1
FRIEDMAN
INDUSTRIES,
INCORPORATED
2001
ANNUAL REPORT
2
FRIEDMAN INDUSTRIES, INCORPORATED
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
2001 2000
------------ ------------
Net sales................................ $120,395,583 $120,267,809
Net earnings............................. $2,927,582 $2,506,801
Net earnings per share (Basic)*.......... $0.39 $0.33
Cash dividends per share*................ $0.16 $0.18
Stock dividend........................... -- 5%
Stockholders' equity..................... $30,378,150 $28,622,951
Stockholders' equity per share
(Basic)*............................... $4.01 $3.79
Working capital.......................... $27,959,527 $28,568,099
* Adjusted for stock dividends.
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
In a difficult year for the steel industry in general, the Company is
pleased to report an increase in earnings. Operating profit from coil operations
declined from the results recorded during fiscal 2000. Coil operations were
adversely affected by soft market conditions which had the effect of generating
intense competition for available sales and decreasing gross profit earned on
coil product sales. This decrease was offset by an increase in operating profit
generated by the Company's tubular operations which benefited from improved
market conditions during fiscal 2001.
You are cordially invited to attend the Annual Meeting of Shareholders to
be held on August 30, 2001. The meeting will be held at 11:00 a.m. in the
offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas.
Sincerely,
/s/ JACK FRIEDMAN
Jack Friedman
Chairman of the Board
and Chief Executive Officer
1
3
FRIEDMAN INDUSTRIES, INCORPORATED
OFFICERS
Jack Friedman
Chairman of the Board and
Chief Executive Officer
Harold Friedman
Vice Chairman of the Board
William E. Crow
President and Chief Operating Officer
Benny B. Harper
Senior Vice President -- Finance
and Secretary/Treasurer
Thomas N. Thompson
Senior Vice President -- Sales and Marketing
Ronald L. Burgerson
Vice President
Dale Ray
Vice President
Charles W. Hall
Assistant Secretary
COMPANY OFFICES AND WEB SITE
MAIN OFFICE
4001 Homestead Road
Houston, Texas 77028
713-672-9433
SALES OFFICE -- COIL PRODUCTS
1121 Judson Road
Longview, Texas 75606
903-758-3431
SALES OFFICE -- TUBULAR PRODUCTS
P.O. Box 0388
Lone Star, Texas 75668
903-639-2511
WEB SITE ADDRESS
www.friedmanindustries.com
COUNSEL
Fulbright & Jaworski L.L.P.
1301 McKinney, 51st Floor
Houston, Texas 77010
AUDITORS
Ernst & Young LLP
1221 McKinney, Suite 2400
Houston, Texas 77010
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10007
DIRECTORS
Jack Friedman
Chairman of the Board and
Chief Executive Officer
Harold Friedman
Vice Chairman of the Board
William E. Crow
President and Chief Operating Officer
Charles W. Hall
Partner, Fulbright & Jaworski L.L.P. (law firm)
Houston, Texas
Alan M. Rauch
President, Ener-Tex
International, Inc.
(oilfield equipment sales)
Houston, Texas
Hershel M. Rich
Private investor and
business consultant
Houston, Texas
Henry Spira
Retired; Former Vice President,
Friedman Industries, Incorporated
Houston, Texas
Kirk K. Weaver
President,
Recycalyst Technologies Corporation
(recycling and catalysts services),
Houston, Texas;
Chairman of the Board and
Chief Executive Officer,
LTI Technologies, Inc.
(technical services)
Houston, Texas
Joe L. Williams
Chairman and Chief Executive Officer,
Wisenberg Insurance + Risk Management
(insurance and risk management)
Houston, Texas
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain without charge a copy of the Company's Annual Report on
Form 10-K for the year ended March 31, 2001 as filed with the Securities and
Exchange Commission. Written requests should be addressed to: Benny B. Harper,
Senior Vice President, Friedman Industries, Incorporated, P.O. Box 21147,
Houston, Texas 77226.
2
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FRIEDMAN INDUSTRIES, INCORPORATED
DESCRIPTION OF BUSINESS
Friedman Industries, Incorporated is in the steel processing and
distribution business. The Company has two product groups: coil processing and
tubular products.
At its facilities in Lone Star, Texas, Houston, Texas and Hickman,
Arkansas, the Company processes semi-finished, hot-rolled steel coils into flat,
finished sheet and plate, and sells these products on a wholesale,
rapid-delivery basis in competition with steel mills, importers and steel
service centers. The Company also processes customer-owned coils on a fee basis.
