EXHIBIT 13.1

 

THE COMPANY’S ANNUAL

REPORT TO SHAREHOLDERS FOR

THE FISCAL YEAR ENDED MARCH 31, 2020

 

 

 

2020

ANNUAL REPORT

 

 

	FINANCIAL HIGHLIGHTS
			2020				2019
	Net sales		$	142,102,324			$	187,154,493
	Net earnings (loss)		$	(5,249,210	)		$	5,099,924
	Net earnings (loss) per share (Basic)		$	(0.75	)		$	0.73
	Cash dividends per share		$	0.10			$	0.19
	Stockholders’ equity		$	66,865,367			$	72,481,577
	Working capital		$	55,566,158			$	62,091,305

 

TO OUR SHAREHOLDERS:

 

Fiscal year 2020 was a challenging year for Friedman Industries, Incorporated (the “Company”) but also a year where a foundation was laid for the Company’s future and greater shareholder value. We continued to experience significant price volatility during much of fiscal year 2020.  We began the year with hot-rolled coil (“HRC”) at approximately $700 per ton and bottomed in November at approximately $490 per ton. The Company experienced margin compression throughout the first three quarters of the year as steel prices were declining resulting in an operating loss for the nine months ended December 31, 2019 of approximately $1,095,000. HRC prices started to increase in November and continued increasing into the fourth quarter. This pivot in pricing allowed the margin compression to ease and the Company had an operating profit of approximately $1,121,000 for the three months ended March 31, 2020 excluding an impairment loss recognized related to the tubular segment’s pipe finishing facility at March 31, 2020. Operating profit or loss is net sales less operating expenses, excluding general corporate expenses, interest expense and interest and other income.

 

The Company’s coil segment continued to show year over year sales growth during fiscal 2020 with sales volume increasing 8% compared to fiscal 2019. During fiscal 2020, we commenced a 22,000 square foot building expansion at our Hickman, Arkansas (“Hickman”) coil processing facility. This project was completed in April 2020 on time and under budget. The expansion provides additional finished goods storage space, removing that constraint to growth, and also provides safety improvements. We also commenced a project to replace the existing temper mill and cut-to-length line at our Decatur, Alabama (“Decatur”) coil processing facility with a stretcher leveler line. This new equipment will allow the Decatur location and our overall coil segment to process material that is thicker, wider and higher strength. In addition, material that has been leveled by the stretcher leveling process is preferable to certain customers and applications compared to material that has been leveled by the temper mill process. In June 2020, we removed the previous equipment from Decatur and we are now preparing the foundation for installation of the new equipment. We expect installation to start in October 2020 and commercial use to begin in February 2021.

 

The Company’s tubular segment experienced challenging demand during fiscal 2020. The US energy sector showed a steady decline in demand throughout the fiscal year. The US drilling rig count entered the year at 1,006 rigs and concluded the year at 728 rigs. In this challenging environment, we worked hard to establish new customers and expand market share seeing manufactured pipe sales volume decline only 4%. At March 31, 2020, we determined it was necessary to review the tubular segment’s pipe finishing facility for impairment. The impairment review resulted in the recognition of a $4,338,419 impairment loss at March 31, 2020. We regret that changes in customer relationships and market conditions have not allowed this facility to operate as initially expected when the investment decision was made. We have implemented a rigorous process to vet all future capital expenditure projects to ensure that shareholder capital is being deployed in a manner that provides maximum shareholder value.

 

During fiscal 2020, we initiated an in-depth strategic review to recognize the strengths within our business and the opportunities available to us as well as the risks that we face. While this level of strategic thinking is a continuous process, it was of significant importance with fiscal 2020 being my first year as President and CEO of the Company and allowed us to establish a foundation for how we prioritize our time and capital. From this strategic review, we have initiated the capital projects at Hickman and Decatur. Additionally, we have implemented a stable dividend philosophy with an intention to pay a dividend at a level we can maintain for the foreseeable future coupled with a desire to increase the dividend when operations become supportive of a new amount we believe is sustainable. With the release of this Annual Report, we are also announcing a Board authorized share repurchase program. The Board’s approval of this program reflects our confidence in the Company’s future and is an additional means to our commitment of enhancing stockholder value. We are also excited to announce that in June 2020 we implemented our first price-risk management actions by participating in the financial futures market for hot-rolled steel coil. We believe price-risk management is a critical tool for improving the consistency of our financial results in a volatile commodity-based business.

