1
FRIEDMAN
INDUSTRIES,
INCORPORATED
1997
ANNUAL REPORT
2
FRIEDMAN INDUSTRIES, INCORPORATED
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
1997 1996
------------ ------------
Net sales................................ $119,920,966 $106,849,181
Net earnings............................. $3,630,071 $2,836,768
Net earnings per share*.................. $0.56 $0.44
Cash dividends per share*................ $0.21 $0.18
Stock dividend........................... 5% 5%
Stockholders' equity..................... $22,781,959 $20,428,936
Stockholders' equity per share*.......... $3.52 $3.18
Working capital.......................... $23,184,488 $21,114,143
* Adjusted for stock dividends.
- - --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
The Company is pleased to report record sales of approximately $120,000,000
in fiscal 1997. As can be seen in the above highlights, both sales and earnings
in fiscal 1997 improved from the respective amounts recorded during fiscal 1996.
These improvements were primarily related to the Company's tubular operations
which benefited from stronger demand in fiscal 1997 and from efficiencies
associated with increased production.
In fiscal 1998, the Company intends to install a 2-Hi rolling mill at the
Arkansas coil processing facility. This rolling mill will be capable of
processing steel up to 74 inches in width and up to 1/2 inch in thickness in a
coil-to-coil mode or directly from coil to cut-to-length processing.
You are invited to attend the Annual Meeting of Shareholders to be held on
August 22, 1997. The meeting is scheduled for 11 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 Harper
Senior Vice President -- Finance
and Secretary/Treasurer
Thomas Thompson
Senior Vice President -- Sales and Marketing
Ronald L. Burgerson
Vice President
Ted Henderson
Vice President
Dale Ray
Vice President
Charles W. Hall
Assistant Secretary
DIRECTORS
Jack Friedman
Chairman of the Board and
Chief Executive Officer
Harold Friedman
Vice Chairman of the Board
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,
Parkans International, L.L.C.
(recycling services),
Houston, Texas;
Chairman of the Board and
Chief Executive Officer,
LTI Technologies, Inc.
(technical services)
Houston, Texas
COMPANY OFFICES
MAIN OFFICE
4001 Homestead Road
Houston, Texas 77028
713-672-9433
SALES OFFICE
1121 Judson Road
Longview, Texas 75606
903-758-3431
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
40 Wall Street
New York, New York 10005
STOCK EXCHANGE LISTING
American Stock Exchange
(Trading symbol: FRD)
APPROXIMATE NUMBER OF
SHAREHOLDERS OF RECORD
730 at May 23, 1997
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, 1997 as filed with the Securities and
Exchange Commission. Written requests should be addressed to: Benny Harper,
Senior Vice President, Friedman Industries, Incorporated, P.O. Box 21147,
Houston, Texas 77226.
2
4
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
(steel sheet and plate) 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 420 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, markets and processes pipe. In addition, this division manufactures
pipe of which a substantial amount is sold to LSS. Pipe is sold nationally to
approximately 330 customers. The Company processes its own tubular products and
processes pipe for LSS on a fee basis. 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 6 of Notes to the Company's Consolidated Financial
Statements appearing herein.
------------------
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
FISCAL YEAR 1997 FISCAL YEAR 1996
----------------- -----------------
HIGH LOW HIGH LOW
---- ----- ---- -----
First Quarter............................................... 4 3/4 3 7/8 4 7/8 3 3/4
Second Quarter.............................................. 5 4 3/16 4 5/8 3 3/4
Third Quarter............................................... 6 5/8 4 1/2 4 7/16 3 9/16
Fourth Quarter.............................................. 6 5 1/4 4 3 7/16
------------------
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
FISCAL YEAR 1997 FISCAL YEAR 1996
----------------- ------------------
CASH STOCK CASH STOCK
---- ----- ---- -----
First Quarter............................................... $.05 $ .05
Second Quarter.............................................. $.05 $ .05
Third Quarter............................................... $.06 $.045
Fourth Quarter.............................................. $.06 5% $ .05 5%
(Per share amounts above have not been adjusted to reflect stock dividends.)
