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, 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 September 30, 1997, the number of shares outstanding of the issuer's only class of stock was 6,477,138 shares of Common Stock. ================================================================================
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> SEPTEMBER 30, MARCH 31, 1997 1997 ------------- ----------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 74,073 $ 168,245 Accounts receivable, less allowance for doubtful accounts ($7,276 at September 30, 1997 and March 31, 1997, respectively).......................................... 13,001,857 11,902,925 Inventories -- Note B..................................... 20,952,075 21,203,665 Prepaid expenses and other current assets................. 396,024 82,325 ------------ ----------- Total Current Assets.............................. 34,424,029 33,357,160 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 2,727,450 2,695,913 Machinery and equipment................................... 13,096,038 11,724,974 Less allowance for depreciation........................... (10,137,153) (9,909,444) ------------ ----------- 5,884,356 4,709,464 OTHER ASSETS Cash value of officers' life insurance.................... 74,395 50,567 ------------ ----------- $ 40,382,780 $38,117,191 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 7,804,827 $ 8,112,096 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 485,780 369,715 Contribution to profit-sharing plan....................... 124,998 242,000 Federal income taxes payable.............................. -- 256,434 Employee compensation and related expenses................ 485,248 392,427 ------------ ----------- Total Current Liabilities......................... 9,700,853 10,172,672 LONG-TERM DEBT, less current portion........................ 6,100,000 4,600,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 419,560 449,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,477,138 at September 30, 1997 and 6,161,994 at March 31, 1997....................................... 6,477,138 6,161,994 Additional paid-in capital................................ 23,653,105 22,377,246 Retained earnings......................................... (6,080,876) (5,757,281) ------------ ----------- Total Stockholders' Equity........................ 24,049,367 22,781,959 ------------ ----------- $ 40,382,780 $38,117,191 ============ =========== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENT OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales................................. $36,961,370 $29,486,754 $75,261,802 $58,238,233 Costs and expenses Costs of goods sold..................... 34,065,469 26,956,145 69,131,090 53,085,111 General, selling and administrative costs................................ 1,251,526 978,013 2,605,254 2,084,978 Interest................................ 112,146 129,605 227,734 263,828 ----------- ----------- ----------- ----------- 35,429,141 28,063,763 71,964,078 55,433,917 Interest and other income................. (10,091) (28,511) (27,270) (57,507) ----------- ----------- ----------- ----------- Earnings before federal income taxes...... 1,542,320 1,451,502 3,324,994 2,861,823 Provision (benefit) for federal income taxes: Current................................. 539,389 506,010 1,160,499 998,019 Deferred................................ (15,000) (12,500) (30,000) (25,000) ----------- ----------- ----------- ----------- 524,389 493,510 1,130,499 973,019 ----------- ----------- ----------- ----------- Net earnings.............................. $ 1,017,931 $ 957,992 $ 2,194,495 $ 1,888,804 =========== =========== =========== =========== Average number of common shares outstanding -- Note C................... 6,477,138 6,431,788 6,477,138 6,431,788 =========== =========== =========== =========== Net earnings per share -- Note C.......... $0.16 $0.15 $0.34 $0.29 =========== =========== =========== =========== Cash Dividends Common Stock -- per share dividend declared during periods.............. $0.075 $0.05 $0.145 $0.10 =========== =========== =========== =========== </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> SIX MONTHS ENDED SEPTEMBER 30, -------------------------- 1997 1996 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 2,194,495 $ 1,888,804 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 334,202 316,020 Provision for deferred taxes........................... (30,000) (25,000) Decrease (increase) in operating assets: Accounts receivable.................................... (1,098,932) 436,328 Inventories............................................ 251,590 (2,959,167) Other.................................................. (313,699) (176,665) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. (307,269) 981,665 Contribution to profit-sharing plan.................... (117,002) (108,000) Employee compensation and related expenses............. 92,821 114,749 Federal income taxes payable........................... (256,434) 48,019 ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..................................... 749,772 516,753 INVESTING ACTIVITIES Purchase of property, plant and equipment................. (1,509,095) (68,461) (Increase) decrease in cash value of officers' life insurance.............................................. (23,828) (23,828) ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES..................................... (1,532,923) (92,289) FINANCING ACTIVITIES Cash dividends paid....................................... (824,871) (599,575) Principal payments on long-term debt...................... (400,000) (400,000) Proceeds from borrowings of long term debt................ 1,900,000 Exercise of stock options................................. 13,850 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... 688,979 (999,575) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (94,172) (575,111) Cash and cash equivalents at beginning of period.......... 168,245 595,216 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 74,073 $ 20,105 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED SEPTEMBER 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 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. 