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 JUNE 30, 1997 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 June 30, 1997, the number of shares outstanding of the issuer's only class of stock was 6,469,731 shares of Common Stock. ================================================================================
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> JUNE 30, 1997 MARCH 31, 1997 ------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 544,906 $ 168,245 Accounts receivable, less allowance for doubtful accounts ($7,276 at June 30, 1997 and March 31, 1997, respectively).......................................... 13,630,363 11,902,925 Inventories -- Note B..................................... 23,460,314 21,203,665 Prepaid expenses and other current assets................. 149,135 82,325 ------------- -------------- Total Current Assets.............................. 37,784,718 33,357,160 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 2,727,449 2,695,913 Machinery and equipment................................... 11,900,012 11,724,974 Less allowance for depreciation........................... (9,968,977) (9,909,444) ------------- -------------- 4,856,505 4,709,464 OTHER ASSETS Cash value of officers' life insurance.................... 57,486 50,567 ------------- -------------- $ 42,698,709 $ 38,117,191 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 11,736,636 $ 8,112,096 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 453,296 369,715 Contribution to profit-sharing plan....................... 62,499 242,000 Federal income taxes payable.............................. 632,698 256,434 Employee compensation and related expenses................ 562,655 392,427 ------------- -------------- Total Current Liabilities......................... 14,247,784 10,172,672 LONG-TERM DEBT, less current portion........................ 4,400,000 4,600,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 434,560 449,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,469,731 at June 30, 1997 and 6,161,994 at March 31, 1997....................................... 6,469,731 6,161,994 Additional paid-in capital................................ 23,646,661 22,377,246 Retained earnings......................................... (6,613,027) (5,757,281) ------------- -------------- Total Stockholders' Equity........................ 23,503,365 22,781,959 ------------- -------------- $ 42,698,709 $ 38,117,191 ============= ============== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENT OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 ------------ ------------ <S> <C> <C> Net sales................................................... $38,300,432 $28,751,479 Costs and expenses Costs of goods sold....................................... 35,065,621 26,128,966 General, selling and administrative costs................. 1,353,728 1,106,965 Interest.................................................. 115,588 134,223 ----------- ----------- 36,534,937 27,370,154 Interest and other income................................... (17,179) (28,996) ----------- ----------- Earnings before federal income taxes........................ 1,782,674 1,410,321 Provision (benefit) for federal income taxes: Current................................................... 621,110 492,009 Deferred.................................................. (15,000) (12,500) ----------- ----------- 606,110 479,509 ----------- ----------- Net earnings................................................ $ 1,176,564 $ 930,812 =========== =========== Net earnings per share -- Note C............................ $ 0.18 $ 0.14 =========== =========== Cash dividends declared per common share.................... $ 0.07 $ 0.05 =========== =========== </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 1,176,564 $ 930,812 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 166,026 158,010 Provision for deferred taxes........................... (15,000) (12,500) Decrease (increase) in operating assets: Accounts receivable.................................... (1,727,438) (400,908) Inventories............................................ (2,256,649) (1,310,491) Other current assets................................... (66,810) (81,069) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. 3,624,540 730,941 Contribution to profit-sharing plan payable............ (179,501) (162,000) Employee compensation and related expenses............. 170,228 56,827 Federal income taxes payable........................... 376,264 42,009 ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ 1,268,224 (48,369) INVESTING ACTIVITIES Purchase of property, plant and equipment................. (313,069) (3,691) Increase in cash surrender value of officers' life insurance.............................................. (6,919) (23,828) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES............. (319,988) (27,519) FINANCING ACTIVITIES Cash dividends paid....................................... (371,575) (293,303) Principal payments on long-term debt...................... (200,000) (200,000) ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... (571,575) (493,303) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 376,661 (569,191) Cash and cash equivalents at beginning of period.......... 