Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, the company’s first quarter of fiscal 2023. The company processes and manufactures steel products through its Coil and Tubular segments. The quarter includes the April 30 acquisition of Plateplus assets; the 10-Q was signed October 12, 2022.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change / context |
|---|---|---|---|
| Net sales | $161.8 million | $65.9 million | Up 145%; higher volume primarily reflected Plateplus. |
| Gross profit | $18.7 million | $17.3 million | Up $1.3 million; gross margin fell to 11.5% from 26.3%. |
| Earnings from operations | $11.9 million | $14.0 million | Down 14.8%. |
| Other income, net | $2.8 million | $0.3 million | 2022 primarily included a $2.75 million gain on derivatives not designated as hedges. |
| Net earnings | $11.2 million | $11.3 million | Down 1.1%; diluted EPS was $1.55 versus $1.64. |
| Operating cash flow | $(21.3) million | $2.1 million | Receivables growth was a major use of cash. |
| Cash and restricted cash at quarter-end | $3.7 million | — | Includes $1.3 million held to collateralize derivative positions; balance-sheet cash was $2.4 million. |
| ABL borrowings at quarter-end | $102.4 million | $18.4 million at March 31, 2022 | Borrowings funded the acquisition; quarter-end rate was 3.20%. |
Business and material changes
- Plateplus acquisition consideration was $76.5 million: $71.7 million cash and $4.8 million in 516,041 Friedman shares. The company acquired East Chicago and Granite City facilities and certain inventory. No goodwill was recorded; purchase-price fair values remained provisional.
- The acquired East Chicago and Granite City facilities contributed approximately $53.6 million in sales and $4.3 million in operating earnings. Sales of acquired Houston and Loudon inventory contributed a further $28.6 million in sales and $2.1 million in operating earnings.
- Total tons sold increased to approximately 105,000 from 54,000. Coil sales rose to $142.9 million from $52.7 million; Tubular sales rose to $18.9 million from $13.2 million.
- Despite higher coil volume, steel-price volatility compressed margins. HRC prices declined about 30% from the end of April through quarter-end; management reported strong margins early in the quarter followed by contraction.
- Tubular sales benefited from higher average selling prices and a shift toward manufactured pipe, but tons sold fell to approximately 10,500 from 14,500. The company sold out of mill reject pipe inventory during the quarter after its sole supplier ceased deliveries in 2020.
Liquidity, debt and investment
- Working capital was $153.6 million and the current ratio was 3.8 at June 30, versus $64.6 million and 2.1 at March 31. Receivables and inventory rose substantially, primarily reflecting Plateplus.
- The ABL facility was increased to $150 million, matures May 19, 2026, and is secured by substantially all company assets. The company reported covenant compliance and full borrowing-base access at quarter-end. By the filing date, borrowings were approximately $36 million and available borrowing capacity approximately $114 million.
- Investing cash outflow included $71.7 million for Plateplus and $2.8 million of capital expenditures. Construction in progress for the Sinton, Texas facility was $19.4 million; total project cost was estimated at $22 million.
- Management stated that cash, operating cash flows and borrowing capacity were expected to cover cash requirements for the next 12 months.
Outlook, risks and notable items
- Management expected approximately $150 million of sales on 115,000 tons in fiscal Q2. It reported HRC prices declined about 25% during July and August, causing further margin compression.
- For fiscal Q3, management expected more stable market conditions, margins closer to historical norms and sales volume of approximately 105,000 tons. These are forward-looking estimates, not guarantees.
- The Sinton facility was expected to enter service in October 2022. Management expected the remainder of fiscal 2023 to be a ramp-up period and projected annual shipments of 110,000–140,000 tons in fiscal 2024.
- Steel-price volatility, commodity hedging and limited suppliers are key exposures. The company reported $2.75 million of gains on non-hedge-accounted derivatives, while recognizing $0.63 million of hedge-related losses in the quarter. It estimated $4.08 million of net AOCI losses would be reclassified into earnings within 12 months.
- Transaction-specific costs were approximately $750,000. The company’s Sinton project estimate increased by $1 million, mainly for added equipment and rail infrastructure.
- Disclosure controls were deemed ineffective because previously identified material weaknesses had not been remediated and the annual report and this 10-Q were filed late. Weaknesses included inadequate control design and documentation, insufficiently precise management reviews, incomplete or inaccurate control reports, and inadequate segregation of duties. Management described remediation steps, including additional accounting staff, an internal-audit/SOX hire and integration of Plateplus’s ERP system; weaknesses were not yet considered remediated.
Important facts for investors to verify
- Whether Plateplus integration delivers sustained earnings and cash generation after acquisition-related costs and working-capital needs.
- Actual HRC price, volume and margin trends versus management’s Q2 and Q3 expectations.
- ABL borrowings, borrowing-base availability, interest costs and covenant headroom as acquisition and Sinton spending progress.
- Completion, cost and operating ramp-up of the Sinton facility, including whether shipment projections are achieved.
- Progress and testing of internal-control remediation, given the disclosed material weaknesses and late filing.
- The timing and earnings impact of derivative gains and losses, including amounts expected to be reclassified from accumulated other comprehensive loss.