EXHIBIT 13.1

 

THE COMPANY’S ANNUAL

REPORT TO SHAREHOLDERS FOR

THE FISCAL YEAR ENDED March 31, 2021

 

 

 

2021

ANNUAL REPORT

 

 

FINANCIAL HIGHLIGHTS

		2021				2020
Net sales		$	126,102,533			$	142,102,324
Net earnings (loss)		$	11,424,475			$	(5,249,210	)
Net earnings (loss) per share (Basic)		$	1.63			$	(0.75	)
Cash dividends per share		$	0.08			$	0.10
Stockholders’ equity		$	65,339,976			$	66,865,367
Working capital		$	48,462,364			$	55,566,158

 

TO OUR SHAREHOLDERS:

 

Fiscal year 2021 was a uniquely challenging year for Friedman Industries, Incorporated (the “Company”) with the fiscal year starting right as the United States began to see widespread impacts of the COVID-19 pandemic. The pandemic created a lot of uncertainty about how our employees, our operations, our customer’s operations and the overall steel industry would be affected. We quickly updated our operational and safety protocols to help ensure the safety and health of our employees. Thankfully, all our facilities have continued to operate throughout this crisis. We are pleased to report that only a small number of employees tested positive for the virus and that all employees have since recovered and returned to work. During fiscal 2021, we experienced unprecedented price volatility of hot-rolled steel coil (“HRC”). Fiscal 2021 started with the HRC price declining from approximately $550 per ton to approximately $440 per ton in August 2020. During August 2020, HRC price began a historic increase, rising to approximately $1,300 per ton at the conclusion of fiscal 2021. We believe the increasing prices were driven by a resurgence of demand that was met by historically low inventory levels in the supply chain and reduced steel mill supply due to certain mills idling capacity in response to the pandemic and leaving that capacity offline. As a result of this price volatility, the Company experienced margin compression with steel prices declining during the first two quarters of fiscal 2020, resulting in a net loss of approximately $1,109,000 for the six months ended September 30, 2020. As steel prices surged to historic levels during the next two quarters, the Company experienced significant margin improvement resulting in net earnings of approximately $12,533,000 for the six months ended March 31, 2021. For the full fiscal 2021 year, we had net earnings of approximately $11,424,000 making it the second most profitable fiscal year in Company history.

 

Sales volume for the Company’s coil segment declined approximately 14% for fiscal 2021 compared to fiscal 2020 with much of that decline being attributable to pandemic related volume decline in the months of April 2020 and May 2020. We were pleased with how volume rebounded for the remainder of fiscal 2021 and we experienced growth in our customer portfolio increasing the number of coil segment customers sold from approximately 185 customers in fiscal 2020 to approximately 200 customers in fiscal 2021. Coil segment operating profit improved from approximately $1,253,000 for fiscal year 2020 to approximately $16,467,000 for fiscal year 2021. During fiscal 2021, we removed our temper mill and cut-to-length line at our Decatur, Alabama plant and replaced it with a stretcher leveler cut-to-length line with significantly enhanced processing capabilities that allow the facility to process material that is thicker, wider and of higher strength compared to the prior equipment’s capabilities. We began commissioning the line during March 2021 and are incredibly pleased with the initial customer response to the facility’s new processing capabilities.

 

Sales volume for the Company’s tubular segment declined approximately 28% for fiscal 2021 compared to fiscal 2020 due primarily to impacts of the pandemic. Demand for the tubular segment did not rebound as quickly as coil segment demand due primarily to challenging energy industry conditions and the tubular segment having a higher level of exposure to the energy industry. The number of tubular segment customers sold remained steady at approximately 125 customers for both fiscal 2021 and fiscal 2020. Tubular segment operations recorded an operating profit of approximately $2,923,000 for fiscal 2021 compared to an operating loss of approximately $5,565,000 for fiscal year 2020.

 

In May 2021, we announced plans for a new facility in Sinton, Texas. Steel Dynamics, Inc. (“SDI”) has invited Friedman Industries to locate the new facility on the campus of its new flat roll steel mill currently under construction in Sinton, Texas. Our new Sinton location will consist of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement. We have selected Red Bud Industries to build one of the world’s largest stretcher leveler cut-to-length lines, capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. This facility will expand the size range and grades of material we can deliver to our coil segment customers, while extending our competitive footprint to the Southwest United States and Mexico. We expect the facility to commence operations in April 2022. We believe this is a great growth opportunity for the Company.

