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 SEPTEMBER 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, 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, 1999, the number of shares outstanding of the issuer's only class of stock was 7,188,213 shares of Common Stock. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I -- FINANCIAL INFORMATION FRIEDMAN INDUSTRIES, INCORPORATED ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS -- UNAUDITED <TABLE> <CAPTION> ASSETS SEPTEMBER 30, 1999 MARCH 31, 1999 ------------------ -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................. $ 711,215 $ 3,798,935 Accounts receivable, less allowance for doubtful accounts ($7,276 at September 30, 1999 and March 31, 1999, respectively).......................................... 10,172,113 8,709,728 Inventories -- Note B..................................... 24,904,371 19,906,170 Prepaid expenses and other current assets................. 274,199 119,207 ------------ ------------ Total Current Assets.............................. 36,061,898 32,534,040 PROPERTY, PLANT AND EQUIPMENT Land...................................................... 221,543 221,543 Buildings and improvements................................ 3,346,912 3,317,088 Machinery and equipment................................... 15,999,367 15,879,803 Less allowance for depreciation........................... (11,646,488) (11,127,089) ------------ ------------ 7,921,334 8,291,345 OTHER ASSETS Cash value of officers' life insurance.................... 586,414 197,992 ------------ ------------ $ 44,569,646 $ 41,023,377 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses............... $ 10,196,813 $ 4,839,560 Current portion of long-term debt......................... 800,000 800,000 Dividends payable......................................... 359,403 410,563 Contribution to profit-sharing plan....................... 126,000 252,000 Income taxes payable...................................... 62,548 68,522 Employee compensation and related expenses................ 447,710 387,393 ------------ ------------ Total Current Liabilities......................... 11,992,474 6,758,038 LONG-TERM DEBT, less current portion........................ 4,000,000 6,400,000 PROVISION FOR NONPENSION RETIREMENT BENEFITS................ 113,000 113,000 DEFERRED INCOME TAXES....................................... 361,560 329,560 STOCKHOLDERS' EQUITY Common stock: Par value $1 per share: Authorized 10,000,000 shares; Issued and outstanding shares -- 7,188,213 at September 30, 1999 and 6,828,387 at March 31, 1999.......................... 7,188,213 6,828,387 Additional paid-in capital................................ 26,878,477 25,725,195 Retained earnings......................................... (5,964,078) (5,130,803) ------------ ------------ Total Stockholders' Equity........................ 28,102,612 27,422,779 ------------ ------------ $ 44,569,646 $ 41,023,377 ============ ============ </TABLE> 1
3 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales................................ $29,397,118 $32,178,289 $56,061,380 $71,101,458 Costs and expenses Costs of goods sold.................... 27,117,844 29,311,077 51,628,785 65,312,853 General, selling and administrative costs............................... 1,095,197 1,223,360 2,246,167 2,531,594 Interest............................... 97,345 152,991 235,056 255,713 ----------- ----------- ----------- ----------- 28,310,386 30,687,428 54,110,008 68,100,160 Interest and other income................ (33,433) (47,145) (78,113) (86,326) ----------- ----------- ----------- ----------- Earnings before federal income taxes..... 1,120,165 1,538,006 2,029,485 3,087,624 Provision (benefit) for federal income taxes: Current................................ 364,857 537,922 658,026 1,079,792 Deferred............................... 16,000 (15,000) 32,000 (30,000) ----------- ----------- ----------- ----------- 380,857 522,922 690,026 1,049,792 ----------- ----------- ----------- ----------- Net earnings............................. $ 739,308 $ 1,015,084 $ 1,339,459 $ 2,037,832 =========== =========== =========== =========== Average number of common shares outstanding: Basic.................................. 7,188,213 7,159,949 7,188,213 7,159,949 Diluted................................ 7,188,213 7,225,536 7,188,213 7,225,536 Net earnings per share: Basic.................................. $ 0.10 $ 0.14 $ 0.19 $ 0.28 Diluted................................ $ 0.10 $ 0.14 $ 0.19 $ 0.28 Cash dividends declared per common share.................................. $ 0.05 $ 0.07 $ .10 $ 0.145 </TABLE> 2
4 FRIEDMAN INDUSTRIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED <TABLE> <CAPTION> SIX MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES Net earnings.............................................. $ 1,339,459 $ 2,037,832 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 519,400 344,952 Provision for deferred taxes........................... 32,000 (30,000) Decrease (increase) in operating assets: Accounts receivable.................................... (1,462,385) 3,180,980 Inventories............................................ (4,998,201) (563,942) Other.................................................. (154,992) (74,384) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses.................. 5,357,253 (6,605,809) Contribution to profit-sharing plan.................... (126,000) (139,600) Employee compensation and related expenses............. 60,317 (124,617) Federal income taxes payable........................... (5,974) (290,208) ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES..................................... 560,877 (2,264,796) INVESTING ACTIVITIES Purchase of property, plant and equipment................. (149,388) (1,372,016) (Increase) decrease in cash value of officers' life insurance.............................................. (388,422) (81,828) ----------- ----------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES..................................... (537,810) (1,453,844) FINANCING ACTIVITIES Cash dividends paid....................................... (771,225) (1,001,354) Principal payments on long-term debt...................... (2,400,000) (400,000) Proceeds from borrowings of long term debt................ 3,833,333 Exercise of stock options................................. 60,438 5,262 ----------- ----------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES..................................... (3,110,787) 2,437,241 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (3,087,720) (1,281,399) Cash and cash equivalents at beginning of period.......... 3,798,935 1,361,693 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 711,215 $ 80,294 =========== =========== </TABLE> 3
