1
FRIEDMAN
INDUSTRIES,
INCORPORATED
1998
ANNUAL REPORT
2
FRIEDMAN INDUSTRIES, INCORPORATED
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
1998 1997
------------ ------------
Net sales................................ $148,840,724 $119,920,966
Net earnings............................. $4,809,992 $3,630,071
Net earnings per share*.................. $0.71 $0.53
Cash dividends per share*................ $0.28 $0.20
Stock dividend........................... 5% 5%
Stockholders' equity..................... $25,732,957 $22,781,959
Stockholders' equity per share*.......... $3.78 $3.35
Working capital.......................... $25,910,370 $23,184,488
* Adjusted for stock dividends.
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
As reflected in the financial highlights set forth above, the Company's
results of operations in fiscal 1998 increased substantially compared to the
results recorded in fiscal 1997. The aggressive growth program which has been
pursued by the management team installed in 1995 and strong market conditions
contributed to increased sales and earnings.
The Company incurred major capital expenditures in fiscal 1998 for a new
seam annealer at its pipe mill and for the ongoing construction of the temper
pass mill at the Arkansas coil facility. These projects are designed to improve
product quality and increase operating efficiency.
You are cordially invited to attend the Annual Meeting of Shareholders
scheduled to start at 11 a.m. (local time) on August 21, 1998 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
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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
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
700 at May 29, 1998
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, 1998 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.
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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
(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 440 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"). Pipe is sold nationally to approximately 340 customers and a
substantial amount of manufactured pipe is sold 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 6 of Notes to the Company's Consolidated Financial
Statements appearing herein.
------------------
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
FISCAL 1998 FISCAL YEAR 1997
----------------- -----------------
HIGH LOW HIGH LOW
---- ----- ---- -----
First Quarter............................................... 6 3/8 5 1/8 4 3/4 3 7/8
Second Quarter.............................................. 9 1/2 6 5 4 3/16
Third Quarter............................................... 9 1/2 5 13/16 6 5/8 4 1/2
Fourth Quarter.............................................. 7 11/16 5 1/2 6 5 1/4
------------------
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
FISCAL 1998 FISCAL YEAR 1997
------------------ ------------------
CASH STOCK CASH STOCK
----- ----- ----- -----
First Quarter............................................... $ .07 $ .05
Second Quarter.............................................. $.075 $ .05
Third Quarter............................................... $.075 $ .06
Fourth Quarter.............................................. $.075 5% $ .06 5%
(Per share amounts above have not been adjusted to reflect stock dividends.)
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31
---------------------------
1998 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 1,361,693 $ 168,245
Accounts receivable, less allowance for doubtful
accounts of $7,276 in 1998 and 1997.................. 13,205,113 11,902,925
Inventories............................................ 24,586,863 21,203,665
Other.................................................. 193,879 82,325
------------ -----------
TOTAL CURRENT ASSETS.............................. 39,347,548 33,357,160
PROPERTY, PLANT AND EQUIPMENT:
Land................................................... 198,021 198,021
Buildings and yard improvements........................ 2,882,358 2,695,913
Machinery and equipment................................ 13,999,439 11,724,974
Less accumulated depreciation.......................... (10,468,859) (9,909,444)
------------ -----------
6,610,959 4,709,464
OTHER ASSET:
Cash value of officers' life insurance................. 80,854 50,567
------------ -----------
TOTAL ASSETS...................................... $ 46,039,361 $38,117,191
============ ===========
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FRIEDMAN INDUSTRIES, INCORPORATED
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31
--------------------------
1998 1997
----------- -----------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $10,925,023 $ 8,112,096
Current portion of long-term debt...................... 800,000 800,000
Dividends payable...................................... 486,886 369,715
Income taxes payable................................... 344,465 256,434
Contribution to profit sharing plan.................... 280,000 242,000
Employee compensation and related expenses............. 600,804 392,427
----------- -----------
TOTAL CURRENT LIABILITIES......................... 13,437,178 10,172,672
LONG-TERM DEBT, less current portion........................ 6,366,666 4,600,000
DEFERRED INCOME TAXES....................................... 389,560 449,560
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 -- 6,491,808 in 1998
