FRIEDMAN INDUSTRIES INC quarterly report, Q2 FY2016

Friedman Industries, Inc. — Q2 FY2016 10-Q Summary

Reporting period: Quarter and six months ended September 30, 2015; comparisons are to the same periods in 2014. The company processes and sells steel coil and tubular products.

Financial results

MetricQ2 FY2016Q2 FY2015Six months FY2016Six months FY2015
Net sales$23.17 million$31.54 million$47.13 million$59.45 million
Gross profit$0.91 million$2.42 million$3.05 million$3.46 million
Gross margin3.9%7.7%6.5%5.8%
Net earnings (loss)$(0.19) million$0.77 million$0.33 million$0.65 million
EPS, basic and diluted$(0.03)$0.11$0.05$0.10
Operating cash flowNot separately stated for the quarter$1.00 million$(3.62) million

For the six-month period, lower steel selling prices and reduced volume cut sales by $12.31 million; average selling price fell to about $597 per ton from $706, and shipments declined to about 79,000 tons from 84,000. Lower input costs partly offset the revenue decline. In Q2, sales fell by $8.38 million as average selling price and shipments declined, and gross margin contracted to 3.9%.

Segments and material changes

  • Coil: Six-month sales were $37.64 million, down from $39.18 million; operating profit improved to $3.04 million from approximately break-even. Higher shipment volume and lower hot-rolled coil costs supported results. Q2 operating profit was $0.89 million versus $0.41 million.
  • Tubular: Six-month sales fell to $9.50 million from $20.27 million; the segment recorded a $1.35 million operating loss versus $2.10 million profit. Q2 operating loss was $0.71 million versus $1.33 million profit. Management cited weak oil-and-gas demand, oversupply, foreign competition, and lower production that raised per-ton costs.
  • Q2 net loss compared with prior-year net income, reflecting the sharp reduction in gross profit; six-month net income also declined year over year.

Financial position, liquidity, and investment

  • At September 30, cash was $1.73 million, working capital was $47.28 million, and the current ratio was 20.4. Total assets were $66.98 million; stockholders’ equity was $63.41 million.
  • No borrowings were outstanding under the $5.0 million revolving credit facility at September 30 or November 13, 2015. The facility expires April 30, 2016; the company reported covenant compliance at quarter-end.
  • Six-month investing cash outflow was $1.36 million, including $1.32 million of property, plant and equipment purchases. Cash declined $0.49 million, primarily due to construction spending, partly offset by operating cash flow. Dividends paid were $0.14 million.
  • The Lone Star, Texas pipe-finishing facility was under construction. Estimated total cost was approximately $9.2 million, with approximately $8.17 million capitalized by September 30; completion was expected in Q4 FY2016.
  • Management said cash, operating cash flow, and borrowing capacity were expected to fund requirements for the next 24 months.

Outlook, risks, and unusual items

  • No specific earnings or sales guidance was provided. Management’s outlook is subject to product demand and pricing, steel-market conditions, and execution of operating and expansion plans.
  • The company depends primarily on Nucor Steel for coil inventory and on U.S. Steel Tubular Products as a tubular supplier and customer. Management warned that loss of either relationship could materially harm the business; future USS orders and supply are uncertain.
  • Intense competition exists in coil products. Tubular demand is exposed to weakness in the U.S. energy business, oversupply, and foreign competition.
  • The company early adopted ASU 2015-11 prospectively for applicable inventory measurement. Tubular finished goods were reduced by approximately $211,000 to lower cost or net realizable value. LIFO inventory remains subject to lower-of-cost-or-market valuation and management estimation.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether tubular demand and production volumes stabilize, and whether the segment returns to profitability.
  • Progress, remaining cost, and timing of the Lone Star pipe-finishing facility, including its expected contribution to operations.
  • Steel selling prices, input costs, shipment volumes, and gross-margin trends, particularly in the coil segment.
  • Continuity and terms of the company’s supply and customer relationships with Nucor and U.S. Steel Tubular Products.
  • Liquidity and covenant compliance as the revolving facility approaches its April 2016 expiration.