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SECURITIES AND EXCHANGE COMMISSION
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
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 |
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.
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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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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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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 | |||||
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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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 | 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
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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 | ||||
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Three Months Ended December 31, 2006
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Date February 14, 2007 | FRIEDMAN INDUSTRIES, INCORPORATED | |||
By | /s/ BEN HARPER | |||
Ben Harper. Senior Vice President-Finance (Principal Financial and Accounting Officer) | ||||
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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 |