Friedman Industries, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended June 30, 2021; comparisons are with the three months ended June 30, 2020 unless noted. The company processes steel products through its Coil and Tubular segments. All amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net sales | $65.92 million | $23.52 million |
| Gross profit | $17.33 million; 26.3% margin | $0.26 million; 1.1% margin |
| Operating earnings (loss) | $13.96 million | $(1.14) million |
| Net earnings (loss) | $11.31 million; $1.64 per diluted share | $(0.86) million; $(0.12) per diluted share |
| Operating cash flow | $2.12 million | $(2.06) million |
- Sales increased approximately 180%. Management attributed the improvement to higher steel prices and increased tonnage; total tons sold rose from about 38,000 to 54,000.
- Gross margin excluding recognized hedging losses was approximately 29.4%, versus the reported 26.3% margin.
- By segment, Coil sales were $52.69 million and operating profit was about $13.26 million; Tubular sales were $13.22 million and operating profit was about $2.60 million.
- At June 30, total assets were $155.57 million, current assets $131.05 million, current liabilities $80.18 million, and working capital $50.87 million. The current ratio was 1.6, down from 2.7 at March 31, 2021.
- Cash on the balance sheet was $0.89 million. Cash and restricted cash totaled $30.25 million, including $29.36 million held as collateral for open derivatives and reported in other current assets.
- The company had $10.86 million outstanding under its $40 million asset-based revolving credit facility at June 30, 2021. It reported full borrowing-base availability and covenant compliance at quarter-end. As of the filing date, borrowings were $23.38 million and the company reported full access to the facility.
- The SBA forgave the company’s PPP loan in June; the $1.71 million gain was included in other income. The company declared dividends of $0.02 per share.
Changes, outlook, and risks
- Steel prices and volumes: Management said hot-rolled steel prices during the quarter were approximately 200% above the prior-year quarter. Coil inventory sales prices rose from about $566 to $1,462 per ton; Tubular prices rose from about $723 to $930 per ton.
- Derivatives: Recognized losses on designated cash-flow hedges were $3.52 million, reducing gross profit; losses on derivatives not designated as hedges were $1.39 million in other income. Other comprehensive loss was $13.69 million, and accumulated other comprehensive loss reached $24.88 million. The company estimated $31.54 million of accumulated hedge losses would be reclassified into earnings within the next 12 months, subject to change.
- Cash generation and working capital: Operating cash flow was positive, but substantial inventory and receivables growth absorbed cash. The quarter-end cash balance is small relative to restricted cash pledged against derivatives.
- Expansion: The company plans a Coil facility in Sinton, Texas, with estimated total project cost of $21 million and $2.69 million spent by June 30. Operations are expected to begin in April 2022; the company expects to fund remaining costs through operating cash flow and the ABL facility.
- Management outlook: The company expected strong margins in the quarter ending September 30, 2021, with operating results improving from Q1. At the filing date, hot-rolled steel prices were about 10% above June 30 levels, and management expected prices to continue rising through September. These are forward-looking expectations, not guarantees.
- Business risks: Steel-price changes can materially affect margins and derivative values. Both segments depend on a limited number of suppliers. U.S. Steel’s Lone Star Tubular facility was idled, ending the company’s mill-reject-pipe receipts in August 2020; management estimated its remaining mill-reject inventory represented about one year of supply. The pipe-finishing facility remained idled due to market conditions.
- Controls and procedures: Management reported that internal control over financial reporting was not effective because a previously disclosed material weakness in review of the annual income-tax provision had not yet been remediated. The company hired an additional accountant and said remediation would require the actions to operate effectively for a sufficient period.
Important facts for investors to verify
- Whether steel prices, realized margins, and sales volumes support management’s Q2 outlook, and how much of reported performance reflects market-price movements.
- The timing and earnings impact of derivative settlements and reclassification of accumulated hedge losses, as well as the cash collateral required for open positions.
- ABL borrowing-base availability, covenant compliance, and liquidity needs as Sinton construction spending progresses.
- Execution, total cost, and expected start-up timing of the Sinton facility, and the effect of reduced mill-reject-pipe supply on Tubular results.
- Whether the company remediates the material weakness in financial-reporting controls and maintains effective controls in subsequent periods.