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FRIEDMAN INDUSTRIES INC - Quarter Report: 2003 June (Form 10-Q)

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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 JUNE 30, 2003
     
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)
     
TEXAS
(State or other jurisdiction of
incorporation or organization)
  74-1504405
(I.R.S. Employer Identification
Number)

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          

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

           
  Yes               No     X

     At June 30, 2003, the number of shares outstanding of the issuer’s only class of stock was 7,573,239 shares of Common Stock.



 


 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS — UNAUDITED
CONSOLIDATED STATEMENTS OF EARNINGS — UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
NOTES TO QUARTERLY REPORT — UNAUDITED
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in securities and use of proceeds
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Fifth Amend.to Amended Letter Agreement
Revolving Promissory Note
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS — UNAUDITED

ASSETS

                       
          JUNE 30, 2003   MARCH 31, 2003
         
 
CURRENT ASSETS:
               
 
Cash and cash equivalents
  $ 458,518     $ 673,127  
 
Accounts receivable, net of allowance of $7,276 in both periods
    9,792,478       9,966,061  
 
Inventories
    22,410,128       24,032,268  
 
Other
    106,023       98,044  
 
   
     
 
     
TOTAL CURRENT ASSETS
    32,767,147       34,769,500  
PROPERTY, PLANT AND EQUIPMENT:
               
 
Land
    437,793       437,793  
 
Buildings and improvements
    4,063,579       4,063,579  
 
Machinery and equipment
    17,289,065       17,216,823  
 
Less accumulated depreciation
    (15,162,527 )     (14,930,027 )
 
   
     
 
 
    6,627,910       6,788,168  
OTHER ASSETS:
               
 
Cash value of officers’ life insurance
    1,228,177       1,221,258  
 
   
     
 
     
TOTAL ASSETS
  $ 40,623,234     $ 42,778,926  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
               
 
Accounts payable and accrued expenses
  $ 5,605,730     $ 9,870,888  
 
Current portion of long-term debt
    68,496       68,496  
 
Dividends payable
    227,189       151,460  
 
Income taxes payable
    391,333       406,620  
 
Contribution to profit sharing plan
    66,000       260,000  
 
Employee compensation and related expenses
    307,281       277,924  
 
   
     
 
     
TOTAL CURRENT LIABILITIES
    6,666,029       11,035,388  
LONG-TERM DEBT, less current portion
    2,039,920       57,329  
DEFERRED INCOME TAXES
    274,458       283,458  
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
    156,000       156,000  
STOCKHOLDERS’ EQUITY:
               
 
Common stock, par value $1:
               
   
Authorized shares — 10,000,000
               
   
Issued and outstanding shares — 7,573,239 at June 30, 2003 and March 31, 2003
    7,573,239       7,573,239  
 
Additional paid-in capital
    27,710,369       27,710,369  
 
Retained deficit
    (3,796,781 )     (4,036,857 )
 
   
     
 
     
TOTAL STOCKHOLDERS’ EQUITY
    31,486,827       31,246,751  
 
   
     
 
     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 40,623,234     $ 42,778,926  
 
   
     
 

2


 

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF EARNINGS — UNAUDITED

                   
      THREE MONTHS ENDED JUNE 30,
     
      2003   2002
     
 
Net sales
  $ 25,204,170     $ 25,561,298  
Costs and expenses
               
 
Costs of goods sold
    23,255,513       24,092,780  
 
General, selling and administrative costs
    1,234,095       1,043,996  
 
Interest
    8,732       30,114  
 
   
     
 
 
    24,498,340       25,166,890  
Interest and other income
    (2,148 )     (25,524 )
 
   
     
 
Earnings before federal income taxes
    707,978       419,932  
Provision (benefit) for federal income taxes:
               
 
Current
    249,713       134,777  
 
Deferred
    (9,000 )     8,000  
 
   
     
 
 
    240,713       142,777  
 
   
     
 
Net earnings
  $ 467,265     $ 277,155  
 
   
     
 
Average number of common shares outstanding:
               
 
Basic
    7,573,239       7,571,239  
 
Diluted
    7,589,900       7,571,239  
Net earnings per share:
               
 
Basic
  $ 0.06     $ 0.04  
 
Diluted
  $ 0.06     $ 0.04  
Cash dividends declared per common share
  $ 0.03     $ 0.02  

3


 

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

                       
          THREE MONTHS ENDED JUNE 30,
         
          2003   2002
         
 
OPERATING ACTIVITIES
               
 
Net earnings
  $ 467,265     $ 277,155  
 
Adjustments to reconcile net income to cash provided by operating activities:
               
   
Depreciation
    232,500       241,766  
   
Provision for deferred taxes
    (9,000 )     8,000  
 
Decrease (increase) in operating assets:
               
   
Accounts receivable
    173,583       (271,431 )
   
