FRIEDMAN INDUSTRIES INC - Quarter Report: 2006 December (Form 10-Q)
Table of Contents
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, 2006 | |
| 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
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ( )
Accelerated filer ( )
Non-accelerated filer (X)
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
| Yes | No X |
At December 31, 2006, the number of shares outstanding of the issuer’s only class of stock was 6,712,108 shares of Common Stock.
Table of Contents
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
FRIEDMAN INDUSTRIES,
INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
| DECEMBER 31, 2006 | MARCH 31, 2006 | ||||||||||
| Unaudited | |||||||||||
ASSETS
|
|||||||||||
CURRENT ASSETS: |
|||||||||||
Cash and cash equivalents |
$ | 27,798 | $ | 1,982,526 | |||||||
Accounts receivable, net of allowances for bad debts and cash
discounts of $37,276 at December 31 and March 31, 2006 |
17,415,099 | 17,494,313 | |||||||||
Inventories |
32,135,509 | 27,956,921 | |||||||||
Prepaid federal income tax |
413,740 | — | |||||||||
Other |
291,235 | 117,243 | |||||||||
TOTAL CURRENT ASSETS |
50,283,381 | 47,551,003 | |||||||||
PROPERTY, PLANT AND EQUIPMENT: |
|||||||||||
Land |
1,082,331 | 486,653 | |||||||||
Buildings
and yard improvements |
4,924,373 | 4,088,149 | |||||||||
Machinery and equipment |
23,519,008 | 20,852,126 | |||||||||
Less accumulated depreciation |
(17,722,009 | ) | (17,653,265 | ) | |||||||
| 11,803,703 | 7,773,663 | ||||||||||
OTHER ASSETS: |
|||||||||||
Cash value of officers’ life insurance and other assets |
655,405 | 606,223 | |||||||||
TOTAL ASSETS |
$ | 62,742,489 | $ | 55,930,889 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES: |
|||||||||||
Accounts payable and accrued expenses |
$ | 19,195,410 | $ | 16,713,944 | |||||||
Income taxes payable |
— | 143,196 | |||||||||
Deferred credit for LIFO replacement |
53,235 | — | |||||||||
Dividends payable |
671,211 | 533,330 | |||||||||
Contribution to profit sharing plan |
202,500 | 256,000 | |||||||||
Employee compensation and related expenses |
527,612 | 736,723 | |||||||||
TOTAL CURRENT LIABILITIES |
20,649,968 | 18,383,193 | |||||||||
DEFERRED
INCOME TAXES |
190,391 | 4,618 | |||||||||
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS |
481,329 | 445,743 | |||||||||
STOCKHOLDERS’ EQUITY: |
|||||||||||
Common stock, par value $1: |
|||||||||||
Authorized
shares — 10,000,000 |
|||||||||||
Issued
shares — 7,887,824 and 7,842,342 at December 31, 2006 and March 31, 2006, respectively |
7,887,824 | 7,842,342 | |||||||||
Additional paid-in capital |
28,887,517 | 28,663,814 | |||||||||
Treasury
stock at cost (1,175,716 shares at December 31, 2006 and March 31, 2006) |
(5,475,964 | ) | (5,475,964 | ) | |||||||
Retained
earnings |
10,121,424 | 6,067,143 | |||||||||
TOTAL STOCKHOLDERS’ EQUITY |
41,420,801 | 37,097,335 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 62,742,489 | $ | 55,930,889 | |||||||
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Table of Contents
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS—UNAUDITED
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Net sales |
$ | 47,472,953 | $ | 44,527,263 | $ | 151,726,627 | $ | 133,314,893 | ||||||||
Costs and expenses |
||||||||||||||||
Costs of goods sold |
44,209,344 | 40,692,809 | 140,180,101 | 122,627,975 | ||||||||||||
General, selling
and administrative
costs |
1,142,955 | 1,288,419 | 4,023,638 | 3,883,104 | ||||||||||||
Gain on sale of assets |
— | — | (1,312,839 | ) | — | |||||||||||
| 45,352,299 | 41,981,228 | 142,890,900 | 126,511,079 | |||||||||||||
Interest and other
income |
(57,334 | ) | (97,053 | ) | (181,117 | ) | (191,960 | ) | ||||||||
Earnings before
income taxes |
2,177,988 | 2,643,088 | 9,016,844 | 6,995,774 | ||||||||||||
Provision (benefit)
for income taxes: |
||||||||||||||||
Current |
735,375 | 1,038,901 | 3,038,918 | 2,714,069 | ||||||||||||
Deferred |