 

As we concluded fiscal 2020, we were faced with unprecedented circumstances due to the global COVID-19 pandemic. We have implemented changes to our operations to help ensure the safety and health of our employees. Our facilities have continued to operate throughout this crisis and we are pleased to report that only one of our employees has tested positive for the virus and that employee has since recovered. Our coil segment experienced a significant drop in demand for April 2020 but a rapid improvement for May 2020 and June 2020. Our tubular segment experienced a significant drop in demand as well but has not seen as quick of a recovery due to COVID-19 having a significant impact on the energy industry and other underlying issues within the energy industry. The Company expects to report a net loss for the quarter ended June 30, 2020 due primarily to the demand deterioration associated with COVID-19.

 

You are invited to attend the Annual Meeting of Shareholders scheduled to start at 10:00 a.m. (Central Time) on Thursday, September 10, 2020, 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

 

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, 2020 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-roll coil processing facilities; one in Hickman, Arkansas (“Hickman”) and the other in Decatur, Alabama (“Decatur”). At March 31, 2020, each facility operated 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. At that time, the facilities combined were capable of cutting sheet and plate with thicknesses ranging from 14 gauge to ½” thick in widths ranging from 36” wide to 72” wide. In June 2020, the temper mill and cut-to-length line at the Decatur facility were removed to allow the foundation to be prepared for a new stretcher leveler line that will be installed. Installation is expected to begin in October 2020 and commercial use is expected to start in February 2021. The new equipment will expand the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and allows 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.

 

The coil product 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 185 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. 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.

 

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 9 of the Notes to the Company’s Consolidated Financial Statements appearing herein.

 

 

---

 

RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK

 

		Fiscal 2020								Fiscal 2019
		High				Low				High				Low
First Quarter		$	8.05			$	6.27			$	10.22			$	5.55
Second Quarter			7.04				5.78				11.47				8.17
Third Quarter			7.24				5.80				9.70				6.23
Fourth Quarter			6.14				3.72				8.48				6.69

 

---

 

 

 

 

 

CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

 

		Fiscal 2020				Fiscal 2019
First Quarter		$	.04			$	.03
Second Quarter			.02				.06
Third Quarter			.02				.06
Fourth Quarter			.02				.04

 

---

 

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 24, 2020 was 190. 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

STOCKHOLDERS’ EQUITY

 

 

See accompanying notes.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

 

See accompanying notes.

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

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, 2020 and 2019, the related consolidated statements of operations, 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, 2020 and 2019, 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 audit 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.

 

 

/s/ MOSS ADAMS LLP

 

Houston, Texas

June 29, 2020

 

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) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on such assessment, management concluded that, as of March 31, 2020, our internal control over financial reporting is effective based on that criteria.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the U.S. Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

 

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. At March 31, 2020, each facility operated 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. At that time, the facilities combined were capable of cutting sheet and plate with thicknesses ranging from 14 gauge to ½” thick in widths ranging from 36” wide to 72” wide. In June 2020, the temper mill and cut-to-length line at the Decatur facility were removed to allow the foundation to be prepared for a new stretcher leveler line that will be installed. Installation is expected to begin in October 2020 and commercial use is expected to start in February 2021. The estimated total cost of this project is $5,800,000 with approximately $2,900,000 having been spent as of March 31, 2020. The new equipment will expand the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and allows 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 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 that TTP has manufactured and new mill reject pipe that TTP purchases from U.S. Steel Tubular Products, Inc.