3
5
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31
--------------------------
1997 1996
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 168,245 $ 595,216
Accounts receivable, less allowance for doubtful
accounts of $7,276 in 1997 and $5,794 in 1996........ 11,902,925 9,423,204
Inventories............................................ 21,203,665 17,391,625
Other.................................................. 82,325 114,625
----------- -----------
TOTAL CURRENT ASSETS.............................. 33,357,160 27,524,670
PROPERTY, PLANT AND EQUIPMENT:
Land................................................... 198,021 198,021
Buildings and yard improvements........................ 2,695,913 2,687,730
Machinery and equipment................................ 11,724,974 11,699,234
Less accumulated depreciation.......................... (9,909,444) (9,316,572)
----------- -----------
4,709,464 5,268,413
OTHER ASSETS:
Cash value of officers' life insurance(Note 3)......... 50,567 19,903
----------- -----------
TOTAL ASSETS...................................... $38,117,191 $32,812,986
=========== ===========
4
6
FRIEDMAN INDUSTRIES, INCORPORATED
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31
--------------------------
1997 1996
----------- -----------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 8,112,096 $ 4,739,206
Current portion of long-term debt (Note 3)............. 800,000 800,000
Dividends payable...................................... 369,715 291,709
Income taxes payable................................... 256,434 53,047
Contribution to profit-sharing plan (Note 5)........... 242,000 216,000
Employee compensation and related expenses............. 392,427 310,565
----------- -----------
TOTAL CURRENT LIABILITIES......................... 10,172,672 6,410,527
LONG-TERM DEBT, less current portion (Note 3)............... 4,600,000 5,400,000
DEFERRED INCOME TAXES (Note 4).............................. 449,560 460,523
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Note 5)........ 113,000 113,000
STOCKHOLDERS' EQUITY (Note 2):
Common stock, par value $1:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 6,161,994 in 1997
and 5,834,195 in 1996............................. 6,161,994 5,834,195
Additional paid-in capital............................. 22,377,246 21,444,360
Retained earnings...................................... (5,757,281) (6,849,619)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........................ 22,781,959 20,428,936
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $38,117,191 $32,812,986
=========== ===========
See accompanying notes.
5
7
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended March 31
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
Sales........................................... $119,920,966 $106,849,181 $97,968,805
Costs and expenses:
Cost of products sold...................... 109,801,719 98,435,636 90,701,372
Selling, general and administrative........ 4,196,358 3,567,785 3,227,646
Interest expense........................... 509,275 617,629 399,098
------------ ------------ -----------
114,507,352 102,621,050 94,328,116
------------ ------------ -----------
5,413,614 4,228,131 3,640,689
Interest and other income....................... 86,493 70,001 83,753
------------ ------------ -----------
EARNINGS BEFORE FEDERAL INCOME
TAXES............................... 5,500,107 4,298,132 3,724,442
Federal income taxes:
Current.................................... 1,880,999 1,423,588 1,186,466
Deferred................................... (10,963) 37,776 79,844
------------ ------------ -----------
1,870,036 1,461,364 1,266,310
------------ ------------ -----------
NET EARNINGS.......................... $ 3,630,071 $ 2,836,768 $ 2,458,132
============ ============ ===========
Average number of common shares outstanding..... 6,470,094 6,432,200 6,430,443
============ ============ ===========
NET EARNINGS PER SHARE................ $ .56 $ .44 $ .38
============ ============ ===========
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
---------- ----------- -----------
Balance at March 31, 1994......................... $5,289,598 $19,678,497 $(7,537,758)
Net earnings...................................... -- -- 2,458,132
Exercise of stock options......................... 1,216 1,411 --
Stock dividend (5%)............................... 264,044 891,149 (1,157,100)
Cash dividends -- ($.18 per share)................ -- -- (1,166,408)
---------- ----------- -----------
BALANCE AT MARCH 31, 1995............... 5,554,858 20,571,057 (7,403,134)
Net earnings...................................... -- -- 2,836,768
Issuance of Directors' shares..................... 2,000 6,625 --
Stock dividend (5%)............................... 277,337 866,678 (1,145,690)
Cash dividends -- ($.18 per share)................ -- -- (1,137,563)
---------- ----------- -----------
BALANCE AT MARCH 31, 1996............... 5,834,195 21,444,360 (6,849,619)
Net earnings...................................... -- -- 3,630,071
Exercise of stock options......................... 34,482 33,103 --
Issuance of Directors' shares..................... 2,000 7,625 --
Stock dividend (5%)............................... 291,317 892,158 (1,185,068)
Cash dividends -- ($.21 per share)................ -- -- (1,352,665)
---------- ----------- -----------
BALANCE AT MARCH 31, 1997............... $6,161,994 $22,377,246 $(5,757,281)
========== =========== ===========
See accompanying notes.