The Company purchases a substantial amount of its annual coil tonnage from Lone
Star Steel Company ("LSS") and Nucor Steel Company ("NSC"). Loss of LSS or NSC
as a source of coil supply could have a material adverse effect on the Company's
business.
Steel sheet and plate and coil processing services are sold directly
through the Company's own sales force to approximately 340 customers located
primarily in the midwestern, southwestern and southeastern sections of the
United States. These products and services are sold principally to steel
distributors and to customers fabricating steel products such as storage tanks,
steel buildings, farm machinery and equipment, construction equipment,
transportation equipment, conveyors and other similar products.
The Company, through its Texas Tubular Products operation located in Lone
Star, Texas, purchases, processes, manufactures and markets tubular products
("pipe"). The Company sells pipe nationally to approximately 350 customers and
sells a substantial amount of manufactured pipe to LSS. The Company purchases a
substantial portion of its annual supply of pipe and coil material used in pipe
production from LSS. Loss of LSS as a source of pipe and coil material supply or
as a customer of manufactured pipe could have a material adverse effect on the
Company's business.
Significant financial information relating to the Company's product groups
is contained in Note 7 of Notes to the Company's Consolidated Financial
Statements appearing herein.
------------------
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
FISCAL 2001 FISCAL 2000
------------------- --------------------
HIGH LOW HIGH LOW
----- ------ ------ ------
First Quarter............................................... 4.00 3.0625 4.625 3.8125
Second Quarter.............................................. 4.25 3.0625 4.4375 3.3125
Third Quarter............................................... 3.875 2.75 3.875 3.25
Fourth Quarter.............................................. 2.89 2.75 4.125 3.3125
------------------
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
FISCAL 2001 FISCAL 2000
------------------ ------------------
CASH STOCK CASH STOCK
----- ----- ----- -----
First Quarter............................................... $ .04 -- $ .05 --
Second Quarter.............................................. $ .04 -- $ .05 --
Third Quarter............................................... $ .04 -- $ .05 --
Fourth Quarter.............................................. $ .04 -- $ .04 5%
(Per share amounts above have not been adjusted to reflect stock dividends.)
------------------
The Company's Common Stock is traded principally on the American Stock
Exchange (trading symbol FRD).
The approximate number of shareholders of record as of April 27, 2001 was
620.
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5
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31
----------------------------
2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 669,076 $ 443,818
Accounts receivable.................................... 10,584,735 13,533,550
Inventories............................................ 28,817,375 22,910,509
Other.................................................. 160,143 57,501
------------ ------------
TOTAL CURRENT ASSETS.............................. 40,231,329 36,945,378
PROPERTY, PLANT AND EQUIPMENT:
Land................................................... 221,543 221,543
Buildings and yard improvements........................ 3,346,912 3,346,912
Machinery and equipment................................ 16,458,899 16,075,816
Less accumulated depreciation.......................... (13,201,590) (12,170,191)
------------ ------------
6,825,764 7,474,080
OTHER ASSET:
Cash value of officers' life insurance................. 953,419 687,332
------------ ------------
TOTAL ASSETS...................................... $ 48,010,512 $ 45,106,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31
----------------------------
2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 10,443,848 $ 6,447,538
Current portion of long-term debt...................... 800,000 800,000
Dividends payable...................................... 302,746 287,522
Income taxes payable................................... 127,209 256,906
Contribution to profit sharing plan.................... 288,000 274,000
Employee compensation and related expenses............. 309,999 311,313
------------ ------------
TOTAL CURRENT LIABILITIES......................... 12,271,802 8,377,279
LONG-TERM DEBT, less current portion........................ 4,800,000 7,600,000
DEFERRED INCOME TAXES....................................... 447,560 393,560
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 113,000 113,000
STOCKHOLDERS' EQUITY:
Common stock, par value $1:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 7,568,839 in 2001
and 7,188,213 in 2000............................. 7,568,839 7,188,213
Additional paid-in capital............................. 27,703,829 26,878,477
Retained deficit....................................... (4,894,518) (5,443,739)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................ 30,378,150 28,622,951
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 48,010,512 $ 45,106,790
============ ============
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED MARCH 31
