Friedman Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2021 (the second quarter of fiscal 2022). Friedman processes and manufactures steel products through its Coil and Tubular segments. Comparisons are with the corresponding 2020 periods, which were affected by the initial COVID-19 downturn and temporary Decatur equipment replacement.
Financial results
| Metric | Three months ended Sept. 30, 2021 | Three months ended Sept. 30, 2020 | Six months ended Sept. 30, 2021 | Six months ended Sept. 30, 2020 |
|---|---|---|---|---|
| Net sales | $92.6 million | $24.9 million | $158.5 million | $48.4 million |
| Operating earnings (loss) | $24.3 million | $(0.3) million | $38.3 million | $(1.5) million |
| Net earnings (loss) | $13.2 million | $(0.3) million | $24.5 million | $(1.1) million |
| Diluted earnings (loss) per share | $1.91 | $(0.04) | $3.55 | $(0.16) |
| Gross margin | 32.1% | 4.4% | 29.7% | 2.8% |
- Management attributed the sharp improvement to higher steel prices and increased sales volume. For the six-month period, tons sold rose to approximately 108,500 from 81,500; average hot-rolled steel prices were approximately 245% higher year over year.
- Six-month Coil sales were $131.0 million and Tubular sales were $27.5 million. Segment operating profit was $37.5 million for Coil and $4.6 million for Tubular, versus $0.3 million Coil profit and $0.3 million Tubular loss in the prior-year period.
- Six-month gross profit included $2.4 million of recognized net hedge gains. Excluding hedge effects, management reported physical-material gross margin of approximately 26.8%. The quarter’s gross profit included $5.9 million of recognized net hedge gains; physical-material gross margin excluding hedges was approximately 24.9%.
- Six-month other loss was $6.5 million, primarily reflecting $8.2 million of losses on derivatives not designated for hedge accounting, partly offset by $1.7 million of PPP loan forgiveness income. The quarter’s $6.8 million other loss was primarily from non-designated derivatives. Separately, a $9.9 million loss was recognized in earnings after certain forecast sales were no longer expected to occur.
Cash flow, liquidity and debt
- Operating cash flow was negative $24.6 million for the six months, compared with positive $3.7 million in the prior-year period. The period included a $31.7 million inventory build and an $12.0 million increase in receivables, partly offset by increased payables. Investing cash flow was negative $2.8 million, including $2.9 million of property and equipment purchases.
- Cash was $2.9 million at September 30, 2021, down from $8.2 million at March 31. Cash and restricted cash totaled $7.1 million; $4.2 million was held as collateral for derivative positions. A $422,877 margin call was funded after quarter-end.
- Working capital was $72.2 million and the current ratio was 2.8, compared with $48.5 million and 2.7 at March 31, 2021. The filing reports an ABL balance of $14.6 million at September 30, with a 1.79% rate and access to a $40 million asset-based revolving facility; the company was covenant-compliant. The facility matures May 19, 2026, is secured by substantially all company assets, and includes a minimum fixed-charge coverage covenant.
- The $1.7 million Paycheck Protection Program loan was fully forgiven in June 2021. Dividends declared were $0.02 per share for the quarter and $0.04 for the six-month period.
Changes, outlook and key risks
- Sales and profitability rebounded substantially from the prior-year pandemic-affected period. The Decatur line installed in March 2021 supported higher Coil throughput; management reported average monthly Decatur volume of about 2,800 tons versus approximately 1,700 tons historically with the prior equipment.
- The company expects fiscal third-quarter margins to decline slightly from recent levels but remain well above historical averages, with modestly lower volume due to holiday seasonality and customer caution as steel prices declined. It expects approximately $14.7 million of hedge losses to be reclassified into earnings in that quarter.
- The planned Sinton, Texas Coil facility is estimated to cost $21 million, with operations expected to begin in April 2022. Construction in process was $6.0 million at September 30; management expects to fund remaining costs from operations and ABL borrowings. After ramp-up, projected calendar-2023 annual shipments are 110,000–140,000 tons.
- Commodity-price volatility and hedge accounting are significant risks. The company reduced forecast sales amid plateauing and declining steel prices, triggering hedge losses; future results and reclassifications may vary with prices and actual customer demand.
- Both segments depend on a limited number of suppliers. U.S. Steel’s Lone Star facility, the sole source of Tubular mill-reject pipe, was idled and shipments ceased in August 2020. The company held approximately 8,900 tons, estimated at slightly less than one year of inventory, and expects eventual depletion to hurt operations. The pipe-finishing facility remains idled due to market conditions.
- Internal control over financial reporting was reported ineffective 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; remediation depends on controls operating effectively for a sufficient period.
Investor verification priorities
- Track steel-price movements, customer demand, physical margins and the timing and earnings effects of derivative losses, including the forecast $14.7 million reclassification.
- Assess cash conversion and working-capital needs, particularly the inventory and receivables build, collateral requirements and future ABL borrowing capacity.
- Monitor Sinton project spending, schedule, funding and shipment ramp-up against management’s estimates.
- Verify replacement sourcing and profitability as the remaining mill-reject pipe inventory is consumed.
- Confirm remediation of the material weakness and effectiveness of financial reporting controls in subsequent filings.