 

RESULTS OF OPERATIONS

 

Year ended March 31, 2020 compared to year ended March 31, 2019

 

During the year ended March 31, 2020 (“fiscal 2020”), sales, costs of goods sold and gross profit decreased $45,052,169, $34,755,467 and $10,296,702, respectively, from the comparable amounts recorded during the year ended March 31, 2019 (“fiscal 2019”). The decrease in sales was related primarily to a decline in steel prices that resulted in our average selling price per ton decreasing. Additional discussion of the average selling price per ton is provided by segment in the following paragraphs. Tons sold decreased from approximately 227,500 tons in fiscal 2019 to approximately 210,500 tons in fiscal 2020. The decrease was related primarily to a decline in the tubular segment’s mill reject sales volume with most of the Company’s other products either maintaining or improving on volume sold for fiscal 2020 in comparison to fiscal 2019 volumes. Discussion of the changes in sales volumes is expanded upon at the segment level in the following paragraphs. Gross profit as a percentage of sales decreased from approximately 6.9% in fiscal 2019 to approximately 1.8% in fiscal 2020.

 

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 2020 and fiscal 2019. 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% to a 3 ½ year low. 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. The steel price volatility translated into volatility in the Company’s operating results for fiscal years 2020 and 2019. Results for fiscal 2020 were negatively impacted by sustained margin compression associated with declines in steel price while fiscal 2019 was positively impacted by stronger margins associated with increases in steel price. Excluding the fixed asset impairment losses recognized in both fiscal 2020 and fiscal 2019, operating profit declined from approximately $10,467,000 for fiscal 2019 to $26,000 for fiscal 2020.

 

 

Coil Segment

 

Coil product segment sales for fiscal 2020 totaled $99,762,892 compared to $124,555,478 for fiscal 2019, representing a decrease during fiscal 2020 of $24,792,586 or approximately 20%. 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 $747,827 for fiscal 2020 compared to $1,251,394 for fiscal 2019. Sales generated from coil segment inventory totaled $99,015,065 for fiscal 2020 compared to $123,304,084 for fiscal 2019. The decrease in coil segment sales was driven by a decrease in the average selling price per ton for these shipments, partially offset by an increase in tons shipped from inventory. The average per ton selling price related to these shipments decreased from approximately $873 per ton in fiscal 2019 to approximately $651 per ton in fiscal 2020. Inventory tons sold increased from approximately 141,000 tons in fiscal 2019 to approximately 152,000 tons in fiscal 2020. Coil segment operations recorded operating profits of approximately $1,253,000 and $6,414,000 in fiscal 2020 and fiscal 2019, respectively.

 

Margins for fiscal 2020 were negatively impacted by declines in hot-rolled steel prices and the resulting effect of inventory with higher average costs flowing through cost of goods sold. Margins for fiscal 2019 were positively impacted by increasing hot-rolled steel prices and the resulting effect of inventory with lower average costs flowing through cost of goods sold. The improved shipping volume for fiscal 2020 is attributable to an increase in the number of customers sold from approximately 170 customers in fiscal 2019 to approximately 185 customers in fiscal 2020.

 