6
8
FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31
---------------------------------------
1997 1996 1995
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 3,630,071 $ 2,836,768 $ 2,458,132
Adjustments to reconcile net
earnings to cash provided by
(used in) operating activities:
Depreciation.................. 645,591 616,991 575,336
Directors' shares issued...... 9,625 8,625 --
Provision for losses on
accounts receivable......... 5,000 9,500 13,645
Provision for deferred
taxes....................... (10,963) 37,776 79,844
(Increase) decrease in operating
assets:
Accounts receivable........... (2,484,721) (762,068) (993,999)
Inventories................... (3,812,040) (832,851) (3,699,588)
Other......................... 32,300 (52,007) 71,906
Increase (decrease) in operating
liabilities:
Accounts payable and accrued
expenses.................... 3,372,890 468,397 (479,001)
Contribution to profit-sharing
plan........................ 26,000 16,000 20,000
Employee compensation and
related expenses............ 81,862 57,440 60,376
Postretirement benefit other
than pensions............... -- -- 36,000
Federal income taxes
payable..................... 203,387 38,389 14,658
----------- ----------- -----------
Net cash provided by (used in)
operating activities........ 1,699,002 2,442,960 (1,842,691)
INVESTING ACTIVITIES
Purchase of property, plant and
equipment........................ (86,642) (470,210) (470,612)
(Increase) decrease in cash value
of officers' life insurance...... (30,664) 683,210 (69,206)
Other.............................. -- -- 16,315
----------- ----------- -----------
Net cash (used in) provided by
investing activities........ (117,306) 213,000 (523,503)
FINANCING ACTIVITIES
Cash dividends paid................ (1,274,659) (1,123,596) (1,097,661)
Proceeds from borrowings of
long-term debt................... -- -- 4,000,000
Principal payments on long-term
debt............................. (800,000) (1,600,000) (200,000)
Cash paid on fractional shares from
stock dividend................... (1,593) (1,675) (1,907)
Cash received from exercised stock
options.......................... 67,585 -- --
----------- ----------- -----------
Net cash (used in) provided by
financing activities........ (2,008,667) (2,725,271) 2,700,432
----------- ----------- -----------
(Decrease) increase in cash
and cash equivalents........ (426,971) (69,311) 334,238
Cash and cash equivalents at
beginning of year................ 595,216 664,527 330,289
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 168,245 $ 595,216 $ 664,527
=========== =========== ===========
See accompanying notes.
7
9
FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Friedman Industries, Incorporated and its subsidiary (which are
collectively referred to herein as the "Company"). All material intercompany
amounts and transactions have been eliminated.
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:
MARCH 31
--------------------------
1997 1996
----------- -----------
Coil................................................... $ 8,900,962 $ 7,033,949
Tubular................................................ 12,302,703 10,357,676
----------- -----------
$21,203,665 $17,391,625
=========== ===========
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 ("FIFO") method. At
March 31, 1997 and 1996, the current replacement cost of LIFO inventories
exceeded their LIFO value by approximately $3,072,000 and $2,857,000,
respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on
the basis of cost. Depreciation is calculated principally 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.
EARNINGS PER SHARE: Earnings per share are based on the weighted average
number of common shares outstanding. Stock options are not included in the
computation of the weighted average number of common shares outstanding, since
their effect is not significant. Fully diluted earnings per share are not
presented because they are not materially dilutive.