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Sales.......................................... $120,395,583 $120,267,809 $124,719,640
Costs and expenses:
Cost of products sold..................... 110,855,198 111,602,851 114,363,659
Selling, general, and administrative...... 4,686,085 4,479,215 4,694,933
Interest expense.......................... 624,431 546,160 443,686
------------ ------------ ------------
116,165,714 116,628,226 119,502,278
------------ ------------ ------------
4,229,869 3,639,583 5,217,362
Interest and other income...................... 205,862 158,602 147,506
------------ ------------ ------------
EARNINGS BEFORE FEDERAL INCOME
TAXES.............................. 4,435,731 3,798,185 5,364,868
Federal income taxes:
Current................................... 1,454,149 1,227,384 1,884,057
Deferred.................................. 54,000 64,000 (60,000)
------------ ------------ ------------
1,508,149 1,291,384 1,824,057
------------ ------------ ------------
NET EARNINGS......................... $ 2,927,582 $ 2,506,801 $ 3,540,811
============ ============ ============
Average number of common shares outstanding:
Basic........................................ 7,568,839 7,547,624 7,528,702
Diluted...................................... 7,568,839 7,547,624 7,575,409
Net earnings per share:
Basic........................................ $ .39 $ .33 $ .47
Diluted...................................... $ .39 $ .33 $ .47
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
---------- ----------- -----------
Balance at March 31, 1998......................... $6,491,808 $23,680,628 $(4,439,479)
Net earnings...................................... -- -- 3,540,811
Exercise of stock options......................... 10,202 8,211 --
Issuance of Directors' shares..................... 2,000 9,000 --
Stock dividend (5%)............................... 324,377 2,027,356 (2,355,039)
Cash dividends ($.25 per share)................... -- -- (1,877,096)
---------- ----------- -----------
BALANCE AT MARCH 31, 1999............... 6,828,387 25,725,195 (5,130,803)
Net earnings...................................... -- -- 2,506,801
Exercise of stock options......................... 16,021 36,666 --
Issuance of Directors' shares..................... 2,000 5,750 --
Stock dividend (5%)............................... 341,805 1,110,866 (1,454,108)
Cash dividends ($0.18 per share).................. -- -- (1,365,629)
---------- ----------- -----------
BALANCE AT MARCH 31, 2000............... 7,188,213 26,878,477 (5,443,739)
Net earnings...................................... -- -- 2,927,582
Exercise of stock options......................... 19,547 11,924 --
Issuance of Directors' shares..................... 2,000 5,500 --
Stock dividend (5%)............................... 359,079 807,928 (1,167,007)
Cash dividends ($0.16 per share).................. -- -- (1,211,354)
---------- ----------- -----------
BALANCE AT MARCH 31, 2001............... $7,568,839 $27,703,829 $(4,894,518)
========== =========== ===========
See accompanying notes.
5
7
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
---------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 2,927,582 $ 2,506,801 $ 3,540,811
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation.................. 1,047,579 1,043,103 671,735
Directors' shares issued...... 7,500 7,750 11,000
Benefit from deferred taxes... 54,000 64,000 (60,000)
Changes in operating assets and
liabilities:
Accounts receivable........... 2,948,815 (4,823,822) 4,495,385
Inventories................... (5,906,866) (3,004,339) 4,680,693
Other assets.................. (102,642) 61,706 74,672
Accounts payable and accrued
expenses.................... 3,996,310 1,607,978 (6,085,463)
Contribution to profit sharing
plan........................ 14,000 22,000 (28,000)
Employee compensation and
related expenses............ (1,314) (76,080) (213,411)
Federal income taxes
payable..................... (129,697) 188,384 (275,943)
----------- ----------- -----------
Net cash provided by (used in)
operating activities........ 4,855,267 (2,402,519) 6,811,479
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment........................ (399,263) (225,838) (2,352,122)
Increase in cash value of officers'
life insurance................... (98,500) (62,710) (117,138)
----------- ----------- -----------
Net cash used in investing
activities.................. (497,763) (288,548) (2,469,260)
FINANCING ACTIVITIES
Cash dividends paid................ (1,195,051) (1,488,670) (1,954,156)
Proceeds from borrowings of
long-term debt................... -- 5,000,000 833,334
Principal payments on long-term
debt............................. (2,800,000) (3,800,000) (800,000)
Payments on loans against life
insurance........................ (167,587) (426,630) --
Cash paid on fractional shares from
stock dividend................... (1,079) (1,437) (2,568)
Cash received from exercised stock
options.......................... 31,471 52,687 18,413
----------- ----------- -----------
Net cash used in financing
activities.................. (4,132,246) (664,050) (1,904,977)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents........ 225,258 (3,355,117) 2,437,242
Cash and cash equivalents at
beginning of year................ 443,818 3,798,935 1,361,693
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 669,076 $ 443,818 $ 3,798,935
=========== =========== ===========
See accompanying notes.