Inventories
    1,622,140       1,408,408  
   
Other current assets
    (7,979 )     (53,600 )
 
Increase (decrease) in operating liabilities:
               
   
Accounts payable and accrued expenses
    (4,265,158 )     (1,801,026 )
   
Contribution to profit-sharing plan payable
    (194,000 )     (194,000 )
   
Employee compensation and related expenses
    29,357       9,109  
   
Federal income taxes payable
    (15,287 )     134,777  
 
   
     
 
     
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
    (1,966,579 )     (240,842 )
INVESTING ACTIVITIES
               
 
Purchase of property, plant and equipment
    (72,242 )     (140,764 )
 
Increase in cash surrender value of officers’ life insurance
    (6,919 )     (21,184 )
 
   
     
 
     
NET CASH USED IN INVESTING ACTIVITIES
    (79,161 )     (161,948 )
FINANCING ACTIVITIES
               
 
Cash dividends paid
    (151,460 )     (75,710 )
 
Principal payments on notes payable
    (17,409 )     (2,179,483 )
 
Proceeds of long-term notes
    2,000,000       69,493  
 
   
     
 
     
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES
    1,831,131       (2,185,700 )
 
   
     
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (214,609 )     (2,588,490 )
 
Cash and cash equivalents at beginning of period
    673,127       4,683,894  
 
   
     
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 458,518     $ 2,095,404  
 
   
     
 

4


 

FRIEDMAN INDUSTRIES, INCORPORATED

NOTES TO QUARTERLY REPORT — UNAUDITED
THREE MONTHS ENDED JUNE 30, 2003

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, 2003.

NOTE B — INVENTORIES

     Inventories consist of prime coil, nonstandard coil and tubular materials. Prime coil inventory (“prime inventory”) consists primarily of raw materials, non-standard coil inventory consists primarily of finished goods and tubular inventory consists of both raw materials and finished goods. Inventories are valued at the lower of cost or replacement market. Cost for prime inventory is determined under the last-in, first-out (“LIFO”) method. Cost for tubular inventory is determined using the weighted average method. Cost for non-standard inventory is determined using the specific identification method.

NOTE C — NEW ACCOUNTING PRONOUNCEMENT

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”). FIN 46 requires that unconsolidated variable interest entities must be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or residual benefits. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the periods beginning after June 15, 2003. No variable interest entities have been created after January 31, 2003. Management is currently evaluating the effect of variable interest entities, if any, created prior to January 31, 2003.

NOTE D — STOCK BASED COMPENSATION

     The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The fair value of options was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 3.0%, a dividend yield of 3.4%, volatility factor of the expected market price of the Company’s common stock of 0.42, and a weighted average expected life of the option of four years.

     The following schedule reflects the impact on net income and earnings per common share if the Company had applied the fair value recognition provisions of Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock based employee compensation for the three months ended June 30:

                     
        2003   2002
       
 
Reported net income
  $ 467,265     $ 277,155  
Less: compensation expenses per SFAS No. 123, net of tax
    31,582       .00  
 
   
     
 
Pro forma net income
  $ 435,683     $ 277,155  
 
   
     
 
BASIC EARNINGS PER COMMON SHARE:
               
Reported net income
    .06       .04  
Less: compensation expense per SFAS No. 123, net of tax
    .00       .00  
 
   
     
 
Pro forma net income
    .06       .04  
 
   
     
 
DILUTED EARNINGS PER COMMON SHARE:
               
Reported net income
    .06       .04  
Less: compensation expense per SFAS No. 123, net of tax
    .00       .00  
 
   
     
 
Pro forma net income
    .06       .04  
 
   
     
 

NOTE E — RENEWAL OF CREDIT FACILITY

     During the quarter ended June 30, 2003, the Company extended its revolving line of credit facility through April 1, 2006.

5


 

NOTE F — SEGMENT INFORMATION

                     
        THREE MONTHS ENDED
        JUNE 30,
       
        2003   2002
       
 
        IN THOUSANDS
Net sales
               
 
Coil
  $ 13,395     $ 14,044  
 
Tubular
    11,809       11,517  
 
   
     
 
   
Total net sales
  $ 25,204     $ 25,561  
 
   
     
 
Operating profit
               
 
Coil
  $ 710     $ 367  
 
Tubular
    769       586  
 
   
     
 
   
Total operating profit
    1,479       953  
 
Corporate expenses
    764       529  
 
Interest expense
    9       30  
 
Interest & other income
    (2 )     (26 )
 
   
     
 
   
Total earnings before taxes
  $ 708     $ 420  
 
   
     
 
                     
        June 30,
2003
  March 31,
2003
       
 
Segment assets
               
 
Coil
  $ 17,260     $ 18,967  
 
Tubular
    21,607       21,849  
 
   
     
 
 
 
  38,867     40,816  
  Corporate assets   1,756     1,963  
 
   
     
 
   
 
  40,623     42,779  
 
   
     
 

6


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

    Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

     During the quarter ended June 30, 2003, sales and costs of goods sold declined $357,128 and $837,267, respectively, from the comparable amounts recorded during the quarter ended June 30, 2002, which had the effect of increasing gross profit by $480,139. Both coil and tubular operations experienced an increase in gross profit as the result of average selling prices accelerating at a greater rate than related costs of material. The Company experienced somewhat stronger market conditions for its products and services in the 2003 quarter as compared to market conditions in the 2002 quarter, and accordingly, overall operations reflected some improvement.