All applicable per share amounts herein have been retroactively adjusted to
give effect to a 5% stock dividend distributed May 23, 1997.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $508,000 in 1997, $679,000 in 1996 and $373,000 in 1995. The
Company paid income taxes, net of refunds, of $1,678,000 in 1997, $1,385,000 in
1996 and $1,130,000 in 1995.
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 financial
statements and accompanying notes. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS: The carrying value of the Company's financial
instruments approximate fair value.
ECONOMIC RELATIONSHIP: Lone Star Steel Company ("LSS") and Nucor Steel
Company ("NSC") 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 and by providing
tubular processing services for LSS. Total sales to LSS were approximately $17.8
million,
8
10
FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$15.6 million and $10.4 million in 1997, 1996 and 1995, respectively. Loss of
this mill as a customer could have a material adverse effect on the Company's
business.
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, 52,248 additional
options may be granted. All options have 10-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):
1997 1996 1995
-------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------ --------- ------ ---------
Outstanding at beginning of year........ 96,857 $2.04 85,832 $1.87 87,240 $1.87
GRANTED................................. 320,237 4.73 11,025 3.40 --
EXERCISED............................... (36,206) 1.87 -- (1,408) 1.87
------- ------ ------
OUTSTANDING AT END OF YEAR.............. 380,888 4.32* 96,857 2.04 85,832 1.87
======= ====== ======
EXERCISABLE AT END OF YEAR.............. 170,636 3.10 96,857 2.04 85,832 1.87
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR............... $1.11 $0.80
* Range of $1.87 to $5.30 per share and a weighted average remaining life of 8.7
years
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), in accounting 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 FASB Statement No. 123,
Accounting for Stock-Based Compensation, the effect would be a 6% reduction in
net earnings and earnings per share for 1997 and no effect for 1996 and 1995.
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 .28; and a weighted-average expected life
of the option of 4 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's long-term debt consists of a term note payable and borrowings
under a line of credit. The term note payable of $1,400,000 and $2,200,000 at
March 31, 1997 and 1996, respectively, bears an interest rate equal to the
lending bank's prime rate. Principal payments in the amount of $200,000 plus
interest are made quarterly through December 1, 1999. Borrowings under the line
of credit were $4,000,000 at March 31, 1997 and 1996. The line of credit
facility provides borrowings of up to $8,000,000, is unsecured, bears interest
at a maximum rate of the bank's prime rate, and expires on April 1, 2000. There
are no commitment fees or compensating balance requirements under this
arrangement. The annual principal payments required on long-term debt during the
next five years are as follows: 1998 -- $800,000; 1999 -- $600,000; and 2001 --
$4,000,000.
9
11
FRIEDMAN INDUSTRIES, INCORPORATED
3. LONG-TERM DEBT (CONTINUED)
In July 1995, the Company borrowed $708,168 at an average interest rate of
6.9% against the cash surrender value of officers' life insurance policies (the
"borrowings"). The borrowings do not require specific repayment terms except
that in case of a death, that portion of the borrowings related to the death
will be deducted from the proceeds of the life insurance policy. The proceeds of
the borrowings were used to reduce the term note.
4. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes. Significant components of the Company's
consolidated deferred tax assets and liability are as follows:
MARCH 31
-------------------
1997 1996
-------- --------
DEFERRED TAX LIABILITY:
Depreciation........................................ $558,624 $553,401
DEFERRED TAX ASSETS:
Inventory capitalization............................ 62,517 52,488
Postretirement benefits other than pensions......... 38,420 38,420
Other............................................... 8,127 1,970
-------- --------
Total deferred tax assets............................. 109,064 92,878
-------- --------
Net deferred tax liability............................ $449,560 $460,523
======== ========
5. 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 $242,000 for the year ended March 31, 1997, $216,000 for the year ended
March 31, 1996, and $200,000 for the year ended March 31, 1995. 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.
6. 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. This operation processes its own tubular products and processes pipe
on a fee basis for LSS.