 

You are invited to attend the Annual Meeting of Shareholders scheduled to start at 10:00 a.m. (Central Time) on Friday, September 10, 2021, in the offices of Norton Rose Fulbright US LLP, 1301 McKinney, 51st Floor, Houston, Texas 77010.

 

Sincerely,

 

 

Michael J. Taylor

President and Chief Executive Officer

Chairman of the Board of Directors 

 

 

OFFICERS

 

Michael J. Taylor 

President and Chief Executive Officer

 

Howard Henderson

Vice President of Operations — Texas Tubular Division

 

Jonathan Holcomb

Vice President of Sales — Coil Divisions and Vice President of Purchasing

 

Alex LaRue

Chief Financial Officer — Secretary and Treasurer

 

Robert McCain

Vice President — Decatur Facility

 

Steve Teeter

Vice President of Operations — Coil Divisions

 

Michael Thompson 

Vice President of Sales — Tubular Division

 

COMPANY OFFICES AND WEBSITES

 

    CORPORATE OFFICE & COIL PRODUCTS SALES OFFICE

    1121 Judson Road, Suite 124

    Longview, Texas 75601

    903-758-3431

 

    TUBULAR PRODUCTS SALES OFFICE

    3681 FM 250

    Lone Star, Texas 75668

    903-639-2511

 

    WEBSITES*

    www.friedmanindustries.com

    www.texastubular.com 

 

COUNSEL

Norton Rose Fulbright US LLP

1301 McKinney, Suite 5100

Houston, Texas 77010

 

AUDITORS

Moss Adams LLP

500 Dallas Street, Suite 2500

Houston, TX 77002

 

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company, LLC

6201 15th Avenue

Brooklyn, NY 11219

 

* Information on our websites is expressly not incorporated by reference into this document.

 

 

DIRECTORS 

 

Durga D. Agrawal

President, Piping Technology & Products, Inc. (pipe fabrication)

Houston, Texas

 

Max Reichenthal

President, Texas Iron and Metal (steel product sales)

Houston, Texas

 

Joel Spira

Private investor; formerly, Partner, Weinstein Spira & Company (accounting firm)

Houston, Texas

 

Tim Stevenson

Chief Executive Officer and Founder, Metal Edge Partners (metals price risk management and strategic advisory services)

Plymouth, Minnesota 

 

Michael J. Taylor, Chairman of the Board

President and Chief Executive Officer of the Company 

Houston, Texas 

 

Joe L. Williams

Partner, Pozmantier, Williams and Stone Insurance Consultants, LLC (insurance and risk management consultants)

Houston, Texas

 

ANNUAL REPORT ON FORM 10-K

 

Shareholders may obtain without charge a copy of the Company’s Annual Report on Form 10-K for the year ended March 31, 2021, as filed with the U.S. Securities and Exchange Commission. Written requests should be addressed to: Alex LaRue, Chief Financial Officer — Secretary and Treasurer, Friedman Industries, Incorporated, P.O. Box 2192, Longview, Texas 75606.

 

 

DESCRIPTION OF BUSINESS 

 

Friedman Industries, Incorporated (the “Company”) is a manufacturer and processor of steel products and operates in two product segments: coil products and tubular products.

 

Coil Products

 

The coil product segment consists of the operation of two hot-rolled coil processing facilities; one in Hickman, Arkansas (“Hickman”) and the other in Decatur, Alabama (“Decatur”). The Hickman 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. The Hickman facility is capable of cutting sheet and plate with thicknesses ranging from 14 gauge to ½” thick in widths ranging from 36” wide to 72” wide. The Decatur facility previously operated a temper mill and a cut-to-length line but during the quarter ended June 30, 2020, the equipment was removed to allow the foundation to be prepared for a new stretcher leveler line. In March 2021, the new stretcher leveler line was placed into service. The estimated total cost of this project is $7,200,000 with approximately $6,733,000 having been paid as of March 31, 2021. The new equipment expands the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and will allow the Decatur facility to cut material that is up to ½” thick compared to the previous equipment’s capability of 5/16” thick. In addition, sheet and plate that has been stretcher leveled is preferable to some customers and applications compared to material that has been leveled through the temper mill process. 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 Hickman and Decatur facilities are substantially similar with respect to products produced. The Company makes shipments of coil products based on which facility offers the desired product or, if the product is available at both facilities, based on other factors, such as customer location, freight conditions and the ability of the facility to fulfill the order on a timely basis. Coil products are sold on a wholesale, rapid-delivery basis in competition with other processors of hot-rolled steel coils. Shipments are made via unaffiliated truckers or by rail.

