Friedman Industries, Inc. (NYSE American: FRD) — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2022. Friedman processes steel products through Coil and Tubular segments. Results include the acquired Plateplus facilities from April 30, 2022 and the Sinton facility, which began operations in October 2022. Amounts below are in U.S. dollars; figures are rounded where indicated.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2022 | Prior-year quarter | Nine months ended Dec. 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Net sales | $111.86 million | $51.66 million | $423.36 million | $210.14 million |
| Gross profit (loss) | $6.13 million | $(3.60) million | $29.48 million | $43.42 million |
| Gross margin | 5.5% | (7.0)% | 7.0% | 20.7% |
| Operating earnings (loss) | $1.43 million | $(5.60) million | $13.82 million | $32.79 million |
| Net earnings (loss) | $1.38 million | $(2.96) million | $15.03 million | $21.53 million |
| Diluted EPS | $0.19 | $(0.45) | $2.06 | $3.12 |
- Segment performance: In the quarter, Coil sales were $100.23 million and operating profit was $3.26 million; Tubular sales were $11.63 million and operating profit was $0.69 million. For the nine months, Coil generated $372.83 million of sales and $15.68 million of operating profit; Tubular generated $50.53 million of sales and $6.14 million of operating profit.
- Cash flow: Nine-month operating cash flow was $44.10 million, versus cash used of $22.94 million in the prior-year period. Investing activities used $80.01 million, including $71.72 million for Plateplus and $8.28 million for property and equipment. Financing provided $25.19 million, including $26.07 million of ABL borrowings. Cash and restricted cash ended at $5.40 million; reported cash was $3.54 million.
- Liquidity: Working capital was $99.83 million and the current ratio was 3.1 at December 31, 2022, compared with $64.55 million and 2.1 at March 31, 2022. Inventory was $97.83 million. Management said cash, operating cash flows and borrowing capacity should fund expected requirements for the next 12 months.
- Debt: ABL borrowings were $44.51 million, at a 6.5% applicable rate, with approximately $99 million of borrowing-base availability. The secured facility matures May 19, 2026. Nine-month interest expense was $1.50 million, compared with $0.15 million in the prior-year period.
- Dividends: Quarterly dividend declared was $0.02 per common share, unchanged from the prior-year quarter.
Material changes versus the prior comparable periods
- Sales rose sharply, primarily because of Plateplus and higher shipment volumes. Quarterly tons sold increased to approximately 113,000 from 39,000; nine-month tons sold increased to approximately 335,000 from 147,500.
- Despite higher nine-month sales, gross profit fell $13.94 million and gross margin declined to 7.0% from 20.7%. Management attributed pressure to falling hot-rolled coil (HRC) prices and compressed physical margins. Excluding recognized hedge losses, physical-material gross margin was approximately 7.6% versus 23.9% for the nine months.
- Quarterly results improved from a prior-year operating and net loss to positive earnings. However, physical-material gross margin excluding hedge effects was approximately 6.2% versus 16.7% in the prior-year quarter.
- Nine-month other income was $7.35 million, principally a $7.33 million gain on derivatives not designated for hedge accounting. The prior-year period had a $4.80 million other loss, including derivative losses and a $1.71 million PPP loan-forgiveness gain. Derivative effects materially influenced reported earnings.
- Tubular sales mix shifted as mill-reject pipe inventory was depleted; manufactured pipe became the sole tubular revenue source in the December quarter. Nine-month tubular tons sold declined to approximately 28,500 from 36,500, while manufactured-pipe volume increased.
Outlook, risks and unusual items
- Management forecast fourth-quarter FY2023 sales volume of approximately 115,000–125,000 tons and expected margin improvement, citing announced HRC price increases from November 2022 through February 2023 and rising Sinton volumes. This is management guidance, not a guarantee.
- Sinton’s estimated project cost is approximately $22.3 million. The facility was operating by October 2022; management described the remainder of FY2023 as a ramp-up period and expected annual shipments of 110,000–140,000 tons in FY2024. Approximately $7.45 million of project costs remained accrued at quarter-end, expected to be paid in the March 2023 quarter.
- Plateplus was acquired for total consideration of approximately $76.5 million, including $71.7 million cash and 516,041 shares valued at approximately $4.8 million. Nine-month results included about $1.2 million of acquisition transaction costs. Purchase-price fair values remained provisional, with no goodwill recorded.
- Steel-price volatility is a material earnings risk. The company also identified dependence on a limited number of suppliers in both segments, possible production interruptions, competition, raw-material availability and demand uncertainty.
- At December 31, 2022, non-designated derivatives included 35,040 tons of short positions maturing January–December 2023. The company disclosed counterparty and commodity-price risks. It expected approximately $1.12 million of net hedge losses in accumulated other comprehensive income to be reclassified into earnings within the following 12 months; the amount could change.
- Controls and filing timeliness: Management concluded disclosure controls were not effective at period-end. Previously identified material weaknesses included deficient control design and documentation, insufficiently precise reviews, incomplete or inaccurate reports used in controls, and inadequate segregation of duties. The company reported that its FY2022 Form 10-K and earlier FY2023 Forms 10-Q were filed late. Additional accounting staff, an internal-audit/SOX hire and an acquired ERP system were part of remediation; weaknesses were not yet considered remediated.
Important facts for investors to verify
- Whether Sinton achieves the stated FY2024 shipment range and whether ramp-up supports improved margins and cash generation.
- Whether HRC prices, inventory values and customer demand develop as assumed; results are sensitive to price movements and hedge timing.
- Current ABL borrowing-base availability, interest costs, covenant headroom and funding needs, including remaining Sinton expenditures.
- Plateplus integration, final acquisition-date fair values and the acquired facilities’ ongoing operating contribution.
- Progress in remediating material weaknesses, effectiveness of controls over financial reporting and timely filing of future reports.
- The earnings and cash-flow impact of derivative positions and any forecast transactions that do not occur as expected.