What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-08 · 86 added, 30 removed, 76 unchanged (60% of the section changed)

13 unchanged sentences

Results of Operations

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”).

Six Months Ended September 30, 2024 Compared to Six Months Ended September 30, 2023

During the six months ended September 30, 2024 (the “ 2024 period”), sales, cost of materials sold and adjusted gross profit decreased approximately $46.7 million, $33.3 million and $13.4 million , respectively, compared to the amounts recorded during the six months ended September 30, 2023 (the “ 2023 period”).

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.

Sales volume for the 2024 period consisted of approximately 240,000 tons from inventory and another 42,000 tons of toll processing customer owned material compared to the 2023 period volume consisting of approximately 258,000 tons from inventory and 50,000 tons of toll processing.

The decline in sales volume for the 2024 period 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.

Adjusted gross profit was approximately $36.7 million for the 2024 period compared to approximately $50.1 million for the 2023 period.

Adjusted gross profit as a percentage of sales was approximately 16.6% for the 2024 period compared to approximately 18.7% for the 2023 period.

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

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

HRC prices then declined approximately 18% by the end of the 2023 period.

As a result, the 2023 period benefitted from strong physical margins during the first half of the period and then experienced margin compression during the second half of the period.

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

As a result, the Company experienced compressed physical margins throughout the 2024 period.

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

The Company recognized hedging related gains of approximately $5.6 million and $4.8 million in the 2024 and 2023 periods, respectively.

Flat-roll Segment

Flat-roll product segment sales for the 2024 period totaled approximately $200.8 million compared to approximately $245.7 million for the 2023 period.

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 $2.7 million for the 2024 period compared to approximately $2.6 million for the 2023 period.

Sales generated from flat-roll segment inventory totaled approximately $198.1 million for the 2024 period compared to approximately $243.1 million for the 2023 period.

The average per ton selling price related to these shipments decreased from approximately $1,011 per ton in the 2023 period to approximately $895 per ton in the 2024 period.

Sales volume for the 2024 period consisted of approximately 221,500 tons from inventory and another 42,000 tons of toll processing customer owned material compared to the 2023 period volume consisting of approximately 241,000 tons from inventory and 50,000 tons of toll processing.

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.

Flat-roll segment operations recorded operating profits of approximately $5.3 million and $15.0 million for the 2024 period and 2023 period, respectively.

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 2024 period totaled approximately $20.5 million compared to approximately $22.3 million for the 2023 period.

Sales decreased primarily due to a decrease in the average selling price per ton from approximately $1,290 per ton for the 2023 period to approximately $1,087 per ton for the 2024 quarter.

Tons sold increased from approximately 17,500 tons in the 2023 period to approximately 19,000 tons in the 2024 period.

The tubular segment recorded an operating loss of approximately $1.8 million for t he 2024 period compared to recording operating profit of approximately $2.3 million for the 2023 period.

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 2024 period, selling, general and administrative costs decreased approximately $2.2 million compared to the 2023 period.

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

Income taxes decreased from a provision for the 2023 period of approximately $3.7 million to a provision for the 2024 period of approximately $0.5 million.

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

The income tax provision as a percentage of earnings before tax was approximately 21.1% and 24.9% for the six months ended September 30, 2024 and 2023, respectively.

For the six months ended September 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 period.

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

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

During the three months ended September 30, 2024 (the “ 2024 quarter”), sales, cost of materials sold and adjusted gross profit decreased approximately $24.0 million, $21.5 million and $2.5 million , respectively, compared to the amounts recorded during the three months ended September 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 121,500 tons from inventory and another 18,000 tons of toll processing customer owned material compared to the 2023 quarter volume consisting of approximately 129,500 tons from inventory and 26,000 tons of toll processing.

The decline in sales volume for the 2024 quarter was related to a combination of weaker demand among some customers and hesitancy among others given the political uncertainty at the time.

Adjusted gross profit was approximately $18.0 million for the 2024 quarter compared to approximately $20.5 million for the 2023 quarter.

Adjusted gross profit as a percentage of sales was approximately 16.9% for the 2024 quarter compared to approximately 15.7% 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.

HRC price declined approximately 25% during the 2023 quarter with this decline being part of a downward price cycle which commenced in April 2023.

