Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2023 (fiscal 2024 second quarter and first half). Amounts below are in millions of dollars unless stated otherwise. Friedman processes and manufactures steel products through its Flat-roll and Tubular segments.
Financial results
| Metric | Three months ended Sep. 30, 2023 | Prior-year quarter | Six months ended Sep. 30, 2023 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $130.7 | $149.7 | $268.0 | $311.5 |
| Gross profit | $5.8 | $4.7 | $22.2 | $23.4 |
| Gross margin | 4.5% | 3.1% | 8.3% | 7.5% |
| Earnings from operations | $1.1 | $0.1 | $11.4 | $12.4 |
| Net earnings | $3.5 | $2.5 | $11.2 | $13.7 |
| Diluted earnings per share | $0.48 | $0.34 | $1.52 | $1.88 |
- Quarterly sales fell 13% year over year, while gross profit and net earnings improved. Six-month sales declined 14% and net earnings declined 18%.
- Quarterly gross margin improved in part because the prior-year quarter included a $1.5 million hedging loss; the current quarter had no hedge gain or loss. Six-month results included a $0.4 million hedging loss in 2023 versus a $2.1 million loss in 2022.
- Non-designated economic hedges generated gains of $4.4 million in the quarter and $4.8 million in the six-month period, compared with $3.7 million and $6.5 million, respectively, a year earlier. These gains contributed to earnings before tax.
Segment and operating trends
- Flat-roll: Six-month sales were $245.7 million, down from $272.6 million; segment operating profit rose to $15.0 million from $12.4 million. In the quarter, sales were $120.5 million versus $129.7 million, while operating profit was $3.1 million versus a $1.1 million loss. Lower selling prices were partly offset by higher volumes, including contributions from the Sinton facility and the acquired Plateplus sites.
- Tubular: Six-month sales fell to $22.3 million from $38.9 million and operating profit declined to $2.3 million from $5.4 million. Quarterly sales were $10.2 million versus $20.0 million; the segment was approximately break-even versus $3.3 million operating profit. Both selling prices and volumes declined.
- For the six-month period, total tons sold increased to approximately 257,000 from 221,500, but average selling prices declined. Management attributed the higher volume principally to Sinton, which began operating in October 2022, and the prior-year period’s shorter contribution from Plateplus facilities acquired April 30, 2022.
Cash flow, liquidity and debt
- Six-month operating cash flow was a use of $20.2 million, versus cash provided of $54.7 million a year earlier. Inventory increased $18.3 million and receivables increased $3.0 million; the prior-year period benefited from a $56.9 million inventory reduction.
- Investing cash use was $2.9 million, including $2.9 million of property and equipment purchases. Financing provided $20.9 million, principally from $21.2 million of net ABL borrowings. Cash and restricted cash ended at $3.2 million, down from $5.4 million at the start of the period.
- At September 30, current assets were $165.2 million and current liabilities $35.3 million; working capital was $129.9 million and the current ratio was 4.7. Cash was $3.2 million and inventory $104.5 million.
- ABL borrowings were $54.4 million at September 30, up from $33.1 million at March 31, at an applicable rate of 7.5%. The borrowing-base calculation supported access to approximately $119.3 million. As of the filing date, borrowings were approximately $34.2 million and borrowing-base-supported access was approximately $114.5 million.
- The $150 million ABL facility matures May 19, 2026, is secured by substantially all company assets, and has a springing fixed-charge coverage covenant that applies when availability falls below specified thresholds. The company reported that it believed cash, operating cash flow and borrowing capacity were adequate for expected requirements over the next 12 months.
Outlook, risks and notable disclosures
- Management reported domestic mill HRC price-increase announcements totaling approximately $300 per ton after quarter-end and longer mill lead times extending into calendar 2024. It expected margin improvement during fiscal third and fourth quarters, while expecting third-quarter sales volume to be slightly below the second quarter because of holiday seasonality. These are forward-looking expectations, not guarantees.
- Steel prices are a significant source of volatility: HRC prices declined approximately 45% from mid-April through September 2023, contributing to margin pressure. The company also identifies reliance on a limited number of suppliers in both segments as a material business risk.
- Disclosure controls and procedures were reported as ineffective at quarter-end because previously identified material weaknesses had not been remediated. Weaknesses included control design and execution, reliability of reports used in controls, insufficiently precise management reviews, documentation deficiencies and inadequate segregation of duties. Management described ERP integration, additional personnel and consultant support as remediation steps; weaknesses remain until remediation operates effectively for a sufficient period.
- The company recorded approximately $0.5 million of Plateplus-related transaction-specific costs in the quarter and $1.2 million in the six-month period, within selling, general and administrative expense.
Important facts for investors to verify
- Whether expected HRC price increases translate into realized margins, given steel-price volatility and inventory exposure.
- Whether Tubular volumes and profitability stabilize after the sharp year-over-year decline.
- Whether operating cash flow improves as inventory and working-capital needs change, and how ABL borrowings evolve.
- Whether internal-control weaknesses are remediated and the new ERP system supports reliable reporting and control execution.
- How much of reported earnings is attributable to derivative gains and losses versus underlying physical-material margins.