1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FROM THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-7521 FRIEDMAN INDUSTRIES, INCORPORATED (Exact name of registrant as specified in its charter) <TABLE> <S> <C> TEXAS 74-1504405 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) </TABLE> 4001 HOMESTEAD ROAD, HOUSTON, TEXAS 77028-5585 (Address of principal executive office zip code) Registrant's telephone number, including area code (713) 672-9433 - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No At December 31, 1999, the number of shares outstanding of the issuer's only class of stock was 7,188,213 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> DECEMBER 31, 1999 MARCH 31, 1999 ----------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 136,478 $ 3,798,935 Accounts receivable, less allowance for doubtful accounts ($7,276 at December 31, 1999 and March 31, 1999, respectively).......................................... 10,392,403 8,709,728 Inventories -- Note B..................................... 26,695,416 19,906,170 Prepaid expenses and other current assets................. 167,733 119,207 ------------ ------------ Total Current Assets.............................. 37,392,030 32,534,040 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 221,543 221,543 Buildings and improvements................................ 3,346,911 3,317,088 Machinery and equipment................................... 16,031,180 15,879,803 Less allowance for depreciation........................... (11,908,688) (11,127,089) ------------ ------------ 7,690,946 8,291,345 OTHER ASSETS Cash value of officers' life insurance.................... 625,081 197,992 ------------ ------------ $ 45,708,057 $ 41,023,377 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 8,642,408 $ 4,839,560 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 359,403 410,563 Contribution to profit-sharing plan....................... 189,000 252,000 Income taxes payable...................................... -- 68,522 Employee compensation and related expenses................ 183,256 387,393 ------------ ------------ Total Current Liabilities......................... 10,174,067 6,758,038 LONG-TERM DEBT, less current portion........................ 6,800,000 6,400,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 377,560 329,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 7,188,213 at December 31, 1999 and 6,828,387 at March 31, 1999....................................... 7,188,213 6,828,387 Additional paid-in capital................................ 26,877,738 25,725,195 Retained deficit.......................................... (5,822,521) (5,130,803) ------------ ------------ Total Stockholders' Equity........................ 28,243,430 27,422,779 ------------ ------------ $ 45,708,057 $ 41,023,377 ============ ============ </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales................................ $29,894,914 $26,938,495 $85,956,294 $98,039,953 Costs and expenses: Costs of goods sold.................... 28,010,830 24,806,991 79,639,615 90,119,844 General, selling and administrative costs............................... 1,059,057 1,035,859 3,305,224 3,567,453 Interest............................... 119,814 112,042 354,870 367,755 ----------- ----------- ----------- ----------- 29,189,701 25,954,892 83,299,709 94,055,052 Interest and other income................ (52,698) (49,277) (130,811) (135,603) ----------- ----------- ----------- ----------- Earnings before federal income taxes..... 757,911 1,032,880 2,787,396 4,120,504 Provision (benefit) for federal income taxes: Current................................ 241,690 366,180 899,716 1,445,972 Deferred............................... 16,000 (15,000) 48,000 (45,000) ----------- ----------- ----------- ----------- 257,690 351,180 947,716 1,400,972 ----------- ----------- ----------- ----------- Net earnings............................. $ 500,221 $ 681,700 $ 1,839,680 $ 2,719,532 =========== =========== =========== =========== Average number of common shares outstanding: Basic.................................. 7,188,213 7,167,706 7,188,213 7,167,706 Diluted................................ 7,188,213 7,207,145 7,188,213 7,207,145 Net earnings per share: Basic.................................. $ 0.07 $ 0.10 $ 0.26 $ 0.38 Diluted................................ $ 0.07 $ 0.09 $ 0.26 $ 0.38 Cash dividends declared per common share.................................. $ 0.05 $ 0.07 $ 0.15 $ 0.215 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 1,839,680 $ 2,719,532 Adjustments to reconcile net earnings to cash provided by operating activities:.................................. Depreciation........................................... 781,600 517,428 Provision for deferred taxes........................... 48,000 (45,000) Decrease (increase) in operating assets:.................. Accounts receivable.................................... (1,682,675) 4,967,821 Inventories............................................ (6,789,246) 1,016,823 Other.................................................. (48,526) (397,040) Increase (decrease) in operating liabilities:............. Accounts payable and accrued expenses.................. 3,802,848 (6,195,267) Contribution to profit-sharing plan.................... (63,000) (69,400) Employee compensation and related expenses............. (204,137) (376,837) Federal income taxes................................... (68,522) (344,465) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..................................... (2,383,978) 1,793,595 INVESTING ACTIVITIES........................................ Purchase of property, plant and equipment................. (181,200) (1,758,212) Decrease (increase) in cash value of officers' life insurance.............................................. (427,089) (112,812) ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES..................................... (608,289) (1,871,024) FINANCING ACTIVITIES........................................ Cash dividends paid....................................... (1,130,628) (1,478,674) Principal payments on long-term debt...................... (2,600,000) (3,600,000) Proceeds from borrowings of long term debt................ 3,000,000 3,833,333 Exercise of stock options................................. 60,438 18,413 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... (670,190) (1,226,928) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (3,662,457) (1,304,357) Cash and cash equivalents at beginning of period.......... 3,798,935 1,361,693 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 136,478 $ 57,336 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED NINE MONTHS ENDED DECEMBER 31, 1999 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed, consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended March 31, 1999. NOTE B -- INVENTORIES Coil inventory consists primarily of raw materials. Tubular inventory is comprised of both raw materials and finished goods. NOTE C -- CASH VALUE OF OFFICERS' LIFE INSURANCE During the nine months ended December 31, 1999, the Company repaid borrowings against the cash surrender value of officers' life insurance ("CSV"). A total of $364,619 was repaid which had the effect of increasing CSV by such amount. NOTE D -- SEGMENT INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- ----------------- 1999 1998 1999 1998 -------- -------- ------- ------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> Net sales Coil processing...................................... $18,458 $19,607 $57,186 $66,553 Tubular.............................................. 11,437 7,332 28,770 31,487 ------- ------- ------- ------- Total net sales.............................. $29,895 $26,939 85,956 $98,040 ======= ======= ======= ======= Operating profit Coil processing...................................... $ 233 $ 1,466 2,345 $ 4,035 Tubular.............................................. 1,030 37 2,278 2,031 ------- ------- ------- ------- Total operating profit....................... 1,263 1,503 4,623 6,066 Corporate expenses................................... 438 408 1,612 1,713 Interest expense..................................... 120 112 355 368 Interest & other income.............................. (53) (50) (131) (136) ------- ------- ------- ------- Total earnings before taxes.................. $ 758 $ 1,033 $ 2,787 $ 4,121 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, ----------------- 1999 1998 ------- ------- (IN THOUSANDS) <S> <C> <C> Segment assets Coil processing........................................... $28,989 $26,314 Tubular................................................... 15,858 13,886 ------- ------- 44,847 40,200 Corporate assets.......................................... 861 301 ------- ------- Total assets...................................... $45,708 $40,501 ======= ======= </TABLE> 4
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1998 During the nine months ended December 31,1999, sales, costs of goods sold and gross profit declined $12,083,659, $10,480,229, and $1,603,430, respectively, from the comparable amounts recorded during the nine months ended December 31, 1998. The Company recorded decreased sales in both coil and tubular product lines. Coil sales were affected by a decline in volume primarily associated with softer demand for these products. In addition, coil and tubular sales decreased as the result of an aggregate decline of approximately 11% in the average selling price per ton. This reduction in average selling price was primarily associated with reduced costs of coil and tubular products. The decline in costs of goods sold was principally related to the sales decrease experienced during the 1999 period. The decrease in gross profit was primarily associated with the Company's coil operations which were adversely affected by the decline in volume, softer market conditions and reduced margins earned on sales. During the quarter ended December 31, 1999, the Company incurred significant increases in costs of coil products and