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 DECEMBER 31, 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 (I.R.S. Employer of incorporation or organization) Identification No.) </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, 1996, the number of shares outstanding of the issuer's only class of stock was 6,145,712 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1996 1996 ------------ ----------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 1,232,054 $ 595,216 Accounts receivable, less allowance for doubtful accounts ($5,794 at December 31, 1996 and March 31, 1996)....... 8,127,131 9,423,204 Inventories -- Note B..................................... 20,637,789 17,391,625 Prepaid expenses & other current assets................... 158,680 114,625 ----------- ----------- Total Current Assets.............................. 30,155,654 27,524,670 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 2,695,912 2,687,730 Machinery & equipment..................................... 11,722,799 11,699,234 Less allowance for depreciation........................... (9,738,883) (9,316,572) ----------- ----------- 4,877,849 5,268,413 OTHER ASSETS Cash value of officers' life insurance -- Note C.......... 46,241 19,903 ----------- ----------- $35,079,744 $32,812,986 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 5,911,993 $ 4,739,206 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 369,718 291,709 Contribution to profit-sharing plan....................... 169,000 216,000 Federal income taxes payable.............................. 18,598 53,047 Employee compensation and related expenses................ 304,611 310,565 ----------- ----------- Total Current Liabilities......................... 7,573,920 6,410,527 LONG-TERM DEBT, less current portion........................ 4,800,000 5,400,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 423,023 460,523 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share; Authorized 10,000,000 shares; Issued and outstanding shares -- 6,145,712 at December 31, 1996 and 5,834,195 at March 31, 1996.............. 6,145,712 5,834,195 Additional paid-in capital................................ 22,361,615 21,444,360 Retained earnings......................................... (6,337,526) (6,849,619) ----------- ----------- Total Stockholders' Equity........................ 22,169,801 20,428,936 ----------- ----------- $35,079,744 $32,812,986 =========== =========== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ENDED DECEMBER 31 ENDED DECEMBER 31 ----------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales................................. $28,468,809 $25,559,420 $86,707,042 $80,520,472 Costs and expenses: Costs of goods sold..................... 26,169,987 23,526,339 79,255,098 74,445,656 General, selling and administrative costs................................ 986,574 869,800 3,071,552 2,583,171 Interest................................ 125,588 144,520 389,416 478,769 ---------- ---------- ---------- ---------- 27,282,149 24,540,659 82,716,066 77,507,596 Interest and other income................. (12,293) (18,293) (69,800) (50,287) ---------- ---------- ---------- ---------- Earnings before federal income taxes...... 1,198,953 1,037,054 4,060,776 3,063,163 Provision (benefit) for federal income taxes: Current................................. 420,144 365,098 1,418,163 1,078,975 Deferred................................ (12,500) (12,500) (37,500) (37,500) ---------- ---------- ---------- ---------- 407,644 352,598 1,380,663 1,041,475 ---------- ---------- ---------- ---------- Net earnings.............................. $ 791,309 $ 684,456 $2,680,113 $2,021,688 ========== ========== ========== ========== Average number of common shares outstanding............................. 6,130,079 6,124,505 6,130,079 6,124,505 ========== ========== ========== ========== Net earnings per share -- Note D.......... $0.13 $0.11 $0.44 $0.33 Cash dividends per common share........... $0.06 $0.045 $0.16 $0.145 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOW -- UNAUDITED <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31 ------------------------------ 1996 1995 ------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $2,680,113 $2,021,688 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 475,028 453,077 Provision for deferred taxes........................... (37,500) (37,500) Decrease (increase) in operating assets: Accounts receivable.................................... 1,296,073 447,256 Inventories............................................ (3,246,164) (627,747) Other.................................................. (44,055) (97,963) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. 1,172,787 96,360 Contribution to profit sharing plan.................... (47,000) (49,997) Employee compensation and related expenses............. (5,954) (16,573) Federal income taxes................................... (34,449) 13,776 ---------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......... 2,208,879 2,202,377 INVESTING ACTIVITIES Purchase of property, plant, and equipment................ (84,466) (408,896) Decrease (increase) in cash value of officers' life insurance -- Note C.................................... (26,338) 687,536 ---------- ---------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES.......... (110,804) 278,640 FINANCING ACTIVITIES Cash dividends paid....................................... (906,534) (862,734) Proceeds from borrowings of long-term debt................ -- 1,000,000 Principal payments of long-term debt...................... (600,000) (2,400,000) Exercise of stock options................................. 45,297 8,623 ---------- ---------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES.......... (1,461,237) (2,254,111) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................ 636,838 226,906 Cash and cash equivalents at beginning of period.......... 595,216 664,527 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $1,232,054 $ 891,433 ========== ========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED 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 share are based on the weighted average number of common shares outstanding. Stock options are not included in the computation of the weighted average number of common shares outstanding since their effect is not significant. Fully diluted earnings per share are not presented because they are not materially dilutive. Applicable per share amounts have been adjusted to give effect to stock dividends. 4
6 FRIEDMAN INDUSTRIES, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1995 During the nine month period ended December 31, 1996, net sales, costs of goods sold and gross profit increased $6,186,570, $4,809,442 and $1,377,128 from the respective amounts recorded during the nine months ended December 31, 1995. The increase in net sales and costs of goods sold were primarily associated with an increase in tons sold during the 1996 period. Both coil and tubular operations benefited from stronger market conditions in the 1996 period. Gross profit increased as a result of the above noted increase in sales and improved margins (7.5% in the 1995 period and 8.6% in the 1996 period). Demand for coil and tubular products was stronger during the 1996 period and supported improved sales and margins. General, selling and administrative costs increased $488,381 from the comparable amount recorded during the 1995 period. This increase was primarily related to expenses associated with increased volume and/or earnings such as employee incentive bonuses and commissions, contribution to the profit sharing plan, and other variable expenses. Interest expense for the 1996 period declined $89,353 from the amount recorded in the 1995 period. This decrease was primarily related to a decrease in term debt and a decline in interest rates charged on borrowed funds. Interest and other income increased $19,513. This increase was primarily related to a gain on the sale of machinery and equipment. Federal income taxes increased $339,188 as a result of the increase in earnings before taxes. Effective tax rates were the same for both periods. THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1995 During the three months ended December 31, 1996, net sales, costs of goods sold and gross profit increased $2,909,389, $2,643,648 and $265,741, respectively, from the comparable amounts recorded during the three months ended December 31, 1995. The increases in sales and costs of goods sold were primarily related to the Company's tubular operations. These operations benefited from stronger demand for its products during the 1996 quarter, and accordingly, increased its production. A decline in gross profit associated with coil products was more than offset by an increase in gross profit related to tubular products. The net increase in gross profit was primarily related to the sales increase noted above. Margin rates were approximately the same, quarter to quarter. General, selling and administrative costs increased $116,774 from the amount recorded during the 1995 quarter. This increase was primarily related to expenses associated with increased volume and/or earnings such as employee remuneration and expense and other variable expenses. Interest expense declined $18,932. This decrease was primarily related to a decline in term debt. Federal income taxes increased $55,046 from the amount recorded during the 1995 quarter. This increase was related to the increase in earnings before taxes. Effective tax rates were the same for both quarters. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at December 31, 1996. Current ratios were 4.0 and 4.3 at December 31, 1996, and March 31, 1996, respectively. Working capital was $22,581,734 at December 31, 1996, and $21,114,143 at March 31, 1996. The Company has a line of credit arrangement with a bank whereby it may borrow up to $8,000,000. At December 31, 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. 5
7 FRIEDMAN INDUSTRIES, INCORPORATED QUARTER ENDED DECEMBER 31, 1996 PART II -- OTHER INFORMATION <TABLE> <S> <C> <C> 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a). Financial Data Schedule b). None </TABLE> 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 <TABLE> <S> <C> Date 11/14/97 By /s/ BEN HARPER -------------------------------------------------- Ben Harper, Senior Vice President -- Finance (Chief Accounting Officer) Date 11/14/97 By /s/ HAROLD FRIEDMAN -------------------------------------------------- Harold Friedman, Vice Chairman </TABLE> 6
8 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 December 31, 1996, and the related consolidated statements of earnings for the three-month and nine-month periods ended December 31, 1996 and 1995 and the consolidated statements of cash flows for the nine-month periods ended December 31, 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 February 10, 1997 7