Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008 During the three months ended June 30, 2009, sales, costs of goods sold and gross profit decreased $47,352,477, $39,875,314 and $7,477,163, respectively, from the comparable amounts recorded during the three months ended June 30, 2008. The decrease in sales was related primarily to a substantial decrease in tons sold. Tons sold declined from approximately 76,000 tons in the 2008 quarter to approximately 22,000 tons in the 2009 quarter. Average per ton selling prices declined as well. The average per ton selling price decreased from $781 per ton in the 2008 quarter to $564 per ton in the 2009 quarter. The decrease in costs of goods sold was related primarily to the decline in tons sold and a decrease in average per ton cost which declined from approximately $675 per ton in the 2008 quarter to $537 in the 2009 quarter. Gross profit was adversely affected by the decrease in tons sold and a substantial reduction in margins. Gross profit as a percentage of sales decreased from approximately 13.5% in the 2008 quarter to approximately 4.8% in the 2009 quarter. During the 2008 quarter, the Company experienced strong market conditions for its tubular products and recorded one of the most profitable quarters in Company history. During the 2009 quarter, the Company's operations continued to be adversely affected by extremely soft market conditions for durable goods and energy related products resulting from the significant downturn in the U.S. economy.
Coil product segment sales decreased approximately $18,996,000 during the 2009 quarter. This decrease resulted primarily from a decrease in tons sold as coil tonnage shipped declined from approximately 31,000 tons in the 2008 quarter to approximately 13,000 tons in the 2009 quarter. Also, the average per ton selling price declined from approximately $841 per ton in the 2008 quarter to $525 in the 2009 quarter. Coil operating profit as a percentage of coil segment sales decreased from approximately 2.2% in the 2008 quarter to 0.6% in the 2009 quarter. The Company believes that market conditions for coil products will remain soft until the U.S. economy improves and generates improved demand for durable goods.
In August 2008, the Company began operating its new coil facility in Decatur, Alabama. This operation produced an operating loss of approximately $400,000 in the 2009 quarter. The Company expects that this facility will continue to produce a loss until demand for coil products improves.
The Company is primarily dependent on Nucor Steel Company ("NSC") for its supply of coil inventory. In the 2009 quarter, NSC continued to supply the Company with steel coils in amounts that were adequate for the Company's purposes. The Company does not currently anticipate any significant change in such supply from NSC. Loss of NSC as a supplier could have a material adverse effect on the Company's business.
Tubular product segment sales decreased approximately $28,357,000 during the 2009 quarter. This decrease primarily resulted from a decrease in tons sold which declined from approximately 45,000 tons in the 2008 quarter to approximately 8,000 tons sold in the 2009 quarter. The average per ton selling price of tubular products decreased from $739 per ton in the 2008 quarter to $627 per ton in the 2009 quarter. Tubular product segment operating profits as a percentage of segment sales were approximately 20.5% and 1.7% in the 2008 and 2009 quarters, respectively. During the 2008 quarter, market conditions for tubular products were strong and the Company recorded one of its most profitable quarters in Company history. In contrast, extremely soft market conditions were experienced in the 2009 quarter. The Company believes that market conditions will remain soft until the U.S. economy recovers and generates improved demand for tubular products.
In recent years, U.S. Steel Tubular Products Inc. ("USS"), an affiliate of United States Steel Corporation, has been the Company's primary supplier of tubular products and coil material used in pipe manufacturing and is a major customer of finished tubular products. Certain finished tubular products are used in the energy business and are manufactured by the Company and sold to USS. Beginning in December 2008, USS reduced orders for these finished tubular products. Also, in February 2009, USS announced that it was temporarily idling its plant in Lone Star, Texas, due to weak market conditions. Since February 2009, the Company has received few orders from USS and a significantly reduced supply of pipe and coil material from USS. The Company believes that reduced orders for finished tubular products will continue until the U.S. economy recovers and generates improved demand for these products. Loss of USS as a supplier or customer could have an adverse effect on the Company's business. The Company can make no assurances as to orders from USS or the amounts of pipe and coil material that will be available from USS in the future.