63,464 | (64,500 | ) | 185,773 | (86,856 | ) | ||||||||||
| 798,839 | 974,401 | 3,224,691 | 2,627,213 | |||||||||||||
Net income |
$ | 1,379,149 | $ | 1,668,687 | $ | 5,792,153 | $ | 4,368,561 | ||||||||
Average number of
common shares
outstanding: |
||||||||||||||||
Basic |
6,696,947 | 7,151,014 | 6,676,733 | 7,143,503 | ||||||||||||
Diluted |
6,765,628 | 7,258,567 | 6,743,240 | 7,261,022 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.21 | $ | 0.23 | $ | 0.87 | $ | 0.61 | ||||||||
Diluted |
$ | 0.20 | $ | 0.23 | $ | 0.86 | $ | 0.60 | ||||||||
Cash dividends
declared per common
share |
$ | 0.10 | $ | 0.08 | $ | 0.26 | $ | 0.24 | ||||||||
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FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
| Nine Months Ended | ||||||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 5,792,153 | $ | 4,368,561 | ||||
Adjustments to reconcile net income to cash
provided by operating activities: |
||||||||
Depreciation |
761,700 | 699,000 | ||||||
Provision
(benefit) for deferred taxes |
185,773 | (86,856 | ) | |||||
Provision for postretirement benefits |
35,586 | 33,978 | ||||||
Gain on sale of assets |
(1,312,839 | ) | — | |||||
Stock awards |
— | 9,792 | ||||||
Excess tax
benefits associated with equity-based compensation |
(163,212 | ) | — | |||||
Decrease (increase) in operating assets: |
||||||||
Accounts receivable |
79,214 | 2,088,358 | ||||||
Inventories |
(4,178,588 | ) | 5,729,083 | |||||
Deferred debit for LIFO replacement |
— | (130,748 | ) | |||||
Prepaid federal income taxes |
(250,528 | ) | 892,104 | |||||
Other |
(173,992 | ) | (71,802 | ) | ||||
Increase (decrease) in operating liabilities: |
||||||||
Accounts payable and accrued expenses |
2,481,466 | (902,981 | ) | |||||
Deferred credit for LIFO replacement |
53,235 | — | ||||||
Contribution to profit-sharing plan |
(53,500 | ) | (58,000 | ) | ||||
Employee compensation and related expenses |
(209,111 | ) | (36,173 | ) | ||||
Federal income taxes |
(143,196 | ) | 170,222 | |||||
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES |
2,904,161 | 12,704,538 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment |
(4,867,220 | ) | (616,350 | ) | ||||
(Increase) decrease in cash value of officers’
life insurance and other assets |
(49,182 | ) | (27,168 | ) | ||||
Proceeds from sale of asset |
1,388,318 | — | ||||||
NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES |
(3,528,084 | ) | (643,518 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Cash dividends paid |
(1,599,990 | ) | (1,713,667 | ) | ||||
Principal payments on notes payable and
revolving credit facility |
— | (2,897 | ) | |||||
Options exercised |
105,973 | 90,770 | ||||||
Excess tax
benefits associated with equity-based compensation |
163,212 | — | ||||||
NET CASH PROVIDED (USED) IN FINANCING
ACTIVITIES |
(1,330,805 | ) | (1,625,794 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(1,954,728 | ) | 10,435,226 | |||||
Cash and cash equivalents at beginning of period |
1,982,526 | 205,375 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 27,798 | $ | 10,640,601 | ||||
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FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED
THREE MONTHS ENDED DECEMBER 31, 2006
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, 2006.
NOTE B — INVENTORIES
Inventories consist of prime coil, non-standard coil and tubular materials. Prime coil 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 coil inventory is determined under the last-in, first-out (“LIFO”) method. Cost for non-standard coil inventory is determined using the specific identification method. Cost for tubular inventory is determined using the weighted average method.
During the nine months ended December 31, 2006, LIFO inventories were reduced but are expected to be replaced by March 31, 2007. A deferred credit of $53,235 was recorded at December 31, 2006 to reflect replacement costs in excess of LIFO cost.
