1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 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, of 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 September 30, 1996, the number of shares outstanding of the issuer's only class of stock was 6,125,512 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> SEPTEMBER 30, MARCH 31, 1996 1996 ------------ ----------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents....................................... $20,105 $ 595,216 Accounts receivable, less allowance for doubtful accounts ($5,794 at September 30, 1996 and March 31, 1996, respectively)................................................ 8,986,876 9,423,204 Inventories -- Note B........................................... 20,350,792 17,391,625 Prepaid expenses and other current assets....................... 291,290 114,625 ------------ ----------- Total Current Assets.................................... 29,649,063 27,524,670 PROPERTY, PLANT AND EQUIPMENT Land............................................................ 198,021 198,021 Buildings and improvements...................................... 2,695,912 2,687,730 Machinery and equipment......................................... 11,706,794 11,699,234 Less allowance for depreciation................................. (9,579,873) (9,316,572) ------------ ----------- 5,020,854 5,268,413 OTHER ASSETS Cash value of officers' life insurance.......................... 43,731 19,903 ------------ ----------- $34,713,648 $32,812,986 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses..................... $5,720,874 $ 4,739,206 Current portion of long-term debt............................... 800,000 800,000 Dividends payable............................................... 306,959 291,709 Contribution to profit-sharing plan............................. 108,000 216,000 Federal income taxes payable.................................... 101,066 53,047 Employee compensation and related expenses...................... 425,314 310,565 ------------ ----------- Total Current Liabilities............................... 7,462,213 6,410,527 LONG-TERM DEBT, less current portion.............................. 5,000,000 5,400,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS...................... 113,000 113,000 DEFERRED INCOME TAXES............................................. 435,523 460,523 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,125,512 at September 30, 1996 and 5,834,195 at March 31, 1996.............................................. 6,125,512 5,834,195 Additional paid-in capital...................................... 22,336,517 21,444,360 Retained earnings............................................... (6,759,117) (6,849,619) ------------ ----------- Total Stockholders' Equity.............................. 21,702,912 20,428,936 ------------ ----------- $34,713,648 $32,812,986 ========== ========== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENT OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales................................. $29,486,754 $26,208,387 $58,238,233 $54,961,052 Costs and expenses Costs of goods sold..................... 26,956,145 24,433,119 53,085,111 50,919,317 General, selling and administrative costs................................ 978,013 789,582 2,084,978 1,713,371 Interest................................ 129,605 167,557 263,828 334,249 ----------- ----------- ----------- ----------- 28,063,763 25,390,258 55,433,917 52,966,937 Interest and other income................. (28,511) (21,291) (57,507) (31,994) ----------- ----------- ----------- ----------- Earnings before federal income taxes...... 1,451,502 839,420 2,861,823 2,026,109 Provision (benefit) for federal income taxes: Current................................. 506,010 297,902 998,019 713,877 Deferred................................ (12,500) (12,500) (25,000) (25,000) ----------- ----------- ----------- ----------- 493,510 285,402 973,019 688,877 ----------- ----------- ----------- ----------- Net earnings.............................. $ 957,992 $ 554,018 $ 1,888,804 $ 1,337,232 ========== ========== ========== ========== Net earnings per share -- Note D.......... $0.16 $0.09 $0.31 $0.22 ========== ========== ========== ========== Cash Dividends Common Stock -- per share dividend declared during periods (shares outstanding at record date: 6,125,512 in 1996 and 5,832,195 in 1995).. $0.05 $0.05 $0.10 $0.10 ========== ========== ========== ========== </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> SIX MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.................................................... $ 1,888,804 $ 1,337,232 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation................................................. 316,020 297,526 Provision for deferred taxes................................. (25,000) (25,000) Decrease (increase) in operating assets: Accounts receivable.......................................... 436,328 290,365 Inventories.................................................. (2,959,167) (1,327,828) Other........................................................ (176,665) (180,400) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses........................ 981,665 950,688 Contribution to profit-sharing plan.......................... (108,000) (100,000) Employee compensation and related expenses................... 114,749 13,941 Federal income taxes payable................................. 48,019 (14,658) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES........ 516,753 1,241,866 INVESTING ACTIVITIES Purchase of property, plant and equipment....................... (68,461) (398,791) (Increase) decrease in cash value of officers' life insurance -- Note C.......................................... (23,828) 689,320 ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES........ (92,289) 290,529 FINANCING ACTIVITIES Cash dividends paid............................................. (599,575) (571,025) Principal payments on long-term debt............................ (400,000) (2,200,000) Proceeds from borrowings of long term debt...................... 1,000,000 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES........ (999,575) (1,771,025) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (575,111) (238,630) Cash and cash equivalents at beginning of period................ 595,216 664,527 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 20,105 $ 425,897 ========== ========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED SEPTEMBER 30, 1996 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, 1996. 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 In July 1995, the Company borrowed $708,168 against the cash surrender value of officers' life insurance policies (the "borrowings"). The borrowings do not require specific repayment terms except that in case of a death, the borrowings will be deducted from the proceeds of the life insurance policy. The proceeds of the borrowings were used to reduce the term note. NOTE D -- EARNINGS PER SHARE Earnings per common and common equivalent share for the periods ended September 30, 1996 and September 30, 1995 are based on the weighted average number of common and common equivalent (stock options) shares outstanding as follows: <TABLE> <CAPTION> 1996 1995 --------- --------- <S> <C> <C> Common Stock: Shares outstanding during the entire period................. 5,834,195 5,554,858 Retroactive effect of stock dividends declared.............. 291,317 568,947 --------- --------- Weighted average number of common and common equivalent shares................................. 6,125,512 6,123,805 ========= ========= </TABLE> Earnings per share assuming full dilution for the quarters ended September 30, 1996 and 1995, are not presented because they are not materially dilutive. Stock options are not included in the above computations of common and common equivalent shares outstanding since their effect is not significant. 4
