Friedman Industries, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended September 30, 2019; comparisons are with the periods ended September 30, 2018. The company processes steel products through Coil and Tubular segments.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $40.0 million, down 25.2% | $81.0 million, down 20.3% |
| Gross profit (loss) | $(0.8) million; margin about (2.0%) | $0.7 million; margin about 0.9% |
| Net earnings (loss) | $(1.54) million; $(0.22) per share | $(1.35) million; $(0.19) per share |
| Prior-year net earnings | $2.00 million; $0.29 per share | $5.60 million; $0.80 per share |
- Six-month Coil sales fell 14% to $56.6 million; segment operating profit declined to $0.7 million from $5.1 million. Tubular sales fell 32% to $24.4 million; the segment recorded a $1.2 million operating loss versus $3.7 million of profit.
- Cash provided by operations was $9.1 million, versus $0.2 million in the prior-year half, primarily reflecting a $12.0 million inventory reduction. Investing used $0.8 million, dividends paid were $0.6 million, and cash increased $7.7 million to $19.4 million.
- At September 30, cash was $19.4 million, inventory $36.1 million, current assets $69.4 million, and current liabilities $9.5 million. Working capital was $59.8 million and the current ratio was 7.3. Total liabilities were $11.0 million and stockholders’ equity $70.9 million.
- The company declared dividends of $0.02 per share for the quarter, compared with $0.06 a year earlier. No interest was paid in the first half.
Material changes and management commentary
- Management attributed weaker results to lower steel prices, softer demand, lower average selling prices, and higher-cost inventory flowing through cost of goods sold. Management reported that hot-rolled steel prices declined about 42% from their July 2018 peak through September 2019.
- Total tons sold fell about 10% in the first half. Coil inventory shipments increased, but the average selling price fell from about $883 to $695 per ton. Tubular shipments declined from about 50,000 to 31,000 tons; its average selling price increased with a shift in product mix.
- Tubular inventory was written down by $955,605 at September 30, 2019, due mainly to declining steel prices, soft demand, and slower turnover. Inventory estimates depend on sales trends, customer demand, and market conditions.
- General, selling and administrative costs decreased about $0.3 million in the first half, primarily because of lower bonuses associated with reduced earnings.
Liquidity, debt, outlook, and risks
- The company had a $5.0 million revolving credit facility expiring December 12, 2019, secured by Tubular receivables and inventory. Although the borrowing base indicated approximately $5.0 million of availability, the company violated its debt-service-coverage covenant. The violation is an event of default that prevents access to funds unless the bank waives it; no waiver was obtained. The company reported no borrowings during or after the quarter and no anticipated need for funds through facility expiry.
- Management stated that cash, operating cash flows, and borrowing capability were adequate for expected cash requirements over the next 24 months. The covenant default limits the stated borrowing capability unless resolved.
- No specific earnings or revenue guidance was provided. Forward-looking results are exposed to steel prices and demand, government trade policy, raw-material availability, supplier concentration, take-or-pay obligations, production interruptions, competition, and energy-industry conditions. Both segments rely on a limited number of suppliers.
- Adoption of lease accounting standard ASC 842 resulted in approximately $63,000 of initial lease assets and liabilities, with no reported impact on earnings, cash flows, or retained earnings. The company reported effective disclosure controls and no material quarter-specific changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the debt-service-coverage covenant breach was cured, waived, or otherwise addressed before the credit facility expired.
- Whether cash generation can be sustained as inventory reductions moderate, given the first-half operating cash flow benefited substantially from inventory liquidation.
- Subsequent steel-price and demand trends, and any further inventory valuation charges, particularly in Tubular.
- Segment shipment volumes, average selling prices, and margins, including whether Tubular demand and profitability recover.
- Supplier continuity and any material changes to supply agreements, take-or-pay obligations, or liquidity needs.