Friedman Industries, Inc. — Q1 FY2021 10-Q Summary
Reporting period: Three months ended June 30, 2020, compared with the three months ended June 30, 2019. The company manufactures and processes steel products through its Coil and Tubular segments.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $23.52 million | $40.98 million |
| Gross profit / gross margin | $0.26 million / 1.1% | $1.47 million / 3.6% |
| Operating loss | $1.14 million | Operating earnings of $0.26 million |
| Net earnings (loss) | $(0.86) million | $0.19 million |
| Diluted earnings (loss) per share | $(0.12) | $0.03 |
| Cash provided by (used in) operations | $(2.06) million | $0.09 million |
- Sales fell 42.6% year over year; management attributed the decline to lower volumes and average selling prices. Total tons sold decreased from about 53,500 to 38,000.
- At June 30, 2020, cash was $15.14 million, total assets $71.25 million, working capital $54.39 million, and the current ratio 16.2. Cash was $17.06 million and working capital $55.57 million at March 31, 2020.
- Total liabilities were $5.27 million, including a $1.69 million Paycheck Protection Program (PPP) loan and finance lease obligations. The PPP loan carries 0.98% interest, with payments deferred for six months; forgiveness is not assured.
- Capital expenditures were $1.37 million. The company declared dividends of $0.02 per share, versus $0.04 in the prior-year quarter.
Material changes and segment results
- Coil: Sales declined to $15.43 million from $28.18 million; segment operating loss was about $459,000 versus operating profit of about $345,000. Inventory tons sold fell from about 38,000 to 27,000, while average selling price fell from about $743 to $566 per ton.
- Tubular: Sales declined to $8.09 million from $12.79 million; segment operating profit fell to about $59,000 from $545,000. Tons sold fell from about 15,500 to 11,000, and average selling price from about $819 to $723 per ton.
- A $274,093 write-down reduced tubular finished-goods inventory to net realizable value amid weaker demand and falling steel prices. General, selling and administrative costs rose $183,366, partly reflecting reclassification of payroll costs.
- Operating cash outflow reflected working-capital movements, including lower accounts payable; inventory reductions and collections provided cash. Investing cash outflow was $1.38 million, partly offset by $1.69 million of PPP proceeds in financing activities.
Outlook, risks and unusual items
- Management said coil sales volumes recovered during the quarter and expected volumes near fiscal 2020 levels in Q2 FY2021; July volume was 6% below the fiscal-year monthly average, and similar August volume was expected.
- Tubular demand was expected to remain soft in Q2 FY2021. Management cited COVID-19 disruption, difficult U.S. energy-sector conditions, increased competition from imported pipe, and declining steel prices.
- The company reported a small number of employee COVID-19 cases, all recovered, with no active cases known at filing. Operations continued with workplace modifications; the pandemic’s full effects remained uncertain.
- The Decatur coil facility’s new stretcher-leveler project was estimated at $5.8 million, with $3.87 million spent by June 30. Installation was expected to begin in October 2020 and commercial use in February 2021. The project is intended to expand processing width and material capabilities.
- U.S. Steel’s idling of its Lone Star Tubular Operations affects the company’s sole supplier of mill-reject pipe. Friedman reported about 31,000 tons of that inventory, estimated to represent roughly two years of supply, and expected a negative effect once inventory is depleted. Coil and tubular segments also rely on a limited number of suppliers.
- In June, the company began using hot-rolled-coil futures as fair-value hedges; open positions covered 6,000 tons and required $180,000 of cash margin. The quarter’s $54,000 hedge-related mark-to-market amounts offset between cost of goods sold and inventory.
- The board authorized repurchases of up to 1,062,067 shares through June 30, 2023; no shares had been repurchased by June 30, 2020. Management said available cash, operating cash flows and borrowing capacity were expected to fund requirements for the next 12 months.
Important facts for investors to verify
- Whether the PPP loan qualifies for full or partial forgiveness and the resulting cash and earnings impact.
- Whether coil-volume recovery continues and whether steel-price movements affect margins and inventory valuations.
- Whether tubular demand, pricing and competition improve, and how the loss of the mill-reject pipe supplier affects future sales.
- Whether the Decatur equipment project remains on budget and reaches installation and commercial-use milestones as planned.
- Whether liquidity and operating cash flow remain adequate amid continued capital spending, dividends and the authorized share-repurchase program.