Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2020; financial statements are unaudited. Friedman processes and manufactures steel products through its Coil and Tubular segments.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Net sales | $28.50 million | $28.15 million | $76.89 million | $109.12 million |
| Gross profit (margin) | $4.50 million (15.8%) | $0.05 million (0.2%) | $5.84 million (7.6%) | $0.74 million (0.7%) |
| Operating income (loss) | $2.76 million | $(1.15) million | $1.31 million | $(2.92) million |
| Net income (loss) | $2.13 million | $(0.88) million | $1.02 million | $(2.23) million |
| Diluted earnings (loss) per share | $0.30 | $(0.13) | $0.14 | $(0.32) |
| Operating cash flow | Not presented separately | Not presented separately | $4.84 million | $14.63 million |
- Quarterly sales rose slightly year over year, while gross profit and earnings improved sharply as steel prices rose and margins recovered. Nine-month sales fell 30% year over year, reflecting lower volume and average selling prices, but gross profit improved substantially.
- Quarterly Coil sales were $21.67 million versus $21.00 million; segment operating profit was $3.24 million versus a $0.09 million loss. Tubular sales were $6.83 million versus $7.15 million; segment operating profit was $0.27 million versus a $0.47 million loss.
- For the nine months, Coil sales were $55.56 million versus $77.60 million and operating profit was $3.53 million versus $0.58 million. Tubular sales were $21.33 million versus $31.52 million and its operating loss narrowed to $0.02 million from $1.67 million.
- Cash was $16.49 million at December 31, compared with $17.06 million at March 31, 2020. Working capital was $55.71 million and the current ratio was 7.5, versus $55.57 million and 6.8, respectively.
- Total liabilities were $10.02 million. The company had a $1.69 million Paycheck Protection Program loan outstanding, classified as $1.34 million current and $0.35 million long-term. Finance lease liabilities totaled approximately $0.39 million.
- Capital expenditures were $4.23 million for the nine months. Financing activity included $1.14 million of share repurchases and $0.42 million of dividends paid. Dividends declared were $0.02 per share for the quarter.
Material changes and notable items
- Hot-rolled steel prices rose approximately 124% from the August 2020 low through December 31. Management attributed improved results principally to recovering steel prices and margins; the nine-month period also included approximately $0.40 million of derivative gains reported as a reduction of cost of goods sold.
- The company began using hot-rolled coil futures in June 2020. At quarter-end, derivative assets and liabilities were reported at $2.86 million and $1.42 million, respectively. Cash-flow hedge gains recognized in other comprehensive income were $3.36 million before tax; $0.40 million was reclassified into earnings. Approximately $1.22 million of cash margin and $1.23 million receivable from closed positions were included in other current assets.
- Cash provided by operations declined to $4.84 million from $14.63 million in the prior-year period, including a smaller cash release from inventory. Inventory fell to $30.13 million from $35.67 million at March 31.
- The Decatur coil facility’s new stretcher-leveler line is estimated to cost $7.2 million; $6.48 million was recorded as construction in progress at December 31. Installation began in December, with commercial operation expected in March 2021.
- The company repurchased 180,200 shares for $1.14 million through December 31 under a program authorizing repurchases of up to 1,062,067 shares through June 2023.
Outlook, risks and contingencies
- At the filing date, management said hot-rolled steel prices had risen approximately 165% from the August low. It expected strong Coil and Tubular margins in the fourth quarter and slightly higher segment sales volumes than in the third quarter. These are forward-looking expectations, not guarantees.
- Management believes cash, operating cash flows and borrowing capability are adequate for expected cash needs over the next 12 months.
- The PPP loan bears 0.98% interest. The company planned to apply for forgiveness, but forgiveness was uncertain; the bank had paused processing applications pending system and process changes.
- COVID-19 effects on the economy, customers and markets remained uncertain. Results are sensitive to steel prices, demand, sales volumes and raw-material availability. Each segment depends on a limited number of suppliers.
- U.S. Steel idled its Lone Star tubular operations, the company’s sole source of mill reject pipe. Friedman had approximately 26,000 tons of mill reject inventory, estimated to represent about two years’ supply, and expected the supplier shutdown to adversely affect operations as inventory is depleted. The pipe-finishing facility remained idled due to market conditions.
- Inventory valuation, receivable collectability, fixed-asset useful lives and the pipe-finishing facility’s fair value depend on estimates; actual results may differ. The filing also reports $136,000 paid to Metal Edge Partners, whose CEO is a Friedman director, for advisory and analytics services during the nine months.
Important facts for investors to verify
- Whether the Decatur line entered commercial operation as expected and whether its cost and capacity benefits matched management’s estimates.
- How steel-price movements, hedge results and any reclassification of hedge gains affect reported margins and earnings.
- Whether the PPP loan was forgiven, and the remaining repayment obligations if it was not.
- How the loss of the Lone Star mill-reject supplier and continued weakness in energy demand affect Tubular results as inventory runs down.
- Whether operating cash flow and liquidity remain sufficient alongside capital spending, dividends and share repurchases.