Friedman Industries, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal quarter and nine months ended December 31, 2011. Friedman operates coil and tubular product segments. Comparative periods ended December 31, 2010; balance-sheet comparisons are to March 31, 2011.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $37.0 million | $31.1 million | $118.0 million | $89.7 million |
| Gross profit | $3.93 million | $3.77 million | $12.98 million | $11.10 million |
| Gross margin | 10.6% | 12.1% | 11.0% | 12.4% |
| Earnings before taxes | $2.70 million | $2.62 million | $8.93 million | $7.44 million |
| Net earnings | $1.80 million | $1.73 million | $5.95 million | $4.95 million |
| Diluted earnings per share | $0.26 | $0.25 | $0.87 | $0.73 |
| Dividends declared per share | $0.13 | $0.61 | $0.39 | $0.73 |
- For the nine-month period, sales rose about 31% and net earnings about 20% year over year. Management attributed sales growth to higher shipment volumes and selling prices. Tons sold increased from approximately 122,000 to 143,000; average selling price rose from about $734 to $824 per ton.
- Quarterly sales increased about 19%, but gross margin fell to 10.6% from 12.1%. Management said higher material costs were not fully passed through to customers. Average selling price increased from about $723 to $778 per ton, while average cost rose from about $636 to $695.
- Nine-month tubular sales rose approximately $19.2 million, supported by increased volume and pricing; coil sales rose approximately $9.0 million. Tubular segment operating profit was $10.45 million versus $8.99 million. Coil segment operating profit was $446,000 versus $278,000.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $15.16 million, compared with $1.45 million in the prior-year period. The increase reflected earnings and a $5.86 million reduction in inventory; the prior-year period had an inventory cash outflow of $7.12 million.
- Cash and cash equivalents were $19.50 million at December 31, 2011, up from $7.21 million at March 31, 2011. Capital expenditures were $309,000; cash dividends paid were $2.52 million.
- Working capital was $49.40 million and the current ratio was 5.4, compared with $45.09 million and 5.8 at March 31, 2011. Total current assets were $60.74 million and current liabilities $11.34 million.
- Total assets were $74.74 million; stockholders’ equity was $62.10 million. The balance sheet lists no debt outstanding, and the filing reports no principal payments on notes payable in the current nine-month period.
Outlook, risks and unusual items
- Management said it had no current plans for significant term borrowing and believed operating cash flows and borrowing capacity were adequate for expected cash requirements over the next 24 months. No specific earnings or sales guidance was provided.
- Management described soft durable-goods demand as a constraint on coil products and expected the Decatur, Alabama coil facility to continue operating at a loss until demand improves. The facility recorded losses of approximately $859,000 for nine months and $292,000 for the quarter.
- Supplier/customer concentration is material: Nucor Steel Company is the primary coil supplier; U.S. Steel Tubular Products is the primary tubular and pipe-coil supplier and a major customer. The company warned that losing either relationship could materially harm its business and gave no assurance about future supply or orders.
- Inventory declined to $28.82 million from $34.68 million. LIFO inventories were reduced during the period and expected to be replaced by March 31, 2012; a $363,623 deferred credit was recorded for replacement cost exceeding LIFO cost. Quarterly LIFO inventory valuation depends on estimates of year-end quantities.
- Management cited changes in product demand and prices, steel-market conditions and execution of operating plans as factors that could cause actual results to differ from forward-looking statements. Disclosure controls were reported effective; no material quarterly change in internal control over financial reporting was reported. Legal proceedings were listed as not applicable.
Important facts for investors to verify
- Whether the decline in gross margin persists as material costs rise and the company’s ability to pass those increases to customers.
- The sustainability and composition of operating cash flow, particularly the contribution from inventory reduction, and the expected replacement of reduced LIFO inventory.
- The reason for the sharp year-over-year difference in dividends declared per share, including the prior-year quarter’s $0.61 declaration.
- Current conditions at the Decatur facility and ongoing exposure to soft coil demand and reliance on Nucor and U.S. Steel Tubular Products.
- The filing text gives a signature date of February 10, 2011, which appears inconsistent with the quarter ended December 31, 2011; verify the correct filing/signature date.