Overview
Friedman Industries, Incorporated is a manufacturer and processor of steel
products and operates in two reportable segments: coil products and tubular
products.
The coil product segment includes the operation of two hot-roll coil processing
facilities; one in Hickman, Arkansas and the other in Decatur, Alabama. Each
facility operates a temper mill and a cut-to-length line. The temper mill
improves the flatness and surface qualities of the coils and the cut-to-length
line levels the steel and cuts the coils into sheet and plate of prescribed
lengths. Combined, the facilities are capable of cutting sheet and plate with
thicknesses ranging from 14 gauge to ½" thick. The coil product segment sells
its prime grade inventory under the Friedman Industries name but also maintains
an inventory of non-standard coil products, consisting primarily of mill
secondary and excess prime coils, which are sold through the Company's XSCP
division. The coil product segment also processes customer-owned coils on a fee
basis.
The tubular product segment consists of the Company's Texas Tubular Products
division ("TTP") located in Lone Star, Texas. TTP operates two electric
resistance welded pipe mills with a combined outside diameter ("OD") size range
of 2 3/8" OD to 8 5/8" OD. Both pipe mills are American Petroleum Institute
("API") licensed to manufacture line pipe and oil country pipe and also
manufacture pipe for structural purposes that meets other recognized industry
standards. TTP has an API licensed pipe finishing facility that threads and
couples oil country tubular goods and performs other services that are customary
in the pipe finishing process. TTP's inventory consists of raw materials and
finished goods. Raw material inventory consists of hot-rolled steel coils that
TTP will manufacture into pipe. Finished goods inventory consists of pipe TTP
has manufactured and new mill reject pipe that TTP purchases from U.S. Steel
Tubular Products, Inc.
Results of Operations
Nine Months Ended December 31, 2019 Compared to Nine Months Ended December 31,
2018
During the nine months ended December 31, 2019 (the "2019 period"), sales, costs
of goods sold and gross profit decreased $35,829,710, $24,503,814 and
$11,325,896, respectively, from the comparable amounts recorded during the nine
months ended December 31, 2018 (the "2018 period"). The decrease in sales was
related to both a decrease in tons sold and a decrease in the average per ton
selling price. Tons sold decreased approximately 10% from approximately 175,500
tons in the 2018 period to approximately 157,500 tons in the 2019 period.
Discussion of the sales decline is expanded upon at the segment level in the
following paragraphs. Gross profit as a percentage of sales decreased from
approximately 8.3% in the 2018 period to approximately 0.7% in the 2019 period.
Our operating results are significantly impacted by the market price of
hot-rolled steel coil. The Company experienced significant volatility in steel
price during both the 2019 period and the 2018 period. In March 2018, the
Administration of the U.S. government announced trade actions under Section 232
of the Trade Expansion Act related to imports of steel and aluminum products. In
November 2017, steel prices began to rise on speculation of potential trade
actions. The rising prices gained momentum in January 2018 when the Commerce
Department's recommendations were provided to the Administration. From January
2018, steel prices continued to rise approximately 40% until reaching a peak in
July 2018. Prices held near a 10 year high until September 2018 when prices
started to decline and continued that downward trend through October 2019,
dropping approximately 50%. The steel price volatility translated into
volatility in the Company's operating results for the 2019 and 2018 periods.
Results for the 2019 period were negatively impacted by sustained margin
compression associated with declines in steel price while the 2018 period was
positively impacted by stronger margins associated with increases in steel
price.
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Coil Segment
Coil product segment sales for the 2019 period totaled $77,603,435 compared to
$94,688,636 for the 2018 period, representing a sales decrease of $17,085,201 or
approximately 18%. For a more complete understanding of the average selling
prices of goods sold, it is helpful to isolate sales generated from processing
of customer owned material and sales generated from coil segment inventory.
Sales generated from processing of customer owned material totaled $578,891 for
the 2019 period compared to $906,209 for the 2018 period. Sales generated from
coil segment inventory totaled $77,024,544 for the 2019 period compared to
$93,782,427 for the 2018 period. The decrease in coil segment sales was driven
by a decrease in the average selling price per ton of material from inventory.
The average per ton selling price related to these shipments decreased from
approximately $890 per ton in the 2018 period to approximately $667 per ton in
the 2019 period. The average selling price decline was partially offset by an
increase in the volume of shipments. Inventory tons sold increased from
approximately 105,500 tons in the 2018 period to approximately 115,500 tons in
the 2019 period. Coil segment operations recorded operating profits of
approximately $575,000 and $5,847,000 in the 2019 and 2018 periods,
respectively.
