Friedman Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2013. The company operates coil and tubular product segments. Comparisons are with the corresponding 2012 periods unless noted.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $28.27 million | $31.72 million | $84.17 million | $104.49 million |
| Gross profit | $1.85 million | $2.88 million | $5.37 million | $11.31 million |
| Gross margin | 6.5% | 9.1% | 6.4% | 10.8% |
| Earnings before taxes | $0.74 million | $1.72 million | $1.94 million | $7.29 million |
| Net earnings | $0.49 million | $1.15 million | $1.32 million | $4.89 million |
| Diluted earnings per share | $0.07 | $0.17 | $0.19 | $0.72 |
- Cash flow: Nine-month operating cash flow was $3.21 million, compared with $11.24 million. Capital expenditures were $0.37 million; dividends paid were $1.63 million. Cash increased $1.17 million to $17.09 million.
- Liquidity and balance sheet: At December 31, cash was $17.09 million, working capital was $52.93 million, and the current ratio was 8.2. Total assets were $71.63 million and stockholders’ equity was $63.06 million. The balance sheet lists no debt; the filing says the company has no current plans for significant term borrowing.
- Dividends: Dividends declared were $0.18 per share for the nine-month period, versus $0.89 a year earlier. The prior-year amount included a $0.50-per-share special dividend.
Material changes and management commentary
- Nine-month sales fell $20.32 million. Management attributed the decline to lower volume and selling prices: total tons sold decreased from approximately 139,000 to 120,000, and average selling price fell from approximately $750 to $704 per ton. Gross margin contracted from 10.8% to 6.4%.
- Coil sales declined about $2.79 million year over year for the nine months; the segment recorded a $0.91 million operating loss versus $0.73 million operating profit. Coil volume was approximately unchanged at 66,500 tons, while average selling price declined.
- Tubular sales declined about $17.53 million; shipments fell from approximately 73,000 to 53,000 tons, and average selling price declined from approximately $759 to $712 per ton. Segment operating income fell about $4.10 million. Management cited lower volume, oversupply, foreign competition, and a weak U.S. economy.
- Management described demand and market conditions as soft and expected coil-market conditions to remain weak until sustained, significant improvement in the U.S. economy. Reduced demand and lower earnings also contributed to lower selling, general and administrative expenses and income taxes.
- On January 23, 2014, the company disclosed construction of a pipe-finishing facility, with estimated cost of approximately $9.2 million, including yard improvements, buildings, and equipment. Management expects to fund it internally and said cash flows and borrowing capacity should cover expected cash needs for the next 24 months.
Risks, contingencies, and other items
- The company relies primarily on Nucor Steel Company for coil inventory; loss of this supplier could materially harm the business. Management said current supply was adequate and did not anticipate a significant change.
- U.S. Steel Tubular Products is a primary tubular-product and pipe-manufacturing material supplier and a major customer for finished tubular products. The company gave no assurance about future orders or material availability; loss of USS as supplier or customer could materially harm the business.
- Management identified product demand and prices, steel-market conditions, execution of operating plans, and expansion plans as factors that could cause actual results to differ from forward-looking statements. Quarterly LIFO inventory valuation depends on estimates; management reported no significant LIFO valuation changes for the periods.
- Disclosure controls were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether demand, shipment volumes, selling prices, and segment margins stabilize or continue to weaken.
- Progress, final cost, timing, and expected returns of the $9.2 million pipe-finishing facility, including the impact on cash and any future borrowing.
- Ongoing supply and customer relationships with Nucor and USS, and the effect of any changes in availability or orders.
- Cash conversion and working-capital trends, including whether operating cash flow remains sufficient to fund investment and dividends.