Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2014. Friedman operates coil and tubular product businesses. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Sept. 30, 2014 | Six months ended Sept. 30, 2014 |
|---|---|---|
| Net sales | $31.54 million, up 19.9% year over year | $59.45 million, up 6.4% |
| Gross profit / gross margin | $2.42 million / 7.7%, versus $1.08 million / 4.1% | Approximately $3.46 million / 5.8%, versus approximately $3.52 million / 6.3% |
| Earnings before taxes | $1.14 million, versus $47,757 | $1.06 million, versus $1.20 million |
| Net earnings / diluted EPS | $765,655 / $0.11, versus $27,659 / $0.00 | $647,405 / $0.10, versus $836,018 / $0.12 |
| Cash flow | Not separately presented for the quarter | Operating cash used: $3.62 million, versus $670,613; investing cash used: $3.96 million; dividends paid: $271,978 |
Six-month sales growth reflected higher average selling prices and volume overall, but costs rose faster than sales and gross profit declined. Quarter results improved substantially as sales volume and gross margin increased. SG&A for the quarter rose $251,196, primarily from higher bonuses and commissions.
Segments and material changes
- Coil: Six-month sales rose about $7.34 million; shipments increased from approximately 46,000 to 52,000 tons, and average price rose from about $691 to $758 per ton. The segment was approximately break-even for the six months, improving from a $522,000 operating loss. In the quarter, it earned approximately $410,000 versus a $700,000 loss.
- Tubular: Six-month sales fell about $3.79 million as shipments declined from approximately 34,000 to 32,000 tons and average price fell from about $703 to $624 per ton. Operating income decreased approximately $660,000. Quarterly sales also declined, mainly from lower prices, although segment operating income increased approximately $218,000.
- For the six months, consolidated net earnings fell about 22.6% year over year despite higher sales. Dividends declared were $0.04 per share versus $0.16 in the prior-year period.
Financial position, liquidity and outlook
- At September 30, 2014, cash was $7.23 million, down from $15.08 million at March 31; current assets were $55.69 million and current liabilities were $6.34 million. Working capital was $49.36 million, compared with $52.08 million, and the current ratio was 8.8 versus 7.7.
- Inventory increased to $40.05 million from $35.29 million. The six-month operating cash outflow was driven in part by a $4.76 million inventory build and lower accounts payable/accrued expenses. Capital expenditures were $3.93 million, primarily associated with the pipe-finishing facility.
- The balance sheet lists no borrowing balance; the company reported no interest paid in the six-month period and said it had no current plans for significant term borrowing. Management considered cash flows and borrowing capacity adequate for expected cash needs over the next 24 months.
- The Lone Star, Texas pipe-finishing facility was estimated to cost $9.2 million in total; approximately $5.35 million had been capitalized by September 30. Management planned to fund it internally and expected completion and operation in the fourth quarter of fiscal 2015.
Management commentary, risks and contingencies
Management cited soft demand, intense competition, and a slow U.S. economic recovery as pressures on coil operations. Tubular operations faced oversupply, foreign competition, and lower production, which increased per-ton production costs. Management described quarterly market conditions as generally improved but did not provide financial guidance.
The company depends primarily on Nucor Steel Company for coil inventory; management said supply was adequate and did not anticipate a significant change, but loss of the supplier could materially harm the business. U.S. Steel Tubular Products is a primary tubular and pipe-material supplier and a major customer for finished tubular products; future orders and material availability are not assured, and loss of the relationship could materially harm the business. Forward-looking results also depend on product demand and prices and execution of expansion plans. Quarterly valuation of LIFO inventory requires estimates of year-end quantities.
Management concluded disclosure controls were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the pipe-finishing facility meets its expected fiscal 2015 completion schedule and estimated total cost, and how it affects cash and operating results.
- Whether the inventory build converts into sales and operating cash flow, given the six-month cash outflow and higher inventory balance.
- Whether coil and tubular demand, pricing, margins, and volumes improve or remain pressured by competition and market conditions.
- How the company’s dependence on Nucor and U.S. Steel Tubular Products affects supply, customer orders, and business continuity.
- Whether dividends and planned investment remain supportable by operating cash generation and liquidity.