Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016 (fiscal 2017 second quarter and first half). Comparisons are with the corresponding 2015 periods. The filing is unaudited.
Financial performance
| Metric | Three months ended Sept. 30, 2016 | Six months ended Sept. 30, 2016 |
|---|---|---|
| Net sales | $18.32 million, down 20.9% year over year | $40.71 million, down 13.6% |
| Gross profit (loss) | $(0.05) million; approximately break-even margin | $(1.30) million; approximately (3.2%) margin, versus 6.5% gross margin in 2015 |
| Net earnings (loss) | $(0.60) million, or $(0.09) per share | $(2.07) million, or $(0.30) per share, versus net earnings of $0.33 million in 2015 |
| Operating cash flow | Not separately presented for the quarter | $4.94 million, versus $1.00 million in 2015 |
| Cash and working capital | Cash was $7.13 million at September 30, up from $2.80 million at March 31; working capital was $43.55 million and the current ratio was 15.0 |
First-half capital expenditures were $0.44 million. Cash dividends paid were $0.14 million; dividends declared were $0.01 per share for the quarter and $0.02 per share for the half-year. No interest was paid, and the balance sheet shows no debt. Management said available cash, operating cash flows and borrowing capacity should cover expected cash needs for 24 months.
Changes and operating context
- First-half sales declined by $6.42 million. Average selling price fell to approximately $543 per ton from $597; tons sold fell to approximately 75,000 from 79,000. Average cost per ton was broadly unchanged at $561 versus $559.
- Coil sales fell about $3.19 million in the first half. Coil operating results shifted to a $1.40 million loss from $3.04 million profit, reflecting volatile and rising hot-rolled steel prices and fixed-price orders sold against higher LIFO costs. The company shipped about 16,500 tons against these orders and expected about 2,000 tons more in the December 2016 quarter.
- Tubular sales fell about $3.24 million in the first half as volume declined to approximately 11,500 tons from 16,000 and average selling price declined to $544 per ton from $595. The segment remained loss-making, with a $0.92 million operating loss, although narrower than the prior-year $1.35 million loss.
- Cash from operations benefited substantially from a $7.89 million inventory reduction. Inventory declined to $34.05 million from $41.94 million at March 31.
- General, selling and administrative costs decreased $0.56 million in the first half, primarily due to fewer tubular-segment administrative employees and lower corporate expenses.
Outlook, risks and unusual items
- The company was continuing construction of its Lone Star, Texas pipe-finishing facility. Estimated total cost was approximately $9.4 million; $9.10 million had been capitalized by September 30. Completion was expected in fiscal 2017’s third quarter.
- Management cited intense competition and steel-price volatility. LIFO inventories were liquidated during the quarter; the company anticipated partial replacement by March 31, 2017 and recorded a $236,687 deferred debit for estimated replacement-cost differences.
- Nucor Steel Company is the company’s primary coil supplier. Supply was adequate and no significant change was anticipated, but loss of the supplier could materially harm the business.
- Weak U.S. energy markets, oversupply and low-priced imports weighed on tubular demand. U.S. Steel Tubular Products had idled its Lone Star facility; the company expected low orders and reduced new mill reject pipe supply while the facility remained idle. Loss of U.S. Steel as a supplier or customer could materially harm the business.
- A shareholder-approved restricted stock plan permits up to 500,000 shares; no awards had been granted as of the filing date. Management stated that adoption of the accounting standards discussed was not expected to have a material impact where it had reached that conclusion.
- Management identified demand and pricing, steel-market conditions and execution of operating and expansion plans as factors that could cause actual results to differ from expectations. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether steel-price movements, LIFO inventory accounting and remaining fixed-price orders improve or further pressure gross margins.
- Progress, final cost and timing of the Lone Star pipe-finishing facility.
- Developments in tubular demand, U.S. energy markets, imports and the U.S. Steel relationship, as well as continued Nucor coil supply.
- Whether operating cash generation is sustainable beyond the substantial first-half inventory reduction.
- The assumptions supporting inventory valuation and the expected partial LIFO inventory replacement by fiscal year-end.