Friedman Industries, Inc. — Form 10-Q Summary
Business context and period: Steel processor and manufacturer with Coil and Tubular segments. This fiscal second-quarter report covers the three and six months ended September 30, 2018; comparisons are with 2017 periods, with prior results adjusted for the inventory accounting change described below.
Financial results
| Metric | Quarter ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $53.43 million, up from $26.08 million | $101.63 million, up from $49.16 million |
| Gross profit margin | 7.4%, versus 5.8% | 10.0%, versus 6.2% |
| Net earnings | $2.00 million, versus $0.40 million | $5.60 million, versus $0.76 million |
| Diluted EPS | $0.29, versus $0.05 | $0.80, versus $0.11 |
| Operating cash flow | Six-month cash provided: $0.19 million, versus $2.07 million |
- Segment performance: Six-month Coil sales were $65.96 million and operating profit $5.10 million; Tubular sales were $35.67 million and operating profit $3.70 million. Both segments improved substantially year over year.
- Cash flow and working capital: Cash was $3.67 million at September 30, down from $4.05 million at March 31. Inventory increased $9.32 million to $54.65 million, a major operating cash use. Working capital was $61.86 million and the current ratio was 5.1, compared with $56.24 million and 6.1 at March 31.
- Debt and liquidity: No borrowings were outstanding under the $7.5 million revolving credit facility at quarter-end or filing date. It was secured by receivables and inventory, carried a 4.70% rate at September 30, and was due to expire December 11, 2018. Management expected to renew it and said liquidity and borrowing capacity were sufficient for expected cash needs over the next 24 months.
- Other: Six-month capital expenditures were $0.21 million. Dividends declared were $0.06 per share for the quarter and $0.09 for six months. Six-month income tax provision was $1.81 million, or 24.4% of pretax income; the federal corporate rate fell from 34% to 21% effective January 1, 2018.
Material changes and accounting
- Sales growth reflected higher shipped tonnage and higher average selling prices. For the six-month period, total tons sold rose approximately 72%, from 72,000 to 124,000. Management attributed stronger demand partly to Section 232 steel trade actions, energy-sector recovery, and broader steel and economic conditions.
- Tubular sales benefited from increased manufactured and mill reject pipe shipments and the new API line-pipe offering. Line pipe accounted for approximately 14,000 tons of six-month shipments; mill reject pipe shipments were approximately 27,500 tons.
- Effective April 1, 2018, the company changed prime-coil inventory valuation from LIFO to average cost, applied retrospectively. Under average cost, the change increased 2018-quarter net earnings by $0.91 million and six-month net earnings by $2.92 million versus LIFO. The change also increased retained earnings at April 1, 2017 by $4.42 million; prior-period comparisons in this report were adjusted.
- The company adopted the new revenue recognition standard in fiscal 2019; it reported no financial statement impact. A new lease standard was not yet adopted; management did not expect a material impact.
Outlook, risks and contingencies
- For the next quarter, management expected Coil shipments to decline to 31,000–34,000 tons due to seasonality and fewer shipping days, with slight margin contraction, primarily from lower steel prices.
- Management expected approximately 5,000 tons of line-pipe shipments in the next quarter, below the quarter’s approximately 8,000 tons, citing customer year-end inventory management and uncertainty over imports when Section 232 quotas reset. Mill reject pipe volume was also expected to decline as inventory approached desired levels. Tubular margin outlook was mixed and management could not estimate the net effect.
- The pipe-finishing facility’s activity had been sporadic as customer relationships developed; management continued to evaluate its long-term operating potential.
- Both segments rely on a limited number of suppliers. U.S. Steel Tubular Products (USS) is a key mill reject pipe supplier and a significant pipe-finishing customer; loss of USS or other key suppliers could materially harm the business. The company noted that USS’s permanent idling of one pipe mill may reduce supply and available size range.
- Mill reject pipe on hand at September 30 exceeded the prior fiscal year’s sales volume. Management supported current classification with expected future sales, but stated that projections involve significant estimates and actual results may differ.
- Other stated risks include changes in demand and steel prices, import competition, energy-market conditions, and execution of operating plans. The company reported commitments and contingencies but the supplied filing text does not provide a clear quantified exposure.
Most important facts to verify
- Whether the credit facility was renewed before its December 11, 2018 expiration and on what terms.
- Whether inventory buildup converts to sales and operating cash flow, especially the mill reject pipe inventory.
- Whether higher sales and margins persist if steel prices, Section 232 effects, imports, or energy-sector demand change.
- Whether line-pipe growth and pipe-finishing customer activity meet management’s expectations.
- The final tax effects of the Tax Act measurement-period analysis and any material updates to supplier availability or contingencies.