5 FRIEDMAN INDUSTRIES, INCORPORATED NOTES TO QUARTERLY REPORT -- UNAUDITED SIX MONTHS ENDED SEPTEMBER 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 six months ended September 30, 1999, the Company repaid borrowings against the cash surrender value of officers' life insurance ("CSV"). A total of $364,619 was repaid which had the effect of increasing CSV by such amount. NOTE D -- SEGMENT INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> Net sales Coil processing..................................... $19,927 $21,694 $38,728 $46,946 Tubular............................................. 9,470 10,484 17,333 24,155 ------- ------- ------- ------- Total net sales............................. $29,397 $32,178 $56,061 $71,101 ======= ======= ======= ======= Operating profit Coil processing..................................... $ 1,007 $ 1,428 $ 2,112 $ 2,569 Tubular............................................. 707 827 1,248 1,994 ------- ------- ------- ------- Total operating profit...................... 1,714 2,255 3,360 4,563 Corporate expenses.................................. 530 611 1,174 1,305 Interest expense.................................... 97 153 235 256 Interest & other income............................. (33) (47) (78) (86) ------- ------- ------- ------- Total earnings before taxes................. $ 1,120 $ 1,538 $ 2,029 $ 3,088 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, ------------------ 1999 1998 ------- ------- (IN THOUSANDS) <S> <C> <C> Segment assets Coil processing........................................... $28,159 $28,256 Tubular................................................... 15,013 14,775 ------- ------- 43,172 43,031 Corporate assets.......................................... 1,398 293 ------- ------- Total assets...................................... $44,570 $43,324 ======= ======= </TABLE> 4
6 FRIEDMAN INDUSTRIES, INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1998 During the six months ended September 30, 1999, sales, costs of goods sold and gross profit declined $15,040,078, $13,684,068 and $1,356,010, respectively, from the comparable amounts recorded during the six months ended September 30, 1998. The Company recorded decreased sales in both coil and tubular product lines. These decreases were primarily related to decreased volume and to the decline in the average selling price per ton. A decline of approximately 8% in tons shipped during the 1999 period reflected softer market conditions for the Company's products. A decline of approximately 14% in the average selling price per ton was primarily associated with reduced costs of coil and tubular products. The decreases in costs of goods sold and gross profit were primarily related to reduced sales as described above. Gross profit as a percentage of sales was approximately the same, period to period. General, selling and administrative costs during the 1999 period declined $285,427 from the amount recorded during the 1998 period. This decrease was primarily related to variable expenses, principally remuneration, associated with reduced earnings or volume. Federal income taxes declined $359,766 from the amount recorded during the 1998 period. This decrease was attributable to the decline in earnings before taxes. Effective tax rates were the same for both periods. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 During the quarter ended September 30, 1999, sales, costs of goods sold and gross profit declined $2,781,171, $2,193,233 and $587,938, respectively, from the comparable amounts recorded during the quarter ended September 30, 1998. Sales declined primarily as a result of a decrease in the average selling price per ton. The average selling price per ton decreased approximately 13% from the comparable amount recorded in the 1998 quarter and was principally associated with reduced costs of products. The decrease in costs of goods sold was primarily related to the sales decline experienced during the quarter. Gross profit declined due to the decline in sales and to a reduction in margins earned on sales. Gross profit as a percentage of sales declined from 8.9% in the 1998 quarter to 7.8% in the 1999 quarter. This decline was primarily related to the Company's coil operations, which incurred increased costs on steel coils, and, due to market conditions, these increased costs could not be immediately passed along to customers. General, selling and administrative costs decreased $128,163 from the amount recorded in the 1998 quarter. This decrease was primarily related to variable expenses, principally remuneration, associated with reduced earnings or volume. Interest expense declined $55,646 from the amount recorded in the 1998 quarter. This reduction in interest was primarily related to the payment of long-term debt during the quarter ended June 30, 1999. Federal income taxes declined $142,065 from the amount recorded during the 1998 quarter. This decrease was attributable to the decline in earnings before taxes. Effective tax rates were the same for both quarters. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company remained in a strong, liquid position at September 30, 1999. Current ratios were 3.0 and 4.8 at September 30, 1999 and March 31, 1999, respectively. Working capital was $24,069,424 at September 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 September 30, 1999, the Company had borrowings outstanding under the revolving 5
7 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 September 30, 1999, the principal amount of indebtedness outstanding under the term facility was $2.8 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 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 key vendors, payors and customers, that have 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. Pursuant to the plan, the Company believes it has identified, addressed and will resolve all such issues by year end 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 SIX MONTHS ENDED SEPTEMBER 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 At the Annual Meeting of Shareholders held on August 27, 1999, the Company's shareholders elected eight 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......................................... 6,214,138 61,457 Harold Friedman....................................... 6,214,169 61,426 William E. Crow....................................... 6,214,169 61,426 Charles W. Hall....................................... 6,214,138 61,457 Alan M. Rauch......................................... 6,214,169 61,426 Hershel M. Rich....................................... 6,213,594 62,001 Henry Spira........................................... 6,213,170 62,425 Kirk K. Weaver........................................ 6,214,169 61,426 </TABLE> 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 November 12, 1999 By /s/ BEN HARPER ------------------------------------ Ben Harper, Senior Vice President-Finance (Chief Accounting Officer) Date November 12, 1999 By /s/ HAROLD FRIEDMAN ------------------------------------ Harold Friedman, Vice Chairman of the Board 8
10 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTIONS ------- ------------ <C> <S> 27.1 -- Financial Data Schedule </TABLE>