Friedman Industries, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended June 30, 2014, compared with the three months ended June 30, 2013. The company operates coil and tubular steel product segments.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $27.90 million | $29.58 million |
| Gross profit | Approximately $1.04 million | Approximately $2.44 million |
| Gross margin | 3.7% | 8.3% |
| Operating profit | $0.37 million | $1.83 million |
| Pre-tax earnings (loss) | ($77,263) | $1.15 million |
| Net earnings (loss) | ($118,250), or ($0.02) per share | $808,359, or $0.12 per share |
| Operating cash flow | ($3.62 million) | $2.25 million |
Sales fell 5.7% year over year; gross profit declined about $1.40 million. Sales volume decreased from approximately 42,000 to 39,000 tons, while average selling price rose from approximately $705 to $710 per ton. SG&A decreased $170,324 to $1.13 million. The quarter’s $40,987 income tax expense included a state-tax estimate true-up.
At June 30, 2014, cash was $10.79 million, down $4.29 million from March 31; inventory was $38.91 million, up $3.62 million, and total assets were $70.37 million. Current liabilities were $6.13 million, working capital was $51.71 million, and the current ratio was 9.4. The filing presents no interest-bearing debt on the balance sheet and reports no interest paid. Dividends declared were $0.02 per share, versus $0.08 in the prior-year quarter.
Segment performance and changes
- Coil: Sales increased approximately $743,000 to $17.91 million, primarily as average price per ton rose to about $745 from $688, partly offset by lower volume. The segment recorded a $404,000 operating loss versus $178,000 operating profit a year earlier. Management cited higher material costs that could not be fully passed on and persistently soft demand.
- Tubular: Sales declined approximately $2.42 million to $10.00 million. Average price per ton fell to about $656 from $730, and volume declined to approximately 15,000 from 17,000 tons. Operating profit fell to $772,000 from $1.65 million; operating margin was 7.7% versus 13.3%. Management cited soft demand, oversupply, foreign competition, and lower production volumes that increased unit costs.
Outlook, risks and notable items
Management expects soft coil market conditions to persist until sustained, significant improvement in the U.S. economy. It attributed weaker tubular demand to oversupply, foreign competition, and a weak economy. The company expects operating cash flows and borrowing capacity to cover expected cash needs for the next 24 months and has no current plan for significant term borrowing.
Construction continues on a pipe-finishing facility in Lone Star, Texas. Estimated total cost is $9.2 million, intended to be funded internally; approximately $2.0 million had been capitalized by June 30. Completion and operation were expected in the fourth quarter of fiscal 2015.
Supplier and customer concentration is material: Nucor Steel Company is the primary coil supplier, while U.S. Steel Tubular Products is the primary tubular supplier and a major customer for finished tubular products. Management said loss of either relationship could materially harm the business; future supply and orders from U.S. Steel Tubular Products are not assured. Other risks include demand and pricing changes, steel-market conditions, expansion execution, and estimates used in quarterly LIFO inventory valuation.
Important facts for investors to verify
- Whether weak demand and lower segment margins continued, particularly in tubular products.
- Whether the Lone Star facility stayed on schedule and within its $9.2 million estimated cost, and how it was financed.
- Changes in coil and tubular volumes, selling prices, and dependence on Nucor and U.S. Steel Tubular Products.
- Inventory levels and operating cash conversion, given the quarter’s inventory build and negative operating cash flow.
- Potential effects of LIFO estimates and state income-tax adjustments on reported results.