 

On May 25, 2021, the Company announced plans for a new facility in Sinton, Texas that will be part of the coil product segment. The new facility will be on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill currently under construction in Sinton, Texas. The Company's new location will consist of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement. The Company has selected Red Bud Industries to build one of the world’s largest stretcher leveler cut-to-length lines, capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. The Company expects the location to commence operations in April 2022 and estimates the total cost of the project to be $21 million.

 

The 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.

 

The Company sells coil products and processing services to approximately 200 customers located primarily in the midwestern, southwestern and southeastern regions of the United States. The Company’s principal customers for these products and services are steel distributors and customers manufacturing steel products such as steel buildings, railroad cars, barges, tanks and containers, trailers, component parts and other fabricated steel products.

 

Tubular Products

 

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. The pipe finishing facility is currently idled due to market conditions. 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 mill reject pipe that TTP purchased from U.S. Steel Tubular Products, Inc.

 

The Company sells its tubular products nationally to approximately 125 customers. The Company’s principal customers for these products are steel and pipe distributors.

 

TTP 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.

 

Significant financial information relating to the Company’s two product groups, coil and tubular products, is contained in Note 13 of the Notes to the Company’s Consolidated Financial Statements appearing herein.

 

 

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RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK

 

		Fiscal 2021								Fiscal 2020
		High				Low				High				Low
First Quarter		$	5.44			$	4.14			$	8.05			$	6.27
Second Quarter			6.50				4.95				7.04				5.78
Third Quarter			7.30				5.55				7.24				5.80
Fourth Quarter			9.90				6.70				6.14				3.72

 

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CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

 

		Fiscal 2021				Fiscal 2020
First Quarter		$	0.02			$	0.04
Second Quarter			0.02				0.02
Third Quarter			0.02				0.02
Fourth Quarter			0.02				0.02

 

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The Company’s Common Stock is traded principally on the NYSE American (trading symbol FRD).

 

The approximate number of shareholders of record of Common Stock of the Company as of April 23, 2021 was 175. Because many of the Company’s common shares are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of individual shareholders represented by these record holders. 

 

 

CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY  

 

 

See accompanying notes.

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

See accompanying notes.

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

See accompanying notes.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

 

Cash and restricted cash at March 31, 2021 includes $12,001,485 of cash required to collateralize open derivative positions. This amount is reported in "Other current assets" on the Company's consolidated balance sheet at March 31, 2021. The Company did not have any restricted cash at March 31, 2020.

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

To the Stockholders and the Board of Directors of

Friedman Industries, Incorporated

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Friedman Industries, Incorporated and subsidiary (the “Company”) as of March 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Derivatives and Hedging – Management’s Forecasts of Physical Purchases and Sales of Prime Coil

 

As described in Note 6 to the consolidated financial statements, in June 2020, the Company implemented its first commodity price risk management activities by transacting hot-rolled coil futures. At the time derivative contracts are entered into, the Company assesses whether the nature of the instrument qualifies for hedge accounting treatment according to the requirements of ASC 815-Derivatives and Hedging. During the twelve months ended March 31, 2021, the Company entered into hot-rolled coil futures contracts which were designated as hedging instruments and classified as cash flow hedges, either as hedges of variable purchase prices or as hedges of variable sales prices. Accordingly, realized and unrealized gains and losses associated with the instruments are reported as a component of other comprehensive income and reclassified into earnings during the period in which the associated hedged transaction affects earnings. The election of hedge accounting requires significant analysis and documentation. This analysis includes estimates for the forecasted future physical purchases of prime coil and physical sales of prime coil. We determined that the auditing of these estimates was a critical audit matter. The Company had an accumulated other comprehensive loss of $11,187,841 as of March 31, 2021 consisting of deferred realized and unrealized losses associated with futures contracts for which forecasted physical purchase or sale transactions were determined by management to be probable of occurring.

