.

The second quarter started with further decline in HRC price but as of the filing date of this Form 10-Q, HRC index prices have started to increase and HRC futures are pricing in further increases.

The Company may experience a generally challenging margin environment in the second quarter but, if sustained, the increasing HRC price should result in improved physical margins toward the end of the second quarter and entering the third quarter.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

The more significant estimates and judgements for the Company include determining the fair value of assets acquired and liabilities assumed in the business combination discussed in Note B.

The determination of fair value requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.

Actual results could differ from these estimates.

generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Actual results could differ from any estimates.

The Company did not identify any significant estimates or judgements related to the consolidated financial statements and accompanying notes presented in this Form 10-Q filing.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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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