Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2019, the first quarter of fiscal 2020. Unless otherwise stated, comparisons are with the quarter ended June 30, 2018.
Business context and results
The company manufactures and processes steel products through its Coil and Tubular segments. Revenue is primarily from steel products sold from inventory, with some processing and finishing services.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $40.98 million | $48.19 million |
| Gross profit | $1.47 million | $6.19 million |
| Gross margin | 3.6% | 12.8% |
| Operating earnings | $263,000 | $4.70 million |
| Earnings before taxes | $269,000 | $4.76 million |
| Net earnings | $195,000 | $3.60 million |
| Diluted earnings per share | $0.03 | $0.51 |
| Operating cash flow | $94,000 | $(420,000) |
| Capital expenditures | $672,000 | $187,000 |
| Cash dividends declared per share | $0.04 | $0.03 |
Material changes and financial position
- Sales fell $7.22 million, or about 15%. Management attributed the decline to lower tonnage and lower average selling prices; total tons sold decreased from approximately 60,500 to 53,500.
- Both segments recorded substantially lower operating profit: Coil approximately $345,000 versus $3.18 million, and Tubular approximately $545,000 versus $2.32 million.
- Management cited declining hot-rolled steel prices and softer demand. Coil inventory shipments increased slightly, but average selling price declined to approximately $743 per ton from $853. Tubular tonnage declined to approximately 15,500 from 24,500, while average selling price rose to approximately $819 from $670, reflecting a shift in sales mix.
- Cash was $10.80 million at June 30, down from $11.67 million at March 31. Working capital was $61.67 million; the current ratio was 7.7, compared with 6.0 at March 31.
- Total liabilities were $11.02 million and stockholders’ equity was $72.48 million. The company reported no outstanding borrowings under its $5.0 million revolving credit facility; approximately $4.9 million was available under the borrowing base. It was compliant with facility covenants.
- Operating cash flow was modestly positive, with inventory reduction providing cash, partly offset by increases in receivables and decreases in payables. Cash declined by $863,000 after investing and financing outflows.
Outlook, risks, and notable items
- Management expected margin challenges to continue into the second quarter of fiscal 2020, citing steel-price declines and softer demand. It believed cash, operating cash flows, and borrowing capacity would fund expected requirements for the next 24 months.
- Key risks identified include steel-price and demand changes, policy changes affecting steel, raw-material availability, reliance on a limited number of suppliers in both segments, supply-agreement obligations, production disruptions, and competition.
- The $5.0 million credit facility expires December 12, 2019. Its borrowing availability depends on eligible Tubular receivables and inventory, and it includes financial covenants.
- The company adopted ASC 842 lease accounting on April 1, 2019, recognizing an initial right-of-use asset and lease liability of approximately $63,000 each. Adoption did not affect earnings, cash flows, or retained earnings.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether steel prices and segment margins stabilized after the reported quarter, particularly given management’s expectation of continued near-term pressure.
- Subsequent sales volumes, pricing, and product mix in the Coil and Tubular segments.
- Renewal, replacement, or repayment arrangements for the revolving credit facility before its December 2019 expiration.
- Cash conversion and working-capital movements, including receivables, inventory, and supplier payment terms.
- Exposure to supplier concentration and any material supply-agreement or production-disruption developments.