Friedman Industries, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2016; fiscal year ends March 31. The company operates coil and tubular steel product segments. Financial statements are unaudited.
Key financial results
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $15.99 million | $18.55 million | $56.70 million | $65.68 million |
| Gross profit (loss) | $0.57 million | $1.47 million | $(0.73) million | $4.52 million |
| Gross margin | 3.6% | 7.9% | (1.3)% | 6.9% |
| Net earnings (loss) | $(0.24) million | $0.49 million | $(2.30) million | $0.82 million |
| Diluted EPS | $(0.03) | $0.07 | $(0.34) | $0.12 |
- Nine-month operating cash flow was $4.03 million, versus $4.38 million a year earlier. Investing activities used $0.70 million, dividends used $0.20 million, and cash increased $3.13 million.
- At December 31, cash was $5.93 million, working capital was $43.29 million, and the current ratio was 19.7. Total assets were $63.58 million and total liabilities were $2.85 million. No borrowings are presented on the balance sheet; the company reported no interest paid during the nine-month periods shown.
- Cash rose from $2.80 million at March 31, primarily as inventory declined from $41.94 million to $34.56 million. Capital expenditures were $0.66 million for the nine months.
- Dividends declared were $0.01 per share for the quarter and $0.03 per share for the nine months, unchanged from the prior-year periods.
Changes and operating performance
- Nine-month sales fell $8.98 million. Management attributed the decline to lower volume and pricing: total tons sold declined from about 115,000 to 101,000, while average selling price fell from about $569 to $560 per ton. Average cost per ton rose from about $530 to $567, turning gross profit into a gross loss.
- Quarterly sales declined $2.56 million as shipments fell from about 36,500 to 26,000 tons; higher average selling prices were partly offset by higher per-ton costs. Quarterly gross margin fell from 7.9% to 3.6%.
- Coil segment nine-month sales were $47.95 million versus $52.84 million, and operating results shifted to an $0.86 million loss from $4.86 million of profit. Steel-price volatility, higher LIFO costs, and fixed-price customer orders were cited as pressures. Shipments against the fixed-price orders were completed in the December quarter.
- Tubular segment nine-month sales were $8.76 million versus $12.85 million; its operating loss narrowed to $1.36 million from $2.32 million. Management cited weak energy-sector demand, oversupply, and foreign competition.
- General, selling and administrative costs declined $0.70 million for the nine months, mainly from fewer tubular-segment administrative employees and lower bonuses, commissions, and corporate expenses.
Outlook, risks, and notable items
- Management said cash, operating cash flows, and borrowing capacity were adequate for expected cash requirements over the next 24 months. No specific earnings or revenue guidance was provided.
- A newly built pipe-finishing facility in Lone Star, Texas, was expected to enter service in March 2017. Construction costs capitalized at December 31 were about $9.31 million; management expected utilization to remain low until a sustained recovery in the U.S. energy business.
- Coil supply is primarily dependent on Nucor Steel Company. Management reported supply was adequate and did not anticipate significant near-term change, but loss of the supplier could materially harm the business.
- U.S. Steel Tubular Products (USS), a significant tubular customer and supplier of new mill reject pipe, announced the permanent idling of its #1 welded pipe mill at Lone Star in December 2016; its #2 mill remained temporarily idled. Friedman expected USS orders to remain low and USS reject-pipe supply to be significantly reduced. Loss of USS as supplier or customer could materially harm the business.
- The company liquidated LIFO inventory during the nine months and recorded a $165,841 deferred debit for the estimated difference between replacement and LIFO cost, anticipating partial replenishment by March 31, 2017. Management noted quarterly LIFO valuations require estimates.
- After quarter-end, 210,000 restricted shares were granted under the 2016 plan, with five-year cliff vesting and stated grant-date fair value of $1.44 million, to be expensed over 60 months.
- Management identified changes in product demand and prices and execution of operating and expansion plans as risks to forward-looking results. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether steel prices and inventory costs stabilize, and how LIFO accounting and inventory replenishment affect gross margins.
- Whether coil and tubular shipment volumes recover, particularly in commercial freight and energy-related markets.
- The financial and operating impact of USS mill idling, reduced USS business, and the company’s reliance on Nucor for coil supply.
- Facility start-up timing, spending, utilization, and potential ongoing costs while energy-sector demand remains weak.
- Actual cash requirements and liquidity against management’s 24-month outlook; the filing gives no detailed borrowing-capacity amount.
- Expected compensation expense and dilution from the post-quarter restricted-stock grants.