FRIEDMAN INDUSTRIES INC - Quarter Report: 2008 December (Form 10-Q)

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

		December 31, 2008				March 31, 2008
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	9,489,475			$	2,643,922
Accounts receivable, net of allowances for bad debts and cash discounts of $37,276 at December 31 and March 31, 2008			14,514,867				16,742,000
Inventories			28,091,915				29,900,327
Other			479,701				136,345
TOTAL CURRENT ASSETS			52,575,958				49,422,594
PROPERTY, PLANT AND EQUIPMENT:
Land			1,082,331				1,082,331
Construction in progress			—				8,706,172
Buildings and yard improvements			7,000,838				3,494,294
Machinery and equipment			29,082,540				21,879,259
Less accumulated depreciation			(19,574,683	)			(18,389,983	)
			17,591,026				16,772,073
OTHER ASSETS:
Cash value of officers’ life insurance and other assets			762,000				720,001
Deferred income taxes			—				43,724
TOTAL ASSETS		$	70,928,984			$	66,958,392
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	8,469,245			$	13,499,314
Current portion of long-term debt			54,028				54,028
Dividends payable			815,933				339,972
Income taxes payable			2,424,769				70,069
Contribution to profit sharing plan			275,500				259,500
Employee compensation and related expenses			1,246,416				561,483
TOTAL CURRENT LIABILITIES			13,285,891				14,784,366
LONG-TERM DEBT LESS CURRENT PORTION			27,014				6,667,536
DEFERRED INCOME TAXES			261,967				—
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS			598,933				549,749
STOCKHOLDERS’ EQUITY:
Common stock, par value $1:
Authorized shares — 10,000,000
Issued shares — 7,975,160 at December 31 and March 31, 2008			7,975,160				7,975,160
Additional paid-in capital			29,003,674				29,003,674
Treasury stock at cost (1,175,716 shares at December 31 and March 31, 2008)			(5,475,964	)			(5,475,964	)
Retained earnings			25,252,309				13,453,871
TOTAL STOCKHOLDERS’ EQUITY			56,755,179				44,956,741
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	70,928,984			$	66,958,392

FRIEDMAN INDUSTRIES, INCORPORATED

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Net sales		$	56,182,665			$	38,062,240			$	186,855,501			$	129,747,321
Costs and expenses
Costs of goods sold			47,775,322				36,092,428				160,237,068				121,575,529
General, selling and administrative costs			1,585,716				1,024,178				5,433,524				3,530,341
Interest expense			—				—				23,310				47,740
			49,361,038				37,116,606				165,693,902				125,153,610
Interest and other income			(26,584	)			(65,875	)			(130,761	)			(163,175	)
Earnings before income taxes			6,848,211				1,011,509				21,292,360				4,756,886
Provision for income taxes:
Current			2,192,149				317,913				7,012,409				1,523,175
Deferred			101,897				33,389				305,691				100,167
			2,294,046				351,302				7,318,100				1,623,342
Net income		$	4,554,165			$	660,207			$	13,974,260			$	3,133,544
Weighted average number of common shares outstanding:
Basic			6,799,444				6,712,108				6,799,444				6,712,108
Diluted			6,799,444				6,771,995				6,799,444				6,776,592
Net income per share:
Basic		$	0.67			$	0.10			$	2.06			$	0.47
Diluted		$	0.67			$	0.10			$	2.06			$	0.46
Cash dividends declared per common share		$	0.12			$	0.06			$	0.32			$	0.22

		Nine Months Ended
		December 31,
		2008				2007
OPERATING ACTIVITIES
Net income		$	13,974,260			$	3,133,544
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			1,184,701				847,200
Provision  for deferred taxes			305,691				100,167
Provision for postretirement benefits			49,184				39,706
Decrease (increase) in operating assets:
Accounts receivable			2,227,133				5,563,741
Inventories			1,808,412				5,967,870
Prepaid federal income taxes			—				(424,739	)
Other			(343,356	)			(83,796	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses			(5,030,069	)			(9,049,723	)
Contribution to profit-sharing plan			16,000				(62,500	)
Employee compensation and related expenses			684,933				(168,507	)
Federal income taxes			2,354,700				(46,742	)
NET CASH PROVIDED  BY OPERATING ACTIVITIES			17,231,589				5,816,221
INVESTING ACTIVITIES
Purchases of property, plant and equipment			(2,003,655	)			(3,921,132	)
Increase in cash value of officers’ life insurance and other assets			(41,999	)			(35,400	)
NET CASH USED IN INVESTING ACTIVITIES			(2,045,654	)			(3,956,532	)
FINANCING ACTIVITIES
Cash dividends paid			(1,699,861	)			(1,610,907	)
Principal payments on notes payable and revolving credit facility			(6,640,521	)			(27,014	)
Long-term debt			—				162,084
NET CASH USED IN FINANCING ACTIVITIES			(8,340,382	)			(1,475,837	)
INCREASE  IN CASH AND CASH EQUIVALENTS			6,845,553				383,852
Cash and cash equivalents at beginning of period			2,643,922				1,039,030
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	9,489,475			$	1,422,882

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED

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, 2008.

