Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2014. The company processes and sells coil and tubular steel products.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Prior-year quarter | Nine months ended Dec. 31, 2014 | Prior-year period |
|---|---|---|---|---|
| Net sales | $23.55 million | $28.27 million | $83.00 million | $84.17 million |
| Gross profit | $1.26 million | $1.85 million | $4.72 million | $5.37 million |
| Gross margin | 5.3% | 6.5% | 5.7% | 6.4% |
| Earnings before income taxes | $298,000 | $740,000 | $1.36 million | $1.94 million |
| Net earnings | $188,000 | $487,000 | $835,000 | $1.32 million |
| Diluted earnings per share | $0.03 | $0.07 | $0.12 | $0.19 |
- Cash flow: Nine-month operating cash flow was negative $2.93 million, compared with positive $3.21 million a year earlier. Capital expenditures were $4.73 million, primarily associated with facility construction. Cash dividends paid were $408,000.
- Cash and liquidity: Cash was $6.96 million at December 31, 2014, down from $15.08 million at March 31, 2014. Working capital was $49.06 million, versus $52.08 million; the current ratio declined to 4.5 from 7.7.
- Debt: The balance sheet reports no borrowings, and the company paid no interest during either nine-month period. Management said it was considering short-term financing to supplement operating cash flow.
- Other balance-sheet changes: Inventory rose to $50.82 million from $35.29 million, including a $9.12 million increase in prime coil inventory. Accounts payable and accrued expenses increased to $13.48 million from $7.21 million.
Material changes and operating trends
- Quarterly sales fell 16.7%; management attributed the decline to lower shipment volume and selling prices. Tons sold declined from approximately 39,000 to 34,000, and average selling price fell from approximately $721 to $684 per ton.
- For the nine-month period, total sales were nearly flat, but gross profit declined $647,000 as gross margin narrowed.
- Coil: Nine-month sales increased about $8.77 million, with higher average prices and shipments. The segment moved from a $911,000 operating loss to a $422,000 operating profit. Quarterly coil sales also increased, and the segment recorded a $416,000 operating profit versus a $389,000 loss.
- Tubular: Nine-month sales declined about $9.93 million and operating profit fell about $2.12 million. Shipments decreased from approximately 53,000 to 45,000 tons, while average price declined from approximately $712 to $614 per ton. In the quarter, tubular operating profit margin was 1.7%, versus 11.5% a year earlier.
Outlook, risks and notable items
- Management described market conditions as soft, citing weak demand, intense competition, tubular-product oversupply, foreign competition and slow U.S. economic recovery. Lower tubular production raised per-ton production costs and pressured margins.
- The company is building an estimated $9.2 million pipe-finishing facility in Lone Star, Texas. Approximately $6.10 million had been capitalized by December 31, 2014; completion and operation were expected in the first quarter of fiscal 2016.
- Management expected to reduce elevated prime coil inventory during the quarter ending March 31, 2015, and believed cash flows and borrowing capacity would cover expected cash requirements for 24 months.
- Supplier/customer concentration is a material risk: Nucor Steel Company is the primary coil supplier; U.S. Steel Tubular Products is the primary tubular and pipe-material supplier and a major customer. The company warned that losing either relationship could materially harm the business and gave no assurance about future supply or orders.
- Quarterly inventory valuation under LIFO requires estimates of year-end quantities. Management noted estimation uncertainty. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company reduces inventory as expected and converts working capital into operating cash flow.
- Whether tubular demand, shipment volumes and segment margins recover, and whether coil profitability is sustained.
- Facility construction spending, completion timing and the funding plan, including any short-term borrowing.
- Developments in supply and customer relationships with Nucor Steel Company and U.S. Steel Tubular Products.
- The effects of steel prices, competition, market demand and LIFO inventory estimates on future margins and reported earnings.