Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019. Friedman processes and manufactures steel products through its Coil and Tubular segments. Comparisons below are year over year unless noted; balance-sheet comparisons are to March 31, 2019.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2019 |
|---|---|---|
| Net sales | $28.15 million | $109.12 million |
| Gross profit / margin | $53,000 / 0.2% | $742,000 / 0.7% |
| Pre-tax loss | $1.15 million | $2.91 million |
| Net loss | $881,000 | $2.23 million |
| Net loss per diluted share | $0.13 | $0.32 |
| Operating cash flow | Not provided for the quarter | $14.63 million |
At December 31, cash was $22.33 million, current assets $69.29 million, and current liabilities $12.87 million. Working capital was $56.42 million and the current ratio was 5.4, versus 6.0 at March 31. Total liabilities were $14.29 million and stockholders’ equity was $69.94 million. The company had no borrowings when its $5 million revolving credit facility expired in December; it was not renewed. Lease liabilities totaled approximately $535,000, including a new five-year forklift finance lease.
Nine-month investing cash use was $3.24 million, principally capital expenditures of $3.22 million; dividends paid were $700,000. Cash increased $10.67 million over the nine months. The filing reports a $955,605 inventory valuation adjustment for the period.
Changes versus prior comparable periods
- Third-quarter sales fell 35% to $28.15 million, while gross margin declined to 0.2% from 4.5%; the company moved from net earnings of $665,000 to a net loss of $881,000.
- Nine-month sales declined 25% to $109.12 million. Gross margin fell to 0.7% from 8.3%, and the company moved from net earnings of $6.27 million to a net loss of $2.23 million.
- Management attributed pressure chiefly to lower steel prices, margin compression, and—in Tubular—weakness in the U.S. energy industry. Steel prices had fallen about 50% from their July 2018 peak through October 2019; management noted that price movements take time to flow through the supply chain.
- In the nine-month period, Coil sales fell 18% and segment operating profit declined to about $575,000 from $5.85 million. Tubular sales fell 37%, and the segment recorded an operating loss of about $1.67 million versus profit of $4.35 million.
- Nine-month tons sold declined about 10% overall. Coil inventory shipment volume increased, but average selling price fell; Tubular shipments fell substantially, partly reflecting reduced mill-reject-pipe sales after a prior inventory-reduction effort.
- Cash dividends declared were $0.02 per share for the quarter versus $0.06 a year earlier, and $0.08 for the nine months versus $0.15.
Outlook, risks, and notable items
- Management said cash, operating cash flows, and borrowing capability supported expected cash requirements for the next 24 months, despite the expired, nonrenewed revolving facility.
- Capital projects underway include a $1.1 million Hickman facility expansion, targeted for completion by April 2020, and a $5.8 million Decatur coil-processing line, with installation expected to begin in October 2020 and commercial use in February 2021. The projects are intended to add storage and expand processing capacity and capabilities.
- Key risks cited include steel-price and product-demand changes, energy-sector softness, dependence on a limited number of suppliers in both segments, raw-material availability and take-or-pay obligations, production interruptions, competition, and execution of operating and expansion plans.
- The company adopted lease-accounting standard ASC 842 in April 2019, recording approximately $63,000 of initial right-of-use assets and lease liabilities, with no reported impact on earnings, cash flows, or retained earnings. Management was evaluating the impact of new credit-loss and income-tax accounting standards.
- Management reported disclosure controls effective at quarter-end and no material change in internal control over financial reporting during the quarter. The filing identifies no specific material litigation contingency beyond the general commitments-and-contingencies disclosure.
Important facts for investors to verify
- Whether steel prices and inventory-cost effects improve gross margins after the period’s sharp compression and inventory valuation adjustment.
- Whether Tubular demand and profitability recover amid U.S. energy-market softness, and whether Coil results benefit from improved pricing or volume.
- Project spending, timing, and expected returns for the Hickman expansion and Decatur processing line.
- Available borrowing capacity and liquidity following nonrenewal of the revolving credit facility, including the company’s stated 24-month cash-needs outlook.
- Exposure to concentrated suppliers, take-or-pay arrangements, and the collectability and valuation estimates identified as critical accounting judgments.