10
12
FRIEDMAN INDUSTRIES, INCORPORATED
6. INDUSTRY SEGMENT DATA (CONTINUED)
The following is a summary of significant financial information relating to
the product groups:
YEAR ENDED MARCH 31
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
NET SALES:
Coil processing....................... $ 66,979,133 $ 63,811,709 $64,138,520
Tubular............................... 52,941,833 43,037,472 33,830,285
------------ ------------ -----------
TOTAL NET SALES............... $119,920,966 $106,849,181 $97,968,805
============ ============ ===========
OPERATING PROFIT:
Coil processing....................... $ 1,578,403 $ 1,856,750 $ 1,975,775
Tubular............................... 5,933,923 4,218,560 3,147,319
------------ ------------ -----------
TOTAL OPERATING PROFIT........ 7,512,326 6,075,310 5,123,094
Corporate expenses.................... (1,589,437) (1,229,550) (1,083,307)
Interest expense...................... (509,275) (617,629) (399,098)
Interest and other income............. 86,493 70,001 83,753
------------ ------------ -----------
TOTAL EARNINGS BEFORE TAXES... $ 5,500,107 $ 4,298,132 $ 3,724,442
============ ============ ===========
IDENTIFIABLE ASSETS:
Coil processing....................... $ 18,345,255 $ 15,132,983 $14,312,010
Tubular............................... 19,474,470 16,998,998 16,309,266
------------ ------------ -----------
37,819,725 32,131,981 30,621,276
General corporate assets.............. 297,466 681,005 1,453,586
------------ ------------ -----------
TOTAL ASSETS.................. $ 38,117,191 $ 32,812,986 $32,074,862
============ ============ ===========
DEPRECIATION:
Coil processing....................... $ 316,714 $ 310,840 $ 287,308
Tubular products...................... 322,071 299,714 280,982
Corporate and other................... 6,806 6,437 7,046
------------ ------------ -----------
$ 645,591 $ 616,991 $ 575,336
============ ============ ===========
CAPITAL EXPENDITURES:
Coil processing....................... $ 16,895 $ 108,765 $ 298,832
Tubular products...................... 66,057 359,737 167,293
Corporate assets...................... 3,690 1,708 4,487
------------ ------------ -----------
$ 86,642 $ 470,210 $ 470,612
============ ============ ===========
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 cash value
of officers' life insurance. There are no sales between product groups.
11
13
FRIEDMAN INDUSTRIES, INCORPORATED
7. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended March 31, 1997 and 1996 (per share amounts have been adjusted
for subsequent stock dividends):
Quarter Ended
---------------------------------------------------------
June 30 September 30 December 31 March 31
1996 1996 1996 1997
----------- ------------ ----------- -----------
Net sales............................... $28,751,479 $29,486,754 $28,468,809 $33,213,924
Gross profit............................ 2,622,513 2,530,609 2,298,822 2,667,303
Net earnings............................ 930,812 957,992 791,309 949,958
Net earnings per share.................. 0.14 0.15 0.12 0.15
Quarter Ended
---------------------------------------------------------
June 30 September 30 December 31 March 31
1995 1995 1995 1996
----------- ------------ ----------- -----------
Net sales............................... $28,752,665 $26,208,387 $25,559,420 $26,328,709
Gross profit............................ 2,266,467 1,775,718 2,033,081 2,338,279
Net earnings............................ 783,214 554,018 684,456 815,080
Net earnings per share(1)............... .12 .09 .11 .13
(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.
8. CONCENTRATION OF RECEIVABLES
The Company's sales are concentrated primarily in the midwestern,
southwestern and southeastern sections of the United States, and are principally
to customers in the steel distributing and fabricating industries. The Company
performs periodic credit evaluations of the financial condition of its customers
and generally does not require collateral. Generally, receivables are due within
30 days.
12
14
FRIEDMAN INDUSTRIES, INCORPORATED
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Friedman Industries, Incorporated
We have audited the accompanying consolidated balance sheets of Friedman
Industries, Incorporated as of March 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1997. 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 generally accepted auditing
standards. 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, Incorporated at March 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
May 30, 1997
Houston, Texas
------------------------------------------
SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------
Net sales............................ $ 119,920,966 $ 106,849,181 $ 97,968,805 $ 70,908,065 $ 56,230,967
Net earnings......................... 3,630,071 2,836,768 2,458,132 1,691,075(A) 806,272
Total assets......................... 38,117,191 32,812,986 32,074,862 27,184,421 20,491,441
Long-term debt....................... 4,600,000 5,400,000 7,000,000 3,800,000 --
Stockholders' equity................. 22,781,959 20,428,936 18,722,781 17,430,337 16,528,543
Net earnings per share............... 0.56 0.44 0.38 0.26(A) 0.13
Cash dividends declared per share
adjusted for stock dividends....... 0.21 0.18 0.18 0.12 0.09
(A) Includes the cumulative effect of accounting changes which increased net
earnings $77,000 ($.01 per share).
