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| FRD > SEC Filings for FRD > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
Results of Operations
Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
During the nine months ended December 31, 2008, sales, costs of goods sold
and gross profit increased $57,108,180, $38,661,539 and $18,446,641,
respectively, from the comparable amounts recorded during the nine months ended
December 31, 2007. The increase in sales was related primarily to an increase in
average selling prices. The average per ton selling price increased from
approximately $622 per ton in the 2007 period to approximately $950 per ton in
the 2008 period. Total tons shipped declined from approximately 208,000 tons in
the 2007 period to 197,000 tons in the 2008 period. The increase in costs of
goods sold was primarily related to an increase in the average per ton cost of
goods which increased from approximately $583 per ton in the 2007 period to $815
per ton in the 2008 period. The increase in gross profit in the 2008 period was
related to substantially improved margins earned on pipe sales. Gross profit as
a percentage of sales increased from approximately 6.3% in the 2007 period to
14.2% in the 2008 period. The Company experienced strong demand for its pipe
products in the 2008 period and margins improved significantly. In addition, the
Company benefited from lower cost inventory sold at substantially improved
selling prices.
Coil product segment sales increased approximately $3,010,000 during the 2008
period. This increase resulted primarily from an increase in the average per ton
selling price which increased from approximately $648 per ton in the 2007 period
to $950 per ton in the 2008 period. In the 2008 period, the Company experienced
a loss of approximately $559,000 related to the coil operations compared to a
profit of $1,938,000 in the 2007 period. Coil products are used primarily in
durable goods and demand for such products was depressed in the 2008 period. As
a result, tons sold declined from approximately 92,000 tons during the 2007
period to approximately 66,000 tons in the 2008 period. Also, the Company
incurred a significant increase in cost of coil products during the 2008 period.
Average per ton cost increased from approximately $616 per ton in the 2007
period to $939 per ton in the 2008 period. The Company was unable to pass all of
this increased cost to its customers in the 2008 period. 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.
In the 2008 period, LIFO inventory of coil products was reduced and is not
expected to be replaced by March 31, 2009. Cost of material related to this
liquidation had a cost approximately the same as the current replacement cost.
Accordingly, this liquidation had no significant impact on earnings in the 2008
period.
In August 2008, the Company began operations at the new coil facility located
at Decatur, Alabama. This operation produced a loss of approximately $555,000
during the 2008 period. The Company expects that this facility will continue to
produce a loss during the ramp up period and until demand for coil products
improves.
The Company is primarily dependent on Nucor Steel Company ("NSC") for its
supply of coil inventory. NSC continues to supply the Company with steel coils
in amounts that are adequate for the Company's purposes. Loss of NSC as a
supplier could have an adverse effect on the Company's business.
Tubular product segment sales increased approximately $54,099,000 during the
2008 period. This increase resulted from both an increase in average selling
prices and an increase in tons sold. The average selling price per ton increased
from approximately $602 per ton in the 2007 period to $950 per ton in the 2008
period. The Company sold approximately 116,000 tons of pipe in the 2007 period
compared to approximately 132,000 tons in the 2008 period. Tubular product
segment operating profit as a percentage of segment sales improved from 6.3% in
the 2007 period to 20.1% in the 2008 period. The Company experienced strong
market conditions for its pipe products in the 2008 period and margins improved
significantly. In addition, the Company benefited from lower cost inventory sold
at substantially improved selling prices.
Beginning in December 2008, the Company experienced a significant decline in
average selling prices for finished tubular products. As a result, the Company
recorded an adjustment of approximately $1,436,000 to reduce the value of
finished tubular products to reflect the required lower of cost or market
valuation at December 31, 2008. This adjustment had the effect of reducing
earnings before income taxes by $1,436,000 during the 2008 period. The Company
believes that the decline in average selling prices is a result of lack of
demand related primarily to the decline in the U. S. economy.