A summary of inventory values follows:
| December 31, | March 31, | |||||||
| 2006 | 2006 | |||||||
Prime
Coil Inventory |
$ | 8,834,609 | $ | 10,525,848 | ||||
Non-Standard
Coil Inventory |
684,594 | 788,266 | ||||||
Tubular Raw Material |
8,923,724 | 3,889,206 | ||||||
Tubular Finished Goods |
13,692,582 | 12,753,601 | ||||||
| $ | 32,135,509 | $ | 27,956,921 | |||||
NOTE C — LONG-TERM DEBT
The Company has a $6 million revolving credit facility which expires April 1, 2008. There were no amounts outstanding pursuant to the facility at December 31 and March 31, 2006. Subsequent to December 31, 2006, the Company borrowed $4,500,000 pursuant to this revolving facility to support cash requirements. Subject to cash requirements, these borrowings are expected to be repaid by March 31, 2007.
NOTE D — STOCK BASED COMPENSATION
The Company followed Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), for its employee stock options through March 31, 2006. Under APB 25, because the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of grant, no compensation expense was recognized.
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 each of the periods ended December 31, 2006 and December 31, 2005, net income and earnings per common share would be the same as reported income and earnings per common share as no options were granted or unvested in the nine months ended December 31, 2006 or December 31, 2005.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company adopted SFAS 123(R) effective April 1, 2006. SFAS 123(R) permits adoption using one of two methods, a modified prospective method (“Prospective Method”) or a modified retrospective method (“Retrospective Method”). With the Prospective Method, costs are recognized beginning with the effective date based on the requirements of SFAS 123(R) for (i) all share-based payments granted after the effective date of SFAS 123(R), and (ii) all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. The Retrospective Method applies the
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requirements of
the Prospective Method but further permits entities to restate all
prior periods presented based on the amounts previously recognized
under SFAS 123 for purposes of pro forma disclosures. The
Company adopted the Prospective Method on April 1, 2006 and
there was no impact on the
financial statements as all of the options were vested as of April 1,
2006.
Under
the Company’s 1989 and 1996 Stock Option Plans, options were
granted to certain officers and key employees to purchase common
stock of the Company. Pursuant to the terms of the plans, no
additional options may be granted. All options have ten-year terms
and become fully exercisable at the end of six months of continued
employment. The following is a summary of activity relative to
options outstanding during each of the periods ended December 31:
| 2006 | 2005 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Shares | Price | Shares | Price | |||||||||||||
Outstanding
at beginning of period |
137,212 | $ | 2.35 | 224,718 | $ | 2.62 | ||||||||||
Granted |
— | — | — | — | ||||||||||||
Exercised |
(45,482 | ) | $ | 2.33 | (29,000 | ) | $ | 3,13 | ||||||||
Canceled or expired |
(2,894 | ) | $ | 3.13 | (10,979 | ) | $ | 2.40 | ||||||||
Outstanding at end of period |
88,836 | $ | 2.33 | 184,739 | $ | 2.55 | ||||||||||
Exercisable
at the end of the period |
88,836 | $ | 2.33 | 184,739 | $ | 2.55 | ||||||||||
Weighted average fair value of options
granted during the period |
N/A | N/A | ||||||||||||||
Outstanding
and exercisable stock options at December 31, 2006, were as follows:
| Outstanding | Exercisable | |||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||
| Range of | Remaining | Exercise | Exercise | |||||||||||||||||
| Exercise Price | Years | Shares | Price | Shares | Price | |||||||||||||||
$2.33 |
6.2 | 88,836 | $ | 2.33 | 88,836 | $ | 2.33 | |||||||||||||
The aggregate intrinsic value of exercisable and outstanding options at December 31, 2006 was $867,928.
NOTE E — NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement
Financial Accounting Standards No. 151, Inventory
Costs, an Amendment of ARB No. 43, Chapter 4, (“SFAS 151”)
regarding current period expenses generated from abnormal inventory
costs associated with idle facility expense, freight, handling costs and
spoilage. Effective in fiscal 2007, SFAS 151 was adopted by the
Company. SFAS 151 did not have a material impact in the period ended
December 31, 2006 and the Company does not expect that SFAS 151 will
have a material impact in future periods.
In
June 2006 the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(“FIN 48”), regarding the clarification of accounting
for uncertainty in income taxes recognized in an enterprise’s
financial statements. On April 1, 2007, FIN 48 will be
applicable to the Company and is not expected to have a material
impact upon adoption or in future periods.
See also note D regarding the adoption of SFAS 123(R).