6
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FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Friedman Industries, Inc., and its subsidiary (collectively, the
"Company"). All material intercompany amounts and transactions have been
eliminated.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products.
The terms of all shipments made by the Company is free on board shipping point.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents.
INVENTORIES: The following is a summary of inventory by product group:
YEAR ENDED MARCH 31
-------------------------
2001 2000
----------- -----------
Coil.................................................... $12,106,418 $11,705,839
Tubular................................................. 16,710,957 11,204,670
----------- -----------
$28,817,375 $22,910,509
=========== ===========
Coil inventory consists primarily of raw materials. Tubular inventory
consists of both raw materials and finished goods. Inventories are valued at the
lower of cost or replacement market. Cost for the Company's coil inventory is
determined under the last-in, first-out ("LIFO") method. Cost for tubular
inventories is determined using the first-in, first-out method. At March 31,
2001, LIFO replacement cost was approximately the same as the LIFO value, while,
at March 31, 2000, the replacement cost of LIFO inventories exceeded their LIFO
value by approximately $2,741,000.
During the year ended March 31, 2001, coil inventory quantities were
reduced. This reduction resulted in liquidation of LIFO inventory quantities
being carried at higher costs prevailing in prior years as compared with the
costs of fiscal 2001 purchases, the effect of which was not material to the
financial statements.
PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated
on the basis of cost. Depreciation is calculated primarily by the straight-line
method over the estimated useful lives of the various classes of assets.
Interest costs incurred during construction projects are capitalized as part of
the cost of such assets.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $637,000 in 2001, $560,000 in 2000, and $777,000 in 1999. The
Company paid income taxes, net of refunds, of $1,583,800 in 2001, $1,039,000 in
2000, and $2,180,200 in 1999.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS: The carrying value of the Company's financial
instruments approximates fair value.
ECONOMIC RELATIONSHIP: Lone Star Steel Company ("LSS") and Nucor Steel
Company supply a significant amount of steel products to the Company. Loss of
either of these mills as a source of supply could have a material adverse effect
on the Company. Additionally, the Company derives revenue by selling a
substantial amount of its manufactured pipe to LSS. Total sales to LSS
7
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FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
were approximately $17.0 million, $11.0 million, and $8.0 million in 2001, 2000,
and 1999, respectively. Loss of the LSS mill as a customer could have a material
adverse effect on the Company's business.
The Company's sales are concentrated primarily in the midwestern,
southwestern, and southeastern sections of the United States, and are primarily
to customers in the steel distributing and fabricating industries. The Company
performs periodic credit evaluations of the financial conditions of its
customers and generally does not require collateral. Generally, receivables are
due within 30 days.
2. CAPITAL STOCK AND STOCK OPTIONS
Under the Company's 1989 and 1996 Incentive Stock Option Plans, incentive
options were granted to certain officers and key employees to purchase common
stock of the Company. Pursuant to the terms of the plans, 27,959 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 the years ended March
31 (adjusted for stock dividends):
2001 2000 1999
------------------- ------------------- -------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Outstanding at beginning of year.......... 419,593 $4.02 437,174 $3.98 416,053 $3.85
Granted................................... -- -- -- -- 32,524 $4.73
Exercised................................. (19,547) $1.62 (17,581) $2.99 (11,403) $1.62
------- ------- -------
Outstanding at end of year................ 400,046 $4.14* 419,593 $4.02 437,174 $3.98
======= ======= =======
Exercisable at end of year................ 400,046 $4.14 419,593 $4.02 404,650 $3.92
Weighted average fair value of options
granted during the year................. N/A N/A $1.65
* Range of $2.94 to $4.73 per share and a weighted average remaining life of 6.2
years.
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), for its employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Had the Company followed the alternative
fair value accounting provided for under Statements of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, net earnings and
earnings per share would have been reduced by 0.0%, 0.7%, and 0.5% in 2001,
2000, and 1999, respectively. The fair value of options was estimated using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.5%, a dividend yield of 3.8%,
volatility factor of the expected market price of the Company's common stock of
0.28, and a weighted average expected life of the option of four years.
The Company has 1,000,000 authorized shares of the Cumulative Preferred
Stock with a par value of $1 per share. The stock may be issued in one or more
series, and the Board of Directors is authorized to fix the designations,
preferences, rights, qualifications, limitations, and restrictions of each
series, except that any series must provide for cumulative dividends and must be
convertible into common stock.
