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FRIEDMAN INDUSTRIES INC - Quarter Report: 2015 June (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

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, 2015

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   74-1504405

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

19747 HWY 59 N, SUITE 200, HUMBLE, TEXAS 77338

(Address of principal executive offices) (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):    Yes  ¨    No  x

At June 30, 2015, the number of shares outstanding of the issuer’s only class of stock was 6,799,444 shares of Common Stock.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Part I — FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

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

     7   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     9   

Item 4. Controls and Procedures

     9   

Part II — OTHER INFORMATION

     9   

Item 6. Exhibits

     9   

SIGNATURES

     10   

EXHIBIT INDEX

     11   

EX-31.1

  

EX-31.2

  

EX-32.1

  

EX-32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

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Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

 

     JUNE 30, 2015     MARCH 31, 2015  

ASSETS

    

CURRENT ASSETS:

    

Cash

   $ 3,824,429      $ 2,225,924   

Accounts receivable, net of allowances for bad debts and cash discounts of $22,276 and $27,276 at June 30 and March 31, 2015, respectively

     5,651,682        6,896,186   

Inventories

     40,169,832        40,850,666   

Other

     18,123        144,579   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     49,664,066        50,117,355   

PROPERTY, PLANT AND EQUIPMENT:

    

Land

     1,082,331        1,082,331   

Buildings and yard improvements

     7,101,615        7,026,980   

Machinery and equipment

     30,768,124        30,690,049   

Construction in progress

     8,056,697        7,374,177   

Less accumulated depreciation

     (31,084,176     (30,656,226
  

 

 

   

 

 

 
     15,924,591        15,517,311   

OTHER ASSETS:

    

Deferred income tax asset

     151,780        187,358   

Cash value of officers’ life insurance and other assets

     1,153,250        1,136,000   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 66,893,687      $ 66,958,024   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable and accrued expenses

   $ 1,370,147      $ 2,148,555   

Income taxes payable

     62,974        —     

Dividends payable

     67,994        67,994   

Contribution to profit sharing plan

     102,000        51,000   

Employee compensation and related expenses

     502,533        383,562   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     2,105,648        2,651,111   

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     1,113,059        1,089,888   

STOCKHOLDERS’ EQUITY:

    

Common stock, par value $1:

    

Authorized shares — 10,000,000

    

Issued shares — 7,975,160 at June 30 and March 31, 2015

     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 June 30 and March 31, 2015)

     (5,475,964     (5,475,964

Retained earnings

     32,172,110        31,714,155   
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     63,674,980        63,217,025   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 66,893,687      $ 66,958,024   
  

 

 

   

 

 

 

 

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS — UNAUDITED

 

     THREE MONTHS ENDED JUNE 30,  
     2015     2014  

Net Sales

   $ 23,968,569      $ 27,904,521   

Costs and expenses

    

Costs of goods sold

     21,826,676        26,862,460   

General, selling and administrative costs

     1,353,456        1,134,576   
  

 

 

   

 

 

 
     23,180,132        27,997,036   

Interest and other income

     (17,250     (15,252
  

 

 

   

 

 

 

Earnings (loss) before income taxes

     805,687        (77,263

Income tax provision (benefit):

    

Current

     244,160        78,435   

Deferred

     35,578        (37,448
  

 

 

   

 

 

 
     279,738        40,987   
  

 

 

   

 

 

 

Net earnings (loss)

   $ 525,949      $ (118,250
  

 

 

   

 

 

 

Average number of common shares outstanding:

    

Basic

     6,799,444        6,799,444   

Diluted

     6,799,444        6,799,444   

Net earnings (loss) per share:

    

Basic

   $ 0.08      $ (0.02

Diluted

   $ 0.08      $ (0.02

Cash dividends declared per common share

   $ 0.01      $ 0.02   

 

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

 

     THREE MONTHS ENDED JUNE 30,  
     2015     2014  

OPERATING ACTIVITIES

    

Net earnings (loss)

   $ 525,949      $ (118,250

Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities:

    

Depreciation

     427,950        443,849   

Deferred taxes

     35,578        (37,448

Change in postretirement benefits

     23,171        19,208   

Decrease (increase) in operating assets:

    

Accounts receivable

     1,244,504        1,240,793   

Inventories

     680,834        (3,624,589

Other current assets

     126,456        100,189   

Increase (decrease) in operating liabilities:

    

Accounts payable and accrued expenses

     (778,408     (1,643,532

Income taxes payable

     62,974        —     

Contribution to profit sharing plan

     51,000        52,500   

Employee compensation and related expenses

     118,971        (52,815
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     2,518,979        (3,620,095

INVESTING ACTIVITIES

    

Purchase of property, plant and equipment

     (835,230     (521,512

Increase in cash surrender value of officers’ life insurance

     (17,250     (15,250
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (852,480     (536,762

FINANCING ACTIVITIES

    

Cash dividends paid

     (67,994     (135,989
  

 

 

   

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

     (67,994     (135,989
  

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH

     1,598,505        (4,292,846

Cash at beginning of period

     2,225,924        15,081,024   
  

 

 

   

 

 

 

CASH AT END OF PERIOD

   $ 3,824,429      $ 10,788,178   
  

 

 

   

 

 

 

 

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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 U.S. 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 consolidated financial statements and footnotes of Friedman Industries, Incorporated (the “Company”) included in its annual report on Form 10-K for the year ended March 31, 2015.

