Friedman Industries, Inc. — Q1 FY2016 10-Q Summary
Reporting period: Three months ended June 30, 2015, compared with the three months ended June 30, 2014. Friedman processes and sells steel coil and tubular products.
Financial performance
- Net sales: $23.97 million, down 14.1% from $27.90 million. Total tons sold declined to approximately 38,000 from 39,000, while average selling price fell to about $627 per ton from $710.
- Gross profit and margin: Gross profit increased approximately $1.10 million to $2.14 million; gross margin improved to about 8.9% from 3.7%. Lower average cost per ton, down to approximately $571 from $684, and improved coil margins drove the gain.
- Operating results by segment: Coil generated $19.35 million in sales and approximately $2.16 million in operating profit, versus a $404,000 operating loss a year earlier. Tubular sales were $4.62 million and the segment recorded a $637,000 operating loss, compared with $9.999 million in sales and $772,000 operating profit in the prior-year quarter.
- Net earnings: $525,949, or $0.08 per share, compared with a net loss of $118,250, or $0.02 per share. General, selling and administrative costs rose $218,880, primarily from higher bonuses tied to earnings.
- Cash flow: Operating activities provided $2.52 million, compared with $3.62 million used in the prior-year quarter. Investing activities used $852,480, including $835,230 of capital expenditures; dividends paid were $67,994. Cash increased $1.60 million during the quarter to $3.82 million.
- Liquidity and balance sheet: Working capital was $47.56 million, versus $47.47 million at March 31, 2015; the current ratio was 23.6 versus 18.9. Total assets were $66.89 million. No borrowings were outstanding, and the filing reports no long-term debt balance.
- Credit facility: A $5.0 million revolving facility with JPMorgan Chase was entered into on May 8, 2015 and expires April 30, 2016. The company reported no borrowings under it as of June 30, 2015; management also said none had been drawn as of August 13, 2015.
Material changes and management commentary
- Coil sales rose approximately $1.44 million as volume increased to about 30,500 tons from 24,000. Management attributed improved coil results to higher volume and lower hot-rolled steel costs; selling price per ton fell about 15%, while cost per ton fell about 26%.
- Tubular sales fell approximately $5.38 million. Volume declined to about 8,000 tons from 15,000, and lower prices and production contributed to the segment loss.
- The company continued construction of its pipe-finishing facility in Lone Star, Texas. Estimated total construction cost was approximately $9.2 million; about $7.75 million had been capitalized by June 30. Management expected completion and operations in the third quarter of fiscal 2016.
- Management believed cash, operating cash flows and borrowing capacity were adequate for expected cash requirements over the next 24 months. The filing provides no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Management cited tubular-market weakness associated with oversupply, foreign competition and reduced U.S. energy-business demand. Intense competition and steel price and demand changes may affect results.
- 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 the supplier could materially harm the business.
- U.S. Steel Tubular Products is a primary supplier of tubular products and coil used in pipe manufacturing and also a major customer. The company gave no assurance about future orders or material availability; loss of this relationship could materially harm the business.
- Management identified quarterly LIFO inventory valuation as a significant estimate, requiring estimates of year-end quantities. The credit facility includes financial covenants for tangible net worth, liabilities to tangible net worth, and four-consecutive-quarter net income.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material legal contingency is described in the supplied filing text.
Important facts for investors to verify
- Whether the coil segment can sustain improved margins as steel prices, selling prices and volumes change.
- Whether tubular demand and production recover, particularly given exposure to the oil and gas market.
- Pipe-finishing facility spending to date, remaining costs, completion timing and expected operational contribution.
- Compliance with credit-facility covenants and continued access to the $5.0 million revolver.
- Supplier and customer concentration risks, including future availability of materials and orders from Nucor and U.S. Steel Tubular Products.