and 6,161,994 in 1997............................. 6,491,808 6,161,994
Additional paid-in capital............................. 23,680,628 22,377,246
Retained deficit....................................... (4,439,479) (5,757,281)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........................ 25,732,957 22,781,959
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $46,039,361 $38,117,191
=========== ===========
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED MARCH 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Sales.......................................... $148,840,724 $119,920,966 $106,849,181
Costs and expenses:
Cost of products sold..................... 135,981,231 109,801,719 98,435,636
Selling, general, and administrative...... 5,193,206 4,196,358 3,567,785
Interest expense.......................... 431,498 509,275 617,629
------------ ------------ ------------
141,605,935 114,507,352 102,621,050
------------ ------------ ------------
7,234,789 5,413,614 4,228,131
Interest and other income...................... 53,080 86,493 70,001
------------ ------------ ------------
EARNINGS BEFORE FEDERAL INCOME
TAXES.............................. 7,287,869 5,500,107 4,298,132
Federal income taxes:
Current................................... 2,537,877 1,880,999 1,423,588
Deferred.................................. (60,000) (10,963) 37,776
------------ ------------ ------------
2,477,877 1,870,036 1,461,364
------------ ------------ ------------
NET EARNINGS......................... $ 4,809,992 $ 3,630,071 $ 2,836,768
============ ============ ============
Average number of common shares outstanding:
Basic........................................ 6,814,423 6,793,599 6,753,810
Diluted...................................... 6,941,978 6,793,599 6,753,810
Net earnings per share:
Basic........................................ $ .71 $ .53 $ .42
Diluted...................................... $ .69 $ .53 $ .42
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
---------- ----------- -----------
Balance at March 31, 1995......................... $5,554,858 $20,571,057 $(7,403,134)
Net earnings...................................... -- -- 2,836,768
Issuance of Directors' shares..................... 2,000 6,625 --
Stock dividend (5%)............................... 277,337 866,678 (1,145,690)
Cash dividends ($.17 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 ($.20 per share)................... -- -- (1,352,665)
---------- ----------- -----------
BALANCE AT MARCH 31, 1997............... 6,161,994 22,377,246 (5,757,281)
Net earnings...................................... -- -- 4,809,992
Exercise of stock options......................... 20,077 17,467 --
Issuance of Directors' shares..................... 2,000 16,500 --
Stock dividend (5%)............................... 307,737 1,269,415 (1,579,431)
Cash dividends($0.28 per share)................... -- -- (1,912,759)
---------- ----------- -----------
BALANCE AT MARCH 31, 1998............... $6,491,808 $23,680,628 $(4,439,479)
========== =========== ===========
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES
Net earnings....................... $ 4,809,992 $ 3,630,071 $ 2,836,768
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation.................. 665,908 645,591 616,991
Loss on disposal of property,
plant, and equipment........ 26,008 -- --
Directors' shares issued...... 18,500 9,625 8,625
Provision for deferred
taxes....................... (60,000) (10,963) 37,776
Decrease (increase) in operating
assets:
Accounts receivable........... (1,302,188) (2,479,721) (752,568)
Inventories................... (3,383,198) (3,812,040) (832,851)
Other......................... (72,517) 32,300 (52,007)
Increase (decrease) in operating
liabilities:
Accounts payable and accrued
expenses.................... 2,812,809 3,372,890 468,397
Contribution to profit sharing
plan........................ 38,000 26,000 16,000
Employee compensation and
related expenses............ 208,377 81,862 57,440
Federal income taxes
payable..................... 48,994 203,387 38,389
----------- ----------- -----------
Net cash provided by operating
activities.................. 3,810,685 1,699,002 2,442,960
INVESTING ACTIVITIES
Purchase of property, plant, and
equipment........................ (2,593,410) (86,642) (470,210)
Decrease (increase) in cash value
of officers' life insurance...... (30,287) (30,664) 683,210
Other.............................. -- -- --
----------- ----------- -----------
Net cash (used in) provided by
investing activities........ (2,623,697) (117,306) 213,000
FINANCING ACTIVITIES
Cash dividends paid................ (1,795,890) (1,274,659) (1,123,596)
Proceeds from borrowings of
long-term debt................... 2,566,666 -- --
Principal payments on long-term
debt............................. (800,000) (800,000) (1,600,000)
Cash paid on fractional shares from
stock dividend................... (1,859) (1,593) (1,675)
Cash received from exercised stock
options.......................... 37,543 67,585 --
----------- ----------- -----------
Net cash provided by (used in)
financing activities........ 6,460 (2,008,667) (2,725,271)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents........ 1,193,448 (426,971) (69,311)
Cash and cash equivalents at
beginning of year................ 168,245 595,216 664,527
----------- ----------- -----------
Cash and cash equivalents at
end of year................. $ 1,361,693 $ 168,245 $ 595,216
=========== =========== ===========
See accompanying notes.