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 raw materials, 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 using 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.

A summary of inventory values by product group follows:

 

     June 30,
2015
     March 31,
2015
 

Prime Coil Inventory

   $ 9,778,816       $ 8,419,340   

Non-Standard Coil Inventory

     1,521,315         1,804,635   

Tubular Raw Material

     1,247,618         1,888,849   

Tubular Finished Goods

     27,622,083         28,737,842   
  

 

 

    

 

 

 
   $ 40,169,832       $ 40,850,666   
  

 

 

    

 

 

 

NOTE C — DEBT

On May 8, 2015, the Company entered into a credit arrangement for a $5,000,000 revolving line of credit facility (the “Credit Facility”) with JPMorgan Chase Bank N.A. The Credit Facility expires on April 30, 2016. The Credit Facility contains financial covenants that require the Company to not permit: tangible net worth to be less than $57,000,000, ratio of total liabilities to tangible net worth to be greater than 1.00 to 1.00 and net income for any period of four consecutive fiscal quarters to be less than $1.00. At June 30, 2015, the Company did not have borrowings outstanding under the Credit Facility.

NOTE D — SEGMENT INFORMATION (in thousands)

 

     THREE MONTHS ENDED
JUNE 30,
 
     2015      2014  

Net sales

     

Coil

   $ 19,348       $ 17,906   

Tubular

     4,621         9,999   
  

 

 

    

 

 

 

Total net sales

   $ 23,969       $ 27,905   
  

 

 

    

 

 

 

Operating profit (loss)

     

Coil

   $ 2,155       $ (404

Tubular

     (637      772   
  

 

 

    

 

 

 

Total operating profit

     1,518         368   

Corporate expenses

     729         460   

Interest & other income

     (17      (15
  

 

 

    

 

 

 

Earnings (loss) before income taxes

   $ 806       $ (77
  

 

 

    

 

 

 

 

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     June 30,
2015
     March 31,
2015
 

Segment assets

     

Coil

   $ 22,608       $ 21,249   

Tubular

     39,143         42,144   
  

 

 

    

 

 

 
     61,751         63,393   

Corporate assets

     5,143         3,565   
  

 

 

    

 

 

 
   $ 66,894       $ 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, profit sharing expense, corporate insurance expenses and office supplies. Corporate assets consist primarily of cash and the cash value of officers’ life insurance.

NOTE E — SUPPLEMENTAL CASH FLOW INFORMATION

The Company paid income taxes of approximately $29,500 and $93,000 in the quarters ended June 30, 2015 and 2014, respectively. No interest was paid in the quarters ended June 30, 2015 and 2014, respectively. Noncash financing activities consisted of accrued dividends of $67,994 and $135,989 in the quarters ended June 30, 2015 and 2014, respectively.

NOTE F — INCOME TAXES

The Company’s effective tax rate for the quarter ended June 30, 2015 approximated the statutory rate. The Company’s effective tax rate for the quarter ended June 30, 2014 differed from the statutory rate due primarily to a change in estimate related to state income taxes payable as of March 31, 2014.

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

Results of Operations

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

During the three months ended June 30, 2015, sales and costs of goods sold decreased $3,935,952 and $5,035,784, respectively, and gross profit increased $1,099,832 from the comparable amounts recorded during the three months ended June 30, 2014. The decrease in sales resulted from both a decline in tons sold and a decrease in the average selling price. Tons sold declined from approximately 39,000 tons in the 2014 quarter to approximately 38,000 tons in the 2015 quarter. The average per ton selling price decreased from approximately $710 per ton in the 2014 quarter to approximately $627 per ton in the 2015 quarter. The decrease in costs of goods sold was related primarily to a decline in the average per ton cost from approximately $684 per ton in the 2014 quarter to approximately $571 per ton in the 2015 quarter. The increase in gross profit was related primarily to improved margins earned on sales. Gross profit as a percentage of sales increased from approximately 3.7% in the 2014 quarter to approximately 8.9% in the 2015 quarter due primarily to improved market conditions for coil segment products.

Coil product segment sales increased approximately $1,442,000 during the 2015 quarter. This increase was related to an increase in coil tons sold partially offset by a decline in the average per ton selling price. Tons sold increased from approximately 24,000 tons in the 2014 quarter to approximately 30,500 tons in the 2015 quarter. The improvement in coil segment sales volume was primarily attributable to sales to customers manufacturing products used in the commercial freight industry. The average per ton selling price decreased from approximately $745 per ton in the 2014 quarter to approximately $633 per ton in the 2015 quarter. The average per ton cost of coil products sold decreased from approximately $746 per ton in the 2014 quarter to approximately $551 per ton in the 2015 quarter. Coil segment operations recorded an operating profit of approximately $2,155,000 in the 2015 quarter and an operating loss of approximately $404,000 in the 2014 quarter. In the 2015 quarter, the coil segment results benefitted from a decline in the cost of hot-rolled steel coils and an increase in tons sold. In addition, the average selling price per ton of coil products declined 15% while the average cost per ton declined 26%, resulting in improved margins earned on sales during the 2015 quarter. The Company continues to experience intense competition for sales due to the general availability of both domestic and foreign hot-rolled sheet and plate.