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 SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1996 During the six months ended September 30, 1997, net sales, costs of goods sold and gross profit increased $17,023,569, $16,045,979 and $977,590, respectively, from the comparable amounts recorded during the six months ended September 30, 1996. The increases in net sales and costs of goods sold were related to coil and tubular operations which reflected a combined increase in tonnage sold of approximately 29%. Gross profit on coil products declined and increased on tubular products, the net effect of which resulted in the increase in gross profit noted above. Gross profit as a percent of sales was 8.8% and 8.1% in the 1996 and 1997 periods, respectively. The decline in margins was primarily related to coil operations which were adversely affected by stiff competition within the industry. The Company increased sales of coil products at the expense of margins. Market conditions for tubular products remained strong in the 1997 period. General, selling and administrative costs increased $520,276 from the amount recorded during the 1996 period. This increase was primarily related to variable expenses associated with volume and/or earnings, to costs associated with additional sales employees and to an increase in bad debt expense. Interest expense and interest and other income declined $36,094 and $30,237, respectively, from comparable amounts recorded during the 1996 period. The decline in interest expense was primarily related to a reduction in term debt. In September 1996, the Company recorded a gain on sale of assets. This factor combined with reduced average invested cash positions during the 1997 period produced the decline in interest and other income noted above. Federal income taxes increased $157,480 due to an increase in earnings before taxes. Effective tax rates were the same for each period. THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 During the three months ended September 30, 1997, net sales, costs of goods sold and gross profit increased $7,474,616, $7,109,324 and $365,292, respectively, from the comparable amounts recorded during the three months ended September 30, 1996. The increases in net sales and costs of goods sold were produced by coil and tubular operations which reflected a combined increase in tonnage sold of approximately 25%. Gross profit earned on sales of coil products and on sales of tubular products declined and increased, respectively, the net effect of which produced the gross profit increase noted above. Gross profit as a percentage of sales declined from 8.6% in the 1996 quarter to 7.8% in the 1997 quarter. This decline in margin rates was primarily related to coil operations which were adversely affected by stiff competition within the industry. The Company increased sales of coil products at the expense of margins. Market conditions for tubular products remained strong during the 1997 quarter. General, selling and administrative costs increased $273,513 from the amount recorded during the 1996 quarter. This increase was primarily related to an increase in variable expenses associated with volume and/or earnings, to costs related to additional sales employees, to an increase in bad debt expense and to other miscellaneous expenses. Interest expense declined $17,459 primarily as a result of a decline in term debt. Interest and other income declined $18,420. This decline was primarily related to a gain on the sale of assets recorded during the September 1996 quarter. 5
7 FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at September 30, 1997. Current ratios were 3.5 and 3.3 at September 30, 1997 and March 31, 1997, respectively. Working capital was $24,723,176 at September 30, 1997 and $23,184,448 at March 31, 1997. The Company has a credit arrangement with a bank pursuant to which the bank provides a revolving line of credit facility and a term credit facility. Pursuant to the revolving line of credit facility, the Company may borrow up to $8 million. The facility expires April 1, 2000. At September 30, 1997, the Company had borrowings outstanding under the line of credit facility of $5 million. Pursuant to the term credit facility, the Company may borrow up to $4.7 million. Advances made pursuant to the term facility convert to a term loan on December 1, 1998. The amount outstanding under the term credit facility bear 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 LIBOR-based interest rate obligation for a fixed interest rate obligation of 8% to remain in effect for the entire term of the term credit facility. As of September 30, 1997, the principal amount of indebtedness outstanding under the term credit facility was $1.9 million. 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 22, 1997, the Company's shareholders elected seven directors to the Company's Board of Directors. 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.......................................... 6,070,067 28,681 Harold Friedman........................................ 6,090,357 8,391 Charles W. Hall........................................ 6,040,136 58,612 Alan M. Rauch.......................................... 6,040,136 58,612 Hershel M. Rich........................................ 6,090,357 8,391 Henry Spira............................................ 6,089,256 9,492 Kirk K. Weaver......................................... 6,090,357 8,391 </TABLE> ITEM 5. OTHER INFORMATION None 6
8 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a). 10.1 -- First Amendment to Friedman Industries, Incorporated 1989 Incentive Stock Option Plan 10.2 -- First Amendment to Friedman Industries, Incorporated 1995 Non-Employee Director Stock Plan 27 -- Financial Data Schedule b). None 7
9 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 14, 1997 By /s/ BEN HARPER ----------------------------------- Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date November 14, 1997 By /s/ HAROLD FRIEDMAN ----------------------------------- Harold Friedman, Vice Chairman of the Board 8
10 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, 1997, the related consolidated statements of earnings for the three and six month periods ended September 30, 1997 and 1996 and the consolidated statements of cash flows for the six month periods ended September 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 November 14, 1997 9
11 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT ------- ------- <C> <S> <C> 10.1 -- First Amendment to Friedman Industries, Incorporated 1989 Incentive Stock Option Plan 10.2 -- First Amendment to Friedman Industries, Incorporated 1995 Non-Employee Director Stock Plan 27 -- Financial Data Schedule </TABLE>