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FRIEDMAN INDUSTRIES, INCORPORATED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Friedman Industries, Incorporated, and its subsidiary (collectively,
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
--------------------------
1998 1997
----------- -----------
Coil................................................... $12,984,266 $ 8,900,962
Tubular................................................ 11,602,597 12,302,703
----------- -----------
$24,586,863 $21,203,665
=========== ===========
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,
1998 and 1997, the current replacement cost of LIFO inventories exceeded their
LIFO value by approximately $2,782,000 and $3,072,000, respectively.
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.
EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings per
Share, which is required to be adopted for financial statements issued for
periods ending after December 31, 1997. The statement replaces primary and fully
diluted earnings per share with basic and diluted earnings per share. The
Company adopted this new standard in the third quarter of 1998. This new
standard did not have a significant effect on earnings per share. The difference
between weighted average shares outstanding used for basic and diluted earnings
per share is the effect of stock options.
All applicable per share amounts herein have been retroactively adjusted to
give effect to a 5% stock dividend distributed May 29, 1998.
SUPPLEMENTAL CASH FLOW INFORMATION: The Company paid interest of
approximately $513,000 in 1998, $508,000 in 1997, and $679,000 in 1996. The
Company paid income taxes, net of refunds, of $2,455,000 in 1998, $1,678,000 in
1997, and $1,385,000 in 1996.
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
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FRIEDMAN INDUSTRIES, INCORPORATED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 were approximately $21.7 million,
$17.8 million, and $15.6 million in 1998, 1997, and 1996, respectively. Loss of
LSS 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, 54,860 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):
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Outstanding at beginning of year.......... 399,932 $4.11 101,700 $1.95 90,124 $1.78
GRANTED................................... -- $ -- 336,249 $4.50 11,576 $3.24
EXERCISED OR CANCELED..................... (22,558) $1.78 (38,017) $1.78 -- $ --
------- ------- -------
OUTSTANDING AT END OF YEAR................ 377,374 $4.24* 399,932 $4.11 101,700 $1.95
======= ======= =======
EXERCISABLE AT END OF YEAR................ 377,374 $4.24 179,168 $2.95 101,700 $1.95
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR................. N/A $1.06 $0.76
* Range of $1.78 to $5.05 per share and a weighted average remaining life of 7.7
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 1.3% and 6%
reduction in net earnings and earnings per share for 1998 and 1997,
respectively, and no effect for 1996. 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 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, 2000, the Company may borrow up to $8 million at an interest
rate no greater than the bank's prime rate. At March 31, 1998, the Company had
borrowings outstanding under the revolving facility of $4 million. The term
credit facility includes borrowings of $1.2 million from the previous term notes
and also provides for additional advances up to $3.5 million, all of which
convert to a term loan on December 31, 1998. The amount outstanding under the
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FRIEDMAN INDUSTRIES, INCORPORATED
3. LONG-TERM DEBT (CONTINUED)
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, 1998,
the principal amount of indebtedness outstanding under the term credit facility
was $3,166,666. The annual principal payments required on long-term debt during
the next five years are as follows:
1999........................................................ $ 800,000
2000........................................................ 800,000
2001........................................................ 4,800,000
2002........................................................ 766,666
2003........................................................ --
----------
Total.................................................. $7,166,666
==========
In July 1995, the Company borrowed $708,168 at an average interest rate of
7.1% against the cash surrender value of officers' life insurance policies (the
"borrowings"). The borrowings do not require specific repayment terms except
that in the case of death, that portion of the borrowings related to the death
will be deducted from the proceeds of the life insurance policy.
