SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 |
or
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 | ||
OR | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 |
Commission file numberCOMMISSION FILE NUMBER 1-7521
FRIEDMAN INDUSTRIES, INCORPORATED
TEXAS (State or other jurisdiction of | ||
incorporation or organization) | 74-1504405 (I.R.S. Employer Identification Number) |
4001 Homestead Road, Houston, TexasHOMESTEAD ROAD, HOUSTON, TEXAS 77028-5585
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 |
Yesü No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126b-212b-2 of the Exchange Act).
Yes NoüYes No X
At December 31, 2002,June 30, 2003, the number of shares outstanding of the issuer’s only class of stock was 7,573,239 shares of Common Stock.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FRIEDMAN INDUSTRIES, INCORPORATED
ASSETS
December 31, 2002 | March 31, 2002 | ||||||||||
CURRENT ASSETS | |||||||||||
Cash and cash equivalents | $ | 161,471 | $ | 4,683,894 | |||||||
Accounts receivable | 8,033,092 | 7,485,217 | |||||||||
Inventories — Note B | 24,826,861 | 23,502,201 | |||||||||
Prepaid expenses and other current assets | 395,027 | 135,676 | |||||||||
Total Current Assets | 33,416,451 | 35,806,988 | |||||||||
PROPERTY, PLANT AND EQUIPMENT | |||||||||||
Land | 437,793 | 221,543 | |||||||||
Buildings and improvements | 3,992,034 | 3,981,154 | |||||||||
Machinery and equipment | 17,179,593 | 16,910,763 | |||||||||
Less allowance for depreciation | (14,686,589 | ) | (13,963,024 | ) | |||||||
6,922,831 | 7,150,436 | ||||||||||
OTHER ASSETS | |||||||||||
Cash value of officers’ life insurance | 1,161,258 | 1,029,031 | |||||||||
$ | 41,500,540 | $ | 43,986,455 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
CURRENT LIABILITIES | |||||||||||
Trade accounts payable and accrued expenses | $ | 8,886,302 | $ | 9,353,386 | |||||||
Current portion of long-term debt | 268,496 | 833,750 | |||||||||
Dividends payable | 227,191 | 75,710 | |||||||||
Contribution to profit-sharing plan | 198,000 | 260,000 | |||||||||
Income taxes payable | 94,007 | 87,472 | |||||||||
Employee compensation and related expenses | 158,798 | 186,788 | |||||||||
Total Current Liabilities | 9,832,794 | 10,797,106 | |||||||||
LONG-TERM DEBT, less current portion | 74,453 | 2,053,438 | |||||||||
PROVISION FOR NONPENSION RETIREMENT BENEFITS | 163,000 | 163,000 | |||||||||
DEFERRED INCOME TAXES | 517,560 | 481,560 | |||||||||
STOCKHOLDERS’ EQUITY | |||||||||||
Common stock: | |||||||||||
Par value $1 per share: | |||||||||||
Authorized 10,000,000 shares; Issued and outstanding shares — 7,573,239 and 7,571,239 at December 31, 2002 and March 31, 2002, respectively | 7,573,239 | 7,571,239 | |||||||||
Additional paid-in capital | 27,710,369 | 27,707,309 | |||||||||
Retained deficit | (4,370,875 | ) | (4,787,197 | ) | |||||||
Total Stockholders’ Equity | 30,912,733 | 30,491,351 | |||||||||
$ | 41,500,540 | $ | 43,986,455 | ||||||||
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 | |||||||
12
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS — UNAUDITED
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
December 31, | December 31, | THREE MONTHS ENDED JUNE 30, | ||||||||||||||||||||||||
2002 | 2001 | 2002 | 2001 | 2003 | 2002 | |||||||||||||||||||||
Net sales | Net sales | $ | 25,418,779 | $ | 20,483,410 | $ | 78,756,126 | $ | 73,344,634 | Net sales | $ | 25,204,170 | $ | 25,561,298 | ||||||||||||
Costs and expenses | Costs and expenses | Costs and expenses | ||||||||||||||||||||||||
Costs of goods sold | 24,173,277 | 19,701,739 | 74,235,979 | 68,992,763 | Costs of goods sold | 23,255,513 | 24,092,780 | |||||||||||||||||||
General, selling and administrative costs | 946,498 | 1,025,887 | 3,088,254 | 3,153,330 | General, selling and administrative costs | 1,234,095 | 1,043,996 | |||||||||||||||||||
Interest | 4,470 | 54,309 | 47,018 | 243,258 | Interest | 8,732 | 30,114 | |||||||||||||||||||
25,124,245 | 20,781,935 | 77,371,251 | 72,389,351 | 24,498,340 | 25,166,890 | |||||||||||||||||||||