U. S. Steel Tubular Products, Inc. ("USS"), an affiliate of United States
Steel Corporation, is the Company's primary supplier of tubular products and
coil material used in pipe manufacturing and is a major customer of finished
tubular products. In the 2008 period, USS accounted for approximately 30% of
total Company sales. Certain finished tubular products are used in the energy
business and are manufactured by the Company and sold to USS. Beginning in
December 2008 and continuing in the quarter ending March 31, 2009, USS reduced
orders for these finished tubular products. The Company expects that reduced
orders for finished tubular products will continue until the U. S. economy
recovers and generates improved demand for these products. Loss of USS as a
supplier or customer could have an adverse effect on the Company's business.
During the 2008 period, general, selling and administrative costs increased
$1,903,183 from the amount recorded during the 2007 period. This increase was
related primarily to increases in commissions and bonuses associated with the
increase in earnings.
Income taxes increased $5,694,758 from the comparable amount recorded during
the 2007 period. This increase was primarily related to the increase in earnings
before taxes. Effective tax rates were 34.4% and 34.1% in the 2008 and 2007
periods, respectively. The Company incurred an increase in state income taxes in
the 2008 period.
Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
During the three months ended December 31, 2008, sales, costs of goods sold
and gross profit increased $18,120,425, $11,682,894 and $6,437,531,
respectively, from the comparable amounts recorded during the three months ended
December 31, 2007. The sales increase was primarily related to an increase in
the average selling price which increased from approximately $601 per ton in the
2007 quarter to approximately $1,061 per ton in the 2008 quarter. In the 2007
quarter, the Company sold approximately 63,000 tons compared to approximately
57,000 tons in the 2008 quarter. The increase in costs of goods sold was
primarily related to an increase in the average per ton cost of goods which
increased from approximately $570 per ton in the 2007 quarter to $902 per ton in
the 2008 quarter. The increase in gross profit in the 2008 quarter was related
to substantially improved margins earned on pipe sales. Gross profit as a
percentage of sales increased from approximately 5.2% in the 2007 quarter to
15.0% in the 2008 quarter. The Company experienced strong demand for its pipe
products in the 2008 quarter and margins improved significantly. In addition,
the Company benefited from lower cost inventory sold at substantially improved
selling prices.
Coil product segment sales decreased approximately $5,227,000 during the 2008
quarter. This decrease resulted from a decrease in tons sold that was partially
offset by an increase in the average per ton selling price. The average selling
price per ton increased from approximately $620 per ton in the 2007 quarter to
$954 per ton in the 2008 quarter. Tons sold declined from approximately 31,000
tons during the 2007 quarter to approximately 15,000 tons in the 2008 quarter.
Operating profit in the 2008 quarter increased approximately $730,000. Coil
operations benefited from a significant reduction in the cost of coil material
in the 2008 quarter which had the effect of reducing the current cost applied to
revenue. Coil products are used primarily in durable goods and demand for such
products continued to be depressed in the 2008 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.
In August 2008, the Company began operations at the new coil facility located
at Decatur, Alabama. This operation produced a loss of approximately $465,000
during the 2008 quarter. The Company expects that this facility will continue to
produce a loss during the ramp up period and until demand for coil products
improves.
The Company is primarily dependent on Nucor Steel Company ("NSC") for its
supply of coil inventory. NSC continues to supply the Company with steel coils
in amounts that are adequate for the Company's purposes. Loss of NSC as a
supplier could have an adverse effect on the Company's business.
Tubular product segment sales increased approximately $23,348,000 during the
2008 quarter. This increase resulted from both an increase in average selling
prices and an increase in tons sold. The average selling price per ton increased
from approximately $582 per ton in the 2007 quarter to $1,102 per ton in the
2008 quarter. The Company sold approximately 32,000 tons pipe in the 2007
quarter compared to approximately 38,000 tons in the 2008 quarter. Tubular
product segment operating profits as a percentage of segment sales improved from
4.7% in the 2007 quarter to 15.0% in the 2008 quarter. The Company experienced
strong market conditions for its pipe products in the 2008 quarter and margins
improved significantly. In addition, the Company benefited from lower cost
inventory sold at substantially improved selling prices.
