Friedman Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2011; the comparable periods ended September 30, 2010. The company processes and sells coil and tubular steel products.
Financial results
| Metric | Three months ended Sept. 30, 2011 | Six months ended Sept. 30, 2011 |
|---|---|---|
| Net sales | $42.04 million; up 43% year over year | $80.97 million; up 38% |
| Gross profit | $4.89 million; gross margin 11.6%, down from 13.2% | $9.04 million; gross margin 11.2%, down from 12.5% |
| Earnings before taxes | $3.48 million | $6.23 million |
| Net earnings | $2.31 million, or $0.34 per share; up from $1.78 million, or $0.26 | $4.15 million, or $0.61 per share; up from $3.22 million, or $0.47 |
| Operating cash flow | Not separately presented | $14.23 million, versus $0.91 million |
| Cash and cash equivalents | $19.56 million at September 30, versus $7.21 million at March 31 | |
| Liquidity | Working capital of $48.14 million; current ratio 5.7 |
Six-month sales growth reflected higher volume and selling prices: shipments rose to approximately 96,000 tons from 79,000, and average selling price increased to about $847 per ton from $740. Costs per ton also rose, and the company said it could not pass all higher material costs to customers. No debt balance is reported on the balance sheet; the company said it had no significant term borrowing plans.
Segments and changes versus prior periods
- Tubular: Six-month sales increased about $16.6 million, supported by shipments rising to approximately 59,000 tons from 44,000. Segment operating margin declined to 15.6% from 19.0% as material cost increases were not fully passed through. Quarterly margin was 14.7%, versus 19.0%.
- Coil: Six-month sales increased about $5.8 million. Shipments rose to approximately 37,000 tons from 35,000, while the average selling price increased to about $852 per ton from $723. Management described demand as soft and coil operations as producing no or minimal operating income over the six-month periods.
- For the quarter, sales increased $12.69 million and gross profit increased $1.00 million year over year. Quarterly shipments increased to approximately 50,000 tons from 40,000, while average selling price rose to about $841 from $730 per ton.
- Cash from operations improved substantially, driven principally by an $8.42 million inventory reduction. Inventory fell to $26.26 million from $34.68 million at March 31. Investing activities used $0.24 million, mainly for capital expenditures; financing activities used $1.63 million for dividends.
Outlook, risks and notable items
- Management said cash flows and borrowing capacity were adequate for expected cash requirements over the next 24 months; it provided no specific earnings or sales guidance.
- The Decatur, Alabama coil facility continued to incur operating losses: approximately $566,000 for the six-month period and $320,000 for the quarter. Management expected losses to continue until coil demand improves.
- Management cited soft durable-goods demand and said coil-market improvement depended on a stronger U.S. economy and better demand. It also identified steel demand and pricing, product prices, and execution of operating plans as factors that could cause actual results to differ from expectations.
- The company relies primarily on Nucor Steel for coil inventory and on U.S. Steel Tubular Products for tubular products and pipe-manufacturing materials; U.S. Steel is also a major customer. Management warned that losing either relationship could materially harm the business and gave no assurance about future supply or orders.
- LIFO inventory quantities were reduced during the period and expected to be replaced by March 31, 2012. A $30,981 deferred credit was recorded for replacement cost exceeding LIFO cost; quarterly LIFO inventory valuation depends on estimates of year-end quantities.
- Dividends declared were $0.13 per share for the quarter and $0.26 per share for six months, up from $0.08 and $0.12, respectively, in the prior-year periods.
Key facts for investors to verify
- Whether steel material costs can be passed through to customers and gross margins stabilize.
- Whether coil and tubular demand, including demand from durable-goods and energy markets, improves.
- Continuity of supply and customer orders from Nucor and U.S. Steel Tubular Products.
- Whether inventory reductions and resulting operating cash flow are sustainable, and whether LIFO inventory is replaced as expected.
- Progress toward reducing Decatur facility losses and the company’s ability to fund operations and dividends without significant borrowing.