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, 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 December 31, 1998, the number of shares outstanding of the issuer's only class of stock was 6,826,387 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> DECEMBER 31, 1998 MARCH 31, 1998 ----------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 57,336 $ 1,361,693 Accounts receivable, less allowance for doubtful accounts ($7,276 at December 31, 1998 and March 31, 1998, respectively).......................................... 8,237,292 13,205,113 Inventories -- Note B..................................... 23,570,040 24,586,863 Prepaid expenses and other current assets................. 590,919 193,879 ------------ ------------ Total Current Assets.............................. 32,455,587 39,347,548 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 198,021 198,021 Buildings and improvements................................ 3,233,091 2,882,358 Machinery and equipment................................... 15,406,919 13,999,439 Less allowance for depreciation........................... (10,986,287) (10,468,859) ------------ ------------ 7,851,744 6,610,959 OTHER ASSETS Cash value of officers' life insurance.................... 193,666 80,854 ------------ ------------ $ 40,500,997 $ 46,039,361 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 4,729,756 $ 10,925,023 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 477,837 486,886 Contribution to profit-sharing plan....................... 210,600 280,000 Income taxes payable...................................... -- 344,465 Employee compensation and related expenses................ 223,967 600,804 ------------ ------------ Total Current Liabilities......................... 6,442,160 13,437,178 LONG-TERM DEBT, less current portion........................ 6,600,000 6,366,666 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 344,560 389,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 6,826,387 at December 31, 1998 and 6,491,808 at March 31, 1998....................................... 6,826,387 6,491,808 Additional paid-in capital................................ 25,715,528 23,680,628 Retained earnings......................................... (5,540,638) (4,439,479) ------------ ------------ Total Stockholders' Equity........................ 27,001,277 25,732,957 ------------ ------------ $ 40,500,997 $ 46,039,361 ============ ============ </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Net sales............................... $26,938,495 $34,300,676 $98,039,953 $109,562,478 Costs and expenses: Costs of goods sold................... 24,806,991 31,533,234 90,119,844 100,664,324 General, selling and administrative costs.............................. 1,035,859 1,151,863 3,567,453 3,757,117 Interest.............................. 112,042 116,799 367,755 344,533 ----------- ----------- ----------- ------------ 25,954,892 32,801,896 94,055,052 104,765,974 Interest and other income............... (49,277) (30,233) (135,603) (57,503) ----------- ----------- ----------- ------------ Earnings before federal income taxes.... 1,032,880 1,529,013 4,120,504 4,854,007 Provision (benefit) for federal income taxes: Current............................... 366,180 534,865 1,445,972 1,695,364 Deferred.............................. (15,000) (15,000) (45,000) (45,000) ----------- ----------- ----------- ------------ 351,180 519,865 1,400,972 1,650,364 ----------- ----------- ----------- ------------ Net earnings............................ $ 681,700 $ 1,009,148 $ 2,719,532 $ 3,203,643 =========== =========== =========== ============ Average number of common shares outstanding: Basic................................. 6,826,387 6,807,527 6,826,387 6,799,920 Diluted............................... 6,863,948 6,956,754 6,863,948 6,940,162 Net earnings per share: Basic................................. $ 0.10 $ 0.15 $ 0.40 $ 0.47 Diluted............................... $ 0.10 $ 0.15 $ 0.40 $ 0.46 Cash dividends declared per common share................................. $ 0.07 $ 0.075 $ 0.215 $ 0.22 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 2,719,532 $ 3,203,643 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 517,428 506,678 Provision for deferred taxes........................... (45,000) (45,000) Decrease (increase) in operating assets: Accounts receivable.................................... 4,967,821 (122,286) Inventories............................................ 1,016,823 (351,901) Other.................................................. (397,040) (214,025) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. (6,195,267) 2,387,514 Contribution to profit-sharing plan.................... (69,400) (54,503) Employee compensation and related expenses............. (376,837) (19,239) Federal income taxes................................... (344,465) (256,434) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..................................... 1,793,595 5,034,447 INVESTING ACTIVITIES Purchase of property, plant and equipment................. (1,758,212) (1,858,205) Decrease (increase) in cash value of officers' life insurance.............................................. (112,812) (24,177) ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES..................................... (1,871,024) (1,882,382) FINANCING ACTIVITIES Cash dividends paid....................................... (1,478,674) (1,310,801) Principal payments on long-term debt...................... (3,600,000) (1,600,000) Proceeds from borrowings of long term debt................ 3,833,333 2,733,333 Exercise of stock options................................. 18,413 50,767 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... (1,226,928) (126,701) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,304,357) 3,025,364 Cash and cash equivalents at beginning of period.......... 