Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended June 30, 2017; comparisons are with the three months ended June 30, 2016. The company processes and sells coil and tubular steel products.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $23.08 million | $22.39 million |
| Gross profit (loss) | $1.26 million | $(1.25) million |
| Gross margin | 5.5% | (5.6)% |
| Operating earnings (loss) | $225,029 | $(2.35) million |
| Net earnings (loss) | $170,620 | $(1.46) million |
| Diluted earnings (loss) per share | $0.02 | $(0.21) |
| Operating cash flow | $2.68 million | $(1.70) million |
- Sales rose about 3.1%, while gross profit improved by approximately $2.52 million. Average selling price increased to about $689 per ton from $519, partly offset by tons sold falling to approximately 33,500 from 43,000. Average cost per ton also increased, to about $651 from $548.
- Coil sales declined approximately $989,000 as volume fell; coil segment operating profit improved to about $753,000 from a $1.52 million loss. Tubular sales rose approximately $1.68 million; its operating loss narrowed to about $1,000 from $274,000.
- Cash was $3.90 million at quarter-end, up from $1.46 million at March 31, 2017. Working capital was $43.43 million, versus $43.08 million, and the current ratio was 6.3 versus 19.3. No debt balance is reported in the supplied balance sheet.
- Operating cash flow benefited significantly from a $5.75 million increase in accounts payable and accrued expenses, which partly offset a $4.50 million inventory increase. Capital expenditures were $159,465; cash dividends paid were $70,094.
Financial position and material changes
- Total assets increased to $69.00 million from $63.26 million at March 31, 2017. Inventory increased to $39.42 million from $34.92 million, while accounts receivable declined to $8.26 million from $8.94 million.
- Current liabilities rose to $8.17 million from $2.36 million, primarily reflecting higher accounts payable and accrued expenses. Management attributed movements in payables and inventory mainly to coil inventory purchase volumes, timing, and payment terms.
- Coil results benefited from a substantially smaller LIFO charge: approximately $280,000 in the 2017 quarter compared with $2.34 million in 2016. Management cautions that LIFO results depend on changes in coil costs and quantities.
- A pipe finishing facility began operating in May 2017 and generated approximately $518,000 of quarterly revenue. Tubular segment assets were $37.59 million at June 30, 2017.
Outlook, risks, and unusual items
- Management said current cash, operating cash flows, and borrowing capability were adequate for expected cash requirements over the next 24 months. No earnings or sales guidance was provided.
- Management cited intense competition and market sensitivity to steel product demand and prices. Tubular demand remains weak amid oversupply, foreign competition, and the prolonged U.S. energy-sector downturn.
- Nucor Steel Company is a significant coil supplier; management reported adequate supply and did not anticipate a significant change, but warned that losing the supplier could materially harm the business.
- U.S. Steel Tubular Products (USS) has been both a pipe supplier and a significant customer. There were no tubular product sales to USS in the quarter. The company expects reduced availability and size range of new mill reject pipe following USS’s permanent idling of its #1 Lone Star pipe mill; USS resumed production at its #2 mill in May 2017. All finishing services at the new facility had been performed for USS as of the filing, and the company could not estimate future USS orders or supply. Losing USS as supplier or customer could materially harm the business.
- A change in estimated useful lives of certain Decatur facility assets, effective April 1, reduced quarterly depreciation by approximately $160,000 and increased net earnings by approximately $102,000, or $0.01 per diluted share.
- The company awarded 210,000 restricted shares under its 2016 plan; they cliff-vest on January 4, 2022. Quarterly stock compensation expense was $72,240.
- The filing identifies commitments and contingencies on the balance sheet, but the supplied text does not provide a clear description or amount. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported return to profitability is sustainable after considering the $102,000 benefit from the depreciation-estimate change and the smaller LIFO charge.
- Whether inventory growth, including $23.44 million of tubular finished goods, converts to sales and cash without additional margin pressure or write-downs.
- Future coil volumes, selling prices, costs, and supply concentration with Nucor; and the effects of steel market competition and LIFO accounting.
- Future USS orders, pipe supply, and use of the new finishing facility, including its dependence on USS to date.
- The nature and potential financial exposure of commitments and contingencies, which are not clearly detailed in the supplied filing text.