     General, selling and administrative costs increased $190,099 from the amount recorded in the 2002 quarter. This increase was related primarily to the write-off of a bad debt incurred during the 2003 quarter and to variable expenses associated with the increase in earnings.

     Interest expense decreased $21,382 from the comparable amount recorded during the 2002 quarter. This decrease was related primarily to a reduction in interest rates paid on borrowings and reductions in short and long term debt.

     Interest and other income decreased $23,376 primarily as the result of a decrease in average invested cash positions during the 2003 quarter.

     Federal income taxes during the 2003 quarter increased $97,936 from the comparable amount recorded during the 2002 quarter. This increase was related to the increase in earnings before taxes in the 2003 quarter since 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 June 30, 2003. Current ratios were 4.9 and 3.2 at June 30, 2003 and March 31, 2003, respectively. Working capital was $26,101,118 at June 30, 2003 and $23,734,112 at March 31, 2003. During the quarter ended June 30, 2003, the Company maintained assets and liabilities at levels it believed were commensurate with operations. During the quarter ended June 30, 2003, the Company paid down accounts payable by using the cash flow generated from reducing inventories and borrowing funds pursuant to the revolving facility described below. The Company expects to continue to monitor and evaluate balance sheet components depending on changes in market conditions and the Company’s operations.

     The Company has extended its credit arrangement with a bank which provides for a revolving line of credit facility (the “revolving facility”). Pursuant to the revolving facility which expires April 1, 2006, the Company may borrow up to $6 million at an interest rate no greater than the bank’s prime rate. At June 30, 2003, the Company had borrowings of $2,000,000 outstanding under the revolving facility.

7


 

     Notwithstanding the current market conditions, the Company believes its cash flows from operations and borrowing capability under its revolving facility are adequate to fund its expected cash requirements for the next twenty-four months.

Critical Accounting Policies

     The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. One such accounting policy which requires significant estimates and judgments is the valuation of LIFO inventories in the Company’s quarterly reporting. The Company’s quarterly valuation of inventory requires estimates of the year-end quantities which is inherently difficult. Historically, these estimates have been materially correct. In addition, the Company maintains an allowance for doubtful accounts receivable by providing for specifically identified accounts where collectibility is doubtful and a general allowance based on the aging of the receivables compared to past experience and current trends. On an on-going basis, the Company evaluates estimates and judgements. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances.

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 changes in the demand and prices of the Company products, changes in the demand for steel and steel products in general, and the Company’s success in executing its internal operating plans.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Not material

8


 

Item 4. Controls and Procedures

      The Company's management, with the participation of the Company's principal executive officer (CEO) and principal financial officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the fiscal quarter ended June 30, 2003. Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures were effective as of the end of the fiscal quarter ended June 30, 2003 to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

      There were no changes in the Company's internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

9


 

FRIEDMAN INDUSTRIES, INCORPORATED

Three Months Ended June 30, 2003

Part II — OTHER INFORMATION

Item 1. Legal Proceedings

      Not applicable

Item 2. Changes in securities and use of proceeds

  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

  10.1 — Fifth Amendment to Amended and Restated Letter Agreement
 
  10.2 — Revolving Promissory Note Between the Company and JP Morgan Chase Bank
 
  31.1 — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Jack Friedman
 
  31.2 — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Ben Harper
 
  32.1 — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Jack Friedman
 
  32.2 — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Ben Harper

  b). Reports on Form 8-K

        None

10


 

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, 2003      
  By   /s/  BEN HARPER
     
  Ben Harper, Senior Vice President-Finance
  (Principal Financial and Accounting Officer)
       

11


 

EXHIBIT INDEX

     
Exhibit No. Description


Exhibit 10.1
  — Fifth Amendment to Amended and Restated Letter Agreement
 
Exhibit 10.2
  — Revolving Promissory Note Between the Company and JP Morgan Chase Bank
 
Exhibit 31.1
  — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Jack Friedman
 
Exhibit 31.2
  — Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Ben Harper
 
Exhibit 32.1
  — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Jack Friedman
 
Exhibit 32.2
  — Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Ben Harper