Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, compared with the three months ended June 30, 2017. Friedman manufactures and processes steel products through its Coil and Tubular segments.
Financial results
| Metric | Quarter ended June 30, 2018 | Prior-year quarter, as adjusted |
|---|---|---|
| Net sales | $48.2 million | $23.1 million |
| Gross profit | $6.2 million | $1.5 million |
| Gross margin | 12.8% | 6.7% |
| Operating earnings | $4.7 million | $0.5 million |
| Net earnings | $3.6 million | $0.4 million |
| Diluted earnings per share | $0.51 | $0.05 |
| Operating cash flow | $(0.4) million | $2.7 million |
- Sales rose about 109%; management attributed the increase to higher sales volume and average selling prices. Tons sold increased approximately 81%, from 33,500 to 60,500.
- Coil sales increased 73% to $31.1 million, and segment operating profit rose to approximately $3.2 million from $1.0 million. Tubular sales increased 236% to $17.1 million; the segment recorded $2.3 million operating profit versus approximately break-even results in the prior-year quarter.
- Cash fell $0.8 million to $3.3 million. Inventory increased $14.3 million, partly offset by a $9.4 million increase in accounts payable and accrued expenses. Capital expenditures were $0.2 million and dividends paid were $0.1 million.
- At June 30, current assets were $81.7 million and current liabilities were $21.7 million; working capital was $60.0 million and the current ratio was 3.8. Total liabilities were $23.9 million. There was no credit-facility borrowing at quarter-end.
Accounting change and comparability
Effective April 1, 2018, the company changed prime-coil inventory valuation from LIFO to average cost and retrospectively adjusted prior-period figures. The company reported current-quarter net earnings of $3.6 million under average cost; it disclosed that earnings would have been $1.6 million under LIFO, a $2.0 million difference. The adjusted prior-year quarter showed net earnings of $0.4 million. The change increased opening retained earnings as of April 1, 2017 by $4.4 million. The company also adopted the new revenue-recognition standard; it reported no financial-statement impact or opening retained-earnings adjustment.
Outlook, risks, and other notable items
- Management expected Coil second-quarter shipping volume to be similar to the first quarter, with slightly narrower margins. It expected second-quarter line-pipe shipments to slightly exceed first-quarter volume and mill-reject-pipe shipments to be similar; mill-reject volume was expected to decline in the third quarter as inventory targets were reached. Customer-owned pipe finishing revenue was expected to decline in the second quarter.
- Management said the recovery in the U.S. energy industry and the launch of direct line-pipe sales supported improved Tubular results. It expected line pipe to become a significant part of Tubular sales.
- Subsequent to quarter-end, the company borrowed $2.5 million under its $7.5 million revolving facility at 4.45%. The facility expires December 11, 2018. Management said the company was compliant with its covenants as of the filing date and expected cash, operating cash flows, and borrowing capacity to meet requirements for the next 24 months.
- Key exposures include reliance on a limited number of suppliers in both segments and dependence on U.S. Steel Tubular Products as a principal source of mill-reject pipe and a significant pipe-finishing customer. The filing states that mill-reject pipe inventory exceeded trailing 12-month sales; its current classification depended on management’s estimates of future demand, which may differ from actual results.
- The federal corporate tax rate was reduced from 34% to 21%, effective January 1, 2018. The company recorded a 24.4% effective tax rate for the quarter and noted that some Tax Act estimates remained provisional.
Important facts for investors to verify
- Assess how much of the year-over-year earnings improvement reflects operating performance versus the inventory-accounting change; the company disclosed a $2.0 million current-quarter earnings difference between average cost and LIFO.
- Track whether inventory growth converts to sales and cash, particularly the elevated mill-reject-pipe inventory and management’s demand assumptions.
- Monitor subsequent credit-facility borrowings, liquidity, and the facility’s December 2018 expiration.
- Verify whether management’s near-term segment volume and margin expectations are achieved, and whether supplier or customer concentration changes.