Friedman Industries, Inc. (NYSE American: FRD) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2021; comparatives are the corresponding 2020 periods. Friedman processes and manufactures steel products in its Coil and Tubular segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Net sales, 2021 / 2020 | $51.7m / $28.5m | $210.1m / $76.9m |
| Operating earnings (loss), 2021 / 2020 | ($5.7m) / $2.8m | $32.6m / $1.3m |
| Net earnings (loss), 2021 / 2020 | ($3.0m) / $2.1m | $21.5m / $1.0m |
| Diluted EPS, 2021 / 2020 | ($0.43) / $0.30 | $3.12 / $0.14 |
| Operating cash flow, 2021 / 2020 | Not provided by quarter | ($22.9m) / $4.8m |
- Third-quarter sales rose about 81% year over year, but costs of products sold increased more than sales; gross profit moved from $4.5m to a $3.6m loss. The quarter included $14.7m of recognized net losses on designated hedges. Excluding hedge effects, management reported physical-material gross margin of approximately 16.7%, versus 14.4% a year earlier.
- For the nine months, management reported gross profit of $43.4m, or 20.7% of sales, compared with $5.8m, or 7.6%. Excluding hedge effects, physical-material gross margin was approximately 23.9%, versus 7.1%. Steel prices were approximately 200% higher than in the prior-year period, and sales volume increased from about 125,000 to 147,500 tons.
- Quarterly segment operating results weakened: Coil recorded a $4.0m loss versus $3.2m profit; Tubular recorded a $0.6m loss versus $0.3m profit. For the nine months, Coil operating profit was $33.5m and Tubular operating profit was $4.0m.
- Nine-month operating cash use reflected a $48.5m increase in inventory and a $5.9m increase in receivables, partly offset by a $17.4m increase in accounts payable and accrued expenses. Investing cash outflow was $7.2m, including $7.4m of property and equipment purchases.
Financial position and liquidity
- At December 31, 2021, cash was $3.1m, current assets $121.9m, and current liabilities $43.8m. Working capital was $78.0m and the current ratio was 2.8, versus 2.7 at March 31, 2021.
- Total assets were $150.4m, total liabilities $59.4m, and stockholders’ equity $91.1m. Inventory rose to $84.6m from $36.0m at March 31, largely reflecting higher steel prices and increased stocking.
- The company had $15.2m outstanding on its $40m asset-based revolving facility at quarter-end; it reported full borrowing-base availability and compliance with covenants. The facility matures May 19, 2026, is secured by substantially all company assets, and bore 1.80% interest at quarter-end. At the filing date, borrowings were $20.8m. The company said cash, operating cash flows, and borrowing capacity should cover expected needs for the next 12 months.
- The $1.7m Paycheck Protection Program loan was fully forgiven in June 2021, with the gain recorded in other income. Dividends declared were $0.02 per share per quarter.
Material changes, outlook, and risks
- Steel prices peaked in September 2021 and had fallen approximately 22% by quarter-end. Management attributed lower quarterly sales volume in both segments to customer reaction to the price peak and subsequent decline.
- For fiscal Q4 ending March 31, 2022, management expected physical margins to decline slightly but remain above historical averages, and sales volume in both segments to increase slightly. It expected to recognize approximately $9m of deferred hedge losses during Q4.
- The Sinton, Texas coil facility is estimated to cost $21m. Operations, previously expected in April 2022, were delayed to August 2022 because required electrical infrastructure was not expected to be completed until July. Construction in progress was $13.0m at December 31; management cited potential fiscal 2024 shipments of 110,000–140,000 tons after ramp-up.
- Steel-price movements and forecasting risk are significant: reduced sales forecasts previously led the company to remove some instruments from hedge accounting and recognize a $9.9m loss in the September 2021 quarter. The company reported $9.2m of net losses in accumulated other comprehensive income expected to be reclassified within 12 months, subject to change.
- U.S. Steel’s Lone Star Tubular facility, the company’s sole source of mill reject pipe, was idled; receipts ended in August 2020. Friedman had about 3,000 tons remaining and expected to sell most within six months. Management expects the run-off to negatively affect operations and plans to expand manufactured-pipe sales. The pipe-finishing facility remains idled due to market conditions.
- The company relies on a limited number of suppliers in both segments. Other stated risks include steel demand and prices, raw-material availability, production interruptions, competition, and execution of the Sinton project.
- Management concluded disclosure controls were not effective because remediation of a previously identified material weakness in review of the annual income tax provision was incomplete. The company hired an additional accountant; remediation was not yet considered complete.
Investor verification points
- Assess how much reported earnings and segment performance depend on steel-price changes and hedge accounting; reconcile hedge-related losses recognized in earnings with amounts deferred in accumulated other comprehensive income.
- Track inventory levels, working-capital cash use, borrowing-base availability, and ABL borrowings, including the increase to $20.8m by the filing date.
- Verify Sinton project cost, electrical-infrastructure timing, funding needs, and progress toward the August 2022 start and projected shipment range.
- Monitor Tubular results as mill reject inventory is depleted and whether manufactured-pipe sales can offset the resulting earnings impact.
- Confirm timely and effective remediation of the material weakness in income-tax controls.