these costs could not be immediately passed along to customers. Federal income taxes declined $453,256 from the amount recorded during the 1998 period. This decrease was attributable to the decline in earnings before taxes. Effective tax rates were the same for both periods. THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998 During the three months ended December 31, 1999, sales and costs of goods sold increased $2,956,419 and $3,203,839, respectively, from the comparable amounts recorded during the three months ended December 31, 1998, the effect of which produced a decline in gross profit of $247,420. The increases in sales and costs of goods sold were primarily related to increased sales of tubular products. Market conditions for tubular products improved substantially during the 1999 quarter. The net decline in gross profit of $247,420 resulted from an increase in gross profit on tubular operations of $1,021,897 and a decrease in gross profit on coil operations of $1,269,317. Coil operations were adversely affected by reduced volume, softer market conditions and reduced margins earned on sales. During the 1999 quarter, the Company incurred significant increases in costs of coil products and these costs could not be immediately passed along to customers. Federal income taxes declined $93,490 from the amount recorded during the 1998 quarter. This decrease was attributable to the decline in earnings before taxes. The effective tax rates were the same for both periods. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at December 31, 1999. Current ratios were 3.7 and 4.8 at December 31, 1999 and March 31, 1999, respectively. Working capital was $27,217,963 at December 31, 1999 and $25,776,002 at March 31, 1999. The Company has a credit arrangement with a bank which provides for a revolving line of credit facility (the "revolving facility") and a term credit facility (the "term facility"). Pursuant to the revolving facility which expires April 1, 2002, the Company may borrow up to $8 million at an interest rate no greater than the bank's prime rate. At December 31, 1999, the Company had borrowings outstanding under the revolving facility of $5 million. The amount outstanding under the term facility bears interest at a stated rate of LIBOR plus 1.25% and requires quarterly principal payments of $200,000 plus accrued interest through March 1, 2003. In July 1997, the Company entered into a swap transaction with the bank pursuant to which it exchanged the term facility's LIBOR-based interest rate obligation for a fixed interest rate obligation of 8% to remain in effect for the entire term of the term facility. As of December 31, 1999, the principal amount of indebtedness outstanding under the term facility was $2.6 million. 5
7 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 and product quality. 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, the success of the Company's capital improvements at its Hickman, Arkansas facility, changes in the demand and prices for the Company's products and changes in the demand for steel and steel products in general, and the Company's success in executing its internal operations plans. EFFECT OF YEAR 2000 ISSUE The Year 2000 issue is the result of computer programming being written using two digits rather than four to define the applicable year. Any of the Company's systems, as well as those of key vendors, payors and customers, that have date sensitive logic may interpret a date using "00" as the year 1900 rather than 2000. This may cause inaccurate processing or possible system failure and may potentially disrupt operations. This disruption may result in, among other things, a temporary inability to process transactions, send bills for services or engage in similar normal business activities. The Year 2000 issue did not result in significant operational or financial problems for the Company. The Company is not aware of any significant problems experienced by its suppliers, third-party payors or customers as a result of the Year 2000 issue, but the Company will continue to communicate with such parties regarding any possible problems. The foregoing statements are intended to be and hereby are designated "Year 2000 Readiness Disclosure Statements" within the meaning of the Year 2000 Information and Readiness Disclosure Act. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. CHANGES IN SECURITIES a). Not applicable b). Not applicable c). Not applicable d). Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES a). Not applicable b). Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a). Exhibits 27.1 -- Financial Data Schedule b). Reports on Form 8-K None 6
8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRIEDMAN INDUSTRIES, INCORPORATED Date February 11, 2000 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date February 11, 2000 By /s/ HAROLD FRIEDMAN ------------------------------------ Harold Friedman, Vice Chairman 7
9 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 27.1 -- Financial Data Schedule. </TABLE>