 

The principal consideration in our determination that management’s forecasts of physical prime coil purchases and physical sales of prime coil is a critical audit matter is the exercise of significant judgment by management when developing these forecasts. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s forecasts of physical purchases and sales.

 

The primary procedures we performed to address this critical audit matter included:

 

	·	Performing a retrospective review of previous forecasts by comparing to actual volumes of prime coil purchased or sold,
	·	Comparing forecasts to historical actual volumes of prime coil purchased or sold, and
	·	Evaluating the sensitivity of forecasts to downward changes and assessing potential impact of changes on the Company’s assertion about the probability of forecasted purchase and sale volumes.

 

 

/s/ MOSS ADAMS LLP

 

Houston, Texas

 

July 7, 2021

 

We have served as the Company’s auditor since 2017.

 

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, as amended). We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to us is recorded, processed, summarized and reported to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report and, during the audit process related to the fiscal year ended March 31, 2021, identified a material weakness in our internal control over financial reporting. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2021.

 

Notwithstanding the identified material weakness, the Company's management, including our Chief Executive Officer and Chief Financial Officer, have determined, based on the procedures we have performed, that the audited consolidated financial statements included in this report fairly present in all material respects our financial condition and results of operations as of and for the years ended March 31, 2021 and 2020 in accordance with U.S. Generally Accepted Accounting Principles.

 

Material Weakness in Internal Control Over Financial Reporting

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

During the audit process related to our fiscal year ended March 31, 2021, management, in connection with our independent auditors, identified a material weakness in our controls related to the review of the annual income tax provision prepared by a third-party firm. Specifically, we did not maintain effective controls to sufficiently review the completeness and accuracy of the annual tax provision. Our review was not sufficiently detailed to identify a material misstatement in deferred income taxes. The Company recorded an audit adjustment of approximately $3.5 million impacting the balance sheet items of deferred tax assets and accumulated other comprehensive loss. The audit adjustment caused the Company to change from a net deferred income tax liability position to a net deferred income tax asset position. Additionally, the Company’s review of the annual income tax provision did not include a process to sufficiently evaluate deferred tax assets to determine if a valuation allowance was necessary. The Company has since performed an analysis to consider if a valuation allowance is necessary in relation to the Company’s deferred tax assets and concluded that no valuation allowance is necessary due to anticipated recoverability through future taxable income.

 

Plan for Remediation of Material Weakness

 

Our Company is relatively small. As disclosed in our Form 10-K, we had 93 full-time employees as of March 31, 2021. Our accounting and finance team consisted of two degreed accountants as of March 31, 2021. Leading up to, and during the financial statement audit period, considerable time was expended by our accounting and finance team to finalize the asset-based credit facility described in Note 3 and to select our general contractor and equipment manufacturer related to our planned new facility in Sinton, Texas disclosed in Note 5 and to finalize contracts with such parties. This resulted in the Company falling behind in the timeline necessary to complete the audit process and regulatory filings in a timely manner. In an effort to meet regulatory deadlines, the Company did not perform a sufficient review of third-party materials. The Company concludes that the best remediation of the material weakness is an investment in human capital that will allow it to meet its regulatory requirements and growth objectives. On May 24, 2021, the Company hired an additional degreed accountant. The timing of this hire in relation to the audit process made it difficult for the hire to have a beneficial impact on the process related to our fiscal year end March 31, 2021. However, the Company believes the investment in human capital will provide sufficient remediation in future periods and the Company will continue to evaluate the appropriate level of staffing to ensure the controls over financial reporting are adhered to and the Company can meet its regulatory requirements in a timely manner.

 

We will continue to monitor the design and effectiveness of these procedures and controls and make any further changes the Company determines appropriate. We believe the additional investment in human capital described above will remediate the material weakness the Company has identified. However, this material weakness will not be considered remediated until the applicable remedial actions operate effectively for a sufficient period of time.

