Business context and reporting period
Friedman Industries, Incorporated filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2017. The company operates coil and tubular product segments. Its recently constructed pipe-finishing facility began operating in May 2017.
Financial results and liquidity
| Metric | Three months ended September 30, 2017 | Six months ended September 30, 2017 |
|---|---|---|
| Net sales | $26.08 million | $49.16 million |
| Gross profit / margin | $1.38 million / 5.3% | $2.64 million / 5.4% |
| Earnings before income taxes | $457,020 | $686,424 |
| Net earnings | $310,039 | $480,659 |
| Diluted earnings per share | $0.04 | $0.07 |
- For the six-month period, operating cash flow was $2.07 million; capital expenditures were $183,000, and cash dividends paid were $140,188. Cash increased $1.74 million to $3.20 million.
- At September 30, total assets were $69.37 million, current assets $52.44 million, current liabilities $8.22 million, and working capital $44.22 million. The current ratio was 6.4, down from 19.3 at March 31.
- The balance sheet reports no borrowings or debt. Total liabilities were $8.53 million; accounts payable and accrued expenses were $7.68 million.
- Inventory was $40.14 million, up from $34.92 million at March 31. Management attributed the increase in inventory and accounts payable primarily to the volume, timing and payment terms of coil inventory purchases.
Material changes versus the prior comparable periods
- Second-quarter sales rose $7.76 million, or approximately 42%, year over year; net earnings improved from a $604,000 loss to $310,000 profit. Gross margin improved from approximately break-even to 5.3%.
- Six-month sales increased $8.45 million, while net earnings improved from a $2.07 million loss to $481,000 profit. Gross margin shifted from a 3.2% loss to a 5.4% profit.
- Management attributed improved six-month sales chiefly to higher average selling prices ($657 per ton versus $543); volume declined to approximately 72,000 tons from 75,000. Coil segment operating profit was $1.31 million versus a $1.40 million loss, with lower LIFO charges ($403,000 versus $2.95 million) contributing to the comparison.
- Tubular segment operating profit was $314,000 for six months versus a $923,000 loss. Higher tubular prices and shipments, along with $1.66 million of finishing-facility revenue, contributed to the improvement. The facility’s finishing services in the period were exclusively for U.S. Steel Tubular Products (USS).
- Operating cash flow fell to $2.07 million from $4.94 million in the prior-year six months, notably reflecting a $5.22 million inventory increase, partly offset by a $5.68 million increase in accounts payable and accrued expenses.
Outlook, risks and unusual items
- The company does not expect to provide finishing services for USS in the quarter ending December 31, 2017, due to market conditions, and was pursuing alternative uses for the facility as of the filing. This creates uncertainty around future facility utilization and revenue.
- Management cited tubular-market oversupply, foreign competition and the prolonged U.S. energy-business downturn. USS is a primary supplier of new mill reject pipe and has also been a customer; reduced supply following the permanent idling of USS’s #1 pipe mill and uncertainty over future USS orders could materially affect the business.
- Coil margins are sensitive to hot-rolled coil costs and LIFO inventory accounting; management also noted intense competition from widely available hot-rolled sheet and plate. Steel prices, demand and sales volumes are key risks.
- A change in useful-life estimates for certain Decatur facility assets, effective April 1, 2017, reduced depreciation expense by approximately $160,000 and increased net earnings by approximately $102,000, or $0.01 per diluted share, for the quarter.
- Management said cash, operating cash flows and borrowing capability were adequate for expected cash requirements over the next 24 months. No specific earnings or revenue guidance was provided.
- The company was evaluating new accounting standards; it did not expect material impacts from the cited revenue-recognition, lease or cash-flow standards. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company secures alternative work or other uses for the pipe-finishing facility after the expected pause in USS services.
- Future USS orders and mill-reject pipe availability, given USS’s role as both supplier and customer.
- Inventory levels, accounts payable and cash conversion, particularly as steel prices and purchasing patterns change.
- Whether improved segment profitability persists after the benefit of lower comparative LIFO charges and the useful-life estimate change.
- Reported working-capital liquidity and the absence of debt alongside the company’s stated 24-month funding outlook.