Margins for the 2019 period were negatively impacted by declining hot-rolled
steel prices and the effect of inventory with higher average costs flowing
through cost of goods sold. Margins for the 2018 period were positively impacted
by increasing hot-rolled steel prices and the effect of inventory with lower
average costs flowing through cost of goods sold. Sales volume improved due
primarily to the number of customers sold increasing from 144 in the 2018 period
to 163 in the 2019 period.
The Company's coil segment purchases its inventory from a limited number of
suppliers. Loss of any of these suppliers could have a material adverse effect
on the Company's business.
Tubular Segment
Tubular product segment sales for the 2019 period totaled $31,518,282 compared
to $50,262,791 for the 2018 period, representing a sales decrease of $18,744,509
or approximately 37%. For a more complete understanding of the average selling
prices of goods sold, it is helpful to isolate sales generated from the
finishing of customer owned pipe and sales generated from tubular segment
inventory. The Company did not generate any sales from the finishing of customer
owned pipe during the 2019 period but generated sales of $837,000 for the 2018
period related to these services. Sales generated from tubular segment inventory
totaled $31,518,282 for the 2019 period compared to $49,425,791 for the 2018
period. Tons sold decreased from approximately 70,000 tons in the 2018 period to
approximately 42,000 tons in the 2019 period. The average per ton selling price
related to these shipments increased from approximately $704 per ton in the 2018
period to approximately $750 per ton in the 2019 period. Tubular segment
operations recorded an operating loss of approximately $1,670,000 in the 2019
period and an operating profit of approximately $4,348,000 in the 2018 period.
Operating results for the 2019 period were negatively impacted by compressed
margins associated with declining hot-rolled steel prices and softness in the
U.S. energy industry. In contrast, the 2018 period was positively impacted by
strong margins associated with increasing steel prices and a stronger U.S.
energy market. The average selling price for the tubular segment increased in
the 2019 period due to a shift in the segment's sales mix between mill reject
pipe and the Company's manufactured pipe. The average selling price associated
with the Company's manufactured pipe is more than the average selling price
associated with mill reject pipe. Shipments of mill reject pipe decreased from
approximately 38,000 tons in the 2018 period to approximately 13,500 tons in the
2019 period. The higher shipping volume of mill reject pipe in the 2018 period
was due primarily to a strategic effort to reduce the level of mill reject pipe
inventory. At December 31, 2019, mill reject pipe inventory was at a desired
level. Shipments of manufactured pipe decreased from approximately 32,000 tons
in the 2018 period to approximately 28,500 tons in the 2019 period.
The Company's tubular segment purchases its inventory from a limited number of
suppliers. Loss of any of these suppliers could have a material adverse effect
on the Company's business.
General, Selling and Administrative Costs
During the 2019 period, general, selling and administrative costs decreased
$173,649 compared to the 2018 period. This decrease was related primarily to
decreases in bonuses and commissions associated with the decreased earnings.
Income Taxes
Income taxes in the 2019 period decreased $2,701,465 from the amount recorded in
the 2018 period. This decrease was related primarily to the decrease in earnings
before taxes for the 2019 period compared to the 2018 period.
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Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
During the three months ended December 31, 2019 (the "2019 quarter"), sales,
costs of goods sold and gross profit decreased $15,175,263, $13,297,712 and
$1,877,551, respectively, compared to the amounts recorded during the three
months ended December 31, 2018 (the "2018 quarter"). The decrease in sales was
related to both a decrease in tons sold and a decline in the average per ton
selling price. Tons sold decreased approximately 12% from approximately 51,500
tons in the 2018 quarter to approximately 45,500 tons in the 2019 quarter.
Discussion of the sales decline is expanded upon at the segment level in the
following paragraphs. Gross profit as a percentage of sales decreased from
approximately 4.5% in the 2018 quarter to approximately 0.2% in the 2019
quarter.
In the 2019 quarter, hot-rolled steel prices continued to decline until the end
of October 2019 when domestic steel producers announced price increases and
continued to increase prices throughout the remainder of the 2019 quarter.
However, the Company continued to see downward sales price pressure and
constrained margins throughout the 2019 quarter due to the time it takes for
price changes to filter through the supply chain. In the 2018 quarter,
hot-rolled steel prices started declining after a preceding period of
approximately nine months where steel prices increased significantly. The 2018
quarter marked the start of a period of margin compression that would continue
through the 2019 quarter.
Coil Segment
Coil product segment sales for the 2019 quarter totaled $21,001,358 compared to
$28,730,992 for the 2018 quarter, representing a sales decrease of $7,729,634 or
approximately 27%. For a more complete understanding of the average selling
prices of goods sold, it is helpful to isolate sales generated from processing
of customer owned material and sales generated from coil segment inventory.