6 FRIEDMAN INDUSTRIES, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1995 During the six months ended September 30, 1996, net sales, costs of goods sold and gross profit increased $3,277,181, $2,165,794 and $1,111,387, respectively, from the comparable amounts recorded during the six months ended September 30, 1995. The increase in sales was primarily related to volume increases associated with coil and tubular operations. Both operations benefited from improved market conditions during the 1996 period. The increase in costs of goods sold primarily resulted from the increase in sales noted above. The increase in gross profit was principally related to improved margins and increased sales. Margin rates were 8.85% and 7.35% in the 1996 and 1995 periods, respectively. Management believes that stronger demand for the Company's products was the primary factor associated with the increase in margins. General, selling and administrative costs increased $371,607 from the amount recorded during the 1995 period. This increase was primarily related to increases in expenses associated with volume and/or earnings such as employee incentive bonuses and commissions, franchise taxes, contribution to profit sharing plan and other variable expenses. In addition, increases in rental costs and officer compensation relative to executive promotions contributed to the overall increase. Interest expense declined $70,421 from the amount recorded during the 1995 period. This decrease primarily resulted from a reduction in term debt and lower interest rates on a period-to-period basis. Interest and other income increased $25,513. This increase was primarily related to a gain on the sale of machinery and equipment. Federal income taxes increased $284,142 as a result of the increase in earnings before federal income taxes. Tax rates were the same during each period. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995 During the three months ended September 30, 1996, net sales, costs of goods sold and gross profit increased $3,278,367, $2,523,026 and $755,341 from the respective amounts recorded during the three months ended September 30, 1995. The sales and costs of goods sold increases were primarily related to volume increases associated with coil and tubular operations. The gross profit increase was principally related to improved margins (8.58% in the 1996 quarter and 6.77% in the 1995 quarter) and the above noted sales increase. Demand for coil and tubular products was stronger in the 1996 quarter when compared to the 1995 quarter and supported improved sales and margins. General, selling and administrative costs increased $188,431 from the comparable amount recorded in the 1995 quarter. This increase was primarily related to variable expenses associated with volume and/or earnings. Additionally, officer compensation relative to executive promotions increased during the 1996 quarter. Interest expense declined $37,952 from the amount recorded in the 1995 quarter. This decrease was principally related to a reduction in term debt and lower interest rates paid on borrowed funds in the 1996 quarter. Federal income taxes increased $208,108 as a result of the increase in earnings before federal income taxes. Effective tax rates were the same for each quarter. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at September 30, 1996. Current ratios were 4.0 and 4.3 at September 30, 1996, and March 31, 1996, respectively. Working capital was $22,186,850 at September 30, 1996, and $21,114,143 at March 31, 1996. The Company has a line of credit arrangement with 5
7 a bank whereby it may borrow up to $8,000,000. At September 30, 1996, borrowings of $4,000,000 had been made under this line of credit arrangement which expires April 1, 1998. In July 1995, the Company borrowed $708,168 against the cash surrender value of officers' life insurance policies and used such proceeds to reduce outstanding indebtedness under the Company's term note. See also Note C appearing herein. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES a). Not applicable b). Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES a). None b). Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held on August 30, 1996, the Company's shareholders elected seven directors to the Company's Board of Directors and approved the Friedman Industries, Incorporated 1996 Employee Stock Option Plan. The number of shares voted for and withheld with respect to the election of each director was as follows: <TABLE> <CAPTION> NAME SHARES VOTED FOR SHARES WITHHELD ------------------------------------------------------- ---------------- --------------- <S> <C> <C> Jack Friedman.......................................... 5,235,463 35,350 Harold Friedman........................................ 5,235,770 35,043 Charles W. Hall........................................ 4,994,793 276,020 Alan M. Rauch.......................................... 5,235,770 35,043 Hershel M. Rich........................................ 5,232,050 38,763 Henry Spira............................................ 5,231,510 39,303 Kirk K. Weaver......................................... 5,235,770 35,043 </TABLE> The number of shares voted for, against and abstain with respect to the 1996 Employee Stock Option Plan was as follows: <TABLE> <S> <C> For....................................... 5,204,733 --------- Against................................... 78,431 --------- Abstain................................... 21,525 --------- </TABLE> ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a). Financial Data Schedule b). 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 November 13, 1996 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date November 13, 1996 By /s/ HAROLD FRIEDMAN ------------------------------------ Harold Friedman, Vice Chairman of the Board 7
9 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors Friedman Industries, Incorporated We have reviewed the accompanying condensed consolidated balance sheet of Friedman Industries, Incorporated as of September 30, 1996, the related consolidated statements of earnings for the three-month and six-month periods ended September 30, 1996 and 1995 and the consolidated statements of cash flows for the six-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Friedman Industries, Incorporated as of March 31, 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated May 28, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP November 9, 1996
10 INDEX TO EXHIBITS Exhibit No. Description ------- ----------- 27 Financial Data Schedule