Interest and other income | Interest and other income | (8,795 | ) | (4,302 | ) | (49,054 | ) | (19,304 | ) | Interest and other income | (2,148 | ) | (25,524 | ) | ||||||||||||
Earnings (loss) before federal income taxes | 303,329 | (294,223 | ) | 1,433,929 | 974,587 | |||||||||||||||||||||
Earnings before federal income taxes | Earnings before federal income taxes | 707,978 | 419,932 | |||||||||||||||||||||||
Provision (benefit) for federal income taxes: | Provision (benefit) for federal income taxes: | Provision (benefit) for federal income taxes: | ||||||||||||||||||||||||
Current | 83,132 | (108,534 | ) | 451,535 | 305,860 | Current | 249,713 | 134,777 | ||||||||||||||||||
Deferred | 20,000 | 8,500 | 36,000 | 25,500 | Deferred | (9,000 | ) | 8,000 | ||||||||||||||||||
103,132 | (100,034 | ) | 487,535 | 331,360 | 240,713 | 142,777 | ||||||||||||||||||||
Net earnings (loss) | $ | 200,197 | $ | (194,189 | ) | $ | 946,394 | $ | 643,227 | |||||||||||||||||
Net earnings | Net earnings | $ | 467,265 | $ | 277,155 | |||||||||||||||||||||
Average number of common shares outstanding: | Average number of common shares outstanding: | Average number of common shares outstanding: | ||||||||||||||||||||||||
Basic | 7,573,239 | 7,571,239 | 7,573,239 | 7,571,239 | Basic | 7,573,239 | 7,571,239 | |||||||||||||||||||
Diluted | 7,573,239 | 7,571,239 | 7,573,239 | 7,571,239 | Diluted | 7,589,900 | 7,571,239 | |||||||||||||||||||
Net earnings (loss) per share: | ||||||||||||||||||||||||||
Basic | $ | 0.03 | $ | (0.03 | ) | $ | 0.12 | $ | 0.08 | |||||||||||||||||
Net earnings per share: | Net earnings per share: | |||||||||||||||||||||||||
Diluted | $ | 0.03 | $ | (0.03 | ) | $ | 0.12 | $ | 0.08 | Basic | $ | 0.06 | $ | 0.04 | ||||||||||||
Diluted | $ | 0.06 | $ | 0.04 | ||||||||||||||||||||||
Cash dividends declared per common share | Cash dividends declared per common share | $ | 0.03 | $ | 0.03 | $ | 0.07 | $ | 0.10 | Cash dividends declared per common share | $ | 0.03 | $ | 0.02 |
23
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
Nine Months Ended | ||||||||||||||||||||||
December 31, | THREE MONTHS ENDED JUNE 30, | |||||||||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||||||||
OPERATING ACTIVITIES | OPERATING ACTIVITIES | OPERATING ACTIVITIES | ||||||||||||||||||||
Net earnings | $ | 946,394 | $ | 643,227 | ||||||||||||||||||
Adjustments to reconcile net earnings to cash provided by operating activities: | ||||||||||||||||||||||
Depreciation | 723,565 | 672,601 | Net earnings | $ | 467,265 | $ | 277,155 | |||||||||||||||
Provision for deferred taxes | 36,000 | 25,500 | Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||||||||||
Decrease (increase) in operating assets: | Depreciation | 232,500 | 241,766 | |||||||||||||||||||
Accounts receivable | (547,875 | ) | 4,600,519 | Provision for deferred taxes | (9,000 | ) | 8,000 | |||||||||||||||
Inventories | (1,324,660 | ) | 2,455,570 | Decrease (increase) in operating assets: | ||||||||||||||||||
Other | (259,351 | ) | (36,998 | ) | Accounts receivable | 173,583 | (271,431 | ) | ||||||||||||||
Increase (decrease) in operating liabilities: | Inventories | 1,622,140 | 1,408,408 | |||||||||||||||||||
Accounts payable and accrued expenses | (467,084 | ) | (3,925,198 | ) | Other current assets | (7,979 | ) | (53,600 | ) | |||||||||||||
Current portion of long term debt | — | 33,750 | Increase (decrease) in operating liabilities: | |||||||||||||||||||
Contribution to profit-sharing plan | (62,000 | ) | (94,340 | ) | Accounts payable and accrued expenses | (4,265,158 | ) | (1,801,026 | ) | |||||||||||||
Employee compensation and related expenses | (27,993 | ) | (222,922 | ) | Contribution to profit-sharing plan payable | (194,000 | ) | (194,000 | ) | |||||||||||||
Deferred credit for LIFO replacement | — | 625,106 | Employee compensation and related expenses | 29,357 | 9,109 | |||||||||||||||||
Federal income taxes | 6,535 | (127,209 | ) | Federal income taxes payable | (15,287 | ) | 134,777 | |||||||||||||||
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES | (976,469 | ) | 4,649,606 | NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES | (1,966,579 | ) | (240,842 | ) | ||||||||||||||
