Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended June 30, 2023. Comparisons are with the three months ended June 30, 2022, unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Friedman manufactures and processes steel products through its Flat-roll and Tubular segments. The quarter’s results reflected lower steel selling prices amid volatile hot-rolled coil prices. Sales volumes rose overall, partly due to the Sinton facility and the prior-year comparison including only two months of activity from the Plateplus facilities acquired April 30, 2022.
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $137.3 million | $161.8 million |
| Gross profit | $16.3 million | $18.7 million |
| Gross margin | 11.9% | 11.5% |
| Earnings from operations | $10.4 million | $12.3 million |
| Earnings before income taxes | $10.3 million | $14.7 million |
| Net earnings | $7.7 million | $11.2 million |
| Diluted earnings per share | $1.04 | $1.55 |
| Operating cash flow | $(4.6) million | $(21.3) million |
| Capital expenditures | $0.5 million | $2.8 million |
Key financial metrics and changes
- Sales fell 15.1% year over year, although total tons sold increased to approximately 129,000 from 105,000. Management attributed the lower revenue primarily to reduced average selling prices.
- Flat-roll sales were $125.2 million versus $142.9 million; segment operating profit was $11.8 million versus $13.5 million. Flat-roll inventory tons sold increased to approximately 120,000 from 94,000, while average selling price declined to about $1,038 per ton from $1,525.
- Tubular sales declined to $12.1 million from $18.9 million. Tons sold fell to approximately 9,000 from 10,500 and average selling price declined to about $1,358 per ton from $1,779. Segment operating profit increased to $2.3 million from $2.1 million.
- Lower earnings included a smaller gain on economic hedges: $0.4 million versus $2.8 million. Interest expense increased to $0.5 million from $0.4 million. The filing reports a $0.4 million hedging loss in gross profit, partly offset by a $0.4 million gain on derivatives not designated as hedges.
- Operating cash use improved year over year but remained negative. Inventory increased $14.9 million during the quarter, contributing to cash use; accounts receivable decreased $2.6 million.
- At June 30, 2023, cash was $4.8 million, current assets were $156.1 million, and current liabilities were $43.0 million. Working capital was $113.1 million and the current ratio was 3.6, compared with $98.6 million and 3.2 at March 31, 2023. Cash and restricted cash totaled $6.4 million; approximately $1.5 million was collateral for derivative positions.
- ABL borrowings were $39.3 million at quarter-end, at an applicable rate of 7.25%. The borrowing base supported access to approximately $111.0 million under the $150 million facility, which matures May 19, 2026. The facility is secured by substantially all company assets. At the filing date, borrowings were approximately $38.0 million and borrowing-base availability was approximately $107.5 million.
- Total assets were $211.4 million and stockholders’ equity was $123.4 million at June 30, 2023. The company declared dividends of $0.02 per common share, consistent with the prior-year quarter.
Outlook, risks and notable matters
- Management expected steady demand in the quarter ending September 30, 2023, with sales volume approximately equal to the June quarter. It expected lower physical margins due to continued downward pressure on hot-rolled coil prices, partly offset by hedging gains.
- Steel-price volatility is a significant driver of sales prices and margins. Management reported that prices fell approximately 27% from mid-April through the end of the June quarter; both comparative quarters experienced stronger first-half margins followed by compression.
- The Flat-roll and Tubular segments rely on a limited number of inventory suppliers; losing a supplier could materially adversely affect the business. Other disclosed risks include steel demand and price changes, raw-material availability, facility shutdowns, competition, and execution of operating plans.
- Disclosure controls and procedures were not effective at quarter-end because previously identified material weaknesses in internal control over financial reporting had not been remediated. Identified issues included control design and execution, completeness and accuracy of reports, review precision, documentation, and segregation of duties. Management cited ongoing ERP integration; the Tubular segment went live on the new system in August 2023. Remediation remains subject to controls operating effectively for a sufficient period.
- Management stated that cash, operating cash flows, and borrowing capacity were expected to meet cash requirements for the next 12 months. This is a forward-looking assessment and depends on operating and market conditions.
Important facts for investors to verify
- Whether steel-price movements and customer demand produce the expected sales volumes and margins in subsequent quarters.
- Whether operating cash flow improves, particularly as inventory levels and working-capital needs change.
- ABL utilization, borrowing-base availability, interest costs, and compliance with the facility’s springing fixed-charge coverage covenant.
- Progress and evidence of effective remediation of the disclosed internal-control material weaknesses following ERP integration.
- The effects of supplier concentration and continued reliance on derivative contracts to manage commodity-price exposure.