The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory. In the 2015 quarter, NSC continued to supply the Company with 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. Loss of NSC as a supplier could have a material adverse effect on the Company’s business.

Tubular product segment sales decreased approximately $5,378,000 during the 2015 quarter. This decrease resulted from both a decrease in the average per ton selling price and a decline in tons sold. The average per ton selling price of tubular products decreased from approximately $656 per ton in the 2014 quarter to approximately $601 per ton in the 2015 quarter. Tons sold declined from approximately 15,000 tons in the 2014 quarter to approximately 8,000 tons in the 2015 quarter. Tubular segment operations recorded

 

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an operating loss of approximately $637,000 in the 2015 quarter and an operating profit of approximately $772,000 in the 2014 quarter. Tubular segment results for the 2015 quarter were negatively impacted by low market prices and reduced demand for the Company’s products used in the oil and gas industry. In the 2015 quarter, the Company experienced a reduction in tons produced, which had the effect of increasing the per ton cost of production and decreasing margins earned. Management believes the lower demand for its tubular products is related to soft market conditions created by oversupply, foreign competition and a decline in the U.S. energy business.

U. S. Steel Tubular Products, Inc. (“USS”) 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. Certain finished tubular products used in the energy business are manufactured by the Company and sold to USS. Loss of USS as a supplier or customer could have a material adverse effect on the Company’s business. The Company can make no assurances as to orders from USS or the amounts of pipe and coil material that will be available from USS in the future.

During the 2015 quarter, general, selling and administrative costs increased $218,880 from the amount recorded during the 2014 quarter. This increase was related primarily to an increase in bonuses associated with the increased earnings.

Income taxes in the 2015 quarter increased $238,751 from the amount recorded in the 2014 quarter. This increase was related primarily to the increase in earnings before taxes in the 2015 quarter.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company remained in a strong, liquid position at June 30, 2015. The current ratios were 23.6 at June 30, 2015 and 18.9 at March 31, 2015. Working capital was $47,558,418 at June 30, 2015, and $47,466,244 at March 31, 2015.

During the quarter ended June 30, 2015, the Company maintained assets and liabilities at levels it believed were commensurate with operations. Changes in balance sheet amounts occurred in the ordinary course of business. Cash increased primarily as a result of reductions in accounts receivable and inventories partially offset by expenditures related to the construction of the Company’s pipe-finishing facility and a decrease in accounts payable. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

The Company is continuing construction of its pipe-finishing facility in Lone Star, Texas. The Company currently estimates the total construction costs for the facility will be approximately $9,200,000. As of June 30, 2015, capitalized expenditures related to the construction of the facility totaled approximately $7,752,000. The Company expects the facility to be completed and operational in the third quarter of fiscal 2016.

The Company entered into a Credit Agreement on May 8, 2015 with JPMorgan Chase Bank N.A. to provide a $5,000,000 revolving line of credit facility (the “Credit Facility”). The Credit Facility expires on April 30, 2016. The Company has not borrowed any amounts under the Credit Facility as of August 13, 2015.

The Company believes that its current cash position along with cash flows from operations and borrowing capability due to its strong balance sheet 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 that requires significant estimates and judgments is the valuation of LIFO inventories in the Company’s quarterly reporting. The quarterly valuation of inventory requires estimates of the year end quantities, which is inherently difficult. Historically, these estimates have been materially correct.

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, as amended) 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 U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 for 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Required

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer (“CEO”) and principal financial officer, 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 Exchange Act), as of the end of the fiscal quarter ended June 30, 2015. Based on this evaluation, the Company’s CEO and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the fiscal quarter ended June 30, 2015 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 principal financial officer, 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 June 30, 2015 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 June  30, 2015

Part II — OTHER INFORMATION

Item 6. Exhibits

 

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 Alex LaRue
  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 Alex LaRue
101.INS      XBRL Instance Document.
101.SCH      XBRL Taxonomy Schema Document.
101.CAL      XBRL Calculation Linkbase Document.
101.DEF      XBRL Definition Linkbase Document.
101.LAB      XBRL Label Linkbase Document.
101.PRE      XBRL Presentation Linkbase Document.

 

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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: August 13, 2015     By  

/s/    ALEX LARUE        

     

Alex LaRue, Vice President – Secretary and

Treasurer (Principal Financial Officer)

 

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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 Alex LaRue
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 Alex LaRue
101.INS      XBRL Instance Document.
101.SCH      XBRL Taxonomy Schema Document.
101.CAL      XBRL Calculation Linkbase Document.
101.DEF      XBRL Definition Linkbase Document.
101.LAB      XBRL Label Linkbase Document.
101.PRE      XBRL Presentation Linkbase Document.

 

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