Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended December 31, 2017. Friedman manufactures and processes steel products through its coil and tubular segments.
Financial performance
- Quarter: Net sales were $28.0 million, up 75% from $16.0 million a year earlier. Gross profit was $1.67 million (about 6.0% of sales), versus $0.57 million (about 3.6%). Pretax earnings were $666,000, compared with a $371,000 pretax loss. Net earnings were $123,000, or $0.02 per share, versus a $237,000 loss, or $0.03 per share.
- Nine months: Net sales were $77.2 million, up 36% from $56.7 million. Gross profit was $4.31 million (about 5.6% of sales), versus a $727,000 gross loss (about negative 1.3%). Pretax earnings were $1.35 million, compared with a $3.65 million pretax loss. Net earnings were $604,000, or $0.09 per share, versus a $2.30 million loss, or $0.34 per share.
- Segment results, nine months: Coil sales were $60.5 million and operating profit was $2.48 million, versus an $858,000 operating loss. Tubular sales were $16.6 million and operating profit was $261,000, versus a $1.36 million operating loss.
- Cash flow: Nine-month operating cash flow was negative $2.59 million, versus positive $4.03 million. The $11.48 million increase in inventory was the principal cash use, partly offset by higher accounts payable and lower receivables. Investing cash use was $288,000; financing provided $3.54 million, including $3.75 million of revolver borrowings. Cash ended at $2.12 million, up from $1.46 million at March 31, 2017.
- Liquidity and balance sheet: Working capital was $45.15 million; the current ratio was 5.2, down from 19.3 at March 31. Total assets were $71.95 million and stockholders’ equity was $60.97 million. Inventory increased to $46.40 million from $34.92 million.
- Debt: The company established a $7.5 million revolving credit facility expiring December 11, 2018, secured by receivables and inventory. It had borrowed $3.75 million at December 31 and $2.0 million as of the filing date. The December 31 rate was 3.95%. Covenants require at least $50 million of tangible common equity and debt no greater than 50% of tangible common equity.
Changes, outlook and risks
- Revenue growth reflected both higher selling prices and greater shipment volumes. For the nine months, average selling price and tons sold increased across inventoried products. Tubular results also benefited from the pipe-finishing facility, which generated about $1.66 million of revenue during the nine-month period.
- Management attributed improved coil results partly to a smaller LIFO charge: about $459,000 for the nine months, compared with $2.93 million a year earlier. Coil sales remain subject to intense competition and LIFO-related margin variability.
- For the next quarter, management expected coil shipment volume to increase slightly from the December quarter. It expected tubular results to benefit from increased line-pipe sales and production; the pipe-finishing facility was expected to resume operations in March 2018. These are forward-looking expectations, not guarantees.
- USS has been a primary supplier of new mill reject pipe and a customer. Following the permanent idling of USS’s #1 pipe mill, Friedman expected reduced supply volume and product-size range. Friedman reported no pipe manufacturing for USS in the periods discussed and warned that losing USS as supplier or customer could materially harm its business. It also identified reliance on a limited number of suppliers as a risk.
- A change in estimated useful lives for certain Decatur facility assets, effective April 1, 2017, reduced depreciation expense by about $160,000 and increased net earnings by about $98,000, or $0.01 per diluted share, for the December quarter.
- The Tax Cuts and Jobs Act resulted in a provisional deferred tax expense of about $240,500 in the December quarter. The company said its tax accounting remained subject to further analysis and anticipated finalizing adjustments by March 31, 2018. It expected no material financial statement impact from adopting the cited new revenue, lease and cash-flow standards.
- Management believed cash, operating cash flows and borrowing capacity were sufficient for expected cash requirements over the next 24 months. Actual results may vary with steel demand and prices, execution of operating plans, supplier availability and other factors. The filing states disclosure controls were effective and reports no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether increased sales volumes and improved margins continue, and how steel prices and LIFO accounting affect profitability.
- Inventory levels, operating cash conversion and use of the revolving facility, including compliance with its financial covenants.
- Availability and terms of USS pipe supply, customer concentration, and progress in selling line pipe to distributors and midstream companies.
- Timing and commercial contribution of the pipe-finishing facility’s expected March 2018 restart.
- Final tax-reform accounting and the ongoing effect of the revised depreciation lives.