3. LONG-TERM DEBT
The Company has a credit arrangement with a bank which provides for a
revolving line of credit facility (the "revolving facility") and a term credit
facility (the "term credit facility"). Pursuant to the revolving facility which
expires April 1, 2002, the Company may borrow up to $8 million at an interest
rate no greater than the bank's prime rate. At March 31, 2001, the Company had
borrowings
8
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FRIEDMAN INDUSTRIES, INCORPORATED
3. LONG-TERM DEBT (CONTINUED)
outstanding under the revolving facility of $4 million. The term credit facility
provided the Company with additional advances up to $3.5 million. The amount
outstanding under the term credit 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 credit
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 credit
facility. As of March 31, 2001, the principal amount of indebtedness outstanding
under the term credit facility was $1.6 million. The fair value of the Company's
credit facilities, including its swap arrangement, is approximately the same as
the carrying values at March 31, 2001. The annual principal payments required on
long-term debt during the next five years are as follows:
2002........................................................ $ 800,000
2003........................................................ 4,800,000
2004........................................................ --
2005........................................................ --
2006........................................................ --
----------
Total.................................................. $5,600,000
==========
In July 1995, the Company borrowed $708,168 against the cash surrender
value of officers' life insurance policies (the "borrowings"). The Company
repaid $167,587 and $426,630 of the loans against the cash surrender value of
officers' life insurance policies during the years ended March 31, 2001 and
2000, respectively. The balance of the borrowings bears interest at 5% and does
not require specific repayment terms except that in the case of death, the
borrowings related to the life insurance policy will be deducted from the
proceeds of such policy.
4. EARNINGS PER SHARE
Basic and dilutive net income per share is computed based on the following
information:
YEAR ENDED MARCH 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
BASIC
Net income................................... $2,927,582 $2,506,801 $3,540,811
========== ========== ==========
Average common shares........................ 7,568,839 7,547,624 7,528,702
========== ========== ==========
DILUTIVE
Net income................................... $2,927,582 $2,506,801 $3,540,811
========== ========== ==========
Average common shares........................ 7,568,839 7,547,624 7,528,702
Common share equivalents:
Warrants................................... -- -- --
Options.................................... -- -- 46,707
---------- ---------- ----------
Total common share equivalents............... -- -- 46,707
---------- ---------- ----------
Average common shares and common
equivalents................................ 7,568,839 7,547,624 7,575,409
========== ========== ==========
5. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amount used for tax purposes.
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FRIEDMAN INDUSTRIES, INCORPORATED
5. INCOME TAXES (CONTINUED)
Significant components of the Company's consolidated deferred tax assets
(liabilities) are as follows:
MARCH 31
---------------------
2001 2000
--------- ---------
DEFERRED TAX LIABILITIES:
Depreciation...................................... $(607,560) $(513,757)
Other............................................. -- (16,536)
--------- ---------
Total deferred tax liabilities...................... (607,560) (530,293)
DEFERRED TAX ASSETS:
Inventory capitalization.......................... 95,621 74,155
Postretirement benefits other than pensions....... 38,420 38,420
Other............................................. 25,959 24,158
--------- ---------
Total deferred tax assets........................... 160,000 136,733
--------- ---------
Net deferred tax liabilities........................ $(447,560) $(393,560)
========= =========
The Company's effective tax rates approximate the statutory rates.
6. PROFIT SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company has a defined contribution plan (the "Plan") covering
substantially all employees, including officers. Company contributions, which
are made at the discretion of the Board of Directors in an amount not to exceed
15% of the total compensation paid during the year to all eligible employees,
were $288,000 for the year ended March 31, 2001, $274,000 for the year ended
March 31, 2000, and $252,000 for the year ended March 31, 1999. Contributions,
Plan earnings, and forfeitures of terminated participants' nonvested accounts
are allocated to the individual accounts of participating employees based on
compensation received during the plan year and years of active service with the
Company.
In addition, certain health care benefits are provided for retired
employees. Employees with a minimum of 20 years of employment with the Company
who retire at age 65 or older are eligible. The Company has not funded the cost
of the postretirement health care plan.
Employees of the Company may participate in a 401(k) retirement plan (the
"401(k) plan"). Employees are eligible to participate in the 401(k) plan when
the employee has completed one year of service. Under the 401(k) plan,
participating employees may defer a portion of their pretax earnings up to
certain limits prescribed by the Internal Revenue Service. The Company provides
matching contributions under the provisions of the plan. Employees fully vest in
the Company's matching contributions upon the completion of 7 years of service.
Contribution expense related to the 401(k) plan was approximately $39,000,
$40,000 and $50,000 for the years ended March 31, 2001, 2000 and 1999,
respectively.