 

Attestation Report of the Registered Public Accounting Firm

 

Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our Company's independent registered public accounting firm regarding internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

Except for the matter discussed above, there were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

 

COMPANY 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-rolled coil processing facilities; one in Hickman, Arkansas and the other in Decatur, Alabama. The Hickman 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. The Hickman facility is capable of cutting sheet and plate with thicknesses ranging from 14 gauge to ½” thick in widths ranging from 36” wide to 72” wide. The Decatur facility previously operated a temper mill and a cut-to-length line but during the quarter ended June 30, 2020, the equipment was removed to allow the foundation to be prepared for a new stretcher leveler line. In March 2021, the new stretcher leveler line was placed into service. The estimated total cost of this project is $7,200,000 with approximately $6,733,000 having been spent as of March 31, 2021. The new equipment expands the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and will allow the Decatur facility to cut material that is up to ½” thick compared to the previous equipment’s capability of 5/16” thick. In addition, sheet and plate that has been stretcher leveled is preferable to some customers and applications compared to material that has been leveled through the temper mill process. In April 2020, the Company completed a 22,000 square foot building expansion at the Hickman facility that provides for additional finished goods storage space, removing that constraint to growth and also providing safety improvements. The project was completed at an actual cost of approximately $1,083,000 compared to an original estimated cost of $1,100,000. 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. 

 

On May 25, 2021, the Company announced plans for a new facility in Sinton, Texas that will be part of the coil product segment. The new facility will be on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill currently under construction in Sinton, Texas. The Company's new location will consist of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement. The lease agreement calls for an annual rental payment of $1. The Company has selected Red Bud Industries to build one of the world’s largest stretcher leveler cut-to-length lines, capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. The Company expects the location to commence operations in April 2022 and estimates the total cost of the project to be $21 million. The Company expects to fund the Sinton capital expenditure through a combination of cash generated from operations and funds drawn under the ABL Facility.

 

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. The pipe finishing facility is currently idled due to market conditions. 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 purchased from U.S. Steel Tubular Products, Inc.

 

RESULTS OF OPERATIONS

 

Year ended March 31, 2021 compared to year ended March 31, 2020

 

Our fiscal year ended March 31, 2021 ("fiscal 2021") commenced in the early stages of the COVID-19 virus' widespread impact on the United States. In addition to the devastating effects on human life, this contagious virus has affected economies globally. The operations of many businesses, including ours and many of our customers have been disrupted during the pandemic. We have been fortunate to operate our facilities throughout the pandemic and more fortunate to report none of our employees have been lost to the virus. The impact of the pandemic on different industries has been unique and we likely do not yet know the full extent of the pandemic's impact. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. 

 

During fiscal 2021, sales and costs of goods sold decreased $15,999,791 and $36,974,654, respectively, and gross profit increased $20,974,863 from the comparable amounts recorded during the year ended March 31, 2020 (“fiscal 2020”). The decrease in sales was related primarily to a decline in sales volume with tons sold decreasing from approximately 210,500 tons in fiscal 2020 to approximately 173,000 tons in fiscal 2021. The decline in sales volume was primarily related to both the impact of COVID-19 and the equipment replacement project at the coil segment's Decatur facility. Discussion of the changes in sales volumes is expanded upon at the segment level in the following paragraphs. The average selling price of the Company's products did increase in fiscal 2021 compared to fiscal 2020 but only to an extent to partially offset the decrease in sales caused by the decline in volume. Discussion of the changes in average selling price is expanded upon at the segment level in the following paragraphs. Gross profit as a percentage of sales increased from approximately 1.8% in fiscal 2020 to approximately 18.7% in fiscal 2021. Gross profit for fiscal 2021 included $6,414,500 in recognized gains related to hedging activities while fiscal 2020 did not have any recognized hedging related gains or losses. Excluding the recognized hedging gains for fiscal 2021, gross profit related to physical material as a percentage of sales was approximately 13.6% for fiscal 2021.