Sales generated from processing of customer owned material totaled $185,870 for
the 2019 quarter compared to $305,289 for the 2018 quarter. Sales generated from
coil segment inventory totaled $20,815,488 for the 2019 quarter compared to
$28,425,703 for the 2018 quarter. The decrease in coil segment sales was driven
by a decrease in the average selling price per ton of material from inventory
partially offset by an increase in the volume of these shipments. The average
per ton selling price related to these shipments decreased from approximately
$905 per ton in the 2018 quarter to approximately $600 per ton in the 2019
quarter. Inventory tons sold increased from approximately 31,500 tons in the
2018 quarter to approximately 34,500 tons in the 2019 quarter. Coil segment
operations recorded an operating loss of approximately $93,000 in the 2019
quarter and an operating profit of approximately $744,000 in the 2018 quarter.
Operating results for the 2019 quarter were negatively impacted by the continued
margin compression associated with the recent decline in hot-rolled steel
prices. Operating results for the 2018 quarter were positively impacted by the
lasting effect of a significant increase in hot-rolled steel prices leading up
to the 2018 quarter. Sales volume improved due primarily to the number of
customers sold increasing from 97 in the 2018 quarter to 114 in the 2019
quarter.
The Company's coil segment purchases its inventory from a limited number of
suppliers. Loss of any of these suppliers could have a material adverse effect
on the Company's business.
Tubular Segment
Tubular product segment sales for the 2019 quarter totaled $7,149,459 compared
to $14,595,088 for the 2018 quarter, representing a sales decrease of $7,445,629
or approximately 51%. For a more complete understanding of the average selling
prices of goods sold, it is helpful to isolate sales generated from the
finishing of customer owned pipe and sales generated from tubular segment
inventory. The Company did not generate any sales from the finishing of customer
owned pipe during the 2019 quarter but generated sales of $66,734 for the 2018
quarter related to these services. Sales generated from tubular segment
inventory totaled $7,149,459 for the 2019 quarter compared to $14,528,354 for
the 2018 quarter. The decrease in tubular segment sales was driven by a decrease
in tons shipped from inventory and a decrease in the average selling price per
ton for these shipments. Tons sold decreased from approximately 20,000 tons in
the 2018 quarter to approximately 11,000 tons in the 2019 quarter. The average
per ton selling price related to these shipments decreased from approximately
$723 per ton in the 2018 quarter to approximately $646 per ton in the 2019
quarter. Tubular segment operations recorded an operating loss of approximately
$468,000 in the 2019 quarter and an operating profit of approximately $650,000
in the 2018 quarter.
Operating results for the 2019 quarter were negatively impacted by compressed
margins associated with the recent decline in hot-rolled steel prices and
softness in the U.S. energy industry. In contrast, the 2018 quarter was
positively impacted by stronger margins associated with the benefits of a
significant increase in hot-rolled steel prices leading up to the 2018 quarter
and a stronger U.S. energy industry. Shipments of mill reject pipe decreased
from approximately 10,500 tons in the 2018 quarter to approximately 3,500 tons
in the 2019 quarter. The higher shipping volume of mill reject pipe in the 2018
quarter was due primarily to a strategic effort to reduce the level of mill
reject pipe inventory. At December 31, 2019, mill reject pipe inventory was at a
desired level. Shipments of manufactured pipe declined from approximately 9,500
tons in the 2018 quarter to approximately 7,500 tons in the 2019 quarter due
primarily to increased softness in the U.S. energy industry.
The Company's tubular segment purchases its inventory from a limited number of
suppliers. Loss of any of these suppliers could have a material adverse effect
on the Company's business.
General, Selling and Administrative Costs
During the 2019 quarter, general, selling and administrative costs increased
$146,293 compared to the 2018 quarter. This increase was related primarily to an
increase in selling expenses primarily associated with the expansion of our
sales force and an increase in corporate expenses primarily associated with the
recognition of bad debt expense.
Income Taxes
Income taxes in the 2019 quarter decreased $480,644 from the amount recorded in
the 2018 quarter. This decrease was related primarily to the decrease in
earnings before taxes for the 2019 quarter compared to the 2018 quarter.
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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
We believe the Company remained in a strong, liquid position at December 31,
2019. The current ratio was 5.4 at December 31, 2019 and 6.0 at March 31, 2019.
Working capital was $56,420,996 at December 31, 2019 and $62,091,305 at
March 31, 2019.