168,245 595,216 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 544,906 $ 26,025 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED JUNE 30, 1997 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, 1997. NOTE B -- INVENTORIES Coil inventory consists primarily of raw materials. Tubular inventory is comprised of both raw materials and finished goods. NOTE C -- EARNINGS PER SHARE Earnings per common and common equivalent share for the periods ended June 30, 1997 and June 30, 1996 are based on the weighted average number of common and common equivalent (stock options) shares outstanding as follows: <TABLE> <CAPTION> 1997 1996 --------- --------- <S> <C> <C> Common Stock: Shares outstanding during the entire period............... 6,161,994 5,834,195 Retroactive effect of stock dividends declared............ 307,737 597,593 --------- --------- Weighted average number of common and common equivalent shares............................... 6,469,731 6,431,788 ========= ========= </TABLE> Earnings per share assuming full dilution for the quarters ended June 30, 1997 and 1996, 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which is required to be adopted for financial statements issued for periods ending after December 31, 1997. The statement replaces primary and fully diluted earnings per share with basic and diluted earnings per share. The Company does not anticipate that the implementation of this new standard will materially impact earnings per share. 4
6 FRIEDMAN INDUSTRIES, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 During the three months ended June 30, 1997, sales, costs of goods sold and gross profit increased $9,548,953, $8,936,655 and $612,298, respectively, from the comparable amounts recorded during the three months ended June 30, 1996. The increases in sales and costs of goods sold were primarily related to coil and tubular operations which reflected an overall increase in volume of approximately 33% during the 1997 quarter. Gross profit declined on coil products and increased on tubular products, the effect of which produced the increase in gross profit noted above. Gross profit as a percentage of sales was 9.1% and 8.4% for the 1996 and 1997 quarters, respectively. This decline in margin rates was primarily related to coil operations which produced increased sales at the expense of margins. Sales of coil products met with stiff competition during the 1997 quarter. Market demand for tubular products remained strong during the 1997 quarter. General, selling and administrative costs increased $246,763 from the amount recorded in the 1996 quarter. This increase was primarily related to expenses associated with volume and/or earnings, to costs related to additional sales employees and to an increase in bad debt expense. Interest expense declined $18,635. This decline was primarily related to the reduction in term debt. Federal income taxes increased $126,601 from the amount recorded during the 1996 quarter due to the increase in earnings before taxes. Tax rates were the same for both quarters. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at June 30, 1997. Current ratios were 2.7 and 3.3 at June 30, 1997 and March 31, 1997, respectively. Working capital was $23,536,934 at June 30, 1997 and $23,184,448 at March 31, 1997. The Company has a line of credit arrangement with a bank whereby it may borrow up to $8,000,000. At June 30, 1997, borrowings of $4,000,000 had been made under this line of credit arrangement which expires April 1, 2000. In July, 1997, the Company secured financing for certain capital improvements contemplated at its Hickman, Arkansas facility. This financing was in the form of an amendment to the Company's then-existing credit facility with its bank. The new credit facility provides for a $4.7 million advancing promissory note, which converts to a term loan on December 1, 1998 (the "Note"). The Note, which also refinanced the outstanding indebtedness under the Company's then-existing credit facility, bears interest at a stated interest rate of LIBOR plus 1.25% and requires quarterly principal payments of $200,000 plus accrued interest through March 1, 2003. The Company has converted the Note to a fixed interest rate of 8% for the life of the Note pursuant to a swap transaction with its bank. 5
7 FRIEDMAN INDUSTRIES, INCORPORATED QUARTER ENDED JUNE 30, 1997 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 Not applicable ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a). Financial Data Schedule <TABLE> <C> <S> 10.1 -- ISDA Master Agreement between the Company and Texas Commerce Bank National Association ("TCB") dated July 21, 1997. 10.2 -- Advancing Promissory Note of the Company to TCB dated July 21, 1997 in the amount of $4,700,000. 10.3 -- Second Amendment to amended and restated letter agreement between the Company and TCB dated July 21, 1997. 27.1 -- Financial Data Schedule. </TABLE> 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 August 13, 1997 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date August 13, 1997 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 June 30, 1997, and the related consolidated statements of earnings and cash flows for the three-month periods ended June 30, 1997 and 1996. 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, 1997, 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 30, 1997, 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, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Houston, Texas August 10, 1997
10 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 10.1 -- ISDA Master Agreement between the Company and Texas Commerce Bank National Association ("TCB") dated July 21, 1997. 10.2 -- Advancing Promissory Note of the Company to TCB dated July 21, 1997 in the amount of $4,700,000. 10.3 -- Second Amendment to amended and restated letter agreement between the Company and TCB dated July 21, 1997. 27.1 -- Financial Data Schedule. </TABLE>