7. INDUSTRY SEGMENT DATA
The Company is engaged in the steel processing and distribution business.
Within the Company, there are two product groups: coil processing (steel sheet
and plate) and tubular products. Coil processing converts steel coils into flat
sheet and plate steel cut to customer specifications. Through its Texas tubular
operation, the Company purchases, processes, manufactures, and markets tubular
products.
10
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FRIEDMAN INDUSTRIES, INCORPORATED
7. INDUSTRY SEGMENT DATA (CONTINUED)
The following is a summary of significant financial information relating to
the product groups:
YEAR ENDED MARCH 31
------------------------------------------
2001 2000 1999
------------ ------------ ------------
NET SALES:
Coil processing.............................. $ 68,517,334 $ 77,842,307 $ 86,409,139
Tubular...................................... 51,878,249 42,425,502 38,310,501
------------ ------------ ------------
TOTAL NET SALES...................... $120,395,583 $120,267,809 $124,719,640
============ ============ ============
OPERATING PROFIT:
Coil processing.............................. $ 1,028,425 $ 1,950,771 $ 4,773,761
Tubular...................................... 5,034,620 3,414,479 2,210,841
------------ ------------ ------------
TOTAL OPERATING PROFIT............... 6,063,045 5,365,250 6,984,602
Corporate expenses........................... (1,208,745) (1,179,506) (1,323,554)
Interest expense............................. (624,431) (546,160) (443,686)
Interest and other income.................... 205,862 158,601 147,506
------------ ------------ ------------
TOTAL EARNINGS BEFORE TAXES.......... $ 4,435,731 $ 3,798,185 $ 5,364,868
============ ============ ============
IDENTIFIABLE ASSETS:
Coil processing.............................. $ 23,914,639 $ 25,728,057 $ 24,030,442
Tubular...................................... 22,374,098 18,183,058 12,913,517
------------ ------------ ------------
46,288,737 43,911,115 36,943,959
General corporate assets..................... 1,721,775 1,195,675 4,079,418
------------ ------------ ------------
TOTAL ASSETS......................... $ 48,010,512 $ 45,106,790 $ 41,023,377
============ ============ ============
DEPRECIATION:
Coil processing.............................. $ 685,126 $ 701,526 $ 326,577
Tubular products............................. 338,933 327,206 335,794
Corporate and other.......................... 23,520 14,371 9,364
------------ ------------ ------------
$ 1,047,579 $ 1,043,103 $ 671,735
============ ============ ============
CAPITAL EXPENDITURES:
Coil processing.............................. $ 117,205 $ 116,172 $ 2,316,306
Tubular products............................. 258,745 49,248 33,216
Corporate assets............................. 23,313 60,418 2,600
------------ ------------ ------------
$ 399,263 $ 225,838 $ 2,352,122
============ ============ ============
Operating profit is total revenue less operating expenses, excluding
general corporate expenses, interest expense, and interest and other income.
Corporate assets consist primarily of cash and cash equivalents and the cash
value of officers' life insurance. There are no sales between product groups.
11
13
FRIEDMAN INDUSTRIES, INCORPORATED
8. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended March 31, 2001 and 2000 (per share amounts have been adjusted
for subsequent stock dividends):
Quarter Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
2000 2000 2000 2001
----------- ------------ ----------- -----------
Net sales....................... $32,274,930 $31,064,827 $27,834,551 $29,221,275
Gross profit.................... 2,593,299 2,478,949 2,176,288 2,291,849
Net earnings.................... 805,518 804,679 645,590 671,795
Net earnings per share(1):
Basic......................... 0.11 0.11 0.09 0.09
Diluted....................... 0.11 0.11 0.09 0.09
Quarter Ended
------------------------------------------------------
June 30 September 30 December 31 March 31
1999 1999 1999 2000
----------- ------------ ----------- -----------
Net sales....................... $26,664,262 $29,397,118 $29,894,914 $34,311,515
Gross profit.................... 2,153,321 2,279,274 1,884,084 2,348,279
Net earnings.................... 600,151 739,308 500,221 667,121
Net earnings per share(1):
Basic......................... 0.08 0.10 0.07 0.09
Diluted....................... 0.08 0.10 0.07 0.09
(1) The sum of the quarterly net income per share amounts does not equal the
annual amount reported, as per share amounts are computed independently for
each quarter and for the full year based on the respective weighted average
common shares outstanding.
12
14
FRIEDMAN INDUSTRIES, INCORPORATED
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Friedman Industries, Inc.