INVESTING ACTIVITIES | INVESTING ACTIVITIES | INVESTING ACTIVITIES | ||||||||||||||||||||
Purchase of property, plant and equipment | (495,961 | ) | (1,004,364 | ) | Purchase of property, plant and equipment | (72,242 | ) | (140,764 | ) | |||||||||||||
(Increase) decrease in cash value of officers’ life insurance | (132,227 | ) | (22,968 | ) | Increase in cash surrender value of officers’ life insurance | (6,919 | ) | (21,184 | ) | |||||||||||||
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES | (628,188 | ) | (1,027,332 | ) | NET CASH USED IN INVESTING ACTIVITIES | (79,161 | ) | (161,948 | ) | |||||||||||||
FINANCING ACTIVITIES | FINANCING ACTIVITIES | FINANCING ACTIVITIES | ||||||||||||||||||||
Cash dividends paid | (378,592 | ) | (832,622 | ) | Cash dividends paid | (151,460 | ) | (75,710 | ) | |||||||||||||
Principal payments on notes payable | (2,648,473 | ) | (2,605,625 | ) | Principal payments on notes payable | (17,409 | ) | (2,179,483 | ) | |||||||||||||
Proceeds from notes payable | 104,239 | 67,500 | Proceeds of long-term notes | 2,000,000 | 69,493 | |||||||||||||||||
Exercise of stock options | 5,060 | 5,878 | ||||||||||||||||||||
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | 1,831,131 | (2,185,700 | ) | |||||||||||||||||||
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES | (2,917,766 | ) | (3,364,869 | ) | ||||||||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (4,522,423 | ) | 257,405 | INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (214,609 | ) | (2,588,490 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 4,683,894 | 669,076 | Cash and cash equivalents at beginning of period | 673,127 | 4,683,894 | |||||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 161,471 | $ | 926,481 | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 458,518 | $ | 2,095,404 | ||||||||||||
34
FRIEDMAN INDUSTRIES, INCORPORATED
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 accounting principles generally accepted in the United Statesaccounting 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, 2002.2003.
NOTE B — INVENTORIES
Inventories consist of prime coil, non-standardnonstandard 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. PrimeInventories are valued at the lower of cost or replacement market. Cost for prime inventory is valued usingdetermined under the last-in, first-out (“LIFO”) method and non-standard coil andmethod. Cost for tubular inventories are valuedinventory is determined using the first-in, first-outweighted average method. Cost for non-standard inventory is determined using the specific identification method.
Beginning April 1, 2002,NOTE C — NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the Company combined two prime inventory LIFO pools into one LIFO pool to consolidate inventories of similar characteristics. There was no cumulative effect and no material impact on income during eachFASB 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 last five fiscal years resulting fromentity’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 combination. This combination did not significantly affect earnings for the quarter or the nine months ended Decemberperiods beginning after June 15, 2003. No variable interest entities have been created after January 31, 2002.
During the nine months ended December 31, 2001, a liquidation of the base period LIFO inventories was experienced and a portion of this liquidation was replaced by fiscal year end. Accordingly, costs of goods sold was charged and a deferred credit was established for the difference ($625,106) between the estimated replacement cost and the liquidated LIFO base. LIFO inventories that were not replaced resulted in a liquidation of LIFO inventories carried at costs prevailing in preceding years as compared to current costs,2003. Management is currently evaluating the effect of which increased costs of goods sold and decreased earnings before taxes by approximately $230,000.variable interest entities, if any, created prior to January 31, 2003.
