NOTE A — BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes of Friedman Industries, Incorporated (the “Company”) included in its annual report on Form 10-K for the year ended March 31, 2017.
NOTE B — CHANGE IN ACCOUNTING ESTIMATE
During the quarter ended June 30, 2017, the Company determined that the economic useful lives of certain fixed assets at the Decatur, Alabama coil processing facility were greater than the useful lives used to calculate depreciation. As a result, effective April 1, 2017, the Company revised the useful lives of these assets resulting in a decrease in depreciation expense of approximately $160,000, an increase in net earnings of approximately $102,000 and an increase in diluted earnings per share of approximately $0.01 for the quarter ended June 30, 2017.
NOTE C — NEW ACCOUNTING STANDARDS
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. This new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact that adoption of the provisions of ASU 2016-15 will have on its consolidated financial statements but does not expect a material impact.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a new lease accounting standard that requires lessees to recognize a right of use asset and related lease liability for most leases having lease terms of more than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. This new guidance is effective for annual and interim periods beginning after December 15, 2018, but can be early adopted. The Company is evaluating the impact that adoption of the provisions of ASU 2016-02 will have on its consolidated financial statements but does not expect a material impact.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 states that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The update supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016; early application is not permitted. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and only permits entities to adopt the standard one year earlier as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact that adoption of the provisions of ASU 2014-09 will have on its consolidated financial statements but does not expect a material impact.
NOTE D — INVENTORIES
Inventories consist of prime coil, non-standard coil and tubular materials. Prime coil inventory consists primarily of raw materials, non-standard coil inventory consists primarily of raw materials and tubular inventory consists of both raw materials and finished goods. Cost for prime coil inventory is determined using the last-in, first-out (“LIFO”) method. The Company’s LIFO reserve was approximately $5,873,000 at June 30, 2017 and $5,593,000 at March 31, 2017. The LIFO reserve signifies the difference between LIFO value used for financial reporting and the value under weighted average cost used for the Company’s internal perpetual inventory records. Cost for non-standard coil inventory is determined using the specific identification method. Cost for tubular inventory is determined using the weighted average method. LIFO inventories are valued at the lower of cost or market. All other inventories are valued at the lower of cost or net realizable value.
A summary of inventory values by product group follows:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Prime Coil Inventory
|
|
$
|
11,648,170
|
|
|
$
|
8,481,605
|
|
Non-Standard Coil Inventory
|
|
|
2,086,410
|
|
|
|
1,119,170
|
|
Tubular Raw Material
|
|
|
2,239,599
|
|
|
|
1,480,730
|
|
Tubular Finished Goods
|
|
|
23,441,562
|
|
|
|
23,837,045
|
|
|
|
$
|
39,415,741
|
|
|
$
|
34,918,550
|
|
NOTE E — STOCK BASED COMPENSATION
The Company maintains the Friedman Industries, Incorporated 2016 Restricted Stock Plan (the “Plan”). The Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) and continues indefinitely until terminated by the Board or until all shares allowed by the Plan have been awarded and earned. The aggregate number of shares of the Company’s Common Stock eligible for award under the Plan is 500,000 shares. Subject to the terms and provisions of the Plan, the Committee may, from time to time, select the employees to whom awards will be granted and shall determine the amount and applicable restrictions of each award. Forfeitures are accounted for upon their occurrence.
As of June 30, 2017, the total number of restricted shares awarded under the Plan was 210,000 shares. All of the awarded shares have five year cliff vesting restrictions with vesting occurring on January 4, 2022. No other shares have been awarded under the Plan. The grant date fair value of the awarded shares is $1,444,800 and is being recognized as compensation expense over the 60 month requisite service period. The Company recorded compensation expense of $72,240 in the quarter ended June 30, 2017 relating to the stock awards issued under the Plan. In the quarter ended June 30, 2016, the Company maintained no equity compensation plans.
NOTE F — SEGMENT INFORMATION (in thousands)
|
|
THREE MONTHS ENDED
JUNE 30,
|
|
|
|
201
7
|
|
|
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
Coil
|
|
$
|
18,010
|
|
|
$
|
18,999
|
|
Tubular
|
|
|
5,073
|
|
|
|
3,395
|
|
Total net sales
|
|
$
|
23,083
|
|
|
$
|
22,394
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
Coil
|
|
$
|
753
|
|
|
$
|
(1,515
|
)
|
Tubular
|
|
|
(1
|
)
|
|
|
(274
|
)
|
Total operating profit (loss)
|
|
|
752
|
|
|
|
(1,789
|
)
|
Corporate expenses
|
|
|
527
|
|
|
|
557
|
|
Interest & other income
|
|
|
(4
|
)
|
|
|
(15
|
)
|
Earnings (loss) before income taxes
|
|
$
|
229
|
|
|
$
|
(2,331
|
)
|
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Segment assets
|
|
|
|
|
|
|
|
|
Coil
|
|
$
|
25,132
|
|
|
$
|
21,833
|
|
Tubular
|
|
|
37,592
|
|
|
|
37,299
|
|
|
|
|
62,724
|
|
|
|
59,132
|
|
Corporate assets
|
|
|
6,279
|
|
|
|
4,131
|
|
|
|
$
|
69,003
|
|
|
$
|
63,263
|
|
Corporate expenses reflect general and administrative expenses not directly associated with segment operations and consist primarily of corporate executive and accounting salaries, professional fees and services, bad debts, retirement plan contribution expense, corporate insurance expenses and office supplies. Corporate assets consist primarily of cash, the cash value of officers’ life insurance, deferred taxes and federal income taxes recoverable.
NOTE G — SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $8,000 and $13,500 in the quarters ended June 30, 2017 and 2016, respectively. No interest was paid in the quarters ended June 30, 2017 and 2016, respectively. Noncash financing activities consisted of accrued dividends of $70,094 and $67,994 in the quarters ended June 30, 2017 and 2016, respectively. There were noncash transactions of $246,000 and $293,000 in the quarters ended June 30, 2017 and 2016, respectively, for the transfer of ownership of life insurance policies from the Company to officers upon their retirement.
NOTE H — INCOME TAXES
The Company’s effective tax rate for the quarter ended June 30, 2017 differed from the statutory rate due primarily to tax benefits related to the ownership transfer of a life insurance policy from the Company to an officer upon retirement. The Company’s effective tax rate for the quarter ended June 30, 2016 differed from the statutory rate due primarily to state income tax benefits resulting from the loss before taxes.