 

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 fiscal 2021 and fiscal 2020. The start of fiscal 2020 was characterized by declining steel prices that reached a 3 ½ year low in October 2019. From November 2019 through February 2020 domestic steel producers issued a series of price increases but the upward momentum was halted in March 2020 when the COVID-19 virus started to impact the U.S. economy. From March 2020 to August 2020 steel prices resumed a negative trajectory and declined approximately 25%. In August 2020, steel prices began a historic run up, increasing approximately 200% by the end of fiscal 2021. Management believes the historic increase in steel prices is primarily the result of a supply and demand imbalance that was created by COVID-19's impact on the steel industry and its customers. At the onset of the pandemic, some steel mill production capacity was idled, and we, and many other industry participants, scaled back inventory purchases. We saw a significant but relatively brief, dip in demand followed by a resurgence, and this resurgence in demand was met by historically low inventory on hand and on order levels in the supply chain and a lower level of available steel mill capacity. Steel mill capacity was booked up quickly and lead times extended well beyond normal levels and due to supportive demand, capacity continued to book up quickly throughout the remainder of fiscal 2021 and lead times remained extended. This supply and demand dynamic resulted in significant margin improvement for the Company's products during the second half of fiscal 2021. In comparison, results for fiscal 2020 were negatively impacted by sustained margin compression associated with declines in steel price. Operating profit for fiscal 2021 was approximately $19,390,000 compared to an operating loss of approximately $4,312,000 for fiscal 2020 that included a fixed asset impairment loss of approximately $4,338,500.

 

 

Coil Segment

 

Coil product segment sales for fiscal 2021 totaled $95,264,555 compared to $99,762,892 for fiscal 2020, representing a decrease during fiscal 2021 of $4,498,337 or approximately 5%. For average selling price disclosure, 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 $917,296 for fiscal 2021 compared to $747,827 for fiscal 2020. Sales generated from coil segment inventory totaled $94,347,259 for fiscal 2021 compared to $99,015,065 for fiscal 2020. The decrease in coil segment sales was driven by a decline in sales volume, partially offset by an increase in the average selling price of tons shipped from inventory. Inventory tons sold decreased from approximately 152,000 tons in fiscal 2020 to approximately 130,500 tons in fiscal 2021. The volume decline was related to both the impacts of COVID-19 and removing the Decatur facility's equipment in June 2020 for an equipment replacement project that was put into service in March 2021. Compared to fiscal 2020's average monthly volume, April 2020 volume was down 51% and May 2020 volume was down 33% but the rest of fiscal 2021's monthly volume was only down an average of 9%. The average per ton selling price related to these shipments increased from approximately $651 per ton in fiscal 2020 to approximately $722 per ton in fiscal 2021. Coil segment operations recorded operating profits of approximately $16,467,000 and $1,253,000 in fiscal 2021 and fiscal 2020, respectively. Operating profit for fiscal 2021 includes recognized gains on hedging activities of $5,500,000 while the Company did not have any hedging activities in fiscal 2020. Margins for fiscal 2021 improved significantly during the second half of the year while steel pricing was experiencing a historic increase. Margins for fiscal 2020 were negatively impacted by declines in hot-rolled steel prices.

 

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 fiscal 2021 totaled $30,837,978 compared to $42,339,432 for fiscal 2020, representing a decrease during fiscal 2021 of $11,501,454 or approximately 27%. The decrease in tubular segment sales was primarily driven by a decline in sales volume which decreased from approximately 58,000 tons in fiscal 2020 to approximately 42,000 tons in fiscal 2021. The volume decline was related primarily to the impacts of COVID-19 and challenging energy industry conditions. Compared to fiscal 2020's average monthly volume, April 2020 volume was only down 4% due to the fulfillment of pre-pandemic orders but May 2020 volume was down 36% and the remainder of fiscal 2021's monthly volume was down an average of 27%. The tubular segment volume did not recover in the same manner as the coil segment's volume due primarily to energy industry conditions which remained challenging throughout fiscal 2021. The average selling price for the tubular segment's products was consistent between years at approximately $730 per ton for fiscal 2021 compared to approximately $728 per ton for fiscal 2020. Tubular segment operations recorded an operating profit of approximately $2,923,000 for fiscal 2021 compared to an operating loss of approximately $5,565,000 for fiscal 2020. Operating profit for fiscal 2021 includes recognized gains on hedging activities of $914,500 while the Company did not have any hedging activities in fiscal 2020.The fiscal 2020 operating loss included a fixed asset impairment loss related to the segment’s pipe finishing facility of approximately $4,338,500. Operating results for both fiscal 2021 and fiscal 2020 were negatively impacted by inventory write downs of $274,093 and $955,605, respectively, related to the segment's manufactured pipe inventory. 