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, 2008, LIFO inventories were reduced and are not expected to be replaced by March 31, 2009. The Company expects that the replacement cost and the liquidated cost of material will be approximately equal at March 31, 2009 and that no significant gain or loss will be experienced in the year ended March 31, 2009 as a result of this liquidation. Accordingly, no gain or loss from this liquidation was recognized in the quarter ended December 31, 2008.

     In December 2008, average selling prices for finished tubular products declined significantly. As a result, the Company recorded an adjustment of approximately $1,436,000 to reduce the inventory value of finished tubular goods to reflect the required lower of cost or market valuation at December 31, 2008. This adjustment had the effect of increasing costs of goods sold and reducing earnings before taxes by approximately $1,436,000.

     A summary of inventory values by product group follows:

		December 31,				March 31,
		2008				2008
Prime Coil Inventory		$	6,672,787			$	8,121,728
Non-Standard Coil Inventory			228,802				918,334
Tubular Raw Material			8,130,543				7,444,805
Tubular Finished Goods			13,059,783				13,415,460
		$	28,091,915			$	29,900,327

NOTE C — LONG-TERM DEBT

     The Company has a $10 million revolving credit facility (the “revolver”) which expires April 1, 2010. There were no amounts outstanding pursuant to the revolver at December 31, 2008. At March 31, 2008, the Company owed $6,600,000 pursuant to the revolver at an average interest rate of approximately 4.4%. These loans were paid off in April and May 2008.

     In June 2007, the Company incurred an interest free, long-term liability of $162,084 related to the purchase of pipe loading equipment which is payable in 36 equal monthly payments and has a balance due of $81,042 at December 31, 2008.

NOTE D — STOCK BASED COMPENSATION

     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 quarters ended December 31:

		2008								2007
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding at beginning of quarter			—				—				88,836			$	2.33
Granted			—				—				—				—
Exercised			—				—				—				—
Canceled or expired			—				—				—				—
Outstanding at end of quarter			—				—				88,836			$	2.33

		2008								2007
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Exercisable at the end of the quarter			—				—				88,836			$	2.33
Weighted average fair value of options granted during the quarter			—				—				—				—

Since no options were outstanding at December 31, 2008, intrinsic value was not applicable.

NOTE E — SEGMENT INFORMATION

		December 31,				March 31,
		2008				2008
		(in thousands)				(in thousands)
Segment assets
Coil		$	22,482			$	29,469
Tubular			38,178				34,041
			60,660				63,510
Corporate assets			10,269				3,448
		$	70,929			$	66,958

     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 consist primarily of cash and cash equivalents and the cash value of officers’ life insurance.

NOTE F — SUPPLEMENTAL CASH FLOW INFORMATION

The Company paid income taxes of approximately $4,243,000 and $2,282,000 in the nine months ended December 31, 2008 and 2007, respectively. Interest paid in the nine months ended December 31, 2008 and 2007 was approximately $23,000 and $48,000, respectively.

NOTE G — NEW ACCOUNTING PRONOUNCEMENTS

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective, for the Company, beginning the first quarter of fiscal year 2009. For certain types of financial instruments, SFAS No. 157 requires a limited form of retrospective transition, whereby the cumulative impact of the change in principle is recognized in the opening balance of retained earnings in the fiscal year of adoption. All other provisions of SFAS No. 157 were applied prospectively beginning in the first quarter of fiscal year 2009. Adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements in the nine months ended December 31, 2008.

     During the nine months ended December 31, 2008, sales, costs of goods sold and gross profit increased $57,108,180, $38,661,539 and $18,446,641, respectively, from the comparable amounts recorded during the nine months ended December 31, 2007. The increase in sales was related primarily to an increase in average selling prices. The average per ton selling price increased from approximately $622 per ton in the 2007 period to approximately $950 per ton in the 2008 period. Total tons shipped declined from approximately 208,000 tons in the 2007 period to 197,000 tons in the 2008 period. The increase in costs of goods sold was primarily related to an increase in the average per ton cost of goods which increased from approximately $583 per ton in the 2007 period to $815 per ton in the 2008 period. The increase in gross profit in the 2008 period was related to substantially improved margins earned on pipe sales. Gross profit as a percentage of sales increased from approximately 6.3% in the 2007 period to 14.2% in the 2008 period. The Company experienced strong demand for its pipe products in the 2008 period and margins improved significantly. In addition, the Company benefited from lower cost inventory sold at substantially improved selling prices.