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, 1997 compared to year ended March 31, 1996
During the year ended March 31, 1997, sales, cost of products sold and
gross profit increased $13,071,785, $11,366,083 and $1,705,702, respectively,
from the comparable amounts recorded during the year ended March 31, 1996. Each
of these increases was primarily related to the Company's tubular operations.
Stronger demand for tubular products during fiscal 1997 supported improved sales
and gross profit and contributed to a substantial increase in volume and
production levels. Margins earned on sales increased from 7.9% in fiscal 1996 to
8.4% in fiscal 1997. This increase was primarily related to tubular operations
which benefited from the above noted demand factor and from efficiencies related
to increased production.
Selling, general and administrative expenses increased $628,573 from the
amount recorded during fiscal 1996. This increase was primarily related to
variable expenses associated with volume and/or earnings such as employee
incentive bonuses, commissions and supplies.
Interest expense during fiscal 1997 declined $108,354 from the amount
recorded during fiscal 1996. This decline was primarily related to a decline in
interest rates paid on borrowed funds and reductions in long term debt in fiscal
1997.
Interest and other income increased $16,492. This increase was primarily
related to the sale of machinery and equipment during fiscal 1997.
Federal income taxes increased $408,672 from the amount recorded in fiscal
1996. This increase was related to the increase in earnings before taxes as the
effective tax rates were the same for both years.
Year ended March 31, 1996 compared to year ended March 31, 1995
During the year ended March 31, 1996, sales, cost of products sold and
gross profit increased $8,880,376, $7,734,264 and $1,146,112, respectively, from
the comparable amounts recorded during the year ended March 31, 1995. The sales
increase was primarily related to the Company's tubular operations which
benefited from stronger market conditions for its products and recorded a
substantial increase in volume. The increase in cost of products sold primarily
resulted from the increase in sales noted above. Gross profit increased as a
result of the increase in sales combined with an improved margin rate. Margins
earned on sales increased from 7.4% in fiscal 1995 to 7.9% in fiscal 1996. This
improvement was primarily related to tubular operations which benefited from
both stronger market conditions for its products and efficiencies associated
with increased production.
Selling, general and administrative expenses increased $340,139 from the
amount recorded during fiscal 1995. This increase primarily resulted from
increases in variable expenses which were associated with increased volume
and/or earnings.
Interest expense increased $218,531 from the comparable amount recorded in
fiscal 1995. This increase was primarily related to interest paid on borrowings
under the Company's bank line of credit which were outstanding twelve months in
fiscal 1996 compared to approximately four months in fiscal 1995. Borrowings
under this line of credit were used to support working capital.
Federal income taxes increased $195,054 from the amount recorded in fiscal
1995. This increase was related to the increase 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
At March 31, 1997, the Company maintained a strong, liquid position as
evidenced by a debt to equity ratio of .20 and by a current ratio of 3.3. In
December 1993, the Company borrowed $4,000,000 from a bank to support the
construction and operation of its new steel processing facility located in
Hickman, Arkansas (the "Hickman Division"). This note is a five year term note
that bears interest at the bank's floating prime rate and requires quarterly
principal payments of $200,000 plus interest through December 1, 1998. The
Company also has available a line of credit facility with a bank, which provides
for borrowings up to $8,000,000, is unsecured, bears interest at a maximum rate
of the bank's floating prime rate and expires on April 1, 2000. At March 31,
1997, the Company had a loan balance of $4,000,000 outstanding under this
facility in support of working capital.