During 1998, interest cost of approximately $82,000 was capitalized as part
of the construction cost of property, plant, and equipment.
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 amount used for tax purposes. Significant components of the Company's
consolidated deferred tax assets and liability are as follows:
MARCH 31
-------------------
1998 1997
-------- --------
DEFERRED TAX LIABILITIES:
Depreciation........................................ $530,040 $558,624
Other............................................... 27,924 --
-------- --------
Total deferred tax liabilities........................ 557,964 558,624
DEFERRED TAX ASSETS:
Inventory capitalization............................ 76,089 62,517
Postretirement benefits other than pensions......... 38,420 38,420
Other............................................... 53,895 8,127
-------- --------
Total deferred tax assets............................. 168,404 109,064
-------- --------
Net deferred tax liabilities.......................... $389,560 $449,560
======== ========
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 $280,000 for the year ended March 31, 1998, $242,000 for the year ended
March 31, 1997, and $216,000 for the year ended March 31, 1996. 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.
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FRIEDMAN INDUSTRIES, INCORPORATED
5. PROFIT-SHARING PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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
Products operation, the Company purchases, processes, manufactures, and markets
tubular products.
The following is a summary of significant financial information relating to
the product groups:
YEAR ENDED MARCH 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
NET SALES:
Coil processing....................... $ 87,619,322 $ 66,979,133 $ 63,811,709
Tubular............................... 61,221,402 52,941,833 43,037,472
------------ ------------ ------------
TOTAL NET SALES............... $148,840,724 $119,920,966 $106,849,181
============ ============ ============
OPERATING PROFIT:
Coil processing....................... $ 1,876,097 $ 1,578,403 $ 1,856,750
Tubular............................... 7,593,430 5,933,923 4,218,560
------------ ------------ ------------
TOTAL OPERATING PROFIT........ 9,469,527 7,512,326 6,075,310
Corporate expenses.................... (1,803,240) (1,589,437) (1,229,550)
Interest expense...................... (431,498) (509,275) (617,629)
Interest and other income............. 53,080 86,493 70,001
------------ ------------ ------------
TOTAL EARNINGS BEFORE TAXES... $ 7,287,869 $ 5,500,107 $ 4,298,132
============ ============ ============
IDENTIFIABLE ASSETS:
Coil processing....................... $ 25,404,991 $ 18,345,255 $ 15,132,983
Tubular............................... 19,054,950 19,474,470 16,998,998
------------ ------------ ------------
44,459,941 37,819,725 32,131,981
General corporate assets.............. 1,579,420 297,466 681,005
------------ ------------ ------------
TOTAL ASSETS.................. $ 46,039,361 $ 38,117,191 $ 32,812,986
============ ============ ============
DEPRECIATION:
Coil processing....................... $ 317,851 $ 316,714 $ 310,840
Tubular products...................... 337,485 322,071 299,714
Corporate and other................... 10,572 6,806 6,437
------------ ------------ ------------
$ 665,908 $ 645,591 $ 616,991
============ ============ ============
CAPITAL EXPENDITURES:
Coil processing....................... $ 2,372,483 $ 16,895 $ 108,765
Tubular products...................... 200,635 66,057 359,737
Corporate assets...................... 20,292 3,690 1,708
------------ ------------ ------------
$ 2,593,410 $ 86,642 $ 470,210
============ ============ ============
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.