Beginning in December 2008, the Company experienced a significant decline in
average selling prices for finished tubular products. As a result, the Company
recorded an adjustment of approximately $1,436,000 to reduce the value of
finished tubular products to reflect the required lower of cost or market
valuation at December 31, 2008. This adjustment had the effect of reducing
earnings before income taxes by $1,436,000 during the 2008 quarter. The Company
believes that the decline in average selling prices is a result of a lack of
demand related primarily to the decline in the U. S. economy.
U. S. Steel Tubular Products, Inc. ("USS"), an affiliate of United States
Steel Corporation, is the Company's primary supplier of tubular products and
coil material used in pipe manufacturing and is a major customer of finished
tubular products. Certain finished tubular products are used in the energy
business and are manufactured by the Company and sold to USS. Beginning in
December 2008 and continuing in the quarter ending March 31, 2009, USS reduced
orders for these finished tubular products. The Company expects that reduced
orders for finished tubular products will continue until the U. S. economy
recovers and generates improved demand for these products. Loss of USS as a
supplier or customer could have an adverse effect on the Company's business.
During the 2008 quarter, general, selling and administrative costs increased
$561,538 from the amount recorded during the 2007 quarter. This increase was
related primarily to increases in commissions and bonuses associated with the
increase in earnings.
Income taxes increased $1,942,744 from the comparable amount recorded during
the 2007 quarter. This increase was primarily related to the increase in
earnings before taxes. Effective tax rates were 33.5% and 34.7% in the 2008 and
2007 quarters, respectively. In the 2008 quarter, the Company benefited from a
domestic manufacturing credit allowed for federal income taxes and from a
reduction in state taxes.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company remained in a strong, liquid position at December 31, 2008.
Current ratios were 4.0 and 3.3 at December 31, 2008 and March 31, 2008,
respectively. Working capital was $39,290,067 at December 31, 2008 and
$34,638,228 at March 31, 2008.
During the nine months ended December 31, 2008, the Company maintained assets
and liabilities at levels it believed were commensurate with operations. Changes
in current assets and liabilities during the 2008 period were related primarily
to the ordinary course of business of the Company. During the 2008 period, cash
increased primarily as the result of net income and a reduction in accounts
receivable and inventories. Cash was used primarily to reduce accounts payable,
pay off long term debt, purchase property and equipment and pay cash dividends.
The Company expects to continue to monitor, evaluate and manage balance sheet
components depending on changes in market conditions and the Company's
operations.
During the nine months ended December 31, 2008, the Company purchased
approximately $2,000,000 in fixed assets. These assets were related primarily to
equipment associated with the new coil operating facility located in Decatur,
Alabama which began operations in August 2008. At the Decatur facility, the
Company operates a steel temper mill and a steel cut-to-length line including a
leveling line. At December 31, 2008, the Company had invested approximately
$10,000,000 in this facility.
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 the bank's
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
December 31, 2008, 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 4.4%. These loans were paid off in April and May 2008.
The Company has in the past and may in the future borrow funds on a term
basis to build or improve facilities. The Company currently has no plans to
borrow any significant amount of funds on a term basis.
Notwithstanding the current market conditions, the Company believes its cash
flows from operations and borrowing capability under its revolver are adequate
to fund its expected cash requirements for the next twenty-four months.
CRITICAL ACCOUNTING POLICIES
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
Company's 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. On an ongoing basis,
the Company evaluates estimates and judgments. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1996) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, future results of operations,
future production capacity, product quality and proposed expansion plans.
Forward-looking statements may be made by management orally or in writing
including, but not limited to, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of the
Company's filings with the Securities and Exchange Commission under the
Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results
and trends in the future may differ materially depending on a variety of factors
including, but not limited to, changes in the demand and prices of the Company's
products, changes in the demand for steel and steel products in general and the
Company's success in executing its internal operating plans, including any
proposed expansion plans.
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