From April 2023 and to the end of the 2023 quarter, HRC price declined approximately 45%.

As a result, the Company experienced compressed 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 middle 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.

The Company recognized hedging related gains of approximately $0.2 million and $4.4 million in the 2024 and 2023 quarters, respectively.

Flat-roll Segment

5 unchanged sentences

Sales volume for the 2024 quarter consisted of approximately 112,000 tons from inventory and another 18,000 tons of toll processing customer owned material compared to the 2023 quarter volume consisting of approximately 121,000 tons from inventory and 26,000 tons of toll processing.

The decline in sales volume for the 2024 quarter was related to a combination of weaker demand among some customers and hesitancy among others given the political uncertainty at the time.

Flat-roll segment operations recorded operating profits of approximately $2.7 million and $3.1 million for the 2024 quarter and 2023 quarter, respectively.

4 unchanged sentences

Sales decreased due primarily to a decrease in the average selling price per ton from approximately $1,217 per ton for the 2023 quarter to approximately $1,030 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.

Sales volume was comparable between the periods with approximately 9,000 tons sold in the 2024 quarter compared to approximately 8,500 tons sold in the 2023 quarter.

The tubular segment recorded an operating loss of approximately $0.6 million for t he 2024 quarter compared to a break even operating profit for the 2023 quarter.

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

3 unchanged sentences

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.

Income taxes decreased from a provision for the 2023 quarter of approximately $1.1 million to a benefit for the 2024 quarter of approximately $0.2 million.

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.

The income tax provision or benefit as a percentage of earnings or loss before tax was approximately 25.2% and 24.6% for the three months ended September 30, 2024 and 2023, respectively .

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

Non-GAAP Information

The non-GAAP measure adjusted gross profit is used in this Management's Discussion and Analysis.

Adjusted gross profit is calculated as sales minus cost of materials sold.

Cost of materials sold is a discrete line on our statements of operations and represents the cost associated with direct materials.

To provide financial statement users with a better understanding of the Company's expenses, cost of sales is disaggregated on our statements of operations into the line items cost of materials sold, processing and warehousing expense, delivery expense and depreciation and amortization.

The Company believes adjusted gross profit is a meaningful measure because our cost structure and operating results are significantly impacted by the fluctuating costs associated with direct materials.

The following table reconciles the GAAP measure for gross profit to the non-GAAP measure adjusted gross profit (in thousands):

THREE MONTHS ENDED

SIX MONTHS ENDED

SEPTEMBER 30,

Gross profit (GAAP measure)

Processing and warehousing expense

Delivery expense

Depreciation and amortization

Adjusted gross profit (non-GAAP measure presented)

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

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.

The Company’s current ratio amounted to 4.1 a t September 30, 2024 and 3.1 at March 31, 2024 .

Working capital was approximately $111.7 million at September 30, 2024 and $116.0 million at March 31, 2024 .

During the six months ended September 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 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.

Cash and restricted cash decreased due primarily to cash used for the purchase of property, plant and equipment and the reduction of debt.

The Company ex pects 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.

8 unchanged sentences

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 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.

At September 30, 2024, the Company had a balance of approximately $35.9 million under the ABL Facility with an applicable interest rate of 7.0%.

At September 30, 2024, the Company's applicable borrowing base calculation supported access to approximately $104.7 million of the ABL Facility.

As of the filing date of this Form 10-Q, the Company had borrowings of approximately $33.1 million outstanding under the ABL Facility and the Company's most recent borrowing base calculation provided access to approximately $98.8 million of the ABL Facility.

4 unchanged sentences

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 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.

The Company recognized gains of approximately $0.2 million and $5.6 million in the three month and six month periods ended September 30, 2024, respectively, related to 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.

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

The Company expects sales volume for the third quarter of fiscal 2025 to be slightly lower than the second quarter volume due primarily to the seasonal impact of holidays.

HRC price remained stable to start the third quarter resulting in minimal change to the Company’s sales prices and margins.

As a result, the Company may experience a generally challenging margin environment in the third quarter.

CRITICAL ACCOUNTING ESTIMATES

9 unchanged sentences

Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the Company’s Annual Report on Form 10-K and its other Quarterly Reports on Form 10-Q.

Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable,” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry.

These forward-looking statements are not guarantees of future performance.

7 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