FRD

Business Context and Reporting Period

Company: Friedman Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company manufactures and distributes steel coil and tubular products. Operations are divided into two segments: Coil and Tubular. The reporting period was significantly impacted by the U.S. economic downturn, resulting in extremely soft market conditions for durable goods and energy-related products.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Decline: Net sales decreased by approximately $102.3 million (78%) compared to the prior year period. This was driven by a substantial drop in volume (tons sold declined from ~144,000 to ~50,000) and lower average selling prices (from ~$909/ton to ~$571/ton).
• Profitability Reversal: The Company reported a net loss of $369,000 for the six months ended September 30, 2009, compared to a net profit of $9.4 million in the prior year. Gross profit margins contracted significantly from 13.9% to 4.3%.
• Segment Performance:
  • Coil Segment: Sales dropped ~$31.5 million. The segment continued to operate at a loss, though the loss as a percentage of sales improved slightly from 3.6% to 1.9%.
  • Tubular Segment: Sales dropped ~$70.9 million. Operating profit margins fell from 22.7% to 5.3% due to reduced orders from major customer U.S. Steel Tubular Products Inc. (USS) and general market weakness.
• Liquidity Improvement: Despite the operating loss, cash and cash equivalents increased by $4.2 million to $21.1 million, primarily due to reductions in accounts receivable and inventory levels to match lower sales volumes.

Outlook, Risks, and Management Commentary

• Market Outlook: Management expects market conditions for both coil and tubular products to remain soft until the U.S. economy recovers and demand for durable goods and energy products improves.
• Operational Adjustments: The Company has downsized its tubular division to align with current operations. The new coil facility in Decatur, Alabama, continues to produce operating losses (~$850,000 for the six-month period) and is expected to remain unprofitable until demand improves.
• Supplier/Customer Concentration Risk:
  • Nucor Steel Company (NSC): Primary supplier for coil inventory. Loss of NSC could have a material adverse effect.
  • U.S. Steel Tubular Products Inc. (USS): Primary supplier and major customer for tubular products. USS reduced orders significantly starting in December 2008 and idled a plant in February 2009. The Company has received few orders since then.
• Debt and Credit Facilities: The Company has a $10 million revolving credit facility expiring April 1, 2010, with no borrowings outstanding. Due to the current lending environment, the Company has chosen not to renew the revolver at this time but believes its strong balance sheet and cash flows are adequate to fund operations for the next 24 months.
• Inventory Accounting: LIFO inventories were reduced during the period. A deferred credit of $111,052 was recorded to reflect replacement costs in excess of LIFO cost, with replacement expected by March 31, 2010.

Investor Verification Checklist

• Customer Concentration: Verify the current status of orders from U.S. Steel Tubular Products Inc. (USS) and the impact of their plant idling on future revenue.
• Supplier Reliance: Assess the risk associated with reliance on Nucor Steel Company (NSC) for coil inventory supply.
• Credit Facility Renewal: Monitor the Company's ability to renew or extend its $10 million revolving credit facility upon expiration in April 2010 given the tight lending environment.
• New Facility Viability: Track the performance of the Decatur, Alabama coil facility to determine when it might reach profitability.
• Inventory Valuation: Confirm the replacement of LIFO inventory layers by March 31, 2010, to avoid potential tax or cost-of-goods-sold impacts.