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NOTE F
— SEGMENT INFORMATION — UNAUDITED
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Net Sales |
||||||||||||||||
Coil |
$ | 21,084 | $ | 23,740 | $ | 75,775 | $ | 68,339 | ||||||||
Tubular |
26,389 | 20,787 | 75,952 | 64,976 | ||||||||||||
Total net sales |
$ | 47,473 | $ | 44,527 | $ | 151,727 | $ | 133,315 | ||||||||
Operating profit
|
||||||||||||||||
Coil |
$ | 1,071 | $ | 919 | $ | 3,128 | $ | 3,306 | ||||||||
Tubular |
1,495 | 2,239 | 6,483 | 5,623 | ||||||||||||
Total operating
profit |
2,566 | 3,158 | 9,611 | 8,929 | ||||||||||||
General corporate
expenses |
445 | 612 | 2,088 | 2,125 | ||||||||||||
Gain on sale of assets |
— | — | (1,313 | ) | — | |||||||||||
Interest & other
income |
(57 | ) | (97 | ) | (181 | ) | (192 | ) | ||||||||
Total earnings
before taxes |
$ | 2,178 | $ | 2,643 | $ | 9,017 | $ | 6,996 | ||||||||
| December 31, | March 31, | |||||||
| 2006 | 2006 | |||||||
Segment assets |
||||||||
Coil |
$ | 22,797 | $ | 24,528 | ||||
Tubular |
38,769 | 28,684 | ||||||
| 61,566 | 53,212 | |||||||
Corporate assets |
1,176 | 2,719 | ||||||
Total assets |
$ | 62,742 | $ | 55,931 | ||||
Segment amounts reflected above are stated in thousands. General corporate expenses reflect general
and administrative expenses not directly associated with segment operations and consist primarily of
corporate executive and accounting salaries, professional fees and services, bad debts, accrued profit
sharing expense, corporate insurance expenses and office supplies. Corporate assets consists
primarily of cash and cash equivalents and the cash value of
officers’ life insurance.
NOTE G
— SALE OF ASSETS
In
September 2006, the Company closed on the sale of real property
owned by the Company in Houston, Texas. This sale resulted in a
before tax gain of $1,312,839. The proceeds from the sale of this
property were used to purchase and improve real property associated
with the new coil facility to be located in Decatur, Alabama.
NOTE H
— DECATUR COIL FACILITY
Included
in fixed assets are certain purchases totaling approximately
$4,550,000 related to the Company’s new coil facility to be
located in Decatur, Alabama. This coil facility is expected to be
operational in fiscal 2008.
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Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results of
Operations
Nine
Months Ended December 31, 2006 Compared to Nine Months Ended
December 31, 2005
During
the nine months ended December 31, 2006, sales, costs of goods sold
and gross profit increased $18,411,734, $17,552,126 and $859,608,
respectively, from the comparable amounts recorded during the nine
months ended December 31, 2005. The increase in sales was related
to an increase in tons sold as well as an increase in the average
per ton selling price. Tons shipped increased from approximately
217,000 tons in the 2005 period to 229,000 tons in the 2006 period
and the average per ton selling price increased from approximately
$615 per ton in the 2005 period to approximately $661 per ton in
the 2006 period. The increase in costs of goods sold was primarily
related to the increase in sales. Average per ton costs of goods sold
increased from approximately $566 in the 2005 period to $611 in the
2006 period. Gross profit as a percentage of sales decreased from
approximately 8.0% in the 2005 period to 7.6% in the 2006 period.
This decrease in margins earned was related primarily to the coil
product segment which incurred increased material costs that could
not be passed along to customers in the short term.
Coil
product segment sales increased approximately $7,436,000 during the 2006 period.
This increase was primarily associated with an increase in average per ton selling
prices which increased from approximately $629 per ton in the 2005 period to $694
per ton in the 2006 period. Tons of coil products sold remained approximately
the same at 109,000 tons in both periods. Coil operating profit decreased
approximately $178,000 as increased costs of material could not be passed
along in total to customers in the short term. Coil operating profit as a
percentage of coil segment sales decreased from approximately 4.8% in
the 2005 period to 4.1% in the 2006 period.
In
the 2006 period, the Company phased out the Lone Star coil facility (“LSCF”).
LSCF accounted for approximately 1% of total sales and generated a small loss
in the 2006 period. Certain LSCF assets will be redeployed to the Company’s
new coil operation to be located in Decatur, Alabama.
The
Company is dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory.
In the 2006 period, NSC continued to supply steel coils in amounts that were adequate
for the Company’s purposes. The Company does not currently anticipate any significant
change in such supply from NSC.
Tubular
product segment sales increased approximately $10,976,000 during the 2006 period.