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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, 1998 and 1997 (per share amounts have been adjusted
for subsequent stock dividends):
Quarter Ended
---------------------------------------------------------
June 30 September 30 December 31 March 31
1997 1997 1997 1998
----------- ------------ ----------- -----------
Net sales............................... $38,300,432 $36,961,370 $34,300,676 $39,278,246
Gross profit............................ 3,234,811 2,895,901 2,767,442 3,961,339
Net earnings............................ 1,176,564 1,017,931 1,009,148 1,606,349
Net earnings per share:
Basic................................. 0.17 0.15 0.15 0.24
Diluted(1)............................ 0.17 0.15 0.15 0.23
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:
Basic(1).............................. 0.14 0.14 0.12 0.14
Diluted(1)............................ 0.14 0.14 0.12 0.14
(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 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.
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, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
May 26, 1998
Houston, Texas
------------------------------------------
SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------ ------------
Net sales........................... $ 148,840,724 $ 119,920,966 $ 106,849,181 $ 97,968,805 $ 70,908,065
Net earnings........................ 4,809,992 3,630,071 2,836,768 2,458,132 1,691,075(A)
Total assets........................ 46,039,361 38,117,191 32,812,986 32,074,862 27,184,421
Long-term debt...................... 6,366,666 4,600,000 5,400,000 7,000,000 3,800,000
Stockholders' equity................ 25,732,957 22,781,959 20,428,936 18,722,781 17,430,337
Net earnings per share:
Basic............................. 0.71 0.53 0.42 0.36 0.25(A)
Diluted........................... 0.69 0.53 0.42 0.36 0.25(A)
Cash dividends declared per share
adjusted for stock dividends...... 0.28 0.20 0.17 0.17 0.12
(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, 1998 compared to year ended March 31, 1997
During the year ended March 31, 1998, sales, cost of products sold and
gross profit increased $28,919,758, $26,179,512 and $2,740,246, respectively,
from the comparable amounts recorded during the year ended March 31, 1997. These
increases were primarily related to an increase of approximately 24% in tons
sold of tubular and coil products. This increase in volume resulted primarily
from strong demand for tubular products and from the Company aggressively
marketing coil products to increase its market share. Gross profit as a
percentage of sales increased from 8.4% in fiscal 1997 to 8.6% in fiscal 1998.
This increase was primarily related to tubular operations which benefited from
stronger market conditions and from efficiencies associated with increased
production.
Selling, general and administrative expenses increased $996,848 from the
amount recorded during fiscal 1997. This increase was primarily related to
variable expenses related to increased volume and/or earnings such as incentive
bonuses, commissions, supplies and other variable expenses. In addition, the
Company recorded increases in bad debt expense and sales expenses associated
primarily with additional sales personnel.
Interest expense during fiscal 1998 declined $77,777 from the amount
recorded in fiscal 1997. This decrease was primarily associated with reductions
in term debt and a decline in interest rates paid on borrowed funds in fiscal
1998. Interest costs associated with advances of additional term debt were
related to construction cost and were capitalized.
Interest and other income declined $33,413. This decline was primarily
related to the loss on the sale of fixed assets.
Federal income taxes increased $607,841 from the amount recorded in fiscal
1997. This increase resulted from the increase in earnings before taxes as the
effective tax rates were the same for both years.
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.
14
16
FRIEDMAN INDUSTRIES, INCORPORATED
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.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company remained in a strong, liquid position at March 31, 1998.
Current ratios were 2.9 and 3.3 at March 31, 1998 and March 31, 1997,
respectively. Working capital was $25,910,370 at March 31, 1998 and $23,184,488
at March 31, 1997.
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, 2000, the Company may borrow up to $8 million at an interest rate no
greater than the bank's prime rate. At March 31, 1998, the Company had
borrowings outstanding under the revolving facility of $4 million. The term
facility includes borrowings of $1.2 million from the previous term note and
also provides for additional advances up to $3.5 million, all of which convert
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, 1998, the principal amount
of indebtedness outstanding under the term facility was $3,166,666.
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, 1999.
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, the success of
the Company's capital improvements at its Hickman, Arkansas 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.
