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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
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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.
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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>
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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>
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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>
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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.
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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
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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
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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
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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
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
QUARTER ENDED DECEMBER 31, 1998.
</LEGEND>
<CIK> 0000039092
<NAME> FRIEDMAN INDUSTRIES, INCORPORATED
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 57,336
<SECURITIES> 0
<RECEIVABLES> 8,237,292
<ALLOWANCES> 0
<INVENTORY> 23,570,040
<CURRENT-ASSETS> 32,455,587
<PP&E> 18,838,031
<DEPRECIATION> 10,986,287
<TOTAL-ASSETS> 40,500,997
<CURRENT-LIABILITIES> 6,442,160
<BONDS> 6,600,000
0
0
<COMMON> 6,826,387
<OTHER-SE> 20,174,890
<TOTAL-LIABILITY-AND-EQUITY> 40,500,997
<SALES> 26,938,495
<TOTAL-REVENUES> 26,938,495
<CGS> 24,806,991
<TOTAL-COSTS> 25,842,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,042
<INCOME-PRETAX> 1,032,880
<INCOME-TAX> 351,180
<INCOME-CONTINUING> 681,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 681,700
<EPS-PRIMARY> $0.10
<EPS-DILUTED> $0.10
</TABLE>