     Coil product segment sales increased approximately $3,010,000 during the 2008 period. This increase resulted primarily from an increase in the average per ton selling price which increased from approximately $648 per ton in the 2007 period to $950 per ton in the 2008 period. In the 2008 period, the Company experienced a loss of approximately $559,000 related to the coil operations compared to a profit of $1,938,000 in the 2007 period. Coil products are used primarily in durable goods and demand for such products was depressed in the 2008 period. As a result, tons sold declined from approximately 92,000 tons during the 2007 period to approximately 66,000 tons in the 2008 period. Also, the Company incurred a significant increase in cost of coil products during the 2008 period. Average per ton cost increased from approximately $616 per ton in the 2007 period to $939 per ton in the 2008 period. The Company was unable to pass all of this increased cost to its customers in the 2008 period. The Company believes that market conditions for coil products will remain soft until the U. S. economy improves and generates improved demand for durable goods.

     In the 2008 period, LIFO inventory of coil products was reduced and is not expected to be replaced by March 31, 2009. Cost of material related to this liquidation had a cost approximately the same as the current replacement cost. Accordingly, this liquidation had no significant impact on earnings in the 2008 period.

     In August 2008, the Company began operations at the new coil facility located at Decatur, Alabama. This operation produced a loss of approximately $555,000 during the 2008 period. The Company expects that this facility will continue to produce a loss during the ramp up period and until demand for coil products improves.

     The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory. NSC continues to supply the Company with steel coils in amounts that are adequate for the Company’s purposes. Loss of NSC as a supplier could have an adverse effect on the Company’s business.

     Tubular product segment sales increased approximately $54,099,000 during the 2008 period. This increase resulted from both an increase in average selling prices and an increase in tons sold. The average selling price per ton increased from approximately $602 per ton in the 2007 period to $950 per ton in the 2008 period. The Company sold approximately 116,000 tons of pipe in the 2007 period compared to approximately 132,000 tons in the 2008 period. Tubular product segment operating profit as a percentage of segment sales improved from 6.3% in the 2007 period to 20.1% in the 2008 period. The Company experienced strong market conditions for its pipe products in the 2008 period and margins improved significantly. In addition, the Company benefited from lower cost inventory sold at substantially improved selling prices.

     Beginning in December 2008, the Company experienced a significant decline in average selling prices for finished tubular products. As a result, the Company recorded an adjustment of approximately $1,436,000 to reduce the value of finished tubular products to reflect the required lower of cost or market valuation at December 31, 2008. This adjustment had the effect of reducing earnings before income taxes by $1,436,000 during the 2008 period. The Company believes that the decline in average selling prices is a result of lack of demand related primarily to the decline in the U. S. economy.

     U. S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation, is the Company’s primary supplier of tubular products and coil material used in pipe manufacturing and is a major customer of finished tubular products. In the 2008 period, USS accounted for approximately 30% of total Company sales. Certain finished tubular products are used in the energy business and are manufactured by the Company and sold to USS. Beginning in December 2008 and continuing in the quarter ending March 31, 2009, USS reduced orders for these finished tubular products. The Company expects that reduced orders for finished tubular products will continue until the U. S. economy recovers and generates improved demand for these products. Loss of USS as a supplier or customer could have an adverse effect on the Company’s business.

     During the 2008 period, general, selling and administrative costs increased $1,903,183 from the amount recorded during the 2007 period. This increase was related primarily to increases in commissions and bonuses associated with the increase in earnings.

     Income taxes increased $5,694,758 from the comparable amount recorded during the 2007 period. This increase was primarily related to the increase in earnings before taxes. Effective tax rates were 34.4% and 34.1% in the 2008 and 2007 periods, respectively. The Company incurred an increase in state income taxes in the 2008 period.

     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, 2008. 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, 2008 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, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FRIEDMAN INDUSTRIES, INCORPORATED

Three Months Ended December 31, 2008

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

     c). 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

     10.1 —Consulting agreement dated October 31, 2008, by and between Jack Friedman and Friedman Industries, Incorporated (incorporated by reference from Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on November 6, 2008).

     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