Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016, the first quarter of fiscal 2017. Comparisons are with the three months ended June 30, 2015, unless noted. The unaudited statements are condensed consolidated financial statements.
Financial performance and position
| Metric | Quarter ended June 30, 2016 | Prior-year quarter |
|---|---|---|
| Net sales | $22.39 million | $23.97 million |
| Gross profit (loss) | Approximately $(1.25) million; gross margin (5.6%) | Approximately $2.14 million; gross margin 8.9% |
| Operating earnings (loss) | $(2.35) million | $0.79 million |
| Net earnings (loss) | $(1.46) million; $(0.21) per share | $0.53 million; $0.08 per share |
| Operating cash flow | $(1.70) million | $2.52 million |
| Capital expenditures | $0.20 million | $0.84 million |
Sales declined 6.6%, while costs of goods sold rose $1.82 million. Cash fell to $0.82 million from $2.80 million at March 31, 2016. Working capital was $44.40 million, down from $46.84 million; the current ratio was 13.2, versus 17.3. Total assets were $65.87 million and total liabilities $4.16 million at June 30. The company reported no borrowings; its $5 million revolving credit facility expired April 30, 2016, and management had no current plan to renew or replace it. The declared dividend was $0.01 per share.
Material changes and operating results
- Average selling price fell to approximately $519 per ton from $627, while total tons sold rose to approximately 43,000 from 38,000. Average cost per ton declined to approximately $548 from $571, but the higher shipment volume and unfavorable cost-price timing drove the gross loss.
- Coil sales were $19.00 million, down about $0.35 million. The segment recorded a $1.52 million operating loss, compared with $2.16 million operating profit a year earlier. Management cited sharply rising hot-rolled steel coil prices, LIFO cost accounting, and shipments under earlier fixed-price orders.
- Tubular sales were $3.40 million, down about $1.23 million. The segment’s operating loss narrowed to $0.27 million from $0.64 million. Management attributed weak demand to the U.S. energy downturn, market oversupply, and foreign competition.
- General, selling and administrative costs declined about $0.26 million, primarily due to lower bonuses and fewer tubular-segment administrative employees.
- Operating cash use included a $1.07 million income-tax receivable and a $2.53 million increase in accounts receivable; lower inventory partly offset these uses.
Outlook, risks and unusual items
- Management expects existing cash, operating cash flows and borrowing capacity based on the company’s financial position to meet expected cash requirements for the next 24 months.
- Construction continued on the Lone Star, Texas pipe-finishing facility. Estimated total cost is approximately $9.2 million; $8.89 million was capitalized by June 30. Completion was expected in the third quarter of fiscal 2017.
- About 13,500 tons shipped in the quarter under fixed-price customer orders accepted when steel prices were lower. Management expected approximately 5,000 additional tons against these orders in the September and December 2016 quarters combined.
- A LIFO inventory liquidation reduced cost of goods sold by approximately $393,000; the company did not expect to replace the liquidated inventory by year-end. Quarterly LIFO valuation requires estimates of year-end quantities.
- Nucor Steel Company is the company’s primary coil supplier. Management said supply was adequate and did not anticipate a significant change, but loss of Nucor could materially harm the business.
- U.S. Steel Tubular Products had idled its Lone Star facility amid weak markets. Management expected orders from USS to remain low and supplies of new mill reject pipe to be significantly reduced while the facility remained idle and the energy market depressed. Loss of USS as a supplier or customer could materially harm the business.
- The quarter included a noncash $293,000 transfer of a life insurance policy to an officer upon retirement. Management said adoption of the cited new lease and revenue-recognition standards was not expected to have a material impact, while noting that it was still evaluating them.
- Management identified changes in product demand and prices, steel-market conditions, and execution of operating and expansion plans as factors that could cause actual results to differ from forward-looking statements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether steel-price volatility and fixed-price order costs continue to pressure coil margins, including the remaining shipments under those orders.
- Whether the tubular business recovers as energy-market conditions, competition and USS operations evolve.
- Facility completion timing and remaining construction spending versus the approximately $9.2 million estimate.
- Liquidity and operating cash generation after the revolving credit facility’s expiration, particularly given the quarter’s cash decline and operating cash outflow.
- Inventory valuation assumptions and the effect of the LIFO liquidation benefit on reported costs and margins.