We have audited the accompanying consolidated balance sheets of Friedman
Industries, Inc. as of March 31, 2001 and 2000, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Friedman
Industries, Inc. at March 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2001, in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
May 25, 2001
Houston, Texas
------------------------------------------
SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Net sales......................... $1120,395,583 $ 120,267,809 $ 124,719,640 $ 148,840,724 $ 119,920,966
Net earnings...................... 2,927,582 2,506,801 3,540,811 4,809,992 3,630,071
Total assets...................... 48,010,512 45,106,790 41,023,377 46,039,361 38,117,191
Long-term debt.................... 4,800,000 7,600,000 6,400,000 6,366,666 4,600,000
Stockholders' equity.............. 30,378,150 28,622,951 27,422,779 25,732,957 22,781,959
Net earnings per share:
Basic........................... 0.39 0.33 0.47 0.64 0.48
Diluted......................... 0.39 0.33 0.47 0.63 0.48
Cash dividends declared per share
adjusted for stock dividends.... 0.16 0.18 0.25 0.25 0.18
See also Note 1 of Notes to the Company's Consolidated Financial Statements
herein which describes the Company's relationship with its primary suppliers of
steel products.
13
15
FRIEDMAN INDUSTRIES, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 2001 compared to year ended March 31, 2000
During the year ended March 31, 2001, sales increased $127,774 and cost of
products sold decreased $747,653 from the comparable amounts recorded during the
year ended March 31, 2000, which resulted in an increase in gross profit of
$875,427. Gross profit earned on tubular sales increased $1,792,702 but was
partially offset by a decline of $917,275 in gross profit earned on coil sales.
Tubular operations benefited from improved market conditions during fiscal 2001
and recorded an increase in tons shipped of approximately 16%. Conversely, soft
market conditions for coil products had the effect of generating intense
competition for available sales and decreasing gross profit. Tons of coil
products sold during fiscal 2001 declined approximately 13%. Gross profit as a
percent of sales was 7.2% and 7.9% during fiscal 2000 and 2001, respectively.
This improvement was associated primarily with improved tubular operations as
noted above.
Interest expense increased $78,271 from the amount recorded during fiscal
2000. This increase was related primarily to an increase in debt associated with
working capital requirements.
Interest and other income increased $47,260 from the amount recorded during
fiscal 2000. This increase resulted primarily from other income associated with
the increase in the cash surrender value of life insurance policies.
Federal income taxes increased $216,765 as the result of the increase in
earnings before taxes. The effective tax rates were the same for both fiscal
2001 and 2000.
Year ended March 31, 2000 compared to year ended March 31, 1999
During the year ended March 31, 2000, sales, cost of products sold and
gross profit decreased $4,451,831, $2,760,808 and $1,691,023, respectively, from
the comparable amounts recorded during the year ended March 31, 1999. During
fiscal 2000, the Company's tubular operations generated an increase in sales
that was more than offset by a decline in sales associated with coil operations.
Tubular operations benefited from stronger demand for tubular products in fiscal
2000 and the Company recorded a 25% increase in tubular tons sold. Conversely,
coil operations were adversely affected by softer demand for these products and
a 6% decline in coil tons sold was recorded. In addition, coil operations
incurred significant increases in the costs of coil products that could not be
immediately passed along to customers. Gross profit as a percentage of sales
decreased from 8.3% in fiscal 1999 to 7.2% in fiscal 2000. Improved margins
earned on tubular sales were more than offset by a significant decline in
margins earned on coil product sales.
Interest expense increased $102,474 from the amount recorded during fiscal
1999. During fiscal 1999, certain interest costs were related to construction of
fixed assets and were capitalized.
Federal income taxes declined $532,673 from the amount recorded during
fiscal 1999. This decrease resulted from the decline in earnings before taxes as
the effective tax rates were the same for both years.
14
16
FRIEDMAN INDUSTRIES, INCORPORATED
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company remained in a strong, liquid position at March 31, 2001.
Current ratios were 3.3 and 4.4 at March 31, 2001 and March 31, 2000,
respectively. Working capital was $27,959,527 at March 31, 2001 and $28,568,099
at March 31, 2000. Several components comprising working capital at March 31,
2001 and March 31, 2000 changed substantially. Accounts receivable decreased
$2,948,815, inventories increased $5,906,866 and accounts payable increased
$3,996,310 from the respective amounts recorded at March 31, 2000. A decline in
February 2001 and March 2001 sales was the primary factor associated with the
decrease in accounts receivable and the increase in inventories. The increase in
accounts payable was primarily associated with vendors offering and the Company
taking extended payment terms on inventory purchases. In general, the Company
believes that assets and liabilities should reflect the current level of
operations. Accordingly, the Company expects to adjust inventories, accounts
payable and liabilities in general to levels commensurate with current
operations.