This increase was primarily related to an increase in tons shipped in the 2006
period. Tons shipped increased from approximately 108,000 tons in the 2005 period
to 120,000 tons in the 2006 period. Tubular product segment operating profit as
a percentage of segment sales was approximately 8.5% and 8.7% in the 2006
and 2005 periods, respectively.
During
the 2006 period, Lone Star Steel Company (“LSS”), the Company’s primary
supplier of tubular products and coil material used in pipe manufacturing,
continued to supply such products in amounts that were adequate for the Company’s
purposes. The Company does not currently anticipate any significant change in
such supply from LSS.
In
September 2006, the Company sold the real property owned by the Company in
Houston, Texas and signed a 12 month rental agreement to
rent corporate office space at this location for $1,400 per month. This sale resulted in a before tax gain of $1,312,839.
Proceeds received from the sale were used to purchase and improve real
property associated with the Company’s new coil operation to be located
in Decatur, Alabama.
Federal
income taxes increased $597,478 from the comparable amount recorded during the 2005 period.
This increase was primarily related to the increase in earnings before taxes. Effective tax
rates were 37.6% and 35.8% in the 2005 and 2006 periods, respectively.
In the 2006 period, the Company benefited from a reduction in state taxes and from a
tax decrease available to manufacturing companies.
Three
Months Ended December 31, 2006 Compared to Three Months Ended
December 31, 2005
During
the three months ended December 31, 2006, sales and costs of goods sold
increased $2,945,690 and $3,516,535, respectively, and gross profit
decreased $570,845 from the comparable amounts recorded during the three
months ended December 31, 2005. The increase in sales was related primarily to an
increase in the average selling price per ton as the average increased from
approximately $606 per ton in the 2005 quarter to $655 per ton in the 2006 quarter.
In the 2005 quarter the Company sold approximately 73,000 tons compared to
approximately 72,000 tons in the 2006 quarter. The increase in costs of goods
sold was primarily related to increased material cost. The average per ton cost
of goods increased from approximately $554 in the 2005 quarter to
$610 in the 2006
quarter. The decrease in gross profit resulted primarily from a reduction in margins
earned on sales as average selling prices increased at a lower rate than did the
average cost of material. The Company could not pass along all of
the increased
material costs to customers in the short term. Gross profit as a percentage of
sales declined from approximately 8.6% in the 2005 quarter to approximately 6.9%
in the 2006 quarter.
Coil
product segment sales decreased approximately $2,656,000 during the 2006 quarter.
This decrease was related primarily to a decrease in tons sold which declined from
approximately 38,000 tons in the 2005 quarter to 31,000 tons in the 2006 quarter.
Partially offsetting the effect of the decrease in tons sold was an increase in the
average per ton selling prices which increased from approximately $625 per ton in
the 2005 quarter to $680 per ton in the 2006 quarter. Coil operating profit
increased approximately $152,000 from the amount recorded in the 2005 quarter.
Coil operations benefited from improved average selling prices and coil
operating profits as a percentage of sales increased from approximately
3.9% in the 2005 quarter to 5.1% in the 2006 quarter.
Tubular
product segment sales increased approximately $5,602,000 during the 2006 quarter.
Tubular operations experienced an increase in tons sold and an increase in average
selling prices in the 2006 quarter. The average per ton selling price increased
from approximately $585 per ton in the 2005 quarter to $636 per ton in the 2006
quarter. Tons sold increased from approximately 36,000 tons in the 2005 quarter
to 41,000 tons in the 2006 quarter. Tubular product segment operating profits as
a percentage of segment sales were approximately 10.8% and 5.7% in the 2005 and
2006 quarters, respectively. In the 2006 quarter, the Company experienced an
increase in material costs and expenses that could not be passed along to
customers in the short term.
During
the 2006 quarter, general, selling and administrative costs decreased
$145,464 from the amount recorded during the 2005 period. This
decrease was related primarily to reduced bonuses associated with the
decline in earnings and volume and a reduction in remuneration
associated with a retired executive.
Interest
and other income decreased $39,719 from the comparable amount recorded in the 2005 quarter.
This decrease was associated primarily with a decrease in the average invested cash position
in the 2006 quarter.
Federal
income taxes decreased $175,562 from the comparable amount recorded during the 2005 quarter.
This decrease was primarily related to the decrease in earnings before taxes. Effective tax
rates were 36.9% and 36.7% in the 2005 and 2006 quarters, respectively.