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 2020 totaled $42,339,432 compared to $62,599,015 for fiscal 2019, representing a decrease during fiscal 2020 of $20,259,583 or approximately 32%. 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 fiscal 2020 but generated sales of $837,000 for fiscal 2019. Sales generated from tubular segment inventory totaled $42,339,432 for fiscal 2020 compared to $61,762,015 for fiscal 2019. The decrease in tubular segment sales was primarily driven by a decrease in mill reject pipe sales volume and a decrease in the average selling price of the segment’s manufactured pipe. In total, inventory tons sold decreased from approximately 86,500 tons in fiscal 2019 to approximately 58,000 tons in fiscal 2020. Mill reject sales volume accounts for approximately 27,000 tons of the decline in volume. In fiscal 2019, shipments of mill reject were higher due to a concentrated effort to reduce the level of inventory while mill reject inventory was at desired levels during fiscal 2020. Mill reject has the lowest average sales price of all the Company’s products but also has the most stable sales price. The average sales price per ton for mill reject was approximately $394 per ton for fiscal 2020 compared to approximately $353 per ton for fiscal 2019. Manufactured pipe sales volumes were comparable between periods with approximately 39,500 tons in fiscal 2020 and 41,000 tons in fiscal 2019. The average selling price per ton for manufactured pipe decreased significantly from approximately $1,116 per ton for fiscal 2019 to approximately $886 per ton for fiscal 2020. Before fixed asset impairment losses related to the segment’s pipe finishing facility, the tubular segment operations recorded an operating loss of approximately $1,226,000 for fiscal 2020 and an operating profit of approximately $4,052,000 for fiscal 2019. Management believes the decline in tubular results was primarily related to compressed margins associated with declining hot-rolled steel prices and softness in the U.S. energy industry.

 

At March 31, 2020, the Company determined that indicators of impairment were present for the tubular segment’s pipe finishing facility due to inconsistent operating results and uncertainty related to future operations due to the following circumstances. The price of oil plummeted during the fourth quarter of fiscal 2020 due to OPEC negotiating challenges and COVID-19 circumstances. This drop in oil price resulted in the drilling rig count reaching all time lows. Additionally, during the fourth quarter, U.S. Steel announced the idling of its Lone Star Tubular Operations, the pipe finishing facility’s largest historical customer, due to the downturn in the energy industry. The Company performed an impairment review of the finishing facility’s assets which resulted in an impairment loss of $4,338,419 being recognized for fiscal 2020. The Company performed an impairment review of the same assets at March 31, 2019 resulting in an impairment loss of $1,723,539. Significant adverse market conditions, lack of operations and the conclusion that certain assets should be valued according to their net salvage value were the primary factors contributing to the additional impairment loss for fiscal 2020. After the impairment loss, the threading facility had a book value of $1,771,450 at March 31, 2020.

 

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 is our sole supplier of mill reject pipe. At March 31, 2020, we had approximately 26,500 tons of mill reject inventory which we believe to be one to two years of inventory. Mill reject pipe sales contributed gross profit of approximately $1,471,000 in fiscal 2020 and $1,617,000 in fiscal 2019. 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 2020, general, selling and administrative costs increased $342,062 compared to fiscal 2019. This increase was related primarily to an increase in restricted stock plan compensation expense and an increase in professional fees.

 

Other Income

 

Other income for fiscal 2020 decreased $421,243 from the amount recorded in fiscal 2019. This decrease was related primarily to a fiscal 2019 settlement received of $56,500 by the Company as a member of the settlement class related to steel antitrust litigation and a fiscal 2019 receipt of insurance proceeds in the amount of $366,085 related to a forklift that was destroyed by fire. For fiscal 2020, other income only consisted of approximately $19,000 for the increase in cash surrender value of life insurance policies the Company holds on its officers.

 

Income Taxes

 

Income taxes for fiscal 2020 decreased $3,313,013 from the amount recorded in fiscal 2019 due primarily to the reduction in earnings before income taxes.

 

FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL

 

The Company's current ratio was 6.8 and 6.0 at March 31, 2020 and March 31, 2019, respectively. Working capital was $55,566,158 at March 31, 2020 and $62,091,305 at March 31, 2019.

 

During the year ended March 31, 2020, 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 decreases in accounts receivable and inventory partially offset by 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.

 

In December 2019, the Company’s $5,000,000 revolving line of credit facility expired and was not renewed.