YEAR 2000 ISSUE
With the turn of the century, time sensitive software using two digits may
not identify the year 2000, which could result in system failure and
miscalculations disrupting the ability to conduct normal business operations.
The Company completed an assessment of its information systems for year 2000
compliance during 1998 and developed a plan to resolve all major issues by the
end of 1999. As a result, the year 2000 issue is not expected to pose
significant operational or financial problems for the Company.
15
17
FRIEDMAN INDUSTRIES, INCORPORATED
TEN YEAR FINANCIAL SUMMARY
YEAR ENDED MARCH 31
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- ----------- -----------
Net sales.......................... $148,840,724 $119,920,966 $106,849,181 $97,968,805 $70,908,065 $56,230,967
Earnings........................... $ 4,809,992 $ 3,630,071 $ 2,836,768 $ 2,458,132 $ 1,691,075(1) $ 806,272
Current assets..................... $ 39,347,548 $ 33,357,160 $ 27,524,670 $25,956,555 $21,014,281 $16,542,769
Current liabilities................ $ 13,437,178 $ 10,172,672 $ 6,410,527 $ 5,816,334 $ 5,534,143 $ 3,549,495
Net working capital................ $ 25,910,370 $ 23,184,488 $ 21,114,143 $20,140,221 $15,480,138 $12,993,274
Total assets....................... $ 46,039,361 $ 38,117,191 $ 32,812,986 $32,074,862 $27,184,421 $20,491,441
Stockholders' equity............... $ 25,732,957 $ 22,781,959 $ 20,428,936 $18,722,781 $17,430,337 $16,528,543
Earnings as a percent of
Net sales...................... 3.2 3.0 2.7 2.5 2.4 1.4
Stockholders' equity........... 18.7 15.9 13.9 13.1 9.7 4.9
Average number of common shares
outstanding: Basic(3)............ 6,814,423 6,793,599 6,753,810 6,751,965 6,749,105 6,748,597
Per share
Net earnings per share:
Basic(3)....................... $ 0.71 $ 0.53 $ 0.42 $ 0.36 $ 0.25(1) $ 0.12
Stockholders' equity(3).......... $ 3.78 $ 3.35 $ 3.02 $ 2.77 $ 2.58 $ 2.45
Cash dividends per common
share(3)......................... $ 0.28 $ 0.20 $ 0.17 $ 0.17 $ 0.12 $ 0.08
Stock dividend declared............ 5% 5% 5% 5% 5% 5%
YEAR ENDED MARCH 31
------------------------------------------------------
1992 1991 1990 1989
----------- ----------- ----------- -----------
Net sales.......................... $42,609,330 $50,264,851 $50,043,949 $53,499,476
Earnings........................... $ 483,720 $ 866,259 $ 1,560,701 $ 1,830,861(2)
Current assets..................... $15,537,203 $16,826,544 $16,731,964 $19,592,919
Current liabilities................ $ 2,849,637 $ 2,501,178 $ 1,783,375 $ 4,695,397
Net working capital................ $12,687,566 $14,325,366 $14,948,589 $14,897,522
Total assets....................... $19,619,875 $20,936,487 $19,042,527 $21,803,286
Stockholders' equity............... $16,277,792 $16,274,914 $16,186,557 $15,715,223
Earnings as a percent of
Net sales...................... 1.1 1.7 3.1 3.4
Stockholders' equity........... 3.0 5.3 9.6 11.7
Average number of common shares
outstanding: Basic(3)............ 6,748,597 6,748,597 6,748,597 6,647,246
Per share
Net earnings per share:
Basic(3)....................... $ 0.07 $ 0.13 $ 0.23 $ 0.28(2)
Stockholders' equity(3).......... $ 2.41 $ 2.41 $ 2.39 $ 2.36
Cash dividends per common
share(3)......................... $ 0.07 $ 0.12 $ 0.16 $ 0.25
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) Includes an after-tax loss of $544,500 ($0.08 per share) due to an
extraordinary item.
(3) Adjusted for stock dividends.