At December 31, 2019, the Company maintained assets and liabilities at levels it
believed were commensurate with operations. Changes in balance sheet amounts
occurred in the ordinary course of business. Cash increased primarily as a
result of reductions in accounts receivable and inventory partially offset by
expenditures for property, plant and equipment and the payment of cash
dividends. The Company expects to continue to monitor, evaluate and manage
balance sheet components depending on changes in market conditions and the
Company's operations.
The Company commenced two capital expenditure projects during the December 31,
2019 quarter. The first project is a building expansion at the Company's coil
processing facility in Hickman, Arkansas. The project will add an additional
22,000 square feet of storage space to the facility. We expect that the
additional space will facilitate efficiency and safety improvements and will
provide necessary space for future growth. This project is estimated to be
complete by April 2020 with an estimated cost of $1,100,000. The second project
involves the installation of a stretcher leveler coil processing line at the
Company's coil processing facility in Decatur, Alabama. This equipment will
replace the existing processing equipment that is currently present at the
Decatur plant and will expand both the size range and grade of material that
Decatur is able to process. In relation to the current processing capabilities
of the coil segment overall, the new equipment will increase the segment's
ability to process coils from up to 72" wide to up to 96" wide and will also
allow for processing of higher strength grades than the segment's current
equipment is capable. The equipment is being constructed, fabricated and
installed by Delta Steel Technologies. The Company currently expects
installation of the new equipment to begin in October 2020 and expects
commercial use to begin in February 2021. The Company currently estimates the
cost of this project to be $5,800,000. The expenditures related to both of these
projects are reported as Construction in Progress on the Company's Condensed
Consolidated Balance Sheet.
On December 12, 2019, the Company's $5,000,000 revolving line of credit facility
(the "Credit Facility") expired and was not renewed. The Company did not have
any borrowings outstanding under the Credit Facility at expiration and did not
advance any funds under the Credit Facility during the quarter ended December
31, 2019.
The Company believes that its current cash position along with cash flows from
operations and borrowing capability due to its financial position are adequate
to fund its expected cash requirements for the next 24 months.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Significant estimates that are subject to
the Company's assumptions include the determination of useful lives for fixed
assets, determination of the allowance for doubtful accounts and the
determination of net realizable value relative to inventory. The determination
of useful lives for depreciation of fixed assets requires the Company to make
assumptions regarding the future productivity of the Company's fixed assets. The
allowance for doubtful accounts requires the Company to draw conclusions on the
future collectability of the Company's accounts receivable. The determination of
net realizable value when reviewing inventory value requires the Company to
makes assumptions concerning sales trends, customer demand and steel industry
market conditions. Actual results could differ from these estimates.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
forward-looking information (as defined in the Private Securities Litigation
Reform Act of 1996, as amended) and that involve risk and uncertainty. Such
statements may include those risks disclosed in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of this
report. These forward-looking statements may include, but are not limited to,
future changes in the Company's financial condition or results of operations,
future production capacity, product quality and proposed expansion plans.
Forward-looking statements may be made by management orally or in writing
including, but not limited to, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of the
Company's filings with the U.S. Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including the Company's Annual Report on
Form 10-K and its other Quarterly Reports on Form 10-Q. Forward looking
statements include those preceded by, followed by or including the words "will,"
"expect," "intended," "anticipated," "believe," "project," "forecast,"
"propose," "plan," "estimate," "enable," and similar expressions, including, for
example, statements about our business strategy, our industry, our future
profitability, growth in the industry sectors we serve, our expectations,
beliefs, plans, strategies, objectives, prospects and assumptions, and estimates
and projections of future activity and trends in the oil and natural gas
industry. These forward-looking statements are not guarantees of future
performance. These statements are based on management's expectations that
involve a number of business risks and uncertainties, any of which could cause
actual results to differ materially from those expressed in or implied by the
forward-looking statements. Although forward-looking statements reflect our
current beliefs, reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which may cause our actual results, performance or achievements to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Actual results and
trends in the future may differ materially depending on a variety of factors
including, but not limited to, changes in the demand for and prices of the
Company's products, changes in government policy regarding steel, changes in the
demand for steel and steel products in general, the Company's success in
executing its internal operating plans, changes in and availability of raw
materials, our ability to satisfy our take or pay obligations under certain
supply agreements, unplanned shutdowns of our production facilities due to
equipment failures or other issues, increased competition from alternative
materials and risks concerning innovation, new technologies, products and
increasing customer requirements. Accordingly, undue reliance should not be
placed on our forward looking statements. We undertake no obligation to publicly
update or revise any forward looking statement, whether as a result of new
information, future events, changed circumstances or otherwise, except to the
extent law requires.
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FRIEDMAN INDUSTRIES, INCORPORATED 