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 JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) 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 June 30, 1998, the number of shares outstanding of the issuer's only class of stock was 6,818,999 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> JUNE 30, 1998 MARCH 31, 1998 ------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 96,360 $ 1,361,693 Accounts receivable, less allowance for doubtful accounts ($7,276 at June 30, 1998 and March 31, 1998, respectively).......................................... 14,001,004 13,205,113 Inventories -- Note B..................................... 24,130,125 24,586,863 Prepaid expenses and other current assets................. 247,196 193,879 ------------- -------------- Total Current Assets.............................. 38,474,685 39,347,548 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 3,077,678 2,882,358 Machinery and equipment................................... 14,752,758 13,999,439 Less allowance for depreciation........................... (10,641,335) (10,468,859) ------------- -------------- 7,387,122 6,610,959 OTHER ASSETS Cash value of officers' life insurance.................... 119,417 80,854 ------------- -------------- $ 45,981,224 $ 46,039,361 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 9,791,626 $ 10,925,023 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 511,419 486,886 Contribution to profit-sharing plan....................... 70,200 280,000 Income taxes payable...................................... 576,335 344,465 Employee compensation and related expenses................ 497,311 600,804 ------------- -------------- Total Current Liabilities......................... 12,246,891 13,437,178 LONG-TERM DEBT, less current portion........................ 7,000,000 6,366,666 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 374,560 389,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,818,999 at June 30, 1998 and 6,491,808 at March 31, 1998....................................... 6,818,999 6,491,808 Additional paid-in capital................................ 25,710,432 23,680,628 Retained earnings......................................... (6,282,658) (4,439,479) ------------- -------------- Total Stockholders' Equity........................ 26,246,773 25,732,957 ------------- -------------- $ 45,981,224 $ 46,039,361 ============= ============== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1998 1997 ------------ ------------ <S> <C> <C> Net sales................................................... $38,923,169 $38,300,432 Costs and expenses Costs of goods sold....................................... 36,001,776 35,065,621 General, selling and administrative costs................. 1,308,234 1,353,728 Interest.................................................. 102,722 115,588 ----------- ----------- 37,412,732 36,534,937 Interest and other income................................... (39,181) (17,179) ----------- ----------- Earnings before federal income taxes........................ 1,549,618 1,782,674 Provision (benefit) for federal income taxes: Current................................................... 541,870 621,110 Deferred.................................................. (15,000) (15,000) ----------- ----------- 526,870 606,110 ----------- ----------- Net earnings................................................ $ 1,022,748 $ 1,176,564 =========== =========== Average number of common shares outstanding: Basic..................................................... 6,818,999 6,793,218 Diluted................................................... 6,958,736 6,793,218 Net earnings per share: Basic..................................................... $ 0.15 $ 0.17 Diluted................................................... $ 0.15 $ 0.17 Cash dividends declared per common share.................... $ 0.075 $ 0.07 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1998 1997 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 1,022,748 $ 1,176,564 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 172,476 166,026 Provision for deferred taxes........................... (15,000) (15,000) Decrease (increase) in operating assets: Accounts receivable.................................... (795,891) (1,727,438) Inventories............................................ 456,738 (2,256,649) Other current assets................................... (53,317) (66,810) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. (1,133,397) 3,624,540 Contribution to profit-sharing plan payable............ (209,800) (179,501) Employee compensation and related expenses............. (103,493) 170,228 Federal income taxes payable........................... 231,870 376,264 ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ (427,066) 1,268,224 INVESTING ACTIVITIES Purchase of property, plant and equipment................. (948,639) (313,069) Increase in cash surrender value of officers' life insurance.............................................. (38,563) (6,919) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES............. (987,202) (319,988) FINANCING ACTIVITIES Cash dividends paid....................................... (489,660) (371,575) Principal payments on long-term debt...................... (200,000) (200,000) Proceeds from borrowings of long-term debt................ 833,333 -- Cash received from exercised stock options................ 5,262 -- ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... 148,935 (571,575) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,265,333) 376,661 Cash and cash equivalents at beginning of period.......... 1,361,693 168,245 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 96,360 $ 544,906 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED JUNE 30, 1998 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, 1998. 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. This new standard did not have a significant effect on earnings per share. The difference between the average number of shares outstanding used for basic and diluted earnings per share is attributable to 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 THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 During the three months ended June 30, 1998, net sales and costs of goods sold increased $622,737 and $936,155, respectively, from the comparable amounts recorded during the three months ended June 30, 1997, the effect of which reduced gross profit by $313,418. Improved gross profit generated by the coil operations was more than offset by a decline in gross profit earned by tubular operations. The Company's coil operations benefited from increased sales associated primarily with volume and improved margins. During the 1998 period, the Company continued its effort to aggressively market these products to increase its market share. Market demand for tubular products declined in the 1998 period, the effect of which adversely affected tubular operations and reduced volume and margins. Interest expense declined $12,866 in the 1998 period compared to the 1997 period. This decline was primarily caused by reductions in term debt associated with operations. Interest on term debt related to construction costs was capitalized. Interest and other income in the 1998 period increased $22,002 from the amount recorded in the 1997 period. This increase was primarily related to income associated with an increase in the cash surrender value of officers' life insurance. Federal income taxes declined $79,240 as a result of the decline in earnings before taxes. The effective tax rates were the same for both periods. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at June 30, 1998. Current ratios were 3.1 and 2.9 at June 30, 1998 and March 31, 1998, respectively. Working capital was $26,227,794 at June 30, 1998 and $25,910,370 at March 31, 1998. 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 bank's prime rate. At June 30, 1998, 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 June 30, 1998, the principal amount of indebtedness outstanding under the term facility was $3.8 million. YEAR 2000 ISSUE With the turn of the century, time sensitive software using two digits may not identify the year 2000, which could result in system failure and miscalculations disrupting the ability to conduct normal business operations. The Company completed an assessment of its information systems for year 2000 compliance during 1998 and developed a plan to resolve all major issues by the end of 1999. As a result, the year 2000 issue is not expected to pose significant operational or financial problems for the Company. 5
7 FRIEDMAN INDUSTRIES, INCORPORATED QUARTER ENDED JUNE 30, 1998 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 <TABLE> <C> <S> 27.1 -- Financial Data Schedule </TABLE> b). Reports on Form 8-K 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 14, 1998 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date August 14, 1998 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 consolidated balance sheet of Friedman Industries, Incorporated, as of June 30, 1998, and the related consolidated statements of earnings and cash flows for the three-month periods ended June 30, 1998 and 1997. 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, 1998, 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 26, 1998, 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, 1998, 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 11, 1998
10 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 27.1 -- Financial Data Schedule. </TABLE>