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, 1999 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, if 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, 1999, the number of shares outstanding of the issuer's only class of stock was 7,184,662 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED BALANCE SHEETS -- UNAUDITED ASSETS <TABLE> <CAPTION> JUNE 30, 1999 MARCH 31, 1999 ------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 1,330,268 $ 3,798,935 Accounts receivable, less allowance for doubtful accounts ($7,276 at June 30, 1999 and March 31, 1999, respectively).......................................... 9,796,304 8,709,728 Inventories -- Note B..................................... 19,494,955 19,906,170 Prepaid expenses and other current assets................. 311,132 119,207 ------------- -------------- Total Current Assets.............................. 30,932,659 32,534,040 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 221,543 221,543 Buildings and improvements................................ 3,346,912 3,317,088 Machinery and equipment................................... 15,933,005 15,879,803 Less allowance for depreciation........................... (11,386,289) (11,127,089) ------------- -------------- 8,115,171 8,291,345 OTHER ASSETS Cash value of officers' life insurance.................... 422,586 197,992 ------------- -------------- $ 39,470,416 $ 41,023,377 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 5,186,552 $ 4,839,560 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 359,226 410,563 Contribution to profit-sharing plan....................... 63,000 252,000 Income taxes payable...................................... 317,691 68,522 Employee compensation and related expenses................ 371,614 387,393 ------------- -------------- Total Current Liabilities......................... 7,098,083 6,758,038 LONG-TERM DEBT, less current portion........................ 4,200,000 6,400,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 345,560 329,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 7,184,662 at June 30, 1999 and 6,828,387 at March 31, 1999....................................... 7,184,662 6,828,387 Additional paid-in capital................................ 26,870,918 25,725,195 Retained earnings......................................... (6,341,807) (5,130,803) ------------- -------------- Total Stockholders' Equity........................ 27,713,773 27,422,779 ------------- -------------- $ 39,470,416 41,023,377 ============= ============== </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Net sales................................................... $26,664,262 $38,923,169 Costs and expenses Costs of goods sold....................................... 24,510,941 36,001,776 General, selling and administrative costs................. 1,150,970 1,308,234 Interest.................................................. 137,711 102,722 ----------- ----------- 25,799,622 37,412,732 Interest and other income................................... (44,680) (39,181) ----------- ----------- Earnings before federal income taxes........................ 909,320 1,549,618 Provision (benefit) for federal income taxes: Current................................................... 293,169 541,870 Deferred.................................................. 16,000 (15,000) ----------- ----------- 309,169 526,870 ----------- ----------- Net earnings................................................ $ 600,151 $ 1,022,748 =========== =========== Average number of common shares outstanding: Basic..................................................... 7,184,662 7,159,949 Diluted................................................... 7,184,662 7,306,673 Net earnings per share: Basic..................................................... $ .08 $ 0.14 Diluted................................................... $ .08 $ 0.14 Cash dividends declared per common share.................... $ .05 $ 0.075 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 600,151 $ 1,022,748 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 259,200 172,476 Provision for deferred taxes........................... 16,000 (15,000) Decrease (increase) in operating assets: Accounts receivable.................................... (1,086,576) (795,891) Inventories............................................ 411,215 456,738 Other current assets................................... (191,925) (53,317) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. 346,992 (1,133,397) Contribution to profit-sharing plan payable............ (189,000) (209,800) Employee compensation and related expenses............. (15,779) (103,493) Federal income taxes payable........................... 249,169 231,870 ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ 399,447 (427,066) INVESTING ACTIVITIES Purchase of property, plant and equipment................. (83,025) (948,639) Increase in cash surrender value of officers' life insurance.............................................. (224,594) (38,563) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES............. (307,619) (987,202) FINANCING ACTIVITIES Cash dividends paid....................................... (410,563) (489,660) Principal payments on long-term debt...................... (2,200,000) (200,000) Proceeds from borrowings of long-term debt................ -- 833,333 Cash received from exercised stock options................ 50,068 5,262 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... (2,560,495) 148,935 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (2,468,667) (1,265,333) Cash and cash equivalents at beginning of period.......... 