Friedman Industries, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2015. Friedman sells coil and tubular steel products. Comparative periods are the quarter and nine months ended December 31, 2014; balance-sheet comparisons are to March 31, 2015.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $18.55 million, down 21% year over year | $65.68 million, down 21% |
| Gross profit | $1.47 million, up $0.21 million | $4.52 million, down $0.20 million |
| Gross margin | 7.9%, versus 5.3% | 6.9%, versus 5.7% |
| Operating expenses, including SG&A | $18.18 million total costs and expenses before other income | $64.83 million total costs and expenses before other income |
| Earnings before income taxes | $696,167, versus $297,717 | $1.21 million, versus $1.36 million |
| Net earnings | $485,120, versus $187,643 | $817,775, versus $835,049 |
| EPS, basic and diluted | $0.07, versus $0.03 | $0.12, unchanged |
For the nine-month period, cash from operating activities was $4.38 million, compared with cash used of $2.93 million a year earlier. Capital expenditures were $1.90 million; dividends paid were $204,000. Cash increased by $2.24 million to $4.46 million from March 31, 2015.
At December 31, 2015, total assets were $69.68 million, working capital was $47.58 million, and the current ratio was 10.4 (18.9 at March 31). The company reported no borrowings under its $5 million revolving credit facility and was in compliance with its financial covenants. The facility expires April 30, 2016. The filing reports no interest paid during either nine-month period.
Changes and operating performance
- Nine-month sales fell by $17.32 million as average selling price declined from about $700 to $569 per ton and shipments eased from about 119,000 to 115,000 tons. Average cost per ton also fell, from about $660 to $530, supporting higher gross margin.
- Coil sales declined $2.32 million over nine months, primarily because of lower prices, partly offset by shipments increasing from about 73,000 to 93,000 tons. Coil operating profit rose to $4.86 million from $422,000.
- Tubular sales fell $15.00 million; shipments dropped from about 45,000 to 23,000 tons and average price declined from about $614 to $565 per ton. The segment moved from $2.23 million operating profit to a $2.32 million operating loss. Management cited weak oil-and-gas demand, oversupply, foreign competition, and lower production volumes that raised per-ton costs.
- In the December quarter, total tons sold increased to about 36,500 from 34,000, but average selling price fell to about $509 from $684. Coil volume increased, while tubular shipments declined to about 7,000 tons from 13,000.
Outlook, risks, and unusual items
- Management said existing cash, operating cash flow, and borrowing capacity should cover expected cash requirements for the next 24 months. This is management’s expectation, not a guarantee.
- Construction continued on the Lone Star, Texas pipe-finishing facility. Estimated total cost is about $9.2 million; approximately $8.62 million had been capitalized by December 31, 2015. Completion was expected in the first quarter of fiscal 2017.
- A $316,310 steel antitrust settlement payment materially increased other income in the current-period comparisons. Litigation against other defendants continued, but the company could not estimate any further proceeds.
- Friedman depends primarily on Nucor Steel Company for coil supply and on U.S. Steel Tubular Products for tubular products and pipe-making coil; each relationship also involves customer exposure. The company warned that loss of either relationship could materially harm the business.
- Competition and changing steel prices, demand for the company’s products, and execution of expansion plans could cause actual results to differ from forward-looking expectations. Quarterly LIFO inventory valuation requires estimates of year-end quantities.
- A $383,000 noncash transaction transferred ownership of an officers’ life insurance policy to an officer upon retirement during the quarter. The company early adopted guidance requiring deferred taxes to be presented as noncurrent.
Important facts for investors to verify
- Whether tubular demand, shipments, and segment profitability recover, given the reported energy-market weakness and operating loss.
- Whether coil segment strength and gross-margin improvement persist amid intense domestic and foreign competition and lower steel prices.
- Facility construction spending, completion timing, and expected contribution to operations.
- Renewal or replacement of the credit facility before its April 30, 2016 expiration, and continued compliance with its covenants.
- Inventory valuation assumptions, particularly LIFO estimates, and the sustainability of cash generation as inventory and operating liabilities change.
- Any further proceeds from the steel antitrust litigation; future proceeds are uncertain and not included as a clear forecast in the filing.