NOTE C — SEGMENT INFORMATION — UNAUDITED
Three Months Ended | Nine Months Ended | |||||||||||||||||
December 31, | December 31, | |||||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||||
in thousands | in thousands | |||||||||||||||||
Net sales | ||||||||||||||||||
Coil | $ | 15,068 | $ | 10,854 | $ | 45,473 | $ | 37,116 | ||||||||||
Tubular | 10,351 | 9,629 | 33,283 | 36,229 | ||||||||||||||
Total net sales | $ | 25,419 | $ | 20,483 | $ | 78,756 | $ | 73,345 | ||||||||||
Operating profit | ||||||||||||||||||
Coil | $ | 85 | $ | 130 | $ | 1,025 | $ | 326 | ||||||||||
Tubular | 615 | 32 | 1,922 | 2,319 | ||||||||||||||
Total operating profit | 700 | 162 | 2,947 | 2,645 | ||||||||||||||
Corporate expenses | 402 | 406 | 1,515 | 1,446 | ||||||||||||||
Interest expense | 4 | 54 | 47 | 243 | ||||||||||||||
Interest & other income | (9 | ) | (4 | ) | (49 | ) | (19 | ) | ||||||||||
Total earnings before taxes | $ | 303 | $ | (294 | ) | $ | 1,434 | $ | 975 | |||||||||
December 31, | ||||||||||
2002 | 2001 | |||||||||
in thousands | ||||||||||
Segment assets | ||||||||||
Coil | $ | 20,343 | $ | 18,847 | ||||||
Tubular | 19,585 | 20,582 | ||||||||
$ | 39,928 | $ | 39,429 | |||||||
Corporate assets | 1,573 | 2,175 | ||||||||
Total assets | $ | 41,501 | $ | 41,604 | ||||||
4
NOTE D — ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETSSTOCK BASED COMPENSATION
Effective April 1, 2002, the The Company adopted FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions offollows Accounting Principles Board Opinion No. 30, Reporting25, Accounting for Stock Issued to Employees (“APB 25”), for its employee stock options. Under APB 25, because the Resultsexercise price of Operations, forthe 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 disposalBlack-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 3.0%, a segment ordividend yield of 3.4%, volatility factor of the expected market price of the Company’s common stock of 0.42, and a business.weighted average expected life of the option of four years.
In November 2001, The following schedule reflects the impact on net income and earnings per common share if the Company ceased operations athad 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 Houston coilrevolving line of credit facility (the “facility”). To the extent possible, sales and production were transferred to other Company locations. Machinery and equipment associated with the facility other than the overhead cranes attached to the buildings will be deployed at other Company locations. Land and buildings and improvements with carrying values of $35,942 and $69,969, respectively, are expected to be sold in the next 12 months. Estimated proceeds are expected to exceed the net book value.through April 1, 2006.
5
FRIEDMAN INDUSTRIES, INCORPORATEDNOTE 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
RESULTS OF OPERATIONSItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NineResults of Operations
Three Months Ended December 31, 2002June 30, 2003 Compared To Nineto Three Months Ended December 31, 2001June 30, 2002
During the nine monthsquarter ended December 31, 2002,June 30, 2003, sales and costs of goods sold increased $5,411,492declined $357,128 and $5,243,216, respectively, and related gross profit increased $168,276 from the comparable amounts recorded during the nine months ended December 31, 2001. During the 2002 period, an increase of $8,357,201 in sales of coil products was offset by a decrease of $2,945,709 in sales of tubular products. Tons of coil products sold increased approximately 14% and the average per ton selling price increased approximately 7% from the levels recorded during the 2001 period. A decline in coil sales associated with the closure of the Houston coil facility in November 2001 was more that offset by an increase in sales attributable to the XSCP Division that began operations in December 2001. During the 2002 period, tubular tons sold and the average selling price per ton declined approximately 3% and 5%, respectively. Coil operations benefited from somewhat stronger market conditions while tubular operations were adversely impacted by soft market conditions during the 2002 period. Management believes that the soft market conditions for tubular products were related to the overall weakness in the energy sector of the United States economy. An increase in gross profit of $568,964 related to coil operations was offset by a decline in gross profit of $400,688 associated with tubular operations. Gross profits as a percentage of sales were approximately 5.7% and 5.9% during the 2002 and 2001 periods, respectively.
Interest expense decreased $196,240 from the amount recorded during the 2001 period. This decrease was primarily related to reductions in both short-term and long-term debt and lower interest rates associated with such borrowings.
Interest and other income increased $29,750 from the 2001 period amount primarily as a result of an increase in invested cash positions during the 2002 period.
Federal income taxes increased $156,175 from the comparable amount recorded during the 2001 period. This increase was primarily related to the increase in earnings before taxes as the effective tax rates were the same for both periods.
