Business context and reporting period
Friedman Industries, Inc. filed this unaudited Form 10-Q for the quarter ended December 31, 2012, the third quarter of its fiscal year, and the nine months then ended. The company reports Coil and Tubular product segments. All comparisons below are with the corresponding 2011 periods unless otherwise noted.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $31.72 million | $36.99 million | $104.49 million | $117.96 million |
| Gross profit | $2.88 million | $3.93 million | $11.31 million | $12.98 million |
| Gross margin | 9.1% | 10.6% | 10.8% | 11.0% |
| Earnings before taxes | $1.72 million | $2.70 million | $7.29 million | $8.93 million |
| Net earnings | $1.15 million | $1.80 million | $4.89 million | $5.95 million |
| Diluted EPS | $0.17 | $0.26 | $0.72 | $0.87 |
- Quarterly sales fell 14.2%; nine-month sales fell 11.4%. Management attributed the declines to lower shipment volumes and average selling prices.
- For the nine months, tons sold declined to approximately 139,000 from 143,000, while average selling price fell to about $750 per ton from $824. Average cost per ton also declined, to about $669 from $733.
- Quarterly Coil operating profit was approximately $104,000, down from $446,000; Tubular operating profit was $2.015 million, versus $2.669 million. For nine months, Coil operating profit rose to $732,000 from $446,000, while Tubular operating profit decreased to $8.437 million from $10.452 million.
- Nine-month operating cash flow was $11.24 million, compared with $15.16 million. Cash increased by $4.72 million during the period to $16.60 million; cash was $19.50 million at December 31, 2011.
- Capital expenditures were $466,000. Cash dividends paid were $6.05 million, versus $2.52 million a year earlier.
Financial position and liquidity
At December 31, 2012, cash was $16.60 million, current assets were $57.03 million, and current liabilities were $6.18 million. Working capital was $50.86 million and the current ratio was 9.2, compared with $51.15 million and 4.7 at March 31, 2012. Total assets were $69.73 million and stockholders’ equity was $62.25 million. The balance sheet reports no borrowings or other debt; the company paid no interest during either nine-month period.
Operating cash benefited from a $9.60 million reduction in receivables and a $3.85 million reduction in inventory, partly offset by a $7.46 million decrease in accounts payable and accrued expenses. Management said cash flows and borrowing capability were adequate for expected cash requirements for the next 24 months. The company had no current plans for significant term borrowing.
Changes, outlook, risks and unusual items
- Quarterly gross margin declined to 9.1% from 10.6%, and nine-month margin eased to 10.8% from 11.0%. Management linked lower earnings mainly to weaker sales and segment demand.
- The company declared and paid a special cash dividend of $0.50 per share in the December quarter. Cash dividends declared per share were $0.63 for the quarter and $0.89 for the nine months, versus $0.13 and $0.39 in the prior-year periods.
- Management described Coil demand as soft due primarily to a weak U.S. economy, with improvement dependent on sustained, significant economic improvement. It associated softer Tubular demand with energy production.
- Nucor Steel Company is the primary Coil supplier; management reported adequate supply and did not anticipate a significant change, but warned that losing the supplier could materially harm the business. U.S. Steel Tubular Products is a primary supplier and a major customer; the company gave no assurance about future orders or material availability and warned that losing USS as either supplier or customer could materially harm the business.
- Forward-looking results are subject to changes in product and steel demand and prices, and the company’s execution of operating plans, including any expansion plans. No significant subsequent events requiring recognition or disclosure were reported.
- Quarterly LIFO inventory valuation requires estimates of year-end quantities; management said changes in LIFO valuation at December 31 were not significant.
Important facts for investors to verify
- Whether Coil and Tubular demand, shipment volumes, and selling prices stabilize or continue to weaken.
- The extent of the company’s dependence on Nucor and USS, including future supply availability and USS orders.
- Whether operating cash generation remains adequate as receivables, inventory, and payables fluctuate.
- The sustainability of the elevated dividend following the special $0.50-per-share payment.
- Future gross margins and Tubular segment profitability, which declined in the reported quarter.