Business context and reporting period
Friedman Industries, Incorporated filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended June 30, 2012. The company sells coil and tubular steel products. Results are compared with the three months ended June 30, 2011; balance-sheet changes are compared with March 31, 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 or prior balance-sheet date |
|---|---|---|
| Net sales | $39.43 million | $38.94 million |
| Gross profit | $4.65 million; 11.8% of sales | $4.16 million; 10.7% of sales |
| Earnings before income taxes | $3.10 million | $2.75 million |
| Net earnings | $2.09 million | $1.83 million |
| Diluted earnings per share | $0.31 | $0.27 |
| Net cash from operating activities | $2.92 million | $10.72 million |
| Cash at period end | $13.86 million | $17.00 million at June 30, 2011 |
| Current ratio | 7.9 | 4.7 at March 31, 2012 |
| Working capital | $52.74 million | $51.15 million at March 31, 2012 |
Gross profit increased about $491,000, while general, selling and administrative costs rose about $140,000 to $1.56 million. The effective tax rate was 32.5%, versus 33.5%. The company declared dividends of $0.13 per share, unchanged from the prior-year quarter. It reported no interest paid and no borrowings on the balance sheet; management said it had no current plans for significant term borrowing.
Changes versus the comparable period
- Sales increased approximately 1.3%, reflecting higher volume but lower average selling prices. Total tons sold rose from about 46,000 to 50,000; average price fell from about $854 to $789 per ton.
- Coil sales grew about $1.4 million as tons sold increased from about 17,000 to 22,000, while average price declined from about $897 to $772 per ton. The segment moved from a $329,000 operating loss to $354,000 operating profit.
- Tubular sales declined about $900,000; volume remained around 28,000 tons, while average selling price decreased from about $828 to $802 per ton. Segment operating profit was $3.69 million, versus $3.92 million.
- Operating cash flow was substantially lower year over year, mainly reflecting a $7.16 million decrease in accounts payable and accrued expenses, partly offset by collections of receivables and lower inventories. Capital expenditures were about $91,000.
- From March 31, total assets fell to $73.52 million from $78.57 million, while stockholders’ equity rose to $64.63 million from $63.42 million. Accounts payable and accrued expenses decreased to $4.93 million from $12.09 million.
Outlook, risks and unusual items
Management said coil demand remained soft and expected market conditions to improve only with a stronger U.S. economy and durable-goods demand. The Decatur, Alabama coil facility recorded an operating loss of about $309,000 in the quarter; management expected continued losses until demand improves. Coil supply depends primarily on Nucor Steel Company; the filing warns that losing this supplier could materially harm the business.
U.S. Steel Tubular Products is the company’s primary tubular-product supplier and also a major customer for finished tubular products. The company gave no assurance about future orders or material availability and cautioned that losing USS as a supplier or customer could materially harm the business. Management believed operating cash flow and borrowing capacity would cover expected cash requirements for the next 24 months.
Quarterly inventory accounting involves estimates of year-end quantities under LIFO. LIFO inventories were liquidated in the quarter, and a $95,309 deferred debit reflected the difference between replacement cost and LIFO cost; management expected the reduced quantities to be replaced by March 31, 2013. No subsequent events requiring recognition or disclosure were identified. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether steel demand, selling prices and coil margins recover, and whether the Decatur facility’s losses persist.
- The company’s reliance on Nucor and USS for supply and customer relationships, including any changes in availability or orders.
- Whether operating cash flow improves, given the sharp year-over-year decline and the substantial reduction in accounts payable.
- Whether LIFO inventory quantities are replaced as expected and whether related estimates or costs change.
- Any significant borrowing, capital spending, or changes to management’s stated 24-month liquidity outlook.