Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2020. The quarter was affected by COVID-19-related demand declines and steel-price movements. The company processes steel coil and manufactures and distributes tubular steel products.
Financial performance
- Quarter: Net sales were $24.86 million, down 37.8% from $40.00 million a year earlier. Gross profit was $1.09 million, a 4.4% margin, compared with a $0.78 million gross loss and negative 2.0% margin. Operating loss was $317,000; net loss was $250,000, or $0.04 per diluted share, versus a $1.54 million net loss, or $0.22 per share.
- Six months: Net sales were $48.39 million, down 40.2% from $80.97 million. Gross profit increased to $1.35 million from $689,000; gross margin rose to approximately 2.8% from 1.0%. Net loss was $1.11 million, or $0.16 per diluted share, compared with a $1.35 million loss, or $0.19 per share.
- Segments: Quarterly coil sales fell to $18.46 million from $28.42 million, while coil operating profit increased to approximately $751,000 from $324,000. Tubular sales fell to $6.41 million from $11.57 million; its operating loss narrowed to approximately $344,000 from $1.75 million. For the six months, coil and tubular operating results were profits of approximately $291,000 and losses of $285,000, respectively.
- Cash flow and investment: Six-month operating cash flow was $3.72 million, down from $9.07 million. Capital expenditures were $2.93 million, versus $796,000. Cash increased by $1.72 million to $18.78 million.
- Liquidity and debt: Working capital was $51.95 million and the current ratio was 9.0 at September 30. Total liabilities were $7.77 million. The company had a $1.69 million PPP loan at 0.98% interest, classified as $987,000 current and $703,000 long-term; forgiveness was not assured. Finance-lease liabilities totaled approximately $419,000.
- Other: Total assets were $73.05 million and stockholders’ equity was $65.28 million. The company declared dividends of $0.02 per share for the quarter. It repurchased 67,281 shares for $410,221 during the quarter.
Changes and operating developments
- Quarterly sales volume declined to approximately 43,000 tons from 58,500; six-month volume fell to approximately 81,500 tons from 112,000. Management attributed much of the decline to COVID-19, with lower average selling prices also contributing.
- Steel prices began rising during the quarter. Management said this supported improving coil margins late in the quarter; tubular margins respond more slowly.
- The Decatur coil-processing upgrade is estimated to cost $7.2 million, increased from $5.8 million after adding components. $5.43 million had been spent by September 30. Installation was expected to begin in December 2020, with commercial operation expected in February 2021.
- The tubular segment recorded a $274,093 inventory write-down in the six-month period. Pipe-finishing operations remained idled due to market conditions.
Outlook, risks and other notable items
- Management reported hot-rolled steel prices had increased approximately 60% since beginning to rise in August, through the filing date. It expected solid margins in the fiscal third quarter and segment sales volumes broadly comparable to the second quarter, potentially slightly lower due to holiday seasonality and fewer shipping days. These are expectations, not formal numerical guidance.
- Management described the COVID-19 pandemic’s ultimate effects as uncertain. Tubular demand also faced weak U.S. energy-industry conditions and increased imported-pipe competition. October volume was approximately 10% below the fiscal 2020 monthly average for coil and 18% below for tubular.
- The company relies on a limited number of suppliers in both segments. U.S. Steel’s idling of its Lone Star tubular operations affects the company’s sole mill-reject-pipe supplier; Friedman held approximately 30,500 tons of mill-reject inventory, estimated to represent about two years’ supply, and expects the supplier idling to affect operations as inventory is depleted.
- The company began hot-rolled-coil futures activity in June and recorded a $4,000 hedging gain in the quarter. It had no open futures positions at September 30; its $118,125 margin requirement was included in other current assets.
- Management stated that cash, operating cash flows and borrowing capacity should be adequate for expected cash needs over the next 12 months. The PPP loan forgiveness application was still pending an invitation from the bank as of the filing date.
Important facts for investors to verify
- Whether demand, steel prices and segment margins continued to improve after the filing date, particularly in tubular markets.
- The timing, final cost and expected returns of the Decatur equipment project.
- The status and amount of any PPP loan forgiveness, and related repayment obligations.
- Supplier availability and the effect of the Lone Star idling on mill-reject-pipe inventory and future sales.
- Inventory valuation, including the assumptions underlying any further write-downs, and the progress of the share-repurchase program.