3,798,935 1,361,693 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,330,268 $ 96,360 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED THREE MONTHS ENDED JUNE 30, 1999 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, 1999. NOTE B -- INVENTORIES Coil inventory consists primarily of raw materials. Tubular inventory is comprised of both raw materials and finished goods. NOTE C -- CASH VALUE OF OFFICERS' LIFE INSURANCE During the quarter ended June 30, 1999, the Company repaid borrowings against the cash surrender value of officers' life insurance ("CSV"). A total of $217,715 was repaid which had the effect of increasing CSV by such amount. NOTE D -- SEGMENT INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ------------------ 1999 1998 ------- ------- (IN THOUSANDS) <S> <C> <C> Net sales Coil processing........................................... $18,801 $25,252 Tubular................................................... 7,863 13,671 ------- ------- Total net sales................................... $26,664 $38,923 ======= ======= Operating profit Coil processing........................................... $ 1,105 $ 1,140 Tubular................................................... 541 1,167 ------- ------- Total operating profit............................ 1,646 2,307 Corporate expenses........................................ 644 693 Interest expense.......................................... 138 103 Interest & other income................................... (45) (39) ------- ------- Total earnings before taxes....................... $ 909 $ 1,550 ======= ======= Segment assets Coil processing........................................... $23,570 $28,500 Tubular................................................... 14,047 17,226 ------- ------- 37,617 45,726 Corporate assets.......................................... 1,853 255 ------- ------- Total assets...................................... $39,470 $45,981 ======= ======= </TABLE> 4
6 FRIEDMAN INDUSTRIES, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 During the quarter ended June 30, 1999, sales, costs of goods sold and gross profit declined $12,258,907, $11,490,835 and $768,072, respectively, from the comparable amounts recorded during the quarter ended June 30, 1998. The declines in sales and costs of goods sold were related to both coil and tubular operations. Sales of coil products declined approximately 25% due to a decrease in tons sold and a decline in the average per ton selling price. The decrease in tons sold of coil products was primarily related to the market demand for these products, and the decline in the average per ton selling price was primarily a reflection of reduced costs of coil products. Sales of tubular products declined approximately 42% due primarily to a decline in volume. Soft demand for tubular products continued to generate intense competition for available sales during the 1999 quarter. The decline in gross profit was primarily related to the decrease in tubular sales described above. Gross profit as a percentage of sales increased from 7.5% during the 1998 quarter to 8.1% during the 1999 quarter. A decline in margins earned on tubular sales was more than offset by an improvement in margins earned on coil sales. General, selling and administrative costs in the 1999 quarter declined $157,264 from the amount recorded during the 1998 quarter. This decline was primarily related to variable expenses associated with reduced volume and earnings. Interest expense in the 1999 quarter increased $34,989 from the amount recorded in the 1998 quarter. During the 1999 quarter, the Company began operating a temper pass mill at its Arkansas coil facility. Interest on the term debt associated with this asset was capitalized in the 1998 quarter and was expensed in the 1999 quarter. Federal income taxes declined $217,701 as a result of the decrease in earnings before tax. The effective tax rate was the same for both quarters. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at June 30, 1999. Current ratios were 4.4 and 4.8 at June 30, 1999 and March 31, 1999, respectively. Working capital was $23,834,576 at June 30, 1999 and $25,776,002 at March 31, 1999. 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, 2002, the Company may borrow up to $8 million at an interest rate no greater than the bank's prime rate. At June 30, 1999, the Company had borrowings outstanding under the revolving facility of $2 million. 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, 1999, the principal amount of indebtedness outstanding under the term facility was $3 million. FORWARD-LOOKING STATEMENTS From time to time, the Company may make certain statements that contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1996) and that involve risk and uncertainty. These forward-looking statements may include, but are not limited to, future results of operations, future production capacity and product quality. Forward-looking statements may be made by management orally or in writing including, but not limited to, this Management's Discussion and Analysis of Financial 5
7 Condition and Results of Operations and other sections of the Company's filings with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results and trends in the future may differ materially depending on a variety of factors including but not limited to, the success of the Company's capital improvements at its Hickman, Arkansas facility, changes in the demand and prices for the Company's products and changes in the demand for steel and steel products in general, and the Company's success in executing its internal operations plans. 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 FRIEDMAN INDUSTRIES, INCORPORATED QUARTER ENDED JUNE 30, 1999 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> 10.1 -- Third Amendment to the Amended and Restated Letter Agreement dated April 1, 1999 between the Company and Chase Bank of Texas ("Chase") 10.2 -- Revolving Promissory Note dated April 1, 1999 between the Company and Chase 27.1 -- Financial Data Schedule </TABLE> 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 August 13, 1999 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date August 13, 1999 By /s/ HAROLD FRIEDMAN ------------------------------------ Harold Friedman, Vice Chairman of the Board 8
10 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 10.1 -- Third Amendment to Amended and Restated Letter Agreement. 10.2 -- Revolving Promissory Note. 27.1 -- Financial Data Schedule. </TABLE>