 

The 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. In March 2020, U.S. Steel announced the idling of their Lone Star Tubular Operations which was our sole supplier of mill reject pipe. U.S. Steel's facility was idled as announced and the Company's receipts of mill reject pipe ceased in August 2020. At March 31, 2021, we had approximately 22,500 tons of mill reject inventory which we believe to be one to one and a half years of inventory. Mill reject pipe sales contributed gross profit of approximately $1,775,000 in fiscal 2021 and $1,471,000 in fiscal 2020. We expect the idling to have a negative impact on our operations as we eventually sell out of inventory.

 

 

 

General, Selling and Administrative Costs

 

During fiscal 2021, general, selling and administrative costs increased approximately $2,710,000 compared to fiscal 2020. This increase was related primarily to payroll, professional fees and restricted stock plan compensation expense.

 

Other Income (Loss)

 

For fiscal 2021, the Company reported an other loss of approximately $503,500 which was the result of a loss of approximately $515,000 on derivative instruments not designated for hedge accounting partially offset by other income of approximately $11,500 for the increase in cash surrender value of life insurance policies the Company holds on its officers. For fiscal 2020, the Company had other income of approximately $19,000 which consisted of the increase in cash surrender value of life insurance policies the Company holds on its officers.

 

Income Taxes

 

Income taxes increased from a benefit for fiscal 2020 of $1,588,992 to a provision for fiscal 2021 of $3,797,498. This increase was related primarily to the shift from a loss before taxes for fiscal 2020 to having earnings before tax for fiscal 2021.

 

FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL

 

The Company's current ratio was 2.7 and 6.8 at March 31, 2021 and March 31, 2020, respectively. Working capital was $48,462,364 at March 31, 2021 and $55,566,158 at March 31, 2020.

 

During the year ended March 31, 2021, 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 operating activities partially offset by the purchases of 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.

 

On April 9, 2020, the Company entered into a Paycheck Protection Program Promissory Note (the “PPP Note”), evidencing an unsecured loan to the Company from JPMorgan Chase Bank under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Pursuant to the PPP Note, the Company received total proceeds of $1,690,385 on April 10, 2020. According to the provisions of the CARES Act, the Company submitted an application for forgiveness of the PPP Note on April 21, 2021 and received notification on June 22, 2021 that full forgiveness of the loan was authorized by the Small Business Administration.

 

On March 8, 2021, the Company entered into a Credit Agreement providing for a $10 million revolving line of credit facility (the "Interim Credit Facility) with JPMorgan Chase Bank, N.A. (the "Bank"). The term of the Interim Credit Facility was relatively short with an expiration date of July 15, 2021 because the Company was evaluating options for longer term credit arrangements. At March 31, 2021, the Company did not have any borrowings under the Interim Credit Facility. On April 14, 2021, the Company executed a first amendment to the Interim Credit Facility that increased the size of the facility from $10 million to $20 million. On May 19, 2021, the Company entered into an Amended and Restated Credit Agreement with the Bank that provides for asset-based revolving loans in an aggregate principal amount up to $40 million (the "ABL Facility"). The ABL Facility matures on May 19, 2026 and replaced the Interim Credit Facility. The ABL Facility is secured by substantially all of the assets of the Company and interest shall accrue on outstanding borrowings at a rate equal to LIBOR plus 1.7% per annum. More details regarding the ABL Facility may be found in Note 3. As of the filing date of this Form 10-K, the Company had borrowings of $11,448,646 outstanding under the ABL Facility.

 

The Company believes that its cash flows from operations and credit availability are adequate to fund its expected cash requirements for the next 12 months.

 

DERIVATIVE CONTRACTS

 

During fiscal 2021, the Company implemented its first commodity price-risk management activities by transacting hot-rolled coil futures. From time to time, the Company may use futures contracts to partially manage exposure to price risk. The Company elects hedge accounting for some of its derivatives and classifies the transactions as either cash flow hedges or fair value hedges. From time to time, the Company may also transact futures contracts where hedge accounting is not elected. For fiscal 2021, the Company recognized gains of $6,414,500 related to derivatives designated for hedge accounting and classified as cash flow hedges and recognized losses of $515,160 related to derivatives not designated for hedge accounting. See Note 6 for further information related to the Company's derivative financial instruments.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off-balance sheet arrangements.

 

INFLATION

 

During fiscal 2021 and fiscal 2020, the Company believes that the general level of inflation did not have a material effect on the Company's operations. 