During the year ended March 31, 1998, the Company expects to make capital
improvements to the Hickman Division. For this purpose the Board of Directors
has approved an expenditure of $3,500,000 and has authorized management to fund
the expenditure with additional financing. The Company believes that its cash
flow from operations and borrowing capability under its line of credit facility
and subsequent borrowings related to the Hickman Division are adequate to fund
its expected cash requirements for the year ending March 31, 1998.
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. When used in this Form 10-K,
expressions such as "belief", "expect" and similar expressions are intended to
identify forward-looking statements. 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 section
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, the success of the Company's
capital improvements at the Hickman facility, changes in the demand and prices
for the Company's products and 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
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ----------- ----------- ----------- -----------
Net sales........................... $119,920,966 $106,849,181 $97,968,805 $70,908,065 $56,230,967 $42,609,330
Earnings............................ $ 3,630,071 $ 2,836,768 $ 2,458,132 $ 1,691,075(1) $ 806,272 $ 483,720
Current assets...................... $ 33,357,160 $ 27,524,670 $25,956,555 $21,014,281 $16,542,769 $15,537,203
Current liabilities................. $ 10,172,672 $ 6,410,527 $ 5,816,334 $ 5,534,143 $ 3,549,495 $ 2,849,637
Net working capital................. $ 23,184,488 $ 21,114,143 $20,140,221 $15,480,138 $12,993,274 $12,687,566
Total assets........................ $ 38,117,191 $ 32,812,986 $32,074,862 $27,184,421 $20,491,441 $19,619,875
Stockholders' equity................ $ 22,781,959 $ 20,428,936 $18,722,781 $17,430,337 $16,528,543 $16,277,792
Earnings as a percent of
Net sales....................... 3.0 2.7 2.5 2.4 1.4 1.1
Stockholders' equity............ 15.9 13.9 13.1 9.7 4.9 3.0
Average number of common and
common equivalent shares(3)....... 6,470,094 6,432,200 6,430,443 6,427,719 6,427,235 6,427,235
Per share
Earnings from operations(3)....... $ 0.56 $ 0.44 $ 0.38 $ 0.26(1) $ 0.13 $ 0.08
Stockholders' equity(3)........... $ 3.52 $ 3.18 $ 2.91 $ 2.71 $ 2.57 $ 2.53
Cash dividends per common
share(3).......................... $ 0.21 $ 0.18 $ 0.18 $ 0.12 $ 0.09 $ 0.07
Stock dividend declared............. 5% 5% 5% 5% 5% 5%
YEAR ENDED MARCH 31
------------------------------------------------------
1991 1990 1989 1988
----------- ----------- ----------- -----------
Net sales........................... $50,264,851 $50,043,949 $53,499,476 $59,255,966
Earnings............................ $ 866,259 $ 1,560,701 $ 1,830,861(2) $ 3,449,368
Current assets...................... $16,826,544 $16,731,964 $19,592,919 $18,110,425
Current liabilities................. $ 2,501,178 $ 1,783,375 $ 4,695,397 $ 3,514,402
Net working capital................. $14,325,366 $14,948,589 $14,897,522 $14,596,023
Total assets........................ $20,936,487 $19,042,527 $21,803,286 $20,498,322
Stockholders' equity................ $16,274,914 $16,186,557 $15,715,223 $15,288,709
Earnings as a percent of
Net sales....................... 1.7 3.1 3.4 5.8
Stockholders' equity............ 5.3 9.6 11.7 22.6
Average number of common and
common equivalent shares(3)....... 6,427,235 6,427,235 6,330,710 6,287,561
Per share
Earnings from operations(3)....... $ 0.13 $ 0.24 $ 0.29(2) $ 0.55
Stockholders' equity(3)........... $ 2.53 $ 2.52 $ 2.48 $ 2.43
Cash dividends per common
share(3).......................... $ 0.12 $ 0.17 $ 0.26 $ 3.47
Stock dividend declared............. 5% 5% 5% 10%
- - ------------
(1) Includes the cumulative effect of accounting changes which increased net
earnings $77,000 ($.01 per share).
(2) Includes an after-tax loss of $544,500 ($0.09 per share) due to an
extraordinary item.
(3) Adjusted for stock dividends.