Friedman Industries Inc Reports Operating Results (10-Q)

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Aug 13, 2009
Friedman Industries Inc (FRD, Financial) filed Quarterly Report for the period ended 2009-06-30.

FRIEDMAN INDUSTRIES is engaged in the steel processing and distribution business. Friedman has two product groups: coil processing and tubular products. Co. purchases domestic and foreign hot-rolled steel coils processes the coils into steel sheet and plate and sells these products on a wholesale rapid- delivery basis in competition with steel mills importers and steel service centers. Co. also processes customer-owned coils on a fee basis. Friedman Industries Inc has a market cap of $41.9 million; its shares were traded at around $6.16 with a P/E ratio of 3.1 and P/S ratio of 0.2. The dividend yield of Friedman Industries Inc stocks is 2%. Friedman Industries Inc had an annual average earning growth of 7.2% over the past 10 years.

Highlight of Business Operations:

During the three months ended June 30, 2009, sales, costs of goods sold and gross profit decreased $47,352,477, $39,875,314 and $7,477,163, respectively, from the comparable amounts recorded during the three months ended June 30, 2008. The decrease in sales was related primarily to a substantial decrease in tons sold. Tons sold declined from approximately 76,000 tons in the 2008 quarter to approximately 22,000 tons in the 2009 quarter. Average per ton selling prices declined as well. The average per ton selling price decreased from $781 per ton in the 2008 quarter to $564 per ton in the 2009 quarter. The decrease in costs of goods sold was related primarily to the decline in tons sold and a decrease in average per ton cost which declined from approximately $675 per ton in the 2008 quarter to $537 in the 2009 quarter. Gross profit was adversely affected by the decrease in tons sold and a substantial reduction in margins. Gross profit as a percentage of sales decreased from approximately 13.5% in the 2008 quarter to approximately 4.8% in the 2009 quarter. During the 2008 quarter, the Company experienced strong market conditions for its tubular products and recorded one of the most profitable quarters in Company history. During the 2009 quarter, the Companys operations continued to be adversely affected by extremely soft market conditions for durable goods and energy related products resulting from the significant downturn in the U.S. economy.

Coil product segment sales decreased approximately $18,996,000 during the 2009 quarter. This decrease resulted primarily from a decrease in tons sold as coil tonnage shipped declined from approximately 31,000 tons in the 2008 quarter to approximately 13,000 tons in the 2009 quarter. Also, the average per ton selling price declined from approximately $841 per ton in the 2008 quarter to $525 in the 2009 quarter. Coil operating profit as a percentage of coil segment sales decreased from approximately 2.2% in the 2008 quarter to 0.6% in the 2009 quarter. The Company believes that market conditions for coil products will remain soft until the U.S. economy improves and generates improved demand for durable goods.

Tubular product segment sales decreased approximately $28,357,000 during the 2009 quarter. This decrease primarily resulted from a decrease in tons sold which declined from approximately 45,000 tons in the 2008 quarter to approximately 8,000 tons sold in the 2009 quarter. The average per ton selling price of tubular products decreased from $739 per ton in the 2008 quarter to $627 per ton in the 2009 quarter. Tubular product segment operating profits as a percentage of segment sales were approximately 20.5% and 1.7% in the 2008 and 2009 quarters, respectively. During the 2008 quarter, market conditions for tubular products were strong and the Company recorded one of its most profitable quarters in Company history. In contrast, extremely soft market conditions were experienced in the 2009 quarter. The Company believes that market conditions will remain soft until the U.S. economy recovers and generates improved demand for tubular products.

The Company remained in a strong, liquid position at June 30, 2009. Current ratios were 9.5 and 12.7 at June 30, 2009 and March 31, 2009, respectively. Working capital was $39,234,903 at June 30, 2009, and $39,320,364 at March 31, 2009.

The Company has an arrangement with a bank which provides for a revolving line of credit facility (the revolver). Pursuant to the revolver, which expires April 1, 2010, the Company may borrow up to $10 million at an interest rate of the banks prime rate or 1.5% over LIBOR. The Company uses the revolver to support cash flow and will borrow and repay the note as working capital is required. At June 30, 2008 and 2009, the Company had no borrowings outstanding under the revolver. At March 31, 2008, the Company owed $6,600,000 pursuant to the revolver at an average interest rate of approximately 4.4%. These loans were paid off in April and May 2008.

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. One such accounting policy which requires significant estimates and judgments is the valuation of LIFO inventories in the Companys quarterly reporting. The quarterly valuation of inventory requires estimates of the year end quantities which is inherently difficult. Historically, these estimates have been materially correct. At June 30, 2008, LIFO inventories were reduced and were partially replaced by March 31, 2009. A deferred credit of $2,456,108 was recorded at June 30, 2008, to reflect the replacement costs in excess of the LIFO cost associated with liquidated inventory. As replacement cost and liquidated cost of material were approximately equal, no significant gain or loss from this liquidation was recorded in fiscal 2009. In the quarter ended June 30, 2009, LIFO inventories were reduced and are expected to be replaced by March 31, 2010. A deferred credit of $496,702 was recorded at June 30, 2009, to reflect the replacement cost in excess of the LIFO cost.

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