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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15D 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, 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 December 31, 1997, the number of shares outstanding of the issuer's only class of stock was 6,488,987 shares of Common Stock. ================================================================================
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1997 1997 ------------ ----------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 3,193,609 $ 168,245 Accounts receivable, less allowance for doubtful accounts ($7,276 at December 31, 1997 and March 31, 1997, respectively).......................................... 12,025,211 11,902,925 Inventories -- Note B..................................... 21,555,566 21,203,665 Prepaid expenses and other current assets................. 296,350 82,325 ------------ ----------- Total Current Assets.............................. 37,070,736 33,357,160 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 2,732,072 2,695,913 Machinery and equipment................................... 13,440,527 11,724,974 Less allowance for depreciation........................... (10,309,629) (9,909,444) ------------ ----------- 6,060,991 4,709,464 OTHER ASSETS Cash value of officers' life insurance.................... 74,744 50,567 ------------ ----------- $ 43,206,471 $38,117,191 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 10,499,610 $ 8,112,096 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 486,141 369,715 Contribution to profit-sharing plan....................... 187,497 242,000 Federal income taxes payable.............................. -- 256,434 Employee compensation and related expenses................ 373,188 392,427 ------------ ----------- Total Current Liabilities......................... 12,346,436 10,172,672 LONG-TERM DEBT, less current portion........................ 5,733,333 4,600,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 404,560 449,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,488,987 at December 31, 1997 and 6,161,994 at March 31, 1997.......................... 6,488,987 6,161,994 Additional paid-in capital................................ 23,678,173 22,377,246 Retained earnings......................................... (5,558,018) (5,757,281) ------------ ----------- Total Stockholders' Equity........................ 24,609,142 22,781,959 ------------ ----------- $ 43,206,471 $38,117,191 ============ =========== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENT OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31 DECEMBER 31 ------------------------- -------------------------- 1997 1996 1997 1996 ----------- ----------- ------------ ----------- <S> <C> <C> <C> <C> Net sales............................... $34,300,676 $28,468,809 $109,562,478 $86,707,042 Costs and expenses: Costs of goods sold................... 31,533,234 26,169,987 100,664,324 79,255,098 General, selling and administrative costs.............................. 1,151,863 986,574 3,757,117 3,071,552 Interest.............................. 116,799 125,588 344,533 389,416 ----------- ----------- ------------ ----------- 32,801,896 27,282,149 104,765,974 82,716,066 Interest and other income............... (30,233) (12,293) (57,503) (69,800) ----------- ----------- ------------ ----------- Earnings before federal income taxes.... 1,529,013 1,198,953 4,854,007 4,060,776 Provision (benefit) for federal income taxes: Current............................... 534,865 420,144 1,695,364 1,418,163 Deferred.............................. (15,000) (12,500) (45,000) (37,500) ----------- ----------- ------------ ----------- 519,865 407,644 1,650,364 1,380,663 ----------- ----------- ------------ ----------- Net earnings............................ $ 1,009,148 $ 791,309 $ 3,203,643 $ 2,680,113 =========== =========== ============ =========== Weighted average shares outstanding Basic................................. 6,483,359 6,436,583 6,476,114 6,436,583 =========== =========== ============ =========== Diluted............................... 6,625,480 6,436,583 6,609,678 6,436,583 =========== =========== ============ =========== Earnings per share -- Note C Basic................................. $ 0.16 $ 0.12 $ 0.49 $ 0.42 =========== =========== ============ =========== Diluted............................... $ 0.15 $ 0.12 $ 0.48 $ 0.42 =========== =========== ============ =========== Cash dividends per common share......... $ 0.075 $ 0.06 $ 0.22 $ 0.16 =========== =========== ============ =========== </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31 -------------------------- 1997 1996 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 3,203,643 $ 2,680,113 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 506,678 475,028 Provision for deferred taxes........................... (45,000) (37,500) Decrease (increase) in operating assets: Accounts receivable.................................... (122,286) 1,296,073 Inventories............................................ (351,901) (3,246,164) Other.................................................. (214,025) (44,055) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. 2,387,514 1,172,787 Contribution to profit sharing plan.................... (54,503) (47,000) Employee compensation and related expenses............. (19,239) (5,954) Federal income taxes................................... (256,434) (34,449) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......... 5,034,447 2,208,879 INVESTING ACTIVITIES Purchase of property, plant and equipment................. (1,858,205) (84,466) Decrease (increase) in cash value of officers' life insurance.............................................. (24,177) (26,338) ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES.......... (1,882,382) (110,804) FINANCING ACTIVITIES Cash dividends paid....................................... (1,310,801) (906,534) Principal payments on long-term debt...................... 2,733,333 -- Proceeds from borrowings of long-term debt................ (1,600,000) (600,000) Exercise of stock options................................. 50,767 45,297 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES.......... (126,701) (1,461,237) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 3,025,364 636,838 Cash and cash equivalents at beginning of period.......... 168,245 595,216 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 3,193,609 $ 1,232,054 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED DECEMBER 31, 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 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 implemented this new standard for the quarter and year to date ended December 31, 1997. This new standard did not have a significant effect on earnings per share. The difference between weighted average shares outstanding used for basic and diluted earnings per share is the effect of stock options. 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, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1996 During the nine months ended December 31, 1997, sales, costs of goods sold and gross profit increased by $22,855,436, $21,409,226 and $1,446,210, respectively, from the comparable amounts recorded during the nine month period ended December 31, 1996. The increases in sales and costs of goods sold were related to both coil and tubular operations which produced a combined increase in tons sold of approximately 26%. The increase in gross profit was primarily related to tubular operations which reflected both increased sales and margins earned on sales. Market conditions for tubular goods remained strong during the 1997 period. Gross profit as a percentage of sales declined from 8.6% in the 1996 period to 8.1% in the 1997 period. This decline in margins was related to the coil operations which were adversely affected by stiff competition within the hot-rolled coil industry. The Company increased sales of coil products at the expense of margins during the 1997 period. General, selling and administrative costs during the 1997 period increased $685,565 from the amount recorded during the 1996 period. This increase was primarily associated with variable expenses associated with volume and/or earnings, to an increase in bad debt expense and to sales expenses related to additional sales employees. Interest expense declined $44,883 due primarily to reductions in term debt during the 1997 period. Interest and other income declined $12,297. This decline was primarily related to a transaction involving a gain on the sale of assets in September 1996. Federal income taxes increased $269,701 period to period due to increased earnings before taxes. Tax rates were the same for both periods. THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1996 During the three months ended December 31, 1997, sales, costs of goods sold and gross profit increased by $5,831,867, $5,363,247 and $468,620, respectively, from the comparable amounts recorded during the three months ended December 31, 1996. These increases were primarily related to an increase in tons sold of approximately 20%. Gross profit as a percentage of sales was approximately the same for both quarters. General, selling and administrative costs during the 1997 quarter increased $165,289 from the amount recorded during the 1996 quarter. This increase was primarily related to increases in selling costs associated with an increase in sales employees and to increases in variable expenses associated with volume and/or earnings. Interest and other income increased $17,940 during the 1997 quarter. This increase primarily resulted from improved invested cash positions during this quarter. Federal income taxes increased $112,221 as a result of 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 December 31, 1997. Current ratios were 3.0 and 3.3 at December 31, 1997 and March 31, 1997, respectively. Working capital was $24,724,300 at December 31, 1997 and $23,184,488 at March 31, 1997. 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, 2000, the Company may borrow up to $8 million at an interest rate no greater than the 5
7 FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) bank's prime rate. At December 31, 1997, the Company had borrowings outstanding under the revolving facility of $4 million. The term facility includes borrowings of $1.2 million from the previous term note and also provides for additional advances up to $3.5 million, all of which convert to a term loan on December 31, 1998. 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, 1997, the principal amount of indebtedness outstanding under the term facility was $2,533,333. 6
8 FRIEDMAN INDUSTRIES, INCORPORATED QUARTER ENDED DECEMBER 31, 1997 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 -- Financial Data Schedule b). Reports on Form 8-K 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 13, 1997 By /s/ BEN HARPER ----------------------------------- Ben Harper, Senior Vice President -- Finance (Chief Accounting Officer) Date November 13, 1997 By /s/ HAROLD FRIEDMAN ----------------------------------- Harold Friedman, Vice Chairman
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 December 31, 1997, the related consolidated statements of earnings for the three and nine month periods ended December 31, 1997 and 1996 and the consolidated statements of cash flows for the nine month periods ended December 31, 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 February 13, 1997
11 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT ------- ------- <C> <S> <C> 27 -- Financial Data Schedule </TABLE>