1,361,693 168,245 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 57,336 $ 3,193,609 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED DECEMBER 31, 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1997 During the nine month period ended December 31, 1998, sales, costs of goods sold and gross profit declined $11,522,525, $10,544,480 and $978,045, respectively, from the comparable amounts recorded during the nine month period ended December 31, 1997. During the 1998 period, increases in sales, costs of goods sold and gross profit attributable to coil operations were more than offset by substantial declines in the comparable financial categories associated with tubular operations. Tubular operations were adversely affected by a significant downturn of the energy sector of the U.S. economy which had the effect of reducing demand for tubular products and generating intense competition for available sales. Interest and other income during the 1998 period increased $78,100 from the amount recorded during the 1997 period. This increase was primarily associated with other income related to an increase in the cash surrender value of officers' life insurance. Federal income tax declined $249,392 from the comparable amount recorded in the 1997 period. This decline was related to the decrease in income before taxes as the effective tax rates were the same for both periods. THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 During the quarter ended December 31, 1998, sales, costs of goods sold and gross profit declined $7,362,181, $6,726,243 and $635,938, respectively, from comparable amounts recorded during the quarter ended December 31, 1997. The declines in sales and costs of goods sold were primarily related to a decline in tubular operations. An increase in gross profit attributable to coil operations was more than offset by a substantial decrease in gross profit associated with tubular operations. Tubular operations were adversely affected by a significant downturn in the energy sector of the U.S. economy which had the effect of reducing demand for tubular products and generating intense competition for available sales. General, selling and administrative costs declined $116,004 from the comparable amount recorded during the 1997 quarter. This decline was primarily related to a decline in incentive bonuses based on net earnings. Interest and other income increased $19,044 from the amount recorded during the 1997 quarter. This increase was primarily associated with other income related to an increase in the cash value of officers' life insurance. Federal income taxes declined $168,685 from the comparable amount recorded in the 1997 quarter. This decline was related to the decrease in income before taxes during the 1998 quarter as the 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, 1998. Current ratios were 5.0 and 2.9 at December 31, 1998 and March 31, 1998, respectively. Working capital was $26,013,427 at December 31, 1998 and $25,910,370 at March 31, 1998. The Company has a credit arrangement with a bank that 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 December 31, 1998, the Company had borrowings outstanding under the revolving facility of $4 million. The term facility includes borrowings of $1.2 million from a previous term note and prior to December 31, 1998, also provided for additional advances up to $3.5 million, all of which converted 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 5
7 remain in effect for the entire term of the term facility. As of December 31, 1998, the principal amount of indebtedness outstanding under the term facility was $3.4 million. EFFECT OF YEAR 2000 ISSUE The Year 2000 issue is the result of computer programming being written using two digits rather than four to define the applicable year. Any of the Company's systems, as well as those of suppliers, third party payors and customers, having date sensitive logic may interpret a date using "00" as the year 1900 rather than 2000. This may cause inaccurate processing or possible system failure and may potentially disrupt operations. This disruption may result in, among other things, a temporary inability to process transactions, send bills for services or engage in similar normal business activities. In 1998, the Company completed an assessment of the readiness of its internal computer systems and related applications to accommodate date-sensitive information relating to the year 2000 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. The Company will continue to analyze systems and services that utilize date-embedded codes that may experience operational problems when the year 2000 is reached. The Company will continue to communicate with its suppliers, third-party payors and customers to coordinate Year 2000 compliance. Because the ability of these third parties to address their Year 2000 issues is outside the Company's control, the failure of third parties to adequately address their respective Year 2000 issues may have a material adverse effect on the Company's results of operations and financial condition. The foregoing statements are intended to be and are hereby designated "Year 2000 Readiness Disclosure" statements within the meaning of the Year 2000 Information and Readiness Disclosure Act. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 6
8 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 27.1 -- 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 February 12, 1999 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date February 12, 1999 By /s/ HAROLD FRIEDMAN ------------------------------------ Harold Friedman, Vice Chairman 8
10 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 27.1 -- Financial Data Schedule. </TABLE>