The recently-depressed market conditions during the downturn of the U. S. economy, along with the significant decrease in orders from USS and the reduction in the supply of pipe and coil material from USS, have had an adverse effect on the Company's tubular business. As a result, the Company downsized its tubular division to a level more commensurate with operations.
During the 2009 quarter, general, selling and administrative costs decreased $1,058,136 from the amount recorded during the 2008 quarter. This decrease was related primarily to a reduction in bonuses and commissions associated with reduced earnings and volume.
Income taxes declined $2,284,227 from the amount recorded in the 2008 quarter. This decrease was related primarily to the decrease in earnings
(loss) before taxes. Effective tax rates were 35% and 49% in the quarters ended 2008 and 2009, respectively. In the 2009 quarter, the Company benefited from recoverable income taxes associated with both federal and state income taxes.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at June 30, 2009. Current ratios were 9.5 and 12.7 at June 30, 2009 and March 31, 2009, respectively. Working capital was $39,234,903 at June 30, 2009, and $39,320,364 at March 31, 2009.
During the quarter ended June 30, 2009, the Company maintained assets and liabilities at levels it believed were commensurate with operations. Changes in balance sheet amounts primarily occurred in the ordinary course of business. Cash increased primarily as a result of decreases in accounts receivable and inventories. Accounts receivable declined due to a substantial decrease in sales in June 2009. Management reduced inventories to a level more commensurate with sales. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company's operations.
During the quarter ended June 30, 2008, the Company purchased approximately 1,147,000 in fixed assets. These assets were related primarily to buildings and equipment associated with the new coil operation located in Decatur, Alabama, which began operations in August 2008. The Decatur processing facility operates a steel temper mill and a cut-to-length line, including a levelling line.
The Company has an arrangement with a bank which provides for a revolving line of credit facility (the "revolver"). Pursuant to the revolver, which expires April 1, 2010, the Company may borrow up to $10 million at an interest rate of the bank's prime rate or 1.5% over LIBOR. The Company uses the revolver to support cash flow and will borrow and repay the note as working capital is required. At June 30, 2008 and 2009, the Company had no borrowings outstanding under the revolver. At March 31, 2008, the Company owed $6,600,000 pursuant to the revolver at an average interest rate of approximately 4.4%. These loans were paid off in April and May 2008.
Historically, the Company has renewed the revolver approximately one year before its expiration date. As a result of the current lending environment, the Company may not be able to amend or extend the revolver or enter into a new credit arrangement on terms as favorable to the Company as the current revolver. As a result, the Company has chosen not to renew the revolver at the present time.
The Company has in the past and may in the future borrow funds on a term basis to build or improve facilities. The Company currently has no plans to borrow any significant amount of funds on a term basis.
Notwithstanding the current market conditions, the Company believes its cash flows from operations and borrowing capability due to its strong balance sheet are adequate to fund its expected cash requirements for the next twenty-four months.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. One such accounting policy which requires significant estimates and judgments is the valuation of LIFO inventories in the Company's quarterly reporting. The quarterly valuation of inventory requires estimates of the year end quantities which is inherently difficult. Historically, these estimates have been materially correct. At June 30, 2008, LIFO inventories were reduced and were partially replaced by March 31, 2009. A deferred credit of $2,456,108 was recorded at June 30, 2008, to reflect the replacement costs in excess of the LIFO cost associated with liquidated inventory. As replacement cost and liquidated cost of material were approximately equal, no significant gain or loss from this liquidation was recorded in fiscal 2009. In the quarter ended June 30, 2009, LIFO inventories were reduced and are expected to be replaced by March 31, 2010. A deferred credit of $496,702 was recorded at June 30, 2009, to reflect the replacement cost in excess of the LIFO cost.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain forward-looking information (as defined in the Private Securities Litigation Reform Act of 1996) and that involve risk and uncertainty. These forward-looking statements may include, but are not limited to, future results of operations, future production capacity, product quality and proposed expansion plans. Forward-looking statements may be made by management orally or in writing including, but not limited to, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Company's filings with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to, changes in the demand for and prices of the Company's products, changes in the demand for steel and steel products in general and the Company's success in executing its internal operating plans, including any proposed expansion plans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Required

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