Three Months Ended December 31, 2002 Compared To Three Months Ended December 31, 2001
During the quarter ended December 31, 2002, sales, costs of goods sold and gross profit increased $4,935,369, $4,471,538 and $463,831,$837,267, respectively, from the comparable amounts recorded during the quarter ended December 31, 2001. The increasesJune 30, 2002, which had the effect of increasing gross profit by $480,139. Both coil and tubular operations experienced an increase in sales and costsgross profit as the result of goods sold were related primarily to coil operations. Sales of coil products andaverage selling prices accelerating at a greater rate than related costs of goods sold increased $4,213,475 and $4,333,028, respectively, the effect of which decreased gross profit by $119,553. This decrease was related primarily to losses incurred on sales of non-standard coils. Decreased gross profit earned on coil products was offset by an increase of in gross profit earned on tubular products of $583,384. During the 2002 quarter, the Company’s tubular operation benefited frommaterial. The Company experienced somewhat stronger market conditions for its products and services in the 2003 quarter as compared to market conditions in the 2001 quarter. Gross profits as a percentage of sales were approximately 4.9%2002 quarter, and 3.8% duringaccordingly, overall operations reflected some improvement.
General, selling and administrative costs increased $190,099 from the amount recorded in the 2002 and 2001 quarters, respectively.quarter. This improvementincrease was related primarily to improved resultsthe write-off of a bad debt incurred during the 2003 quarter and to variable expenses associated with the tubular operation.increase in earnings.
Interest expense decreased $49,839$21,382 from the comparable amount recorded during the 20012002 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 both short and long-term debt.average invested cash positions during the 2003 quarter.
Federal income taxes during the 2003 quarter increased $203,166$97,936 from the comparable amount recorded during the 20012002 quarter. This increase was primarily related to the increase in earnings before taxes asin the 2003 quarter since the effective tax rates were the same for both quarters.
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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCESFinancial Position, Liquidity and Capital Resources
The Company remained in a strong, liquid position at December 31, 2002.June 30, 2003. Current ratios were 3.44.9 and 3.33.2 at December 31, 2002June 30, 2003 and March 31, 2002,2003, respectively. Working capital was $23,583,657$26,101,118 at December 31, 2002June 30, 2003 and $25,009,882$23,734,112 at March 31, 2002.2003. During the nine monthsquarter ended December 31, 2002, the Company primarily used its cash to pay down both long-term and short-term debt and to support operating activities. At December 31, 2002,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 these balance sheet components depending on changes in market conditions and the Company’s operations.
The Company has aextended its credit arrangement with a bank which provides for a revolving line of credit facility (the “revolving facility”) and a term credit facility (the “term facility”). Pursuant to the revolving facility which expires April 1, 2004,2006, the Company may borrow up to $10$6 million at an interest rate no greater than the bank’s prime rate. At December 31, 2002,June 30, 2003, the Company had no borrowings of $2,000,000 outstanding under the revolving facility. The amount outstanding under the term facility bears interest at a stated rate of LIBOR plus 1.25% and requires quarterly principal payments of $200,000 plus accrued interest through March 1, 2003. In July 1997, the Company entered into a swap transaction with the bank pursuant to which it exchanged the term facility’s LIBOR-based interest rate obligation for a fixed interest rate obligation of 8% to remain in effect for the entire term of the term facility. As of December 31, 2002, the principal amount of indebtedness outstanding under the term facility was $200,000.
During the quarter ended December 31, 2002, the Company exercised its right under a lease agreement to purchase approximately 68 acres of land on which its tubular operations are located for $214,338. This land was previously leased from Lone Star Steel Company.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 POLICIESCritical 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 endyear-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 ongoingon-going basis, the Company evaluates estimates and judgments.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 STATEMENTSForward-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.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
Not material.material
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ITEMItem 4. CONTROLS AND PROCEDURESControls and Procedures
Based on an evaluationThe Company's management, with the participation of the disclosure controls and procedures conducted within 90 days prior to the filing date of this report on Form 10-Q, theCompany's principal executive officer (CEO) and principal financial officer (CFO), evaluated the effectiveness of the Company have concluded that theCompany's disclosure controls and procedures (as defined in Rules 13a-14(c)13a-15(e) and 15d-14(c)15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) are effective.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 significant changes in the Company's internal controlscontrol over financial reporting that occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, those controls subsequent to the date of the evaluation thereof.Company's internal control over financial reporting.
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FRIEDMAN INDUSTRIES, INCORPORATED
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 |
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 | |
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 |
910
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 | |||
By | /s/ BEN HARPER | ||
Ben Harper, Senior Vice President-Finance | |||
( | |||
I, Jack Friedman, the Chairman of the Board and Chief Executive Officer of Friedman Industries, Incorporated, a Texas corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Friedman Industries, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: February 13, 2003
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I, Ben Harper, Senior Vice President-Finance and Secretary/Treasurer of Friedman Industries, Incorporated, a Texas corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Friedman Industries, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: February 13, 2003
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EXHIBIT INDEX
Exhibit No. | Description | |
Exhibit | — 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 | — 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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