 

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. The PPP note calls for a 24-month term and an interest rate of 1%. Under the original requirements of the CARES Act, the loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the applicable 8 week forgiveness period or restored by June 30, 2020. The original provisions also called for at least 75% of the proceeds to be used for eligible payroll costs. Any forgiveness of the loan will be subject to approval by the U.S. Small Business Administration (the “SBA”) and JPMorgan Chase Bank and will require the Company to apply for such treatment in the future. On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPP Flexibility Act”) was signed into law, extending the loan forgiveness period from 8 weeks to 24 weeks after loan origination while also still allowing an election for the original 8 week period. Additional changes to the CARES Act that were enacted by the PPP Flexibility Act include reducing the required amount of eligible payroll expenditures from 75% to 60%, moving the deadline for restoration of employment and pay from June 30, 2020 to December 31, 2020, additional exclusions to the full-time employee forgiveness reduction provisions, removing the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and allowing for the amendment of the maturity date on existing loans from two years to five years. The Company is evaluating the impact of these changes on its PPP Note. While the Company plans to apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, the PPP Flexibility Act and the SBA regulations and requirements, no assurance can be given that all or any portion of the PPP Note will be forgiven.

 

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 12 months.

 

COVID-19

 

In March 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic. In addition to the devastating effects on human life, this contagious virus has adversely affected economies globally. It has also disrupted the normal operations of many businesses, including ours and many of our customers. Our facilities have continued to operate during this crisis but we are operating with modifications to our facility practices, employee travel, employee work locations and virtualization or cancellation of company and customer events, among other modifications. We may take further actions that alter our business operations as the situation evolves. Our coil segment experienced a significant drop in demand for April 2020 but a rapid improvement for May 2020 and June 2020. Our tubular segment experienced a significant drop in demand as well but has not seen as quick of a recovery due to COVID-19 having a significant impact on the energy industry and other underlying issues within the energy industry. 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. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or our operations. We do expect to report a net loss for the quarter ended June 30, 2020 due primarily to the demand deterioration associated with COVID-19.

 

DERIVATIVE CONTRACTS

 

In June 2020, the Company implemented its first commodity price-risk management activities by transacting hot-rolled coil futures. The Company sold 4,000 tons of hot-rolled coil futures for August 2020 settlement at an average price of $514.50 per ton and sold 2,000 tons of hot-rolled coil futures for September 2020 settlement at an average price of $522 per ton. We believe price-risk management is a critical tool for improving the consistency of our financial results in a volatile commodity-based business.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off-balance sheet arrangements.

 

INFLATION

 

During fiscal 2020 and 2019, the Company believes that the general level of inflation did not have a material effect on the Company's operations. 

 

 

CRITICAL ACCOUNTING POLICIES

 

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. Significant estimates that are subject to the Company’s assumptions include the fair value of the pipe-finishing facility, 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 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. 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 make 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 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
		2020				2019				2018 As Adjusted				2017*				2016*				2015*				2014*				2013*				2012*				2011*
Net sales		$	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			$	131,709,492
Net earnings (loss)		$	(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			$	8,155,637
Current assets		$	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			$	54,562,344
Current liabilities		$	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			$	9,467,375
Working capital		$	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			$	45,094,969
Total assets		$	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			$	69,584,131
Stockholders’ equity		$	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			$	58,802,514
Net earnings (loss) as a percentage of Net sales			(3.7	)			2.7				3.2				(3.4	)			0.4				0.4				1.5				4.5				5.0				6.2
Stockholders’ equity			(7.9	)			7.0				5.7				(4.4	)			0.5				0.6				2.7				9.7				12.9				13.9
Weighted average number of common shares outstanding:
Basic			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				6,799,444
Per share
Net earnings (loss) per share:
Basic		$	(0.75	)		$	0.73			$	0.56			$	(0.39	)		$	0.04			$	0.06			$	0.25			$	0.90			$	1.20			$	1.20
Stockholders’ equity		$	9.55			$	10.34			$	9.78			$	8.81			$	9.30			$	9.30			$	9.31			$	9.26			$	9.33			$	8.65
Cash dividends per common share		$	0.10			$	0.19			$	0.05			$	0.04			$	0.04			$	0.07			$	0.20			$	0.97			$	0.52			$	0.84

 

---

* The figures for fiscal years 2011 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 2011 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 2020.