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FINANCIAL POSITION, LIQUIDITY AND
CAPITAL RESOURCES
The
Company remained in a strong, liquid position at December 31, 2006.
Current ratios were 2.4 and 2.6 at December 31, 2006 and
March 31, 2006, respectively. Working
capital was $29,633,413 at December 31, 2006 and $29,167,810 at
March 31, 2006.
During
the nine months ended December 31, 2006, the Company maintained
assets and liabilities at levels it believed were commensurate with
operations. Changes in current assets and liabilities during the 2006
period were related primarily to the ordinary course of business of the
Company. An increase in inventories and related increase in accounts
payable during the period was related primarily to a pipe production cycle. The Company expects to
continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.
During
the nine months ended December 31, 2006, the Company
purchased approximately $4,900,000 in fixed assets. These assets were
related primarily to improvements to the small diameter pipe mill
located in Lone Star, Texas and to land,
land improvements and equipment associated with the new coil operation to be located in
Decatur, Alabama. In connection with this planned new operation,
the Company phased out the Lone Star coil facility (“LSCF”) in the six months ended September 30,
2006. At the Decatur site, the Company
intends to construct a coil processing facility using, in part, assets
used at LSCF. The Company expects that
the Decatur processing facility will initially operate a hot roll steel temper mill and
a hot roll steel cut-to-length and leveling line. The Company expects that the Decatur facility
will commence operations in fiscal 2008. In
addition to $680,480 used to purchase the real property in
Alabama, the Company has authorized up to $16 million to be used, if
necessary, for capital expenditures and
working capital related to the acquisition and improvement of the Decatur
facility. At December 31, 2006, the Company had invested
approximately $4,550,000 at the Decatur location.
In
September 2006, the Company sold the real property owned by the
Company in Houston, Texas and signed a 12 month rental agreement to rent corporate
office space at this location for $1,400 per month. This sale resulted in a before tax gain of
$1,312,839. The proceeds of the sale were used to purchase and
improve real property associated with the new coil operation to be
located in Decatur, Alabama.
The Company has an 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, 2008, the Company may borrow up to $6 million at the bank’s
prime rate or 1.5% over LIBOR. The Company uses
the revolving facility to support cash flow and will borrow and repay
the note as working capital is required. At December 31, 2006 and
March 31, 2006, the Company had no borrowings
outstanding under the revolving facility. Subsequent to December 31, 2006, the
Company borrowed $4,500,000 pursuant to the revolving facility to
support cash requirements. Subject to cash requirements,
these borrowings are expected to be repaid by March 31, 2007.
The Company has
in the past and may in the future borrow funds on a term basis to build or improve facilities. The Company
currently has no plans to borrow funds on a term basis.
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 24 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 quarterly valuation of LIFO inventory
requires estimates of the year end quantities and 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. On an ongoing basis, the Company evaluates estimates and
judgments. 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, product quality and proposed expansion
plans. 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’s products, changes in the demand for steel and
steel products in general and the Company’s success in executing its internal
operating plans, including any proposed expansion plans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal
course of business the Company is exposed to market risks primarily
from changes in the cost of steel in inventory and in interest rates.
The Company closely monitors exposure to market risks and develops
appropriate strategies to manage risk. With respect to steel
purchases, there is no recognized market to purchase derivative
financial instruments to reduce the inventory exposure risk on
changing commodity prices. The exposure to market risk associated
with interest rates relates primarily to debt. Recent debt balances
are minimal and, as a result, direct exposure to interest rate
changes is not significant.
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 December 31, 2006. 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 December 31, 2006 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 (i) recorded,
processed, summarized and reported, within the time periods specified in the SEC’s rules and
forms and (ii) accumulated and communicated to the Company’s
management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2006 that have
materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
9
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FRIEDMAN INDUSTRIES, INCORPORATED
Three Months Ended December 31, 2006
Three Months Ended December 31, 2006
Part
II — OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 1A.
Risk Factors
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a). Not applicable
b). 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
a). Exhibits
31.1
—Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
signed by William E. Crow
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 William E. Crow
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
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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.
| Date February 14, 2007 | FRIEDMAN INDUSTRIES, INCORPORATED |
|||
| By | /s/ BEN HARPER | |||
| Ben Harper. Senior Vice
President-Finance (Principal Financial and Accounting Officer) |
||||
11
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EXHIBIT INDEX
| Exhibit No | Description | |
Exhibit 31.1
|
—Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by William E. Crow | |
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 William E. Crow | |
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 |