 

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The more significant estimates and judgements include forecasted purchases of hot-rolled coil and forecasted sales or prime coil inventory and manufactured pipe inventory in relation to hedging activities and the fair value of the pipe-finishing facility, when impaired. From time to time, the Company hedges these forecasted purchases and sales and may designate those transactions for hedge accounting. If the actual volume of these purchases and sales differs from the forecasted volumes, it may impact the application of hedge accounting related to those transactions and may disallow the use of hedge accounting on a go forward basis. Determination of forecasted purchases of hot-rolled coil and forecasted sales of prime coil inventory and manufactured pipe inventory require the Company to make assumptions related to customer demand and the volume and timing of inventory purchases. The pipe-finishing facility impairment analysis requires assumptions related to future operations of the facility and estimates related to the replacement cost and value in exchange for the assets. 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 and the Company’s success in executing its internal operating plans, changes in and availability of raw materials, 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.

 

 

TEN YEAR FINANCIAL SUMMARY (Unaudited)

 

		Year Ended March 31
														2018
		2021				2020				2019				As Adjusted				2017*				2016*				2015*				2014*				2013*				2012*
Net sales		$	126,102,533			$	142,102,324			$	187,154,493			$	121,157,278			$	77,756,055			$	81,631,382			$	108,322,780			$	116,149,022			$	136,448,786			$	161,521,993
Net earnings (loss)		$	11,424,475			$	(5,249,210	)		$	5,099,924			$	3,934,101			$	(2,678,684	)		$	294,000			$	382,330			$	1,712,926			$	6,135,812			$	8,150,464
Current assets		$	77,534,635			$	65,211,517			$	74,456,207			$	67,269,406			$	45,432,836			$	49,701,656			$	50,117,355			$	59,846,668			$	64,283,557			$	65,007,891
Current liabilities		$	29,072,271			$	9,645,359			$	12,364,902			$	11,030,635			$	2,356,590			$	2,865,750			$	2,651,111			$	7,770,689			$	12,312,082			$	13,853,388
Working capital		$	48,462,364			$	55,566,158			$	62,091,305			$	56,238,771			$	43,076,246			$	46,835,906			$	47,466,244			$	52,075,979			$	51,971,475			$	51,154,503
Total assets		$	95,008,809			$	77,344,088			$	86,601,982			$	81,653,307			$	63,263,297			$	66,890,397			$	66,958,024			$	72,284,399			$	76,575,129			$	78,570,393
Stockholders’ equity		$	65,339,976			$	66,865,367			$	72,481,577			$	68,575,450			$	60,356,425			$	63,239,047			$	63,217,025			$	63,310,656			$	62,957,619			$	63,417,268
Net earnings (loss) as a percentage of Net sales			9.1				(3.7	)			2.7				3.2				(3.4	)			0.4				0.4				1.5				4.5				5.0
Stockholders’ equity			17.5				(7.9	)			7.0				5.7				(4.4	)			0.5				0.6				2.7				9.7				12.9
Weighted average number of common shares outstanding:
Basic			7,027,707				7,000,403				7,010,266				7,009,444				6,851,944				6,799,444				6,799,444				6,799,444				6,799,444				6,799,444
Per share
Net earnings (loss) per share:
Basic		$	1.63			$	(0.75	)		$	0.73			$	0.56			$	(0.39	)		$	0.04			$	0.06			$	0.25			$	0.90			$	1.20
Stockholders’ equity		$	9.30			$	9.55			$	10.34			$	9.78			$	8.81			$	9.30			$	9.30			$	9.31			$	9.26			$	9.33
Cash dividends per common share		$	0.08			$	0.10			$	0.19			$	0.05			$	0.04			$	0.04			$	0.07			$	0.20			$	0.97			$	0.52

 

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* The figures for fiscal years 2012 to 2017 have not been adjusted for a change in accounting principle where the Company changed its valuation method for prime coil inventory from the LIFO method to the average cost method. The change in accounting principle was effective for fiscal 2019 and fiscal 2018 figures were adjusted to meet comparative financial statement reporting requirements. The impact of the change in accounting principle on fiscal years 2012 to 2017 has not been quantified by the Company and could be material, therefore, the figures may not be comparable to fiscal years 2018 to 2021.