Friedman Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2013, the second quarter of the company’s fiscal year. Friedman operates coil and tubular product segments. The filing compares the quarter and six-month period with the same periods in 2012.
Financial performance and position
- Second-quarter sales: $26.31 million, down 21.1% from $33.33 million. Gross profit was approximately $1.08 million versus $3.78 million; gross margin fell to 4.1% from 11.3%.
- Second-quarter earnings: Pretax income was $47,757 and net earnings were $27,659, compared with $2.47 million and $1.64 million, respectively, a year earlier. Diluted earnings per share were reported as $0.00 versus $0.24.
- Six-month results: Sales were $55.89 million, down 23.2%; net earnings were $836,018 versus $3.74 million. Gross margin declined to approximately 6.3% from 11.6%; diluted EPS was $0.12 versus $0.55.
- Segments: In the quarter, coil recorded a $700,000 operating loss versus $274,000 operating income a year earlier; tubular operating income was $1.11 million versus $2.74 million. For six months, coil recorded a $522,000 operating loss and tubular operating income was $2.76 million.
- Cash flow: Operating activities used $670,613 in the first six months, compared with providing $10.69 million in 2012. Cash declined $1.94 million to $13.98 million. Capital spending was $153,019 and dividends paid were $1.09 million.
- Liquidity and debt: Current assets were $61.36 million and current liabilities $9.01 million; working capital was $52.36 million and the current ratio was 6.8. Cash was $13.98 million. No borrowings or debt balance are reported on the balance sheet.
- Other metrics: Total assets were $72.93 million and stockholders’ equity $62.71 million at September 30. Dividends declared were $0.08 per share for the quarter and $0.16 for six months, down from $0.13 and $0.26, respectively, in 2012.
Material changes and management commentary
Lower selling prices and lower shipment volumes drove the six-month sales decline: total tons sold fell from approximately 96,000 to 80,000, while average selling price declined from about $756 to $696 per ton. For the quarter, tons sold fell from about 46,000 to 38,000 and average selling price declined from about $720 to $686. Management said soft demand and higher material costs that could not be passed through reduced margins. Tubular results were also pressured by lower volumes, oversupply, foreign competition, and a weak U.S. economy. Coil demand was described as soft.
Management characterized liquidity as strong and believes operating cash flows and borrowing capacity are adequate for expected cash needs over the next 24 months. The company said it had no current plans to borrow a significant amount on a term basis. No earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- The company depends primarily on Nucor Steel Company for coil inventory; loss of that supplier could materially harm the business.
- U.S. Steel Tubular Products is a primary tubular-product and pipe-manufacturing material supplier and a major customer for finished tubular products. Loss of either supply or customer relationship, or changes in future orders or material availability, could materially adversely affect the company.
- LIFO inventories declined during the six-month period and are expected to be replenished by March 31, 2014. A $32,213 deferred credit was recorded for the replacement-cost/LIFO-cost difference; quarterly LIFO valuation depends on estimates of year-end quantities.
- Management identified product demand and pricing, broader steel-market conditions, and execution of operating plans as factors that could cause actual results to differ from forward-looking statements.
- Disclosure controls were judged effective at quarter-end; the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weak demand, falling prices, and compressed margins persist, particularly in the coil segment.
- Whether tubular shipment volumes recover and whether oversupply and foreign competition continue to affect profitability.
- Any changes in the company’s relationships, supply availability, or orders involving Nucor Steel Company and U.S. Steel Tubular Products.
- Inventory replacement and LIFO estimates, and the effect of cash outflows and dividends on liquidity.