The Company has a 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, 2002, the Company may borrow up to $8 million at an interest rate no
greater than the bank's prime rate. At March 31, 2001, the Company had
borrowings outstanding under the revolving facility of $4 million. The term
facility included borrowings of $1.2 million from the previous term note and
also provided for additional advances up to $3.5 million, all of which converted
to a term loan on December 31, 1998. 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 March 31, 2001, the principal amount
of indebtedness outstanding under the term facility was $1.6 million.
The Company believes that its cash flow from operations and borrowing
capability under its line of credit and term debt facilities are adequate to
fund its expected cash requirements for the year ended March 31, 2002.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1996) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, future results of operations,
future production capacity 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 for 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.
15
17
FRIEDMAN INDUSTRIES, INCORPORATED
TEN YEAR FINANCIAL SUMMARY
YEAR ENDED MARCH 31
---------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
Net sales........................ $120,395,583 $120,267,809 $124,719,640 $148,840,724 $119,920,966 $106,849,181
Earnings......................... $ 2,927,582 $ 2,506,801 $ 3,540,811 $ 4,809,992 $ 3,630,071 $ 2,836,768
Current assets................... $ 40,231,329 $ 36,945,378 $ 32,534,040 $ 39,347,548 $ 33,357,160 $ 27,524,670
Current liabilities.............. $ 12,271,802 $ 8,377,279 $ 6,758,038 $ 13,437,178 $ 10,172,672 $ 6,410,527
Net working capital.............. $ 27,959,527 $ 28,568,099 $ 25,776,002 $ 25,910,370 $ 23,184,488 $ 21,114,143
Total assets..................... $ 48,010,512 $ 45,106,790 $ 41,023,377 $ 46,039,361 $ 38,117,191 $ 32,812,986
Stockholders' equity............. $ 30,378,150 $ 28,622,951 $ 27,422,779 $ 25,732,957 $ 22,781,959 $ 20,428,936
Earnings as a percent of
Net sales.................... 2.4 2.1 2.8 3.2 3.0 2.7
Stockholders' equity......... 9.6 8.8 12.9 18.7 15.9 13.9
Average number of common shares
outstanding: Basic(2).......... 7,568,839 7,547,624 7,528,702 7,512,901 7,489,943 7,446,076
Per share
Net earnings per share:
Basic(2)..................... $ 0.39 $ 0.33 $ 0.47 $ 0.64 $ 0.48 $ 0.38
Stockholders' equity(2)........ $ 4.01 $ 3.79 $ 3.64 $ 3.43 $ 3.04 $ 2.74
Cash dividends per common
share(2)....................... $ 0.16 $ 0.18 $ 0.25 $ 0.25 $ 0.18 $ 0.15
Stock dividend declared.......... -- 5% 5% 5% 5% 5%
YEAR ENDED MARCH 31
------------------------------------------------------
1995 1994 1993 1992
----------- ----------- ----------- -----------
Net sales........................ $97,968,805 $70,908,065 $56,230,967 $42,609,330
Earnings......................... $ 2,458,132 $ 1,691,075(1) $ 806,272 $ 483,720
Current assets................... $25,956,555 $21,014,281 $16,542,769 $15,537,203
Current liabilities.............. $ 5,816,334 $ 5,534,143 $ 3,549,495 $ 2,849,637
Net working capital.............. $20,140,221 $15,480,138 $12,993,274 $12,687,566
Total assets..................... $32,074,862 $27,184,421 $20,491,441 $19,619,875
Stockholders' equity............. $18,722,781 $17,430,337 $16,528,543 $16,277,792
Earnings as a percent of
Net sales.................... 2.5 2.4 1.4 1.1
Stockholders' equity......... 13.1 9.7 4.9 3.0
Average number of common shares
outstanding: Basic(2).......... 7,444,041 7,440,888 7,440,328 7,440,328
Per share
Net earnings per share:
Basic(2)..................... $ 0.33 $ 0.23(1) $ 0.11 $ 0.07
Stockholders' equity(2)........ $ 2.52 $ 2.34 $ 2.22 $ 2.19
Cash dividends per common
share(2)....................... $ 0.16 $ 0.11 $ 0.07 $ 0.07
Stock dividend declared.......... 5% 5% 5% 5%
- ------------
(1) Includes the cumulative effect of accounting changes which increased net
earnings